"Trend" negative: Obama extends his lead...

As we review the polls and political futures markets from this past weekend, Obama seems to be expanding his lead.

Despite Governor Palin’s “better than expected” performance in the Vice Presidential debates last week, McCain has received no bounce. The current Real Clear Politics national poll average shows Obama up +5.9 and Intrade Market show a 65.5% chance of an Obama victory. In addition, on an electoral college basis Real Clear Politics has Obama up by an astounding 168 electoral college votes.

We have been writing since August that an Obama victory is likely and that his victory will be negative for the equity markets in the intermediate term. As a result, we have been positioned very conservatively (96% Cash, 3% Gold) and will be positioned conservatively from here through November 4th subject to the facts changing.

Daryl Jones
Managing Director

PNRA – Wheat Price Favorability

Wheat prices declined nearly 14% last week and are down 50% from the peak levels seen back in March. For PNRA, a $1 change in the price of wheat impacts the company’s full-year costs by $3.25 million, or about $0.06 per share. PNRA offsets some of these rising costs with price increases, however, so the company does not typically feel the full impact of that increase on the bottom line. Earlier in the year, PNRA locked in its full-year 2008 wheat costs at $14/bushel and has since then contracted 95% of its 1H09 requirements at $10/bushel (versus the average $15/bushel paid by the company in 1H08). Based on the 1H09 cost of $10/bushel, the $4 of wheat price favorability versus 2008 represents about $13 million of lower commodity costs in FY09.
  • With wheat prices having recently fallen to below $7/bushel, PNRA could see even more substantial savings in the back half of 2009. Management said back in June when it announced that it had locked in its wheat requirements for 1H09 that part of the benefit from more favorable YOY wheat costs would be offset by higher commodity costs, notably proteins, dairy, packaging, and the increasing cost of gasoline, but that was when wheat was trading closer to $9/bushel.
  • Also, PNRA has not seen the demand destruction experienced by other restaurant companies. The Panera Bread concept is able to attract customers at multiple day parts, which is a clear advantage in difficult times. Helping to drive sales is a new breakfast sandwich which is driving incremental customers in the critical morning meal period. If top-line trends continue to hold up in FY09, I would expect PNRA to see incremental benefit to its bottom line as the company finally experiences some relief on the wheat cost front.

Wearing New Shoes

Stocks, commodities, real estate, and foreign currencies are all crashing again this morning. No, they aren’t going down – they are crashing. Whether it’s the Russian stock market trading down -13% or the South Korean Won moving to -27% for the year to date, it’s all one and the same in this complex global economic system of macro factors. It is global this time, indeed. Cash remains king.

By month’s end, it will have been 1 year since I left Carlyle’s hedge fund. Time flies when you’re having fun.

October 2007 was the last month that I worked in New York City for someone else. On the day of my departure, I walked down 5th Avenue and bought a new pair of shoes. My son was due to be born in the coming week and it was time to start my new life. My days of trading a “book” for a hedge fund were over. I left my old shoes in their office to symbolize as much. My last “call” on the global market, and the industry in general, has turned out to be right.

Leaving any firm in NYC can be very impersonal. You take the elevator downstairs, open the door to New York’s finest taxi cabs honking at one another and that’s your goodbye. As I walked to Grand Central Station that night, I said to myself, goodbye and good luck.

My last month of trading on Wall Street was a profitable one. It was October, and my shorts had already started working. It’s no secret that I had an unprofitable Q3 of 2007. I’d had a huge run in the 8 years prior, and my short term luck had run its course. You can ask my team about it – my best analysts from Carlyle now work at SAC and Ziff. I had no excuses. I was a few months too early. I was too bearish to earn a myopic weekly return. That down quarter was all my fault, no one else’s.

The good news for me is that I haven’t had many “bad quarters” and that one in particular was only down low single digits. At the time, I was told that I was being “too macro”, and I suppose that was a sign of the global market top in and of itself. That’s not telling you much other than what it is that people say about me when I am not in the room. It is what it is. Numbers don’t lie, people do.

