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COLM: Bull By The Horns

I hate to show any enthusiasm over people losing their jobs, but I really like the 4% workforce cut Columbia announced after the close. By my math, we’re looking at about $100k per employee in net savings, or $0.15 per share (5% EPS accretion). Several factors to consider…

1) Timing: This was in the works when the company announced earnings just 2 weeks ago. Usually when a company announces a workforce cut it accompanies admission that business outright stinks. We all found that out 12 days ago when COLM reported an 11% decline it its backlog. The biz has not changed meaningfully since.

2) One reason the company is doing this now is not only because it should, but because it CAN. The latter has never been the case as COLM habitually stripped capital out of its P&L and balance sheet in an attempt to buoy margins. But over the past two years, SG&A has grown 2x the rate of sales, as COLM has shown greater commitment towards investing in its brands. One might argue that it is going the other way with today’s announcement. That’s fair. But the point I like about brand and infrastructure investment is that if the business slows, a company at least has levers it can pull and capital to redirect to stabilize business. COLM has never had that – until now.

3) Don’t forget that a workforce cut of this magnitude does not come lightly to this family-run business. COLM has resisted this in the past. They dipped their toe in the water w layoffs last year, and now are diving in. I respect the ‘hometown hero’ aspect of the culture – but when return on capital goes from 25% to 10% over 5 years, that’s probably being a bit too blind. Sight restored.

4) COLM is no stranger to down years—but the consensus never forecasted it. Now the Street is calling for a down year in ’09 – but next year I actually think earnings will be up. My estimates were ahead of consensus heading into 3Q, and my ’09 estimate is 13% higher than the Street.

5) Lastly, sentiment on this name smells rank. Over 30% of the float is short, the sell side is calling for a down year, and 91% of the ratings are not Buy.

For what it’s worth, words usually flow off my fingertips when I write comments on our Portal. But I had to stop several times throughout this note and ask myself the question “McGough, are you actually getting bullish???” While I still think there are plenty of Zeros out there, I definitely see value in names like this. So “am I getting more bullish?” Yes.


PNK reports on Thursday morning. Every gaming company that has released calendar Q3 earnings has experienced a positive move in its stock. However, those stocks didn’t double the week heading into earnings.

Since we posted “A SHORT SQUEEZE COMETH” last week, PNK is up 114%. After such a big move, how much more upside can there be? Considering that the stock is still down 75% year to date, even after the recent surge, I’d say quite a bit.

PNK is a victim, self inflicted to an extent, of a major consumer pull back, a leveraged balance sheet, and the (investor) perception of tight liquidity. However, while not predicting blow out operating results, I believe the performance and outlook will be much better than bad. PNK’s market exposure is more advantageous than most casino companies. Texas and markets less exposed to the housing bubble generate most of PNK's customers. October commentary should be positive, on the margin, relative to September.

Regarding liquidity, management should be able to allay those fears on the conference call. There are no covenant issues until possibly Q2 but the company has a lot of levers to pull to maintain the appropriate leverage including, cessation of construction in St. Louis, cost cutting, and a temporary cut in maintenance (slot) capex. PNK could stop construction on St. Louis and be able to pay off its entire credit facility before it matures in 2010. They have a significant amount of flexibility and, as such, we moved them to the right side of the liquidity trade last week.

The following table highlights some key forward looking comments issued by management on the Q2 conference call. Unlike most of the commentary from the other casino operators, I actually think PNK management will reiterate their Q2 assertions. Maybe not Reno but who cares?

Management may affirm all or most of these assertions issued during Q2 conference call

Great Day For Our Shorts!

November 4th, 2008 was just a great day for the "New Reality" of American Capitalism.

Those who are bulled up and long liquidity are making a pile of money here on the long side. Those who have a short selling process are banking it today too.

Research Edge highlight of the day: 50% of our short positions in the 'Hedgeye Portfolio' were down today (MGM, UUP, and DIN).

Being on the winning team is always so much more fun.
Have a great night!

Early Look

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S&P500 Levels Into The Close...

As the facts change, our math does. If this squeeze rally can hold and close at/above SPX 982, we're getting longer of US Equities.

Here are our refreshed levels for the S&P500:

BUY "Trade" support = 932
BUY "Trend" breakout = 982
SELL "Trade" momentum = 1061
SELL "Trend" resistance = 1164

Few believe in this rally, and I love that. My name is Keith McCullough, and I support this message.

The VIX is receding, finally

The VIX is receding, finally

From technical perspective the VIX looks poised to decline. It has already traded at levels today below its 30 day moving average, as well as the 30 and 90 day realized volatility for the S&P 500.

If you read our work regularly, you know that we watch the VIX closely. Since the second week of October, we have viewed the wild gyrations of the “fear index” as the volatility equivalent of a short squeeze, where those very few arbitrageurs left in the options markets with capital have had the heads of the many without it caught in a vise.

The models employed by the designers of the VIX assumed that implied volatility could be extrapolated by backing out the known factors (maturity, difference between the strike and underlying) and a series of assumptions (e.g. cost of funding). The implicit assumption of this methodology is that the option premium reflects the ability of a trader to execute a delta hedge in the underlying market simultaneous to trading the option. Obviously, if a trader cannot execute a hedge due to choppy markets (or say, a short sale ban) or if he has no funding available, he will not be able to manage risk efficiently. If the trader is a market maker, and therefore OBLIGATED to show a price, he will show one with a premium that is either so richly priced he has a high degree of confidence that the premium will offset any loss or it will simply discourage anyone from trading with him (more often the preferred outcome).

As such, it is our opinion that the VIX here is still not really measuring equity investor sentiment, even though it has come down by more than 40 points from its high. Instead the VIX appears to remain more a measure of liquidity in the risk markets, which have been severely disrupted.

The decline of the VIX towards levels which appear more “normal” compared to longer term historical averages is inevitable. As a former colleague of mine recently commented “It would be nearly impossible for realized volatility to persist above 50 forever. At that level everything would hit zero eventually and there would be no more market.”

Andrew Barber

Australian Sobriety: Monetary Policy, The Right Way...

This is easily one of the best Macro charts in the league. The Reserve Bank Of Australia's czar, Glen Stevens, has nailed the global macro call every step of the way.

Look at this chart below. Today, that 75 basis point drop you see in the blue part of the chart was a man with a plan. Stevens not only predicted that commodity inflation would go higher, faster, but he proactively managed his country's reserve rate to that proactive prediction. Now he is one of the sober few who has both a rate a of return to deliver to those in his country who save, and some room to breathe. He’s at 5.25% and “Heli-Ben” is at 1%.

My hat is tipped to you, Sir Stevens - great job!

Daily Trading Ranges

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