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The Obamerica Macro Catalyst

We see a catalyst on the horizon in the way of President Elect Obama’s Inauguration. For those who doubt the ability of an incoming President to have immediate economic impact, especially in a crisis period, we would recommend studying President Roosevelt’s (FDR) first week.

More so than any immediate policy or legislative proposal, FDR’s charisma and the optimism that he conveyed were critical in ending the run on banks that he inherited from President Hoover. In fact, after his first fire side chat, only five days after becoming President, in which he discussed the need for the average citizen to support the banking system, he then reopened the banks that next Monday and citizens lined up to deposit money into banks, which immediately ended the banking crisis.

While we cannot quantify the impact of President Elect Obama becoming President will have on optimism in the U.S., he has a popularity and approval rating that is almost 2x that of President Bush. On January 21st, the United States will wake up with a President that has broad support and approval. And not unlike FDR’s first week, once again, the President words will have an ability to impact the psyche of the country. Additionally, this weekend revealed a couple of more clues in regards to Obama’s initial fiscal plan and, in a nut shell, this plan seems to involve lower than expected taxes and massive stimulus.

In terms of taxes, the following exchange between David Axelrod, Obama’s Campaign Manager and Senior White Advisor, and David Gregory, the Host of Meet the Press was telling:

“MR. GREGORY: All right, but you're not--because the commitment was to, to lower those taxes to definitely--excuse me, I mean to raise those taxes on people by letting those tax cuts expire. You're saying you'll hold on and see. You won't make a decision yet.
MR. AXELROD: Yes, I'm saying that. But I'm also--I also want to stress that what the president-elect and the change--the expiration or the repeal of, of the tax cut for the wealthy, it'll amount to a net tax cut for the American people. It'll just restore some balance, David, which we badly need.”

The message is pretty clear, the idea of raising taxes for the wealthiest Americans is likely off the table in the short term.

In conjunction with Axelrod’s appearance on Meet the Press this weekend, Larry Summers, the incoming director of the National Economic Council, and the “grey hair” on Obama’s economic team wrote:

"In this crisis, doing too little poses a greater threat than doing too much. Any sound economic strategy in the current context must be directed at both creating the jobs that Americans need and doing the work that our economy requires. Any plan geared toward only one of these objectives would be dangerously deficient. Failure to create enough jobs in the short term would put the prospect of recovery at risk. Failure to start undertaking necessary long-term investments would endanger the foundation of our recovery and, ultimately, our children's prosperity."

Summers, who is rarely one to mince words, was very direct in the above statement. The incoming administration is going to err on the side of too much stimulus. And they will have the political capital to do so.

Consumer confidence continues to mount in the face of lower taxes and a massive stimulus . . . Market Bears ignore the potential catalyst of an Obama presidency at their own risk.

Daryl Jones
Managing Director

MCD – Sticking To Their Knitting?

On December 16th, the WSJ ran an article about the best CEOs of 2008. One of the CEOs mentioned was Jim Skinner of McDonald’s. Not to take anything away from Mr. Skinner, but he had very little to do with MCD’s turnaround. Instead, it was his job not to mess with what was working.

The article went on to say that "McDonald's has done a terrific job of improving what it does at its existing locations, improving the food, improving service, expanding the menu, expanding hours." Importantly, "They've stuck to their knitting and made their existing stuff better and it's paid off."

MCD’s new beverage strategy is a clear example of the company now expanding the complexity of its store operations instead of maintaining its simplicity. Expanding into gourmet coffee is not an example of “making stuff better” like the company has done successfully in the past.

I don’t believe that MCD’s beverage strategy will drive top line results in 2009 as most people expect. MCD has been so successful for so long that there is a high level of compliancy surrounding the company’s ability to execute. The Bullish-Bearish Indicator from IChartpro.com highlights these high expectations. MCD’s rating currently stands at a 60.2 versus the average for all QSR names (including MCD) of 21.9. Additionally, MCD’s bullish-bearish indicator has increased since December 2007 while the rest of the group has declined.

SP500 Levels Into The Close...

This market continues to trade extremely thin, and that makes “making the call” here tougher than on full volume days. That said, the VIX is not confirming any of the intraday weakness that we saw in the market. The step ups of stiff resistance for the VIX are at the 46.30 and 52.61 lines (its currently trading at 44.80).

Alongside lower volatility and expanding breadth, I find myself with a more manageable range whereby I can trade stocks. The “BUY” zone is outlined below within the lines we have painted between SP500 864 and 881. Don’t buy stocks on up days – add to them on down ones. Selling part of this “Trade” up at the 915 line is where my math washes out.

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.51%
  • SHORT SIGNALS 78.32%

M&A Market Becoming "Unstuck"?

M&A activity, either private equity or strategic, is an indicator that we track broadly. Obviously, and on the margin, if M&A activity is increasing it is bullish for equities. It goes without saying that there has been very limited M&A activity in Q4 2008 and, in fact, M&A globally as of December 22nd was “down 29 percent from the full year 2007.” This week we have seen activity perk up with the IndyMac Bancorp acquisition by a private equity consortium and an announced divestiture by the New York Times.

