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Quote Of The Week: Barrack Obama...

Being too long the US market into his Presidential victory top on November 4th (see chart) made me feel a lot like Obama’s description of himself on Friday - a "mutt." I hate one thing in life - losing. On a gross basis, the ‘Hedgeye Portfolio’ was down -1.1% this week (the S&P 500 was -3.9%).

The point in selecting the aforementioned Obama one liner as our “Quote Of The Week” has nothing to do with the choice of his family’s new White House puppy - it has everything to do with rhetoric and expectations. That’s what the US market traded up +18.6% from the October 27th low into (S&P500, ); it’s what dropped it fastest in 2 days since 1987 (Wednesday-Thursday); and it’s also what spiked us higher into Friday’s close (Obama’s late afternoon press conference).

If you're a Republican, you may very well have chalked up the Obama win to "it’s the economy stupid", and to some extent, it's hard for a realist to disagree with that. That said, I think it's equally hard for you to convince that same realist that Obama's victory wasn't partly due to his changing the tone of the political rhetoric in this country.

"Hope" is not an investment process, but it is something winners want to wake up to in the morning. When the rhetoric of hope is combined with absolute power, leadership has the potential to take hold. Between the control he has won in Congress and being within ear shot of having a filibuster proof Senate, Barrack Obama is going to be in one of the most absolute positions of Presidential power that this country has ever seen. That power/rhetoric can freak you out (Wednesday/Thursday of this week), or it can inspire you. To each their own.

Can Obama’s absolute power meet the expectations of his rhetoric? I guess the answer there can be yes or no, depending on your partisanship.

Be certain of one thing - Wall Street's old boy “tax cut” guard has doubted this man from the beginning. As obvious as Obama’s challenge will be to over-deliver on the bullish expectations of his faithful constituency are the bearish market expectations of what said capitalists of “Investment Banking Inc.” leaders past think a "leftist" can do to an economy – on that expectations front, Obama has plenty of runway to over-deliver to the right.

Don’t forget that he stood up on Friday, with Paul Volcker at his side, and called himself a "mutt"...

Expectations in market’s are critical, particularly if you have the power to set them…

Keith R. McCullough
CEO / Chief Investment Officer

EYE ON THE NEW REALITY: CHINA HAS THE CASH

We remain the new China bulls. This morning's announcement by the Chinese government is a reminder to all living in "The New Reality" that he/she who is liquid long cash is king.
KM

BEIJING (AP) -- China announced a $586 billion stimulus package Sunday in its biggest move to stop the global financial crisis from hitting the world's fourth-largest economy.

CASUAL DINING DISCOUNTING – JUST WHEN YOU THOUGHT YOU HAVE SEEN IT ALL!

This is the most aggressive discounting I have seen so far!

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Chart Of The Week: Asia Bottoming?

We have been the bulls in the China shop since the October lows. We understand where consensus is, since the bears are using our 9 month old thesis. Does the Street understand that these 3 Asian indices are bottoming (see chart)?

We are long China via the Chinese etf (FXI). It was +12.8% on Friday, putting it +32% from the October 27, 2008 low. Bottoms are processes, not points - and this one is in motion.
KM

ASCA: WHAT’S CHANGED?

Below is a YouTube of management’s forward-looking commentary from the Q2 conference call. Focus points for the Q3 release will be forward looking commentary, progress on the $20m in cost reductions, and the Capex outlook.

Of particular importance will be the financing situation. ASCA is on track to bust the senior leverage covenant by Q2 2009 unless the removal of the Missouri loss limit provides a big boost to EBITDA. Hopefully, the company will provide color on their refinancing strategy. Options include re-pricing the bank facility in exchange for more flexibility on the covenants. This is unlikely given that most of the company’s debt is generated through the facility and the rate would likely increase 400-500 bps. That would result in a massive increase in interest expense. More likely would be a subordinated debt offering to provide comfort under the senior leverage covenant. The rate on a sub debt bond offering could be in the mid-teens.

The company expressed a pretty cautious tone last quarter and business probably deteriorated further, particularly in September. October should be incrementally better than September, however, but still difficult. Commentary regarding Missouri should be positive, given the much faster implementation of the loss limit removal.

To limit downside on the stock in the face of estimates coming down, ASCA needs to show progress on cost reductions, limiting Capex, and put forth a reasonable refinancing strategy.

Here's what they said last quarter

The Deflation Chart...

The red line in this chart is our "Trend" line. Provided that the CRB Commodities Index remains below it, the intermediate "Trend" for commodities as an asset class will remain negative versus equities.
KM

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