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CASUAL DINING – REGIONAL EXPOSURE EXPOSED, OCTOBER

We all know that October was a bad month for the casual dining group. Same-store sales were down 6% and traffic was down 8.1%. We learned yesterday that November’s numbers, although still negative, improved sequentially from October (please see yesterday’s post titled “Casual Dining – November Was Less Bad”). On a regional basis, October’s results showed more of the same with Texas continuing to post the best numbers and Florida continuing to trail the rest of the country, according to Knapp Track data (holds true on a year-to-date basis as well). In October, Texas was the only region of the 11 (listed below in the chart) that both improved sequentially from September and did not experience a same-store sales decline (was flat). In October, the spread between the best and worst performing regions (in this case, Texas and Florida) on a comparable sales basis reached 10.1%, its highest level since January 2007 and a nearly 400 bps increase since September.

So from a regional exposure standpoint, this widening of the range of performance among regions reaffirms that it is still a positive if a company has a significant proportion of its restaurants located in Texas (PFCB, EAT’s Chili’s, TXRH and DRI are among the highest). And, on the flipside, it is less than positive if a casual dining operator/concept has a lot of geographic exposure to Florida (LongHorn Steakhouse, SNS, Capital Grille and RUTH). We will have to monitor whether casual dining trends in Texas continue to outperform, however, as DRI commented last week on its earnings call that it is seeing weakness across the country and that some of the regions that had been strong, Texas in particular, did soften up in the second quarter.

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 September and October 2008. As of October, CPKI has the most exposure to the underperforming regions of the country, primarily as a result of it having 40% of its restaurant base located in California while 74% of SNS’s restaurants are located in the better performing parts of the country, despite its large presence in Florida. The only region of the country that moved from performing below the national same-store sales average to better than or equal to the average in October was the East and part West South Central region. If these relatively better trends hold up, CHUX will be the biggest beneficiary as 26% of its restaurants are located in this region of the country.

An Intraday Note From Your New Federal Government Bankers

“JPMorgan Chase & Co. is using the TARP funding for the purposes that the government has designated. The company is lending to consumers, small businesses, corporations, municipalities and other institutions in a disciplined and responsible manner.”

Jaime Dimon knows it, and you know it. "Investment Banking Inc.", in all of its levered manifestations, is going to go by the way of the horse and buggy whip.

From Citigroup to Morgan Stanley, what these stocks do intraday means less and less to the American Capitalists investing in The New Reality.

Upward and onward. Let the government re-regulate those who asked for it.
KM

Keith R. McCullough
CEO & Chief Investment Officer

Charting Commodity Consensus: "C'mon Man!"

Commodities have crashed faster and further than the SP500 in 2008. The peak to trough decline (see chart) is a magnificent one – and now that the CRB Commodities Index is trading at 214, down -55% from its nosebleed consensus peak, I am getting bullish.

My bullishness in commodities has taken my current Asset Allocation model to 15% in Commodities today. This is the highest allocation I have ever had to commodities, and I feel pretty good about that. Buying low is what I do, and to all the bulls turned bears out there who think this chart looks like it’s time to start shorting commodities aggressively, I have to submit my favorite Monday Night Football segment one liner – “C’mon Man!”

The US$ is breaking down, and gold is breaking out. This is THE early “Re-Flation” signal associated with the most aggressive global rate cutting party in world history. Since everything “Chindia” that the bulls bought into at the June/July CRB Index highs can’t be forgotten. May I remind the newfound commodity bears of their own investment letters from only a year ago that stated, as if it were gospel, that “its global this time.” Basic commodities have a place in everyone’s portfolio, but only at a price.

Keith McCullough
Research Edge LLC

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Brazilian Bulls?

One of the many thanks that I will be giving at this year’s McCullough 2008 Christmas party, is not having bought into the “Fast Money” highs of everything from Brazil to horse manure. Latin American and fertilizer stocks should never be bought at a fully loaded Park Avenue price!

