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Charting the STAG in Stagflation...

Just a chart. Even if you don't do macro, you'll get the picture.
KM

"Heli-Ben", Please Show Hank The Math...

September’s inflation data is hardly “deflationary”. Conversely, it looks quite sticky when considered on a y/y basis. We define stagflation as the rate of inflation meaningfully outrunning the rate of growth. You don’t need a PhD. in math to realize that +5-9% inflation run rates (see charts) are expansionary. Yes, everything that matters in our models happens on the margin, and yes, both of these upward “Trends” have sequentially rolled over. But do not mistake this as deflation in American consumer or producer prices. Deflation is what you see in your home or portfolio right now – i.e. their prices are DOWN year over year, not UP.

There is a tremendous divide right now between the alarmist Bush administration rhetoric and economic reality. Not unlike their reactive approach to Iraq, Paulson has come out guns a blazin’ and a huntin’ for the evil doers that he can blame for this mess. “Heli-Ben” has his back and is right there willing to drop free moneys from the skies even though the last thing you should be giving to American junkies is more cheap money to borrow. It’s time to take a deep breath. Look at the charts and do the math. GDP in the USA for Q4 is going to be flat to negative, while inflation is going to be up. That’s called stagflation, and you need to raise rates (or stop cutting them) in order to stop it.

KM

Flying a solo mission, for now...

Warren Buffet famously said: “The best way to become a millionaire is to start as a billionaire and buy an airline.” We fully understand the issues that any “investor” has with the airline industry, especially when it comes to applying Porter’s Five Forces to the industry and coming out with a favorable view. That doesn’t mean airlines can’t be good “stocks”, for a “Trade” - look at their outperformance today!

While Keith was giving me the gears this morning and last night when I mentioned airlines as a potential long, like any Portfolio Manager with a process should, and we are not there yet, the chart below does depict an interesting story. In the last few months, the historical inverse correlation between airline stocks and jet fuel has broken down. For many airlines jet fuel is currently ~40% of sales versus 20 – 25% a year ago, if oil, and thus jet fuel, stay at or below currently levels, the y-o-y cost comparisons all of sudden start to look very interesting.

Daryl G. Jones
Managing Director

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HSY – Key Takeaways from the Earnings Call

Some of the main concerns for FY09 stem from the company’s significant price increase in August (up an average of 10% in U.S. business). In FY09, HSY is raising both its everyday price points and its promotional price points. In the past, when HSY has raised its prices, it has typically not raised its promotion price points. Management’s lowered FY09 2%-3% revenue growth (from long-term 3%-5% range) is based primarily on the fact that they could see lower volumes as a result of the higher prices and some shift in mix between products sold at everyday price points versus promotion price points. Management is also expecting revenues to be hurt slightly by currency in FY09, but HSY does not have much emerging market exposure, which they said is a good and bad thing (only good because they won’t be as hurt by FX YOY).
There were also a lot of questions around commodity costs in 2009 because the company recently hedged a lot of its costs (management won’t specify what % of costs are hedged), and cocoa and sweetener prices have since come down. Commodity cost increases are expected to be higher in FY09 versus FY08. Management really won’t give too many details on this front except to say that from where they sit they are comfortable having greater visibility on 2009 as a result of their hedging strategy.

HSY is seeing improvements in volumes in the core brands it has increased advertising behind. Hershey’s Milk, Kit-Kat, Reese’s, Twizzlers were all up mid single digits. Refreshment, snacks and the Kisses brand are still all underperforming.

In FDM, ex convenience, market share was flat for the quarter. In the last 4 weeks (first month of 4Q), HSY gained share in the c-store category for the first time in 2 years. Management attributes these improved share trends to HSY’s increased retail coverage efforts.

HSY is seeing some slowdown in the overall premium chocolate category, but the company has little exposure so although it is bad for the category, it is somewhat of a positive for HSY’s overall core brands.


Are These Jobless #'s A Signal For the Bulls?

For the 2nd week in a row, US weekly jobless claims came in better than I expected. On balance, this is bullish for the market’s immediate term “Trade”. Incorporating this morning’s selloff in my math, I think we are within 3% of another short term low in the SP500.

