Spain: The Terror Mullet

A very frightening man with a very funny hair style…

News that the ETA military leader Mikel Garikoitz Aspiazu Rubina , known as “Txeroki” had been apprehended in France was headline news across the continent with Spanish Prime Minister Zapatero heralding the arrest a “severe blow” to the separatists.

The ETA has waged a smoldering terrorist campaign in Spain since the Franco regime ended with frequent violent outbursts. Since July the ETA is suspected of 3 car bombings, including one at a military academy in Santona that killed a Spanish Army officer on September 21st and one in a university parking lot in Pamplona on Oct 30th that injured 15 students. Despite the capture the IBEX continued to decline throughout the day session closing lower by 330 points or 3.77% pulled down by concerns over the gloomy prospects for a recovery anytime soon. Banco Santander, Spain’s largest financial institution fell by more than 6%.

We have followed the Spanish market closely this year and were short EWP, the Spanish ETF, during the spring as the housing market crisis there began to accelerate. We continue to keep an eye on the Spanish market, looking for signs that matter on the margin. This one certainly didn’t.

Andrew Barber

US PPI: The Most Bullish Chart Of The Day

When a tree falls in a forest, does anybody hear? This inflation charts is starting to sing bullishly (albeit softly) to our macro model.

Suffice to say, the top in reported US inflation is in the rear view mirror (see chart). This is going to pave the way for "Heli-Ben" to justify cutting US interest rates to zero. Altogether, this is going to be bullish for equities and commodity prices in the months to come. Re-flating may very well be the only policy path left.


Eye On Liquidity: Flatlining

LIBOR and spreads between short term and long term rates came in flat yesterday as the markets waited for PPI and CPI for cues. This morning’s PPI was deflationary, so US short rates continue to come in nominally, but three month LIBOR is holding at 2.22% On the margin, this is a bearish signal for equities and a negative sign for liquidity in general as the cost of lending in the interbank and capital markets increases slightly on concerns over counterparty risk (the low was closer to 2.10%, so we are moving up from the lows, not down from them).

The decline of 3 month LIBOR from near 5% in early October to less than half of that in the first week of this month was one of the most positive signals in our macro model, but don’t mistake lower reference rates with increased liquidity. Figures released last week by the Fed for Interbank loans by commercial banks during the first week of November showed the second sequential week over week decline (see chart) suggesting that commercial lenders are still reluctant to extend credit despite government intervention. They fear the market’s proverbial pirates. They are sitting on their cash.

Meanwhile the swap spread market still reflects the high cost of financing positions in the capital markets. Although shorter maturity swap rates decreased overnight the levels still remain over 100 basis points – well above historic averages. The drought appears to be impacting the listed futures markets as well - an informal survey of brokers suggests that FCMs on average are quoting rates above the Exchange minimum levels and that this premium has been creeping up steadily in recent weeks.

We will continue to watch reference rates for signals, but will weigh those signals against the real cost of liquidity when factoring them into our model.

Andrew Barber

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Another Negative for Casual Dining

A consumer survey, conducted by BIGresearch, indicated that overall gift card sales are expected to decline more than 5% this year to $24.9 billion. In 2007, restaurants and retailers enjoyed a 6% increase in gift card sales.
Not only is the number of gift cards purchased expected to fall from 2007 levels but the average gift card purchaser is also expected to spend less this year - $147.33 per person compared with $156.24 last year. 2008 marks the first year that average gift card spending has decreased since this Holiday Consumer Intentions and Actions Survey began in 2003.

National Retail Federation President Tracy Mullin stated, “Since gift cards never go on sale, some price-conscious shoppers will be passing up gift cards in favor of holiday bargains.”

As a true sign of the times, the survey found that 3.1% of shoppers attributed their cutting back on gift cards to fear that the issuing restaurant/retailer might go out of business, and their fears, in some cases, are warranted. Just two weeks ago, RUTH commented that it is relying on strong gift card sales in the fourth quarter to help the company to remain below its year end maximum debt to EBITDA covenant level of 3.5x, which management said “will be tight.” In 2007, gift card sales added about $12-$13 million of revenues in RUTH’s fourth quarter, and management is expecting the same level of gift card sales this year, which may also be tight, as a result of this survey's findings.

RUTH, however, is not alone. A lot of casual dining restaurants count on gift card sales to boost revenues in the fourth quarter. This year these gift card sales are even more crucial as a means to offset the overall fall off in casual dining traffic trends. For reference, in addition to its typical holiday season gift card promotion, Red Robin also rolled out a third party gift program, primarily in Safeway and Kroger grocery store chains, to drive incremental traffic. California Pizza Kitchen increased the number of distribution points for its gift card program by three times relative to last year, and is also offering the gift buyer a $20 reward card for every $100 gift card purchase. McCormick & Schmick’s is also focused on making its gift cards more readily available in additional points of distribution, including grocery stores, Costco and the internet. The company sold $8.5 million worth of gift cards last year at Costco alone and is expecting an ever greater contribution this year.