Now that Brazil’s Bovespa Index has seen a -60% price cut from those manic highs to October’s lows, it’s getting very interesting. We bought more of the EWZ etf today for the same 3 reasons that we have been discussing: 1. Best country to own for Re-flation, 2. Pending Brazilian interest rate cuts, and 3. Technical support built up at the line shown below (36,582).

Buy low, sell high.
KM

Eye on Private Equity: Don't count on a 2009 rebound

Eye on Private Equity: Don't count on a 2009 rebound

Two themes we expect to see emerging from private equity land in 2009 are continued bankruptcies of debt-laden portfolio companies, which in 2008 stands at 40 major bankruptcies and counting, and dramatic moves from these private equity owners to stave off bankruptcy. These drastic operational moves will also have many unintended consesquences as highlighted in a Bloomberg article this morning, entitled: "Feinberg Despised in Wisconsin Where Cerberus Lives Up to Name."

Feinberg's Cerebrus Capital Management owns NewPage Corporation, which recently closed a paper mill in Kimberly, Wisconsin, to ostenibly cut over head at the parent company. As a result of the closure, more than 600 jobs were lost in a town of 6,200 people. While outrage at private equity firms for downsizing is certainly not new, the comments aimed at Feinberg are particularly venomous and include, "This is a . .. extremely greedy guy who doesn't care about other human beings . . . he sold his soul to the devil . . . Feinberg has no morals."

Situations similar to this one in Kimberly, Wisconsin will only accelerate in 2009 and with them negative sentiment towards private equity firms. As this sentiment grows, Obama's ability to pass a bill forcing private equity executives to pay capital gains taxes of 35%, up from 15%, will be made easier. With continued failed deals and the outlook for lowered future compensation, the next few years are shaping up to be challening ones for the private equity world.

In addition to the points outlined above, leverage will be much less readily available for traditional leverage buyouts in 2009 than it has been in the past as investors in private equity deal debt, and investment banks that were left holding the debt, have suffered severe losses. As a result, these lenders will not be opening up their balance sheets and the credit markets for LBOs will be closed for the forseeable future, except on a very limited basis.

While it seems like Henry Kravis proclaiming that we were entering the golden age of private equity was just yesterday, and it was less than 18 months ago, that proclamation along with IPO of Blackstone marked the peak of the private equity business. In the traditional levered return sense, the priave equity business will be dead for quite some time. In its place, we will likely see an increased amount of strategic M&A. On the margin, credit markets continue to thaw, and valuations in some sectors have reached compelling levels.

In an environment where access to LBO capital tightens, and the cost of it begins to rise (over the long term; that’s what rates do after they go to zero), those liquid long cash become kings of The New Reality.

Daryl Jones
Managing Director

Bear Tracking: Another Signal For the Bulls...

This morning’s initial read on US Consumer Confidence for the month of December came in positive again (both relative to expectations and on an absolute basis versus the prior University of Michigan reading).

The first chart below shows the sequential improvement from the November freak-out lows. The second chart provides the context for this improvement looking back at prior economic recessions. The point here is that if you are tracking bears, there is a lot of negativity already baked into their footprints.

Admittedly, it is getting harder for me to decipher whether or not the US consumer’s less than toxic confidence level is more about Obama or Bush. All of a sudden, Bush is providing American Capitalists with the economic foundations by which great business are built – cheap oil, zero interest rates, and a stock market that’s been cut in half.

On the confidence issue, Bush going away is probably as positive as Obama coming online. While Obama’s approval rating is destined to come down from its current level of 67%, I do not think the bears get fed on that thesis between now and the inauguration. Fully loaded with the January effect of bear hibernation, the January Obama 20th option remains one that I will be long, at a price. I like buying stocks, patiently, in the SP500 range of 864-884.

Confidence is where markets and multiples are built. We have our “Eyes On” sentiment readings and bad news bears alike.
KM

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