Quote Of The Week: John Mack, CEO, Morgan Stanley

"MUFG’s investment is a powerful endorsement of the tremendous value in the Morgan Stanley franchise, but the caliber and commitment of our people give me even greater confidence about the future of this Firm,”...
-John Mack, 2008

This, of course, is Morgan Stanley’s version of a white knight, MUFG (as in Mitsubishi Financial)... as in the Japanese firm that cut their outlook by another 50% versus expectations this week and announced that they need to find another 990B in Yen of liquidity...

The aforementioned quote by Mack, was not one he made this week. He said it earlier in the month, when guiding the Street to whatever light he saw in levering MS to another over-geared bank. There have been multiple points in this economic downturn's history that the said leaders of "Investment Banking Inc." and the US Treasury (are they one and the same?), have issued global investors short sighted perceptions versus reality. Our promise is to ‘You Tube’ them.

If the excuse is that “no one could have proactively seen this financial tsunami coming”, we’re short that. If there is no proactive risk management or research process, we’ll just call it out for what it is – being wrong.

We hear, quite often, that Mack is a good guy. This quote is unfortunate.

Chart Of The Week: A Great Week For Capitalists!

This was a great week for capitalists!

Our chart of the week is the +14.6% squeeze rally in the S&P500 (from the intraday Tuesday low of 845 to Friday’s closing high of 968). The “I am going to cash” crowd’s call to arms looks a little late now. The US market has closed UP, on a week over week basis, in 2 of the last 3 weeks.

This was a great week for America’s new capitalists –being liquid and long trumps being levered with debt.

CHUX – Removing CHUX from the dreaded list

I’m officially removing CHUX from the Restaurants @ Research Edge bankruptcy list. The remaining players on the list include DIN, RUTH and RT.

On the 3Q98 conference call CHUX’s management said they would limit capital spending to only maintenance capital spending. The balance of the cash would be used to reduce debt by the end of fiscal 2009. Unfortunately, that alone would not eliminate the potential of being in default of their bank credit agreement if business trends remained on the current trajectory.

The only answer is a liquidity event for the company. Currently, the company owns the land and building on 100 stores, of which 15 are not pledged as collateral to the banks. I believe that company will do a sales leaseback on the 15 properties to generate cash and repay the bank debt. The transaction will be dilutive to EPS as the lease payment will be higher that the interest on the bank debt, but the risk of default is eliminated. The sale-leaseback will not happen all at once, but over the next 3-4 months.

A liquidity that eliminates the potential for default will be a significant catalyst for short covering.

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 80.47%
  • SHORT SIGNALS 78.68%


Light sweet crude, the primary grade traded on the NYMEX, is on its way to the biggest single month decline since futures contracts for it started trading in 1983. The sellers are focused squarely on demand: concern over the cooling global economy is trumping OPEC’s saber rattling, at least for now.

We continue to think oil is something to trade here, not to own.

Our near term buy trade level is 59.62
Our near term sell trade level is 67.14

We would keep stop losses in place in either direction.

Keep a trade a trade to stay in the game.

Andrew Barber

RUTH – Desperate Times

I commented back in September when RUTH announced its sales-leaseback transaction that the banks appeared to be driving the process at the company. At the time, management stated that it had pursued the transaction to increase free cash flow and “ensure maximum operating flexibility.” I argued the transaction achieved the exact opposite and that owning real estate and not paying rent actually provides more flexibility. Instead, I think the company was motivated to do the sales-leaseback by Wells Fargo which wanted RUTH to use the cash proceeds to reduce its outstanding debt balance.

Yesterday, RUTH announced that it has completed additional cost reduction initiatives, including a cut in the number of corporate personnel. The company estimates that these cost reductions will generate annualized savings of approximately $2-$4 million on top of the previously announced annual expense efforts of about $8 million, resulting in about $3-$4 million of savings in 2008 and $10-$12 million in 2009.
Again, management stated in its press release that these cost reductions were completed in order “to maximize free cash flow and manage the business to preserve [its] flexibility.” The press release went on to say that “these changes are necessary in order for our organization to maintain stability in the current operating environment” and that “these actions were also taken in an effort to rationalize the company’s infrastructure from one intended to support material new unit growth, to one with a significantly reduced development outlook.”

I would agree that these recent moves to eliminate costs will provide the company with more flexibility, but again, like the sales-leaseback transaction, I think the need to implement these cost savings initiatives points to RUTH’s current desperation. The company is doing anything it can to survive in the current environment. Making matters worse for RUTH, although not surprising relative to recent comments from other casual dining operators, the company also stated that the challenging trends through 3Q08 deteriorated further in October. RUTH’s comment about its significantly reduced development outlook, however, highlights a definite step in the right direction…better late than never.

Japan's "We Don't Get Capitalism" Chart...

We wrote about Japan's decision to cut rates from zero to zero again this morning (from 0.5% to 0.3%). This was nothing but a polarized and politicized event. Inflation was also reported in Japan overnight at +2.3% year over year growth. When your economy is experiencing chronic stagnation, and mounting stagflation, the last thing you should do is cut rates further.

Paul Volcker will do a teach in to the world on this score, once Obama takes office... I hope. This chart is getting painful to look at.

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