Since late 2007, many of you have seen every “Trade” and every “Trend” that I have “called” and acted on. Transparency and accountability were the principles I cared to espouse, so that’s what I set out to do. I started ranting on my ‘MCM Macro’ blog ( in Q4 of 2007, and those views are still open to the public to audit. On Tuesday April 1, 2008, I submitted a performance report for MCM of +2.15% (the S&P 500 was -10% and the NASDAQ -14%), and my new Partners and I proceeded to open the doors of Research Edge LLC’s office in New Haven, CT. Since November of 2007, my portfolio has made money every quarter. Well ahead of last week, I had been calling for a market crash. Last week, the S&P500 was down -9.4%, and I was +0.28%.

Unfortunately, this business pays a higher multiple for accuracy than it does principles. We’re seeing the ugly side of that “Trend” now. It was unsustainable. Now it’s time to re-build the trust in client relationships that Wall Street lost. Work ethic and handshakes are important to us. We think they are to other people too.

This morning is the last “Early Look” that we will be issuing to Institutional Research Edge subscribers for free. Our Hedgeye subscribers will continue to get the “Early Look” note via email. Feel free to pass this along to your friends (they can sign up at We feel an obligation to help you protect and preserve your family’s hard earned capital during times like these. We are here for you, feet on the floor, bright and early every morning.

For our Research Edge Institutional clients, we are launching ‘Research Edge Macro’ tomorrow. Having never been a “scribe”, and needing to earn my stripes every day, I felt that the right thing to do was work for the market for 2 quarters for free. While I still do not plan on paying myself any time soon, I do feel that our paying clients are due the exclusivity of our service. We have 20 people working on our team now. We are hiring. This isn’t about me. This about my team being better than I could ever be on my own.

In two short quarters, we have already broken through the 100 Institutional client milestone, and we have visibility on getting to 200 in the coming months. Most of our clients have given us praise for “being right” year to date, and for that I am very humbled and grateful. Getting a thank you in this business is a wonderful feeling.

So let me take this opportunity to thank all of you. Most importantly, thank you to all of you who believed in us, and are so kind as to cross pollinate your research edge with ours. Without having the opportunity to work for you, we couldn’t be wearing these new shoes with so much pride.

The best way to predict our future together is to create it. We’re looking forward to the journey,

Keith R. McCullough


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CONVERSIONSConversions: Morgan Stanley has seen the light!

As if moved by the sprit, the past weeks have seen the soul of Morgan Stanley embrace conversion.

First was the conversion of millions of restricted share units held by employees into common stock on September 8th. Subsequently, on September 17th, CEO John Mack announced his conversion from a hedge- fund-loving, free-market-cheerleader to a market socialist demanding short sale restrictions and increased regulation. Then, on September 21st came the most shocking conversion of all: the proud company that traces its roots to the decision by top bankers at JP Morgan to depart after the passage of Glass-Steagall in order create a pure investment bank announced its intention to convert to a bank holding company.

As you can see from the attached chart, the past weeks have also seen the conversion of the retirement plans of many of the star employees at Morgan Stanley who were holding restricted stock (and who were restricted from entering the market until after earnings were announced).

Here endeth today’s reading.
Andrew Barber

Germany: Cash Remains King...

Our friends at Street Account just hit us with the most positive headline we have seen this weekend:
"German government offers to guarantee all private savings accounts, reports AFP -- Bloomberg"

As the global market melts down, we are looking for attractive entry points in high quality dividend yielding assets. Germany's exchange traded fund, EWG, yields 10.3% now, and if we are patient, we can probably get this ETF cheaper. In the meantime, cash remains king.

German fiscal policy is less frightening than that of America’s. Unlike in the US, the German unemployment cycle remains calm; and their monetary policy views of the Bundesbank remain objective.

My downside target for EWG is $21.50. I'm a buyer there. EWG closed at $22.29 on Friday.

US Market Performance: Week Ended 10/3/08...

Index Performance:

Week Ended 10/3/08:
DowJones (7.3%), SP500 (9.4%), Nasdaq (10.8%), Russell2000 (12.1%)

Q408’ To Date:
DowJones (4.8%), SP500 (5.8%), Nasdaq (6.9%), Russell2000 (8.9%)

20008 Year To Date:
DowJones (22.2%), SP500 (25.1%), Nasdaq (26.6%), Russell2000 (19.1%)

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