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Eye on Regionalism: France

French President Nicolas Sarkozy announced today that France will pay out €20 billion to protect its “strategic companies” in the wake of the global financial crisis through the creation of the country’s first sovereign fund. Made up of government and private investment, with state ownership projected between 34-49%, the fund will provide the catalyst for Mr. Sarkozy’s plan, announced last month, of protecting French companies from “foreign predators”.

Yesterday before an aerospace supply manufacturing company near Paris Sarkozy said:
“The day we don’t build trains, aeroplanes, automobiles and ships, what is left of the French economy? Memories. I will not make France a tourist reserve… I want France to keep its factories. I want this process of factory relocation and outsourcing to stop and I want firms with the potential to develop to be able to do so, even if financial institutions at the moment are a little timid.”

Theodore Roosevelt once said, “Speak softly and carry a big stick; you will go far”, which became his trademark foreign policy style. Ironically, Sarkozy, who took over the EU’s six-month rotating presidency in July 2008, has proven since his inauguration in May 2007 to define himself on an internationally stage as the converse: with bouts of grandiose rhetoric and de minimis policy measures. On Friday, on a podium with Dmitri Medvedev, Le Sarko stuck his foot in his mouth, saying the Americans’ (and Czechs’ and Poles’) plan to install an anti-missile shield against Iranian nukes would bring nothing to European security.” Further, Sarkozy proved to be a poor mediator in negotiating the withdrawal of Russian troops from Georgia. Sarkozy—who has received such nicknames as Super-Sarko, Sarko L’Americain, and President Bling Bling—has been nearly as heavily covered for his private life (e.g. his high-profile new wife Carla Bruni who has posed for nude pictures) as for his public service to the French state.

An advisor to Sarkozy offered this positive spin: “People are starting to understand how he works. He has an idea, says something serious, but not diplomatically, and then if necessary he’ll correct himself. If there’s a hullabaloo, he couldn’t care less.”

It is the “idea” part of the quote that deserves attention. Since arriving in office Sarkozy has proposed the organization of Europe’s six largest countries—Germany, France, Great Britain, Italy, Spain, and Poland—to form a European military. Yet reputation always seems to come back and hit you in the face. Historically France is not known for their lack of military involvement around the world, leading back to its departure from NATO more than 40 years ago. Even with Sarkozy’s recent statements that he wants back in the club, the state’s credibility within the European community might remain an issue.

Matt Hedrick
Analyst

Casual Dining Exposure Exposed…

The charts attached below show casual dining restaurants’ exposure to the better and worse performing regions of the U.S. relative to the national average from a comparable sales growth perspective in August and September 2008. For reference, in September, none of the regions had positive comparable sales growth so the outperformance and underperformance is relative to the average 4.1% same-store sales decline. CHUX, CPKI and RUTH have the most exposure to the underperforming regions of the U.S. while SNS and TXRH have the highest proportion of their restaurants located in the better performing regions.

SINGAPORE SLING

Singapore’s Trade ministry released Q3 GDP data today showing a 0.64% year-over-year decline and the second consecutive decline on a quarter-over-quarter basis. The ministry also lowered their growth forecast for next year to a 1% contraction as demand for export is expected to continue to decline –increasing the likelihood that the Central Bank will pursue a weak currency strategy. If that is the case they are already off to a great start, Singapore’s currency has slipped 11% against versus the US dollar since July.

We like to keep an eye on Singapore. As one of the last true city-states they provide a fascinating economic vantage point into south Asia. If prospects are diminishing so rapidly for this mature economy, it raises question about the rosy growth assessments that central bankers in some of their large developing neighbors still espouse.

Andrew Barber
Director

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EYE ON EUROPE: DISCORD & DIVERGENCE

NTC business condition survey data was released today for the Eurozone showing a sharp decline to 4.1 43.61 on a year over year basis to the lowest levels in a decade. Economic contraction, particularly in the manufacturing sector, is increasing the pressure on ECB policy makers to lower rates further. The decline in manufacturing is also exacerbating the tension between EU partners - with French President Sarkozy taking a particularly shrill stance with the creation of a €20 billion fund to defend his nations “strategic companies” from ``foreign predators''.

Importantly, today’s NTC data also revealed that German industry came fared significantly better than the Eurozone aggregate with manufacturing coming in at 42.88 and services at 48.31. We continue to believe that, on a relative basis, the German economy is more stable structurally than the other major economies in Europe and remain long the German equity market via the EWG ETF.

Andrew Barber
Director

TBL: A Rare Comment from FL

"One of few positive call outs on the product front - 6 inch boot from TBL has come back very strong (ASP $145)." I continue to like TBL.
"One of few positive call outs on the product front - 6 inch boot from TBL has come back very strong (ASP $145)." I continue to like TBL.

Studying History

“No matter how busy you may think you are, you must find time for reading, or surrender yourself to self-chosen ignorance.”
-Confucius
 
I have been spending an inordinate amount of my time away from my screens this month, studying and reviewing economic depressions and crashes. What are they? What causes them? How long can they last? I know – nice life man…  reality is, however, that Jeremy Grantham’s thesis continues to play out. Right brain management (patient and objective study) is crushing the lefties this year (reactive Hank “The Tanks”). Studying is where my most productive time can be spent.
 
