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Eye on Regionalism: Italy, "I've got your back"...

Another data point in the narrative of EU divisiveness…

Some key data points arrived this week in regards to Italian economic health. On Tuesday CPI numbers were released for September which came in slightly better than August on a year-over-year basis, though still up almost 4%. Today, industrial activity data for August was released showing an unsurprising drop in both sales and orders.

A more telling measure of Italian economic credibility came from three Libyan government entities: The Central Bank of Libya, Libyan Investment Authority and Libyan Foreign Bank. These three entities boosted their holding in floundering UniCredit to 4.2% and committed to participate to the tune of almost 10% in an upcoming 6 billion Euro secondary. UniCredit, Italy’s largest bank, has seen its balance sheet shredded by the credit markets and has been rushing to shore up capital.

Italy has always been one of the weaker hands at the EU table and their finance industry has a long history of unsavory practices and corruption. The fact that one of their preeminent financial institution is receiving a bailout from a country that has just reemerged from rogue status and remains controlled by an unbalanced megalomaniac dictator (recall our 9/5 post) says a lot. This isn’t Warren Buffet to the Rescue – this is Muammar Qaddafi.

As a point of fact, Libya has a long investment history in Italy. During the decades when the rest of the world shunned doing business with them because they sponsored terrorism. The Libyan government acquired stakes in Italian banks, utilities & sports teams, but the timing of this move coming so closely on the heels of Berlusconi’s pledge to compensate Libya monetarily for colonial period abuse suggests that Italy and Libya are becoming increasingly chummy.

This is unnerving.

Andrew Barber
Director

Europe's Trade Balance Continues to deteriorate...

This chart is not a predictive one; more of a reminder of a "Trend". The EU, in its current organizational form, has never had to deal with protracted economic adversity. The finger pointing has began, but it looks mild relative to what it could be.
KM

DF – November Milk Prices Continue to Decline YOY

The USDA just released the advanced Class 1 milk price for November of $17.33 per hundredweight. This price reflects a 19.2% decline year-over-year, but an 11.6% sequential increase from October’s level. As I have pointed out once before, there is an inverse relationship between the change in milk prices and DF’s gross margins so the fact that the average milk price for the first two months of the company’s 4Q08 have declined nearly 24% should benefit DF’s quarterly gross margins.

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.64%
  • SHORT SIGNALS 78.61%

VFC: Written in the Cosmos

VFC has been one of our top short ideas for the past several months. No matter how well-managed a company is, when 3-years of acquisition/FX-fueled growth ends in conjunction with a consumer downturn and lapping its best cash conversion cycle in history, then that spells trouble at a 20% valuation premium to the group.
Growth rolled over in every one of VFC’s businesses – which is a first. It also represents the biggest sequential slowdown we’ve seen in the outdoor division in years. With 12.5% growth in that division (which is responsible for almost all of VFC’s multiple premium), my sense is that after stripping out FX benefit, it was a mid-high single digit increase – with several points of that coming from company-owned retail stores (not what I want to see). As I noted in a note last month – this company needs a deal.

The biggest saving grace here is that the company upped its dividend by $0.04 annually, which will presumably push its yield from 3.9% to something north of 4% when the stock opens in negative territory. That’s fine. If it were any more I’d be even more concerned about this story. I don’t want to see a company with 28% debt to total cap and 20% of its debt due over the next 2.5 years up its dividend at the expense of the balance sheet.

I’m not interested in owning this stock until it has a 4-handle.


There's No Crying In Investing!

``There's a crying need for capital, and now there's a chance that the government will invest alongside''
-David Rubenstein, The Carlyle Group (Bloomberg article by Jason Kelly this morning)

The man they call “Ruby” definitely has that right. I am not sure how that fits within the parameters of free market capitalism, but there is indeed a lot of crying going on these days. You can hear it across the oceans from “Private Equity Inc’s” Super Return Middle East Conference! C’mon guys, there’s no crying in investing.

David Rubenstein is one of the hardest working men in America. He has built a wonderful firm, and hires wonderful people. Moshe Silver and Tanya Clark were two of the finest who I had the opportunity to work with while I was with Carlyle’s hedge fund. Now Mo and Tanya work here, alongside me at Research Edge.