This week’s jobless # came in at 461,000. This was lower than last week’s print of 477,000. Remember, everything in our economic model that matters occurs on the margin. If next week’s jobless report comes in better yet again, I am bullish on the October employment report. Yes, bullish, as in it will be better than market expectations which are ostensibly deteriorating by the minute.

All the while, the intermediate “Trend” will remain bearish. See the chart below – what a difference a year makes.
KM

WEST and the JBX Exchange Offer

Following up on my post from October 6th, Western Sizzlin Corporation (WEST) announced yesterday that it has commenced an exchange offer for up to 680,500 shares of JBX. The exchange ratio for the offer is 1.607 shares of WEST common stock for one share of JBX common stock and is set to expire at 5 p.m. ET on November 13. WEST already owns 100 shares of JBX so based on the exchange ratio for the offer, if the maximum 680,500 JBX shares are exchanged, WEST would own about 1.2% of JBX’s shares outstanding.
As I mentioned in my past post, the CEO and controlling shareholder of WEST is Sardar Biglari. Mr. Biglari holds a 35% interest in WEST through The Lion Fund L.P., a private investment partnership. Mr. Biglari is the general partner of The Lion Fund L.P., which is an activist hedge fund. WEST and The Lion Fund have bought positions in several public restaurant companies that were perceived to be value plays. In the past, Mr. Biglari has been very public about putting pressure on senior management of these public companies to unlock shareholder value. JBX, however, is already a value stock trading below 5x NTM EV/EBITDA.

Mr. Biglari’s intentions are still widely unknown. Based on the prospectus, following the offer, WEST “intends to evaluate its investment in the Jack in the Box common stock on a continual basis and may, from time to time, communicate with Jack in the Box management, members of Jack in the Box’s board of directors and other stockholders of Jack in the Box. Following the consummation of the offer, Western may, from time to time, acquire additional shares of Jack in the Box common stock, dispose of shares of Jack in the Box common stock or formulate other purposes, plans or proposals regarding Jack in the Box or the Jack in the Box common stock, to the extent deemed advisable in light of its general investment policies, market conditions or other factors… Except as indicated in this prospectus, neither Western nor any of Western’s subsidiaries or affiliates has any current plans or proposals which relate to or would result in (1) any extraordinary transaction, such as a merger, reorganization or liquidation of Jack in the Box or any of its subsidiaries, (2) any purchase, sale or transfer of a material amount of assets of Jack in the Box or any of its subsidiaries, (3) any material change in the present dividend rate or policy, or indebtedness or capitalization of Jack in the Box or any of its subsidiaries, (4) any change in the current board of directors or management of Jack in the Box, (5) any other material change in Jack in the Box’s corporate structure or business, (6) any class of equity security of Jack in the Box ceasing to be authorized to be quoted in an automated quotation system operated by a national securities association or (7) any class of equity securities of Jack in the Box becoming eligible for termination of registration under the Exchange Act.”

To be clear, WEST is an illiquid, holding company with no real brands. Its revenues have declined for the last 3.5 years, resulting in a net loss of $0.13 per share in FY07 and a net loss of $2.14 in the 6 months ended June 30. JBX, on the other hand, has experienced revenue growth over the same timeframe (and longer), leading to increased operating income growth (growth only slowed 0.3% in the forty weeks ended July 6).

On October 3, the last full trading day before WEST announced its intention to commence this offer, the closing price of WEST was $14.10 and the closing price of JBX $19.37. Based on these closing prices and the exchange ratio in the offer, the WEST offer had a value of $22.66 per share of JBX, which represented a 17% premium over JBX’s $19.37 closing price.

Since then, however, WEST’s stock price has declined rather significantly and closed on October 14 (the last full trading day before date of the prospectus) at $10.50 relative to JBX’s $18.49 closing price. Based on these more current prices, the WEST offer has a value of $16.87, which represents an 8.7% discount to JBX’s price. If JBX shareholders really wanted to own WEST at those prices, which I would be hard-pressed to understand, they would be better off selling their shares on the open market for $18.49 and buying 1.8 shares of WEST on the open market versus the offer of 1.607 shares. My guess is that no shares will be tendered.




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