Proactively preparing yourself for predictable behavioral patterns generally puts you in a situation to take advantage of an opportunity. If I wasn’t in print with warnings of this crash, you could chalk me up as just another revisionist historian chirping in your inbox this morning. Unfortunately for all of us, that’s not the case. My being right was never going to equate to a positive surprise in the US unemployment rate, but hopefully it has convinced you that being liquid long cash had some strategic benefits to your balance sheet.
 
As of yesterday’s close, peak to trough declines in the S&P500, US Consumer Discretionary, and US Financials are now at -52%, -65%, and -75%, respectively. Them be crashes folks – and they aren’t all equal. Some of these moves have lasted longer and fallen further. Waking up this morning and being “bearish on the US consumer stocks” is no more unique than being bullish on “Chindia”, private equity, or petro dollars was 12 months ago.
 
In September I moved to 96% cash. As we moved into and out of the October 27th low, I began to patiently deploy some of that cash into equities. While my holding a 62% position in US Cash this morning (see Hedgeye Asset Allocation model above) should hardly be construed as “bullish” positioning relative to other Wall Street “Strategists”, I continue to believe that tremendous short term “Trade” opportunities will present themselves on the long side of this market. Squeezes are more pronounced in bear markets than bull ones. This morning I see another one coming and I will be using any weakness to cover/buy stocks. I have an immediate term squeeze target for the S&P500 of 858 (+14% higher).
 
Last week, my investment process called out 9 specific reasons why the S&P500’s October low of 848 could hold. As of the last few trading days, clearly that has been proven wrong. Bottoms are processes, not points Keith. Don’t mess with Mr. Market. He will run you over.
 
Other than being in sunny California opening our new office, the best news for me is that I didn’t buy the S&P500 until this week. I bought SPY (S&P500 etf) into the close yesterday (see Hedgeye Portfolio). Rather than focusing on my playing Jack Sparrow or Cinderella Man pre-open, you are always best served to watch what I do when the game is on with our virtual portfolio – actions always speak louder than words. I hold myself accountable to both.
 
As I was driving over the Golden Gate bridge after the close yesterday, I reminded myself that being down -4% in my S&P500 position when the US market has lost -18% since last Friday is no reason to beat myself up. I do plenty of that when you aren’t looking. I thought about doing that again here in print this morning; but now is not the time. Now is a time for leadership. So let’s get back to the history books.
 
Throughout 2008 I have discussed that 2007-2009 will look most like the 1 period of consumers savings rates replacing their levered up spending ones. While no period of US economic history is a carbon copy of another, the durations and depths of peak to trough price declines can be studied. The Dow peaked in January of 1973, and picked-up its most bearish price momentum into year end of 1974 (-45% peak to trough). There are only 2 other worse peak to trough declines in the Dow than that one – the September 1929 to July 1932 period (-89%), and the other “Depression” within the Great Depression from March 1937 to March 1938 (-49%).
 
In my macro model, yesterday’s combined volatility (VIX) and volume (NYSE) readings implied another immediate term selling capitulation. Fear of another Great Depression is here. This fear is based on fiction versus fact, and you need to have yourself another cup of coffee this morning and wake up to that reality if you already haven’t. Grantham’s October investor letter walked through some of the math on the 3 most relevant equity bubbles in the 20th century (1929, 1965, and Japan’s 1989). These are the only peak to trough corrections that have exceeded 50%. Yesterday’s S&P500 -52% peak to trough print felt like it should have – a crash. But wait … it’s we’re in a different century this morning. Yes, indeed folks, we are. This is “The New Reality.” Don’t get sucked into the vacuum of the media’s manic narrative fallacy.
 
The most relevant difference between this century and the last one is China. They have the cash now; we don’t. They own our debt; we don’t own theirs. China’s stock market didn’t make a lower low last night - America’s did. Chinese stocks are now trading +15% above their 2008 lows, and Asia traded up across the board overnight… hmmm… how could that be? Shouldn’t Asian trading take America’s lead? Isn’t the USA the land of the financial Gods? Uh, no… not so much anymore.
 
The Saudi’s are being held ransom for $25M by Somali pirates this morning. All of a sudden cartoon characters like Chavez, Ahmadinejad, and Ortega don’t have any leverage with oil trading under $50/barrel. The financial genius of “The Pandit Bandit" should try wearing a black pirate’s patch over his eye when he walks into this so called “Citigroup board meeting to discuss strategic options.” After seeing what’s become of his “bullish on India” call, he’ll already have a limp. I’ll provide the script and a parrot. “Argh! Hi there mateys'… we’re right screwed here again... prepare the anchor… it’s time to take what money we can and jump ship.”
 
Again, pay less attention to Captain Jack Sparrow than studying history. The world doesn’t have the liquidity problem that it had 3 months ago. “Investment Banking Inc.’s” handshake has a credibility one. This storm of confidence is rightly held, but like those of 1932 and 1974, it will creatively destruct. “The New Reality” is here. New leaders are emerging. Be patient, study, and take your time. Never mind the levered long activists and the “lefty reactivists” - they are preparing to walk the plank. And yes, they are depressed.
 
Have a great weekend.


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