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SATIRE AS A CONTRARY INDICATOR

The satire of comics and the covers of national news magazines and business publications show what’s making news now. As we know, the market, on the other hand, is a discounting mechanism; it anticipates future events, and reflects them in the current price.

Magazine covers are intended to sell magazines. The related cover story is typically written because that featured topic is resonating with the public at that moment. When a magazine decides something is worthy of its publication’s highest profile, it usually means that trend is reaching a climax.

Why does this work as a contrary indicator? MCD is a classic example. We have included three pictures of magazine covers in this post: two feature MCD and one focuses on SBUX. The two MCD cover stories pictured were published in 1998 and 2007, respectively. Then look at the cartoon from the Seattle post last week.

Just building a mosaic!

PROMOS AND THE POWER OF 3

My partner, Brian McGough, brought up an interesting tidbit in our morning meeting yesterday. For the first time ever, Canyon Ranch is allowing 2 night stays versus the customary 3 night minimum, a clear violation of the Koch Curve and the theory of triangles.

I had just gotten back from a family vacation in London where I noticed many hotels offering a free room night with every two paid nights. Here, the hotels are incorporating the power of 3 into their marketing pitch. The marketing executives may be pursuing the right mathematical process but a 50% giveaway is a bad signal for the industry. Demand is falling off a cliff, particularly in the gateway cities.

Here is a sampling of hotel promotions:

• Intercontinental Hotel Group - Holiday Inn two-nights-for-one
• Starwood: offering a “pay your birth year” promotion for the second and third nights of a 3 night stay
• Four Seasons: a number of Four Seasons hotels offering a 3rd night free
• Baltimore: City-wide promotion, 3rd night free
• Luxor Las Vegas: Stay 2 nights and get the 3rd night free
• Marriott: 2 nights, third night free at Rive Gauche in Paris

Margins are looking scary. It might be time to call for another 25% reduction in EPS estimates for the hotel owners.


3rd night free: the new marketing fad

SP500 Levels Into The Close...

Our "Beware Of The Squeeze" call (11/12) is not one that lasts in perpetuity. As the math changes, so do our models. The shorts have been eaten, not once, but twice in the last 48 hours - today's rally off the lows was impressive. "Pop... Pop... Bang!"

And yes, we are selling into it... that's what winners do. We aren't going to get piggy here. This isn’t a Depression, but it is a recession, after all... we need to ration points when we are awarded them. Keep a "Trade" a trade.

See levels below: SP500 resistance lines are material up at 920 and 920. Sharks can jump and bite bulls too, don't forget.
KM

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Not Everything China Is Equal: Selling Our EWH Today...

We have expressed our bullishness on China via both the EWH (Hong Kong) and FXI (China) etfs. After big runs in their respective domestic markets, we are selling one, and sticking with the other. Not everything China is created equal.

While this morning's GDP report out of HK wasn't new news, it inspired many questions in our models with regards to how bad HK can still get while the Chinese domestic consumption story improves. Obviously HK is much more levered to Wall Street and London than inland China is. The answers we are seeing initially are not positive enough for us to hold the line long EWH here.

As the facts change, we will. To put the Hong Kong +1.7% GDP growth print in historical context, we have attached the chart below.
KM

German Inflation Continues To Abate...

Below is the chart of Germany's year over year consumer price inflation (CPI). This morning's report showed another month/month decline. It looks increasingly likely that Germany's inflation rate will approach 1-1.5% year over year growth within the next 3 months.

This, on the margin, is bullish for German Equities.

We remain long Germany via the EWG etf.
KM

Eye on Leadership: Phil Falcone

We wanted to highlight Phil Faclone’s testimony in front of Congress yesterday. While Keith and I may be biased since we come from small town, blue collar roots and are former college hockey players (sorry Phil we had a winning record against Harvard when we played at Yale), his is a track record that is difficult to disparage. Phil has built one of the most impressive hedge funds in history.

The path from Chisholm, Minnesota was a not easy one, no doubt, and as Phil outlines below, he has suffered his share of bumps along the way. But at the end of the day, his hard work, integrity, and a process have led him to incredible success. We also have the pleasure of knowing a few of Phil’s colleagues and it is pretty obvious that success hasn’t changed the man. As they say, you can take the man out of Chisholm, but you can’t take the Chisholm out the man. Indeed.

Daryl G. Jones
Managing Director

“I would like to take just a moment to tell you a bit about myself. I currently reside in
New York City with my wife of 11 years and two children. By way of background, I was
born in Chisholm, Minnesota, population 5,000, on the Iron Range in Northern
Minnesota. I was the youngest of nine kids who grew up in a three-bedroom home in a
working class neighborhood. My father was a utility superintendent and never made
more than $14,000 per year, while my mother worked in the local shirt factory. I take
great pride in my upbringing, and it is important for the Committee and the public to
know that not everyone who runs a hedge fund was born on 5th Avenue - that is the
beauty of America.

I attended Chisholm Senior High and went on to Harvard University, where I received an
A.B. in Economics in 1984. After college, I pursued my first love, hockey, although an
injury cut short a professional hockey career abroad. I then moved to New York and
began working as a high-yield bond trader at Kidder, Peabody. A few years later, at the
age of 28, I teamed up with a friend to complete a leveraged buyout of a small company
based in Newark, New Jersey. Unfortunately, the recession in the early 1990's made that
venture quite difficult. As a result, by 1994, I was so 'financially challenged' that the
power in my apartment was shut off because I could not afford to pay the electric bill.
That experience, as painful as it was, stayed with me over the years and taught me several
valuable lessons that have had a profound impact upon my success as a hedge fund
manager.


Through hard work, and perhaps a little bit of luck, Harbinger Capital Partners has been
able to generate substantial returns for our investors since 2001. Our investment
philosophy is very simple; we study, often for months, the fundamentals of companies to
identify those that are undervalued or overvalued, and we act decisively when
opportunities present themselves. We are not momentum traders, nor are we day traders;
we are investors. It is not magic. My analysts perform thorough due diligence, rather
than relying on ratings agencies or other research reports -- like many of the reports that
improperly valued securitized mortgage products over the past few years.”

Philip A. Falcone
Senior Managing Director and co-founder of Harbinger Capital Partners
Testimony to Congress
November 13, 2008

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