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TRADE VS TREND


KEITH - WEN is the best looking fast food stock on the long side… however…..

HOWARD – WEN - The however is due to management proving that the merger makes sense and that the margin opportunities at the Wendy’s brand are real. In 3Q05 The Wendy’s brand posted strong same-stores sales in 3Q08 on the back of the $0.99 menu. It’s a start!

KEITH - YUM starting to shape up long... has a lot of work to do, but looks better than it has in a while

HOWARD – YUM – We need to get past the 4Q08 – the quarter is not looking good. YUM’s U.S. business is in a secular decline and China is slowing versus a very difficult comparison last year.

A smoldering stimulant!

I know there are a number of factors influencing how people spend money in today’s economic environment, but current trend in gas prices will have a positive influence on consumer sentiment. As you can see from the national gas price map, the regions of the country with the lowest gas prices are those hardest hit by the current economic environment.

US Market Performance: Week Ended 11/28/08

Index Performance:

The 5 Day Squeeze:
DJ +16.9%, SP500 +19.1%, Nasdaq +17.0%, Russell2000 +22.8%

November 08A:
DJ (5.3%), SP500 (7.5%), Nasdaq (10.8%), Russell2000 (12.0%)

Q408’ To Date:
DJ (18.6%), SP500 (23.2%), Nasdaq (26.6%), Russell2000 (30.4%)

2008 YTD:
DJ (33.4%), SP500 (39.0%), Nasdaq (42.1%), Russell2000 (38.2%)

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WHEN INSIDER BUYING IS NOT A GOOD SIGNAL

It’s rare that insider buying is not a good sign. BYD insiders have been buying which I do think is a good signal to investors. BYD management has bought and sold well and the two key individuals there are buying (BB&BB), Bill Boyd and Bob Boughner.

The ASCA situation is a bit different. It’s no secret that that Ray Nielsen and the Craig Nielsen Trust would probably like to sell the company. This has been the investment thesis for quite awhile. Unless management wants to spend their retirement years in jail, there probably isn’t a deal in the works over the near term. Now that’s a signal, although probably not the one investors were looking for.

Next, let’s take a look at how management has done historically on its own stock. The results there are certainly not as good as BYD. The chart below shows the recent buying and it’s pretty obvious that management should stick to running casinos, which they actually do very well.


China: Jump on the positive "Trend"

If you missed the party bus, it doesn’t mean you have to miss the party. China’s FXI gave us a +12% move on Wednesday.

Our China long intermediate "Trend" was further supported yesterday with the announcement from China’s State Council of increased efforts to encourage enterprises to upgrade technology and engage in independent innovation. Key industries such as steel, auto, ship manufacturing, petrochemical, light industry, textile, nonferrous metals, equipment manufacturing, and information technology were highlighted by the Council.

Again, this is very proactive policy coming from the Chinese. In the last days China announced that they are cutting taxes, slashing interest rates, and issuing a $586B stimulus package. With high single-digit GDP growth combined with low single-digit inflation in 2009, China’s ETF (FXI) is a buy.

Matthew Hedrick
Analyst

Eye On Japan: The Ghost Of Stagnation Past

CPI is down but Shirakawa opposes more rate cuts. Will he hold the line?

October Japanese consumer inflation came in lower for the second month in a row yesterday, reaching 1.9% year-over-year as lower commodity prices eased pricing pressure. Other circumstances could have provided an opportunity for a rate cut but, with the overnight call rate already at 0.3%, BOJ governor Shirakawa has publicly pledged to abstain from further cuts, favoring other strategies to increase liquidity. He can’t cut from zero – how strong a stance these Japanese economic ones are!

This policy course may become more politically difficult for the BOJ with mounting evidence that the recession is deepening rapidly. Data released this week registered a month-over-month decline of 3.1% in industrial production in October and rapidly slowing export data in recent months suggest still further production cuts ahead. Meanwhile domestic demand is slowing rapidly with household spending down 3.8% in October –the eighth consecutive monthly decline, and retail sales for October that were lower by 3.3% year-over-year.

Unemployment dropped to 3.7%, the lowest level since July 2007 and the second lowest since 1998. While at face value this data looks surprisingly positive, all is not as it seems. Japanese employment data does not acknowledge the division between permanent employees and temporary workers, the so called “haken”, who work outside the pension and benefits social-safety-net (see our September 7th post). Toyota’s recent factory layoffs, for instance, were confined to temporary workers, who will not be fully factored into official unemployment data. The figure also excludes those who have ceased looking for a job –a rising group among less educated young adults in large cities.

With the memory of the “lost decade” fresh in the minds of policy makers, the reluctance to take rates to zero again makes simple sense. One alternative measure to spur growth was a corporate tax break on repatriating offshore income proposed by the tax commission. Ideas like this seem to be superior to cutting rates further but, with rates already at a mere 30 basis points, the damage may already be baked in Japanese Stagnation cake.

We are short the Japanese equity market via the EWJ ETF and the yen via the FXY ETN. We sincerely hope that Japan does not suffer the same prolonged stagnation that it experienced in the 90’s, but if you read our work you know that we do not consider hope a valid investment thesis. We will remain short as long as the data tells us to.

Andrew Barber
Director

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