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The Prime Minister is starting to recover, the economy is still very sick…

76 Year old Prime Minister Singh left the intensive care ward today as he recovers from open heart surgery performed over the weekend. Doctors expect him to begin doing some work within “two to four” weeks.

This is a difficult juncture for India to be without the Prime Minister as the economy continues to teeter and the response to the attacks in Mumbai last year is still foremost on voters’ minds. The press has seen Mr. Singh’s recuperation as an opening for his INC rival Sonia Gandhi, leader of the most politically powerful family in the nation, to advance her 38 year old son Rahul to the forefront of the party (see chart below).

Wholesale Price inflation saw a slight uptick this week, 5.64% Y/Y vs. 5.6% the prior week, suggesting that the trajectory of disinflation may be starting to flatten. Regardless, the government subsidy level for gasoline and other fuel was cut for the second time in two months, helping to assuage the masses.

We are currently short Indian equities via IFN and continue to believe that the economy there faces profound structural hurdles that cannot be overcome by a populist coalition –no matter who leads it.

Andrew Barber

The Europeans Are Now Setting Up For Their Manic Panic...

From our friends at Street Account: 1/29/2009 12:09:41 PM BOE's Blanchflower says UK may face worse recession than in 1980's; rates need to be cut further and quickly -- wires

Obamerica: The Honeymoon is Over

If we needed a reminder that partisanship still exists in Washington, we got it yesterday in the House’s vote on the stimulus bill. In the vote, 244 Democrats voted for the bill, 11 Democrats voted against the bill, and 177 Republicans voted against the bill. While the bill passed and is now on to the Senate, the vote was noteworthy in that it was solidly split across party lines.

Ironically, earlier in the week President Obama visited House Republicans in an attempt to sway some votes. Politico provided a summary of the meeting afterwards:
“He promised to make tough spending choices in his first budget blueprint — “everyone will have to take a haircut,” he said. He told them he wouldn’t increase the size of government just to increase the size of government. He even teased House Minority Leader John A. Boehner about his golf swing.”
Other media outlets provided a similar assessment, mainly that the meeting was very cordial and President Obama was earnestly attempting to reach across party lines.

In the aftermath of this meeting, expectations were raised dramatically in terms of President Obama’s ability to garner support for the bill. Some reports suggested that as many as 50 of the more moderate Republicans would vote for the bill. Obviously, these expectations were widely out of touch with reality and imply that despite his resounding electoral victory and high approval ratios, his political capital may have limitations as noted by this inability to even pick off ONE vote.

When President Obama and his advisors consider their inability to rally Republican support on this vote, they may not have to look any further than the assessment from Representative Patrick McHenry, a Republican from North Carolina, who when asked what happened to Obama’s honeymoon responded simply: “Ask Pelosi”. Clearly, President Obama is going to have to do a better job of Captaining his former Democrat colleagues in Congress, who have peeved off their Republican counterparts by failing to reach across party lines in the construction of the stimulus bill.

From an investment perspective, on the margin, this is bullish for the US dollar to the extent that the bill gets reshaped, or renegotiated, in a less Socialist fashion (via more tax cuts primarily) in the Senate where the Republicans yield more power with the ability to filibuster the bill. As you know, Keith has been saying that a stronger US Dollar is bad for stocks and commodities – you are seeing that inverse correlation play out in the market again today.

Daryl G. Jones
Managing Director

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Claiming A Win For The Bears...

This week’s initial jobless claims released showed us 588,000 new applicants, 3,000 more than the revised figure for last week and 45,000 above the four week moving average. There is no need to mince words with this print – it was awfully bearish (see chart below).

Importantