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Deflating the Chinese Inflation Chart...

Today's Chinese producer price inflation report was somewhat lost in the shuffle of the media's daily dance on the data point coals... but it shouldn't have been. On the margin, this was a material release.

China's PPI came in at +6.6% y/y (see chart). This is down materially from the +9.1% reported in September, and what now looks like it was a 12 year peak in August at +10.1% year over year.

If you are going to invest in equities, we suggest you do so globally. Combined with the $586B stimulus plan that the Chinese instituted this morning, decelerating inflation is a positive macro factor. This puts owning the Chinese etf (FXI) at the top of our global macro country investment list.
KM

TSN – Implications for the Chicken industry

TSN’s chicken segment reported operating losses of $91 million and $118 million for 4Q and FY08, respectively. These results were hurt primarily by higher grain costs, which increased $231 million in the fourth quarter and $593 million for the full year. Chicken prices moved in the right direction in Q4, up 5.5% YOY, but not enough to offset the magnitude of cost increases. And, the outlook for the first half of 2009 does not look much better.
Management has limited visibility on input costs going forward and supply issues remain a concern, but given current leg quarter and breast prices 6 weeks into the quarter, TSN expects to lose significant dollars in Q1 and could potentially lose money again in Q2. Egg sets have come down 10%, which is an indicator of future supply levels, but given the current pressures on demand, TSN does not think this reduction will be enough to return to profitability. Management stated that a lot depends on demand. Given the strength of the U.S. dollar, there will be increased pressure on export demand and there continues to be weakened demand from casual dining companies within the food service segment. Not surprising relative to the recent October same-store sales numbers we have been seeing from casual dining operators, TSN said casual dining demand has gotten significantly more discouraging in the October/November timeframe relative even to what it was seeing in August and September. All of these issues are industry issues so the challenges TSN is facing will also impact its chicken competitors.

TSN said it may take a quarter or two before the supply/price relationship comes into balance, but relative to its current environment, “ultimately this will not go on. It cannot go on forever. So there will be a time when these prices will materially rise, and that time frame is not years away. It's months away. Whether it's this quarter or next quarter or whether it has to wait till April or May, it is going to happen.” However, due to the volume of questions/concerns around the chicken segment, investors did not seem comforted by this statement. Management alluded to these concerns at the close of its earnings call when it said, “Let me just conclude by saying it's evident that on the chicken side, you all think we should be cutting production. I will tell you we will continue to monitor that, but I still believe that the improvements that we've put in place and what we are doing to match demand with supply is the right thing for Tyson Foods.”

Currency Market Stabilization: "Trade" or "Trend"?

One of the emerging bullish factors in our macro strategy model is the stabilization that we are finally starting to see in the foreign currency market. After a September to remember, followed by an October to forget, the November thaw in daily currency volatility has been a welcomed change.

Below we show this via 3 currency lines: the US, Canadian, and Australian dollars. Last night, Asia currencies continued to stabilize alongside Asian equity markets, which are now all being buoyed by a proactive Chinese government stimulus package.

Bottoms in markets are processes, not points. This is one more macro factor to add to the bullish side of the ledger.
KM

Early Look

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Drip…Drip…Drip…

The Chinese water torture continues... Contrary to what might be a glimmer of hope, China’s answer to ‘Hank the Tank’s’ bailout plan won’t help the apparel/footwear industry in the US.
Adidas, Nike, and Puma all have announced recently that they are relocating manufacturing capacity outside of China. Interesting that Nike and Adidas only source about a third of their footwear in China, versus 90%+ at most other US companies. These companies have been around the block a few dozen times. Most other players have not. There’s massive tail risk for those lacking a proactive strategy here.

While I take any statistical evidence from Chinese authorities with a massive grain of salt, Government stats show that 67,000 factories were shuttered in China in the first half of the year, and more than 100,000 plants will have closed by year-end. My math suggests that about 8-10% of this is footwear and apparel.

An interesting story highlighted in the LA Times noted the closure last week of China’s biggest textile dye operation — with four factories, a campus the size of 31 football fields, 4,000 workers, and 300 local suppliers that also face bankruptcy. Not good at all…

Is China’s stimulus package going to help? My two cents is that we should not hold our breath. Do you REALLY think that a domestic stimulus plan that could very well end up being the same size (in US dollars) as Paulson’s bailout plan is geared toward amping up the firepower for low-end export goods? Quite the opposite… That’s the exact business that China is trying to shift away from in its quest to morph into more of a local consumer-driven economy instead of a sweat-shop economy. That’s great for companies who’s net revenue base in China is greater than its sourcing base (Nike and Adidas are the only ones that come close), but everyone else will suffer the imbalance.

GS: Would Marcus Be Proud?

Below we have attached what we think is a very noteworthy "Trade" developing in the US market. What is bad for GS and MS stock prices has not been a leading indicator for downturns in the broad indices (see the 3 week overlay chart below of GS vs. SPY). The US market was strong on Friday, while Goldman’s stock miserably underperformed. This performance divergence matters. The “New Reality” is finding clearing prices.

Goldman has already lost another -9% today, and the talking heads like David Faber at CNBC are saying whatever it is that they say. Marcus Goldman can't be smiling down on how this story is starting to unwind. Taleb’s “narrative fallacy” is alive and well in terms of the media seeking explanations as to what is going on here. How about this: GS and MS are now bank holding companies who cannot earn 2007’s returns, ever again.

When Chris Cox and his cronies banned short selling, they were only postponing this inevitable fundamental realization. Shame on them.
KM

Barclays Is Getting In The Game With Us Here!

It's dressed up like Barclays but it's really Lehman, and their analyst is downgrading Abercrombie (ANF) today. We bought ANF in the Hedgeye Portfolio on Friday and are happy to butt heads for this ball. Be sure to 'You Tube' Lehman's prior positive rating on ANF - note the price. I won’t be mean and attach a chart here.

Incidentally, the stock is trading up on this downgrade…

This is a great game, and another great day for it.
KM

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