After closing its doors in July after a $1.3 billion run on deposits over 11 days, IndyMac Bancorp is now close to being sold by the government vis-à-vis the FDIC to private equity firms J.C. Flowers & Co. and Dune Capital Management, and hedge fund Paulson & Co. The deal would be the first of its kind involving an unregulated firm buying a bank-holding company. According to various reports, the deal will include 33 branches, its reverse-mortgage unit and a $176 billion loan-servicing portfolio, with an announcement coming as soon as tomorrow.

In another deal, the New York Times, one of many beleaguered newspaper companies, is strapped for cash, faced with a poor advertising environment and tightened credit markets. With net debt at ~$1.13 billion at the end of the third quarter and a 60% drop in its stock price year-to-date, the Company is looking to raise cash to meet a reported ~$400MM debt repayment in May 2009. The deal according to Barclays Capital could be worth as much as $166.3 million. Earlier this month, the Company said a sale-leaseback of its headquarters building would raise as much as $225 million.

While these are only two deals, they are two notable announcements in a quarter which saw almost no major asset sales. The willingness of buyers to commit capital, in the case of the IndyMac deal, and sellers willing to move prize assets, in the case of the New York Times, could be an early sign that the M&A market is starting to become “unstuck”.

Daryl G. Jones
Managing Director

Matthew Hedrick

111 Whitney Avenue
New Haven, CT 06

Eye on Leadership: Compensation

Most senior management team members of large U.S. financial institutions have publically declined bonus compensation for 2008. We applaud this leadership. This action indicates to their employees that they are willing to share in the pain of both layoffs and lower compensation, but also indicates to their shareholders that they hold themselves accountable for the weak performance of their stock prices in 2008. Two notable CEOs that have yet to publically state that they will forgo bonuses this year are, Kenneth Lewis from Bank of America (BAC) and Vikram Pandit from Citigroup (C).

While U.S. Banker, an industry publication, recently noted in a headline that, “Lewis Emerges as Exemplar of Leadership in Time of Crisis”, the performance of his Company’s stock suggests otherwise. Over the last 52-weeks, BAC is down ~-67%. He may indeed be the best of an underperforming group of money center banking executives, but the reality of the poorly timed and overpaid acquisitions of Merrill Lynch and Country Wide Financial, has led to massive underperformance of BAC’s stock versus the broader market.

We have long been critical of Vikram "The Bandit" Pandit, the current CEO of Citigroup. In fact, we have been critical of almost all of Investment Banking, Inc.'s leadership. On the margin, though, we do find positive the fact that most of the CEOs and senior managers of the major Investment Banks are forgoing bonus compensation for 2008. Even John Thain, after likely pressure from his Board, has decided to forgo a bonus for 2008. As of now, the last major CEO of all the major investment banks to forgo his 2008 bonus compensation, at least publicly, is "The Pandit Bandit".

In June 2007, Citigroup acquired Old Lane, a hedge fund founded by Pandit, for reportedly more than $800MM. Pandit's take from the acquisition was more than $165MM. Less than a year later, Citigroup decided to shut down Old Lane due to "mediocre performance and the loss of top managers." Last Wednesday, Citigroup press released that the embarrassing story of Old Lane had finally ended as Citigroup press released that they will "severe ties with senior executives" of Old Lane Partners by December 31, 2008.

While Pandit cannot take back many of his questionable management decisions from 2008, we do think it is due time for him to forgo his bonus compensation for the year and return some of the $165MM that he paid less than a year and a half ago for a business, Old Lane Partners, that no longer exists. In Pandit's own words from August of 2008 as it relates to his changing the scheme of how Citi employees were paid, "people do what you pay them to do". Indeed.

Financials (XLF) continue to underperform the SP500 today.

Daryl G. Jones
Managing Director

Attention All Bubble Watchers

One of the more peculiar notions born out of the financial media’s perpetual patrol of all that is in the rear view mirror, is that bubbles, having already popped, can continue to “deflate.”

Have you ever tried to deflate a balloon that’s already popped? Try it, and let me know how that goes. That metaphor is more mathematically represented by the chart below that shows you what Commodities (measured by the CRB Commodities Index) have done, in the aggregate, since everything from fertilizer to grain elevators were given Park Avenue valuations.

The good news here is that, with the stimulus associated with a politicized US Federal Reserve creating FREE moneys from the heavens and countries from the USA to Eastern Europe devaluing their respective currencies, we have big thick patches being put on the former commodity hot air balloons that will allow for “re-flation.”

Gold trading up +4.1% week over week last week, and hitting a 2 month high again here today is the most obvious early signal of the commodity “re-flation” that is coming to a theatre near you in 2009. The revisionist CNBC bubble watchers saw this movie before, but right now they are still focused on how it ended versus how it begins.

Our “buy” zone for Commodities is shown below, from 209 to 219 in the CRB Commodities Index.

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