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ARGENTINA AND PNK: A FOLLOW UP

Below I’ve re-posted a note by Andrew Barber that provides an overview of the current Argentinean crisis. During the last financial crisis there, unemployment rose to 25%. EBITDA at PNK’s Casino Magic Argentina dropped from $9 million to $2 million in 2002. Food for thought.

STEALING THE FUTURE

In one of the more pathetic developments of the global credit crisis to date, Argentine president Cristina Fernandez de Kirchner introduced legislation this afternoon to nationalize Argentina’s pension system in a move designed to get control over the $29 billion held in private retirement programs to prop up her floundering socialist regime. In advance of the anticipated announcement the benchmark Merval Index declined by 13.8% as yields on government bonds due in 2033 rose to 23.94%. Reportedly, large dollar sales by the central bank helped prop the peso during the day.

Since assuming Office last year after her husband’s second term as leader ended, Cristina Fernandez de Kirchner has made one misstep after another. You may recall that earlier in the year we covered the repeated farmer’s strikes that resulted from her attempt to tax agricultural exports as one of the themes in the Corn market bubble. Her actions at that time helped prevent her nation –the second largest economy in South America, from realizing the full positive impact of the greatest commodity boom the world has seen.

Cristina –known by her first name among supporters, and her husband painted themselves into a corner with reckless debt policies. Their failure to settle with holdout bondholders over the remaining government debt issued before the 2002 default effectively shut them out of the private markets while their decision to print fictitious CPI numbers to hold down interest rate on inflation linked bonds sold domestically shut them out of IMF programs. Only Hugo Chavez, that champion of absurd socialist programs, was a willing lender, at a less-than-comradely 15% coupon.

Observers now expect that, if the legislation is passed, the government will effectively eliminate its debts to the private pension system. For Argentineans who lived through the default in 2002 and the resulting cycle of rampant unemployment and currency devaluation, this will mark the second time they have seen their savings disappear.

As the dominos continue to fall globally we will see more socialists leaders make desperate decisions as they try to stave off the inevitable.

Andrew Barber
Director
I personally own shares of PNK

STEALING THE FUTURE

In one of the more pathetic developments of the global credit crisis to date, Argentine president Cristina Fernandez de Kirchner introduced legislation this afternoon to nationalize Argentina’s pension system in a move designed to get control over the $29 billion held in private retirement programs to prop up her floundering socialist regime. In advance of the anticipated announcement the benchmark Merval Index declined by 13.8% as yields on government bonds due in 2033 rose to 23.94%. Reportedly, large dollar sales by the central bank helped prop the peso during the day.

Since assuming Office last year after her husband’s second term as leader ended, Cristina Fernandez de Kirchner has made one misstep after another. You may recall that earlier in the year we covered the repeated farmer’s strikes that resulted from her attempt to tax agricultural exports as one of the themes in the Corn market bubble. Her actions at that time helped prevent her nation –the second largest economy in South America, from realizing the full positive impact of the greatest commodity boom the world has seen.

Cristina –known by her first name among supporters, and her husband painted themselves into a corner with reckless debt policies. Their failure to settle with holdout bondholders over the remaining government debt issued before the 2002 default effectively shut them out of the private markets while their decision to print fictitious CPI numbers to hold down interest rate on inflation linked bonds sold domestically shut them out of IMF programs. Only Hugo Chavez, that champion of absurd socialist programs, was a willing lender, at a less-than-comradely 15% coupon.

Observers now expect that, if the legislation is passed, the government will effectively eliminate its debts to the private pension system. For Argentineans who lived through the default in 2002 and the resulting cycle of rampant unemployment and currency devaluation, this will mark the second time they have seen their savings disappear.

As the dominos continue to fall globally we will see more socialists leaders make desperate decisions as they try to stave off the inevitable.

Andrew Barber
Director

PINNACLED IN ARGENTINA

The Argentinean stock market plunged 11% today on news that the government will nationalize private pensions to the tune of $29 billion. Government bonds are now yielding 24%. The fall in commodity prices is already taking its toll on an economy that generates the majority of its export revenue from raw materials. The government’s cash grab could be another step to a governmental and/or economic collapse.

While buried in the international section of the PNK’s EBITDA tables, Casino Magic Argentina actually generated almost $15 million of EBITDA in 2007, or 9% of total company EBITDA. This is a real number and it is very conceivable that this EBITDA could go away.

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.

FXI: PANDAS

The China bear narrative has kicked into full gear from the front page of the Wall Street Journal’s dire warnings to the constant chatter on financial television about the chilling impact on the global economy.

The glass half empty argument is straight forward: GDP came in at 9% - significantly below growth levels in previous quarters and below consensus estimates. Industrial Output is cooling -something that the commodities markets (particularly copper) have already been telling us for months, and the global slowdown is hurting Chinese exporters. Today the Ministry of Finance announced increases in export rebates for manufactures of consumer products like textiles and toys to help offset slowing demand from the US & EU. A bleak picture.

Our, somewhat contrarian view is that all of this signifies a shift in the nature and trajectory of Chinese growth, but not its direction. Retail sales held in strong for September as both consumer and producer inflations levels came down. It looks clear to us that China’s economy will redirect towards domestic consumption as its primary driver. This transition will not be without hiccups - greater seasonality and more modest near-term growth rates for starters, but it should also enjoy the benefits of a more diversified base and the potential for sustained long-term growth as domestic consumer markets in the central and western provinces continue to develop.

Currently we are continuing to hold our FXI position although it is almost 4% below our entry point. We often find ourselves taking a contrarian stance, but that is not because we seek it out. If the fundamental data points for our China thesis deteriorate than we will adjust our opinion, but for now the glass appears more than half full to us.

Andrew Barber
Director

S&P 500 LEVELS

Our upside target level for the S&P 500 in the near term is 1030.64 provided that the index can hold above 952. We remain 75% cash and 25% equities but will look to selectively increase our equity position if the S&P 500 remains above our support level through the week.

Current volatility has forced us to keep our target levels exceptionally wide. To put the present situation in historical context we calculated the intraday spread between low and high for the cash S&P as a percentage of the prior session’s close since November of 1984: 34.21% of all days with moves that exceeded 5% were in calendar 2008 and 31.58% were in sessions after September 17th of this year.

PS -For those who are superstitious: 55.26% of moves that were 5% or greater happened on days in the month of October.

Andrew Barber
Director

SBUX - Coffee Advertising Wars

Over the next 12-months Starbucks will be forming a new advertising strategy – they have no choice. Starbucks is a great brand and the world needs to hear it. Unfortunately, this is real weakness fir the company. In fact, SBUX’s most recent AD agency told the company they don’t want to do business with them anymore.

Yesterday, Dunkin’ Donuts fired a shot at Starbucks by saying that it beat SBUX in a recent national blind taste test (for more details, visit www.dunkinbeatstarbucks.com), and SBUX has no real way of responding. I’m sure management at Starbucks doesn’t feel the need to respond, but the company needs to be on TV reassuring customers what the brand stands for.

At some point in 2009, MCD will be on TV talking about the company’s coffee initiative. Taken together McDonald’s and Dunkin’ Donuts will be spending a significant amount of money promoting their respective brands. Starbucks can’t sit on the side lines. Going forward the Starbucks brand will need to have a competitive voice in the advertising world.

Lastly a small, global coffee icon is starting to accelerate its growth plans. The Juan Valdez Cafe chain is now selling coffee at 101 stores across Colombia, as well as stores in New York, Seattle, Philadelphia, Santiago, and Spain. According to press reports the company plans to add 500 more shops across the U.S., Latin America and Europe by 2010.

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