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Eye On Leadership: Jaime Dimon

This is definitely one of the quotes of the day that lines up most succinctly with what we have been saying this week - "we're not running the company as if we're in a Great Depression" (Jaime Dimon, CEO of JPM).

Nice call Mr. Dimon - we're on board with you there. People are freaking out about 2009, and you're providing some leadership to calm the fear that some investors should have had 12 months ago.

We are not going into a Great Depression. The only depression I see dominating New York's groupthink is in the bank accounts of the levered longs.

Keith McCullough

Shrink to Grow

As an industry analyst I have deployed the shrink to grow theory many times to identify ways to make money buying companies that are right sizing their business to enhance future profitability. With SBUX reporting earlier this week, I have the shrink to grow theme as top of mind. Unfortunately, this theme is everywhere I turn and is one reason to remain cautious on the consumer. From a Macro standpoint, the US economy will likely contract before it can grow again. The US and many global economies are headed down a slippery slope which can be toxic for investors, because of the unknown of how steep the slope will be. I guess this is why I’m still bearish about the consumer.

The market swoon in October provided another shock to the consumer, the impact of which we do not know and most likely has yet to be fully digested by the market. The monthly sales figures reported by companies that rely on discretionary purchase decisions, like restaurant and automobile manufactures, were disastrous in October, and November is not off to a good start. The consumers have not bottomed yet; as a result there continues to be significant excess capacity in many sectors. These sectors need to shrink capacity before they can grow again.

There continues to be significant excess capacity in the restaurant industry that needs to close before the industry can fix the traffic related issues we are seeing today, particularly in casual dining. This is not to say that QSR is immune, but it does not appear to be as bad. QSR has picked up some traffic from casual dining, but the incremental traffic is coming from discounting. Unfortunately, the more stores that close the more people there are out of jobs. Regardless, the restaurant industry still needs to shrink to grow!

Moving to… Discussing the fate of GM is a moot point – the collapse of the credit markets, especially speculative credit, means there is no life support in bankruptcy. So that leaves one of two outcomes for GM; it’s going to file for bankruptcy and liquidate or the government will bail them out. The reality is the government will provide life support, with the stipulation that the company needs real fundamental restructuring – it needs to shrink its excess capacity and thus cut its payrolls. When the US Government bailed out Chrysler it ended up laying off 1/3 of its work force. GM needs to shrink to grow!
The US Banking and financial services has been operating with excess capacity for years. No need to rehash that story, but capacity is finally declining there, too. Shrink to grow!

We are now just beginning to see the severity of the stress in other parts of retail. The retailer du jour is Best Buy – no surprise, but reality. Recently, Circuit City and Linens ‘N Things have either shrunk significantly or liquidated. The US economy is going through a cleansing process that is healthy but takes time to fix. Unfortunately, government intervention in the process is only prolonging the process. Today, companies that are on the brink of collapse don’t go bankrupt, but become socialized by the US government.

Why we didn't cover our Japan Short (EWJ) today...

This questioned is better answered with a chart. This is embarrassing. Amidst the rest of the world (Australia, Germany, USA, etc...) putting in sentiment bottoms, the Japanese ring the gong on a fresh 26 year low.

Japan is not a place to be invested. As Wall Street great, Marty Whitman, would say "a bargain, that remains a bargain... is no bargain!"
KM

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Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

Why Did We Cover our British (EWU) Short Position Today?

One, the EWU was down over -6%, and we cover on red meltdown days... Two, and more importantly, as bad as this morning's jobless claims # in the UK was (worst since 1992), the rate of change improved sequentially (i.e. less bad, see chart).

Everything that matters in our macro models occurs on the margin. Today's delta was an important one. Look for the British to cut interest rates again in the near future.
KM

Paulson: Get The Guy Out The Door Already!

Hank "The Market Tank" Paulson strikes again. Just when I thought we were done with his lack of clarity, they cart him back onto that ole Bushy administration podium to remind us of this countries reactive management ghosts past.

Getting Paulson off of TV and back into whatever job he wants to take other than his current one could very well be the most bullish pending catalyst that US market investors can look forward to.

The Goldman Sachs that he left is the company that is seeing there share price go down every day. America has voted. Let's get on with it, and clean this mess up.
KM

Trade VS Trend – MCD and EAT

MCD

Keith - MCD a tough one here ... but 2 up days in down tapes = + divergence... I am scared to short it until I see my $58-59

Howard – The top line trends for MCD are some of the best in all of consumer. The universal love for the stock is scary. Plus, don’t forget about the franchisee, they are the ones absorbing the losses from selling all that cheap food.

EAT

Keith - EAT has been eaten by the shorts ... way oversold, finally... a buy for a "Trade" under 8.30

Howard – My guess is there are a lot of names like this in casual dining – OVERSOLD TECHNICALLY. I have a hard time understanding the catalyst to buy any name. Here is an interesting tidbit - of all the casual dining chains that are covered in Knapp Track, Chili’s was the second best performing chain (after the Olive Garden) in October. For a pair trade I would be long EAT and short DIN in this market.

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 80.33%
  • SHORT SIGNALS 78.51%
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