I support Carlyle’s cash flow every day that I check into Dunkin’ Donuts (they own it). This morning I was down there on Whitney Avenue in New Haven with my buddy “Joe The Plumber”. He and I had a quick chat about how great this week has been. If yesterday’s gains hold, this will be the best week in the US stock market since 2003. This is fantastic news for those of us in no need of government assistance. This is a great week for American capitalists with net cash who don’t need “gearing” schemes in order to earn a return.

If the Red Sox can come back from 7-0 last night and stay in the game, so can “Private Equity Inc.”. Never say never folks. As long as “Hank the Tank” is operating the bazookas, you never know how much free money that he and the old boys can endow you with. Once we get through this election, and the Democrats start putting some fire in the zero-transparency holes, things may get uglier however. It will be interesting to see how Blackstone, KKR, and Carlyle deal with non-trivial critters like the “Employee Free Choice Act” (unionization), and a turn in the Queen Mary 25 year-chart of cost of capital (long rates rising). They better hope that the “government invests alongside”. That might be their only way out.

Hope is not part of our investment process. We’re interested in investing the way that people did in the 1970’s. We’re looking for great balance sheets, not levered ones. We’re looking for disciplined capital allocators, not reckless ones. We’re looking for unlevered dividend yields, not manufactured ones. This, of course, is the antithesis of what private equity does. Joe and I are cool with that.

Yesterday we gave some Obamerica “knucks” to another investment great, Jack Bogle, and bought some of his low fee wares via the Vanguard High Dividend Yield fund. The dividend yield we bought into was 4.6%. That’s certainly better than anything called US Treasuries, and importantly, it’s more predictable. The only thing that I can predict about US Treasuries and the man who runs the US Treasury show, is continued reactivity and volatility. There never was a proactive plan. Don’t bank on one now.

From a ‘Hedgeye Portfolio’ perspective (see www.researchedgellc.com for positions), we bought low on market weakness yesterday, and it paid off handsomely. This morning, Warren Buffett is even signing off on Americans buying stocks in their personal accounts. Upward and onward? While we have bought a few bottoms this week, we’re not going to rush out and call it “THE Bottom” – that’s what entertainers do. Be patient and be sure to buyem when they are down, not when they are up. I know, another ingenious strategy from Joe’s buddy from Thunder Bay. Our current ‘Hedgeye Portfolio Allocation’ is: Cash 72%, Stocks 25%, and Commodities 3%.

I don’t like bonds here. I don’t like debt, period. Debt is a disease that needs repeated treatment and de-leveraging therapy before I get interested. Everything has a price.

In fact, oil finally found our price yesterday. We bought it at $69/barrel for two reasons: price and a catalyst. That was the lowest price we have seen in 13 months, and since Goldman is now saying it can go to $50 (which is weird because I could have sworn that they said $140 this year as well), and page 1 of the Wall Street Journal has an article dedicated to it “plummeting”, I BUY. The catalyst, of course, is that “Hank the Tank” and “Heli-Ben” will drop moneys from the heavens again, and cut rates to negative (on a real basis) on October 29th. Creating more free moneys for the monkeys will only re-ignite the bubble bath that so many in this market have come to enjoy since Greenspan prepared the lather and hot tubs from 2001-2003.

Staying in hot tubs for extended periods of time is bad for you. Keep your discipline, and stay away from government supports. Be your own process and stand on its principles. Having to depend on the governments of this world to “invest alongside” will only end in more regionalism, regulation, and a host of ugly and unintended consequences.

Have a great weekend,
KM



$435M FOR A SEAT AT THE TABLE

Few jurisdictions are less attractive than Illinois from a casino investment standpoint. Yet there were no shortage of bidders for the State’s 10th and last license. Bids ranged from $60 million (dumb) to $435 million (and dumber). And that’s just for the right to operate a casino in this socialist state. Never mind land and construction costs.

Assuming the $435 million bid wins (loses), the all in investment cost will certainly approach $1 billion. I don’t think there is one existing Illinois casino property that will generate more than $55 million in EBITDA this year, and likely less next year. Even if the new casino can drive $100 million in the face of the most onerous tax structure, a 100% smoking ban, and an uncertain consumer environment, a 10% ROI is not very appealing.

The only encouraging take away is that no public gaming entity even bothered to enter a bid. BYD, PENN, and WYNN are the only companies with the actual resources to even face that decision. They all made the right one.

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

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