Trading Oil? Here's How We see the "Trade"

Oil, and commodities in general, remain in an intermediate down "Trend". That doesn't mean you can't making money on the immediate "Trade" using an upside bias. Below is how our models flush out in terms of trading oil directionally. We'd be a better buyer under the $54/barrel line and a seller on rallies to the $60 level.

The US$ is starting to lose its upward momentum. As we get closer to another free money rate cut by the US Federal reserve in December, we are getting interested in getting long some commodity exposure (US$ down, CRB up = “Trade”). Currently, we have zero commodity exposure in the 'Hedgeye Asset Allocation' model, and that's been a good thing for performance over the course of the last few weeks. Look for that to change if we get our price in oil.


At World's End - Pirates!

“The only rules that really matter are these: what a man can do and what a man can’t do.”
-Captain Jack Sparrow (Pirates of the Caribbean)
As I was driving past Stamford, CT this morning, a light snow blew in… the morning was her usual self, plenty dark, and very quiet… it was 430AM, and all of a sudden a radio news program broke in suggesting that I should beware of pirates. No, not the Disney kind – real Somali pirates!
By the time I got to the office and grinded through the news of markets selling off overseas, fear had become me. The US futures “are selling off” cried a CNBC entertainer… the global economy “is in a recession” sulked another… “hedgies are selling”… a “Great Depression” cometh…  even the immortal bankers at Goldman may not get paid this year… the Black Pearl is here – we must be “At World’s End!”
C’mon, get serious. While it is true that “Somali pirates” boarded and took control of a Saudi oil ship last night, this isn’t that scary. After all, since the world is no longer “awash with liquidity” (as many of my investment strategy competitors can be ‘You Tubed’ as having said no less than 9 months ago) does a $100 million worth of oil banging around in a pirates barracks really matter? The Saudi stock market has been in free fall ever since we called the “Fast Money” commodity top in May. This morning the Saudi market is down another -3.5% and the United Arab Emirates tape is getting tagged for another -5.1% loss. This isn’t new. This is called deleveraging. This is “The New Reality.”
The simpleton math says that since Goldman was all bulled up on oil prices in July, we have seen a -63% decline in the value of the said Somali pirates’ newfound treasure. In America, we have a US Treasury Captain, who only 28 months ago loaded that very Goldman ship up to the gills with leverage. Some of the most lucrative prop trading gains in world history were cash bonuses paid out on the high seas of Wall Street “sell side” desks. Oh wait, were those “buy side” prop desks? I can’t for the life of me see through the fog. Them must have been pirates!
Save a banker or trader’s bonus here and there, who really cares anymore? This has basically been revealed as the biggest pillaging of the US Treasury since whenever. What can we do about it? Well… Larry Summers and Robert Rubin finally sat down with Captain Hank “The Market Tank” last night, and called him out on enough issues for any viewer to feel the tensions associated with a difference of opinion. The best thing Obama can do is have Captain Hank walk the plank. This Disney movie is over guys – the US economy is real. There are families to feed and a “New Reality” of American Capitalism that needs to take hold. “Lead, follow, or get out of the way.”
Back to our pirate ship of ‘Hedgeye Portfolio’ treasures. We signaled yesterday that we had taken advantage of the market’s proactively predictable market squeeze and sold into it. This morning our treasure trove is sitting comfortably on a 79% position in US cash. A few of the shipwrecked pirates bumped up against my inbox again yesterday questioning who, how, and why I could be trading around my exposure like I have in the last 3 trading days, and my answer is the same as Captain Jack’s: “the only rules that matter are these: what a man can do and what a man can’t do.”
There are no rules against buying low and selling high. There are definitely no rules against buying high and trying to, as “Fast Money” used to say, “sell high-ah”… but there are silly new rules like ‘You Tube’… so you better be careful out there. If you want to get in the game and manage money with pirates in the waters, sleep with one eye open. It’s really really getting scary out there…
My upside target for the VIX is 71.17 and my downside target for the S&P500 is 833. At those scary levels, we’ll be buying/covering stocks into the darkness of market weakness. I am praying for the snow to last. According to just about everyone in the media this morning, the forecast is for the “world’s end.” If we are all going to go down, it may as well be in the fluffy white stuff. In the meantime, the best way to beat the pirates is to be one. Argh!

Best of luck out there,

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