The S&P 324

If SP500 held to it's $4B market cap hurdle, it would lose 166 components.

JBX – Franchisee Files For Bankruptcy

Nation’s Restaurant News reported yesterday that a JBX franchisee, Kobra Properties, filed for Chapter 11 bankruptcy in Sacramento last week. Kobra operates 71 Jack in the Box units, four Qdoba restaurants and five T.G.I. Friday’s units. The company also owns the fine-dining eatery Crush 29 in Roseville, California and has other concepts in development.
“Like families, governments and businesses everywhere in the Sacramento area, America and around the world, our company is facing difficult financial challenges,” company founder Abe Alizadeh said in a statement. “In the face of these challenges, we’re taking action so we can fairly honor our financial commitments, protect the thousands of jobs we provide and restructure Kobra Properties so we not only weather the storm, but emerge even stronger.”

Clearly, these challenges are not specific to JBX. As I have said before, franchisees in general are more greatly feeling the impact of today’s difficult operating environment, and I would expect to see more franchise operators file for Chapter 11 bankruptcy and/or require increased financial support from their franchisors whether it be in the form of loans or deferred payments (please see my post titled “Franchisees are Really Feeling the Pinch” from November 20 for more details).

China: The Best Looking Major Country Chart In Macro

The Shanghai Stock Exchange Index (see chart) had another solid day of trading, closing up another +4% at 1,965. Considering the major policy moves the Chinese Government has made in the last few months, this chart looks as fantastic as it should.

Since the beginning of November, Chinese stocks are up over +15% (the USA is down -15%). They are cutting both taxes and interest rates. They are plugging in one of the largest domestic stimulus plans in world history. Who can afford to miss getting this wrong? This is not that complicated.

If we weren’t bearish on China (and Asian growth broadly) at this time last year, I may not understand the bear case as well as I feel my investment team does. We also have a research office there, which gives us both critical contacts and context to make this call. After crashing for a 70% peak to trough move, the nominal slowdown in Chinese growth is baked into the cake.

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Commodity Exposure Exposed – Fast Casual and QSR

The tables below highlight fast casual and QSR companies’ commodity exposure and their most recent cost outlook for fiscal 2008 and fiscal 2009. Please see my post from yesterday titled “Commodity Exposure Exposed – Casual Dining” for more details.


I guess Las Vegas casino executives will have to find a new metric to promote to investors. McCarran airport data just released suggest occupancy will suffer a major hit in October. The number of enplaned/deplaned passengers declined 12.8% which was only slightly better than September at -13.2%. September was the worst year over year decline since 9/11 impacted the last four months of 2001.

Operators have consistently used the tool of adjusting room rates to keep occupancy above 90% to leverage the big fixed asset called the casino. The inability to maintain occupancy even with double digit rate cuts is very disconcerting. Gaming revenues are likely to begin declining at a faster rate or the casinos will have to cut rates even more and endure significant margin erosion. Not pretty.

We’ve dusted off our model which has been very accurate in projecting gaming revenues from just the airport data. October 2008 gaming revenues could fall by 17% assuming a normalized slot and table game hold percentage. Last year in October, slot revenue was boosted by an abnormally high hold %. On the table side, October volume was unusually high given the visitation level. October 2008 faces this tough comparison which should amplify the 12.8% McCarran drop.

If occupancy levels track the airport data, this will be a very bad signal for the duration of this downturn. I suspect any sustained Las Vegas recovery is a long way off. This is not good for MGM.

October will not prove to be very kind to the operators based on the airport data

I Dare You

“The policies of the developed nations on these institutions are not clear. Until they are clear, I don’t dare to invest in them. What if they go bust? I will lose everything.”
-Lou Jiwei (Chairman Of China Investment Corp.)

It is a very rare opportunity that I can start my morning missive with a real time quote. This morning’s quote is from a leader in the Chinese Financial System and it may very well be one that my son Jack uses when he is studying this period of reactive American financial leadership. I never thought I would see the day when the Chinese looked like they were wearing the world’s financial leadership pants. Never say never.

It’s both pathetic and sad that our vaunted American billionaires tried to plug the Chinese with toilet paper, thinking that they’d get away with it. The aforementioned quote by the Chairman of China Investment Corp is one of disgust. He is staring at $6 billion in losses on his Blackstone and Morgan Stanley paper. He is very fluent in math. He understands what not to do when someone compromises their handshake – walk away. We don’t have a liquidity crisis in America anymore. We have a credibility crisis.

Spare me the excuse making, the finger pointing, and that embarrassing new CNBC commercial that reminds us that “my name is Charles Gasparino, and I am CNBC.” Our “New Reality” Investment Theme for 2009 is unfolding here real time on a global stage, and we need to wake up and get with the program. He or she who has the cash, now has the leverage.

Long gone are the days of Goldman levering their brains out and calling those investment returns repeatable. Their latest candidate for US political office, CEO Lloyd Blankfein, is cited in the Wall Street Journal this morning insinuating that he disagrees that leverage ratios and Goldman’s returns are correlated. Pardon? Send that math to the Chinese to run, and see if they come up with the same answer. This isn’t an Olympic synchronized diving competition, but man are some of our said leaders out of sync with reality.

Goldman’s stock price goes down every day for a reason. The global investor who owns the duration of their trades owns the ultimate card at the table of global finance - they own themselves. A compromised US government owns Goldman, and maybe that makes the most sense because Goldman’s ex-CEO and the US Secretary of the Treasury are one and the same. Trust me, the Chinese get this. So does anyone who has ‘You Tube’. Contrasted with the facts, “the policies of the developed nations on these institutions are not clear.”

Goldman is talking about starting an “internet bank” … or is Gasparino talking about his “sources” talking about it?... forgive me, I don’t manage my business around inside information, and I can lose track of the daily “he said, she said” that’s brought this US financial system to its knees. The people who have reactively put us in this mess need to just stop. That’s it. Listen to their own bearer of trading gospels past, Jim Cramer, and just “stop trading.” He was a Goldman guy too – this will work. They all whisper and listen to one another.

If I wasn’t in print all the way back to last December calling the top in Goldman’s valuation and stock price, my keystrokes here would have far less impact. This is the point. When you proactively prepare your business for foreseeable risks, you put yourself in a position to win, every day. America is tired of losing. It’s time to change the lineup before the Chinese run the tables on us.

Hank “The Market Tank” Paulson is going to blast into China in the next few days and tell them to let their currency appreciate. In order to remind Mr. Compromised who is wearing the pants, the Chinese let the Yuan trade limit down last night (0.50%), taking it to a 5 month low and down -0.86% in the last 3 days. The Chinese stock market tacked another +4% move onto their most recent leadership move. Since the beginning of November, the Chinese stock market is +15%. The SP500 and Goldman Sachs are down -16% and -32%, respectively, since November the 4th. The Chinese “don’t dare” invest in the USA all of a sudden. Do you blame them?

There is plenty of blame to go around, and I am done dishing it out to GS for today. There’s a new Wall Street watch dog coming to town in the coming months. Her name is Hillary R. Pelosi – R, as in Regulation. As a result, my call on the compromised, conflicted, and constrained business model of “Investment Banking Inc.” is going to find itself in the main stream halls of consensus.

Being right on this wasn’t fun. It’s actually quite saddening. I, like the Chinese, dare you to run out and buy the investment bank financials today. During the 5 day squeeze, they rallied +35%. The XLF (financials index) is now trading at $11.40, and I see 22% downside from here on a break down and close below the $11.09 line. I shorted Bank of America (BAC) yesterday because, as the compromised US Federal Reserve cuts rates to zero, the bastion of US Capitalism (a positively sloped yield curve) is starting to flatten again. Borrow short, and lend long is a lot harder to do when the curve is flattening, rather than steepening. I dare Blankfein and Paulson to challenge the math behind that.

I have moved back to a 79% position in cash. I have a zero position in US Equities. I remain long China. My downside target for the SP500 is now 749. On a close below the 835 line, watch out below. Obama, Volcker, and Summers won’t be playing for us for another few months. Markets, like the Chinese government, wait for no one.

Keep your head up out there today,

Long ETFs

GLD -SPDR Gold Shares - Gold declined in London as the dollar traded close to its highest in more than a week against the Euro.

OIL iPath ETN Crude Oil --Light Sweet Crude futures fell as low as 47.06 this morning despite comments in the press from Qatar’s oil Minister, who confirmed OPEC intentions to reduce production at their next meeting on December 17th.

EWG – iShares Germany  --The DAX Index declined  1.8 % to 4,452.59 this morning with Infineon technologies (EWG: 0.35%)  down 24% on Q4 losses and Volkswagen AG (EWG: 13.6%) down 2.5% on declining auto sales in the US.

FXI –iShares China  --The CSI 300 Index rose 4.5% to close at 1,952.67 while the Yuan declined the full 0.5% limit from yesterday’s reference rate reaching 6.8845 USD in trading.

Short ETFs

IFN iShares India --The Rupee rose by 0.6% to 49.845 USD this morning while the Sensex declined 0.3% to 8716. Tata Steel announced a series of cost saving measures including layoffs.

EWU – iShares United Kingdom --The FTSE 100 traded down by 0.8% to 4,089.86 this morning  with Rio Tinto group (EWU: 2.7% ) down 6.7% on lessening demand for copper and Stagecoach Group (EWU: 0.1%) down over 20% on lower guidance into 2010.

UUP – U.S. Dollar Index --The pound declined to 1.47 USD this morning near the lowest level in 6 years.

EWJ – iShares Japan --The Nikkei 225 rose  1.8% to close at 8,004 today with Toyota Motor Corp. (EWJ: 5.61%) down nearly 2% on US sales which declined 34% year-over-year in November.

FXY – CurrencyShares Japanese Yen Trust  --The yen  declined to 93.42 USD in trading this morning.

Keith R. McCullough
CEO & Chief Investment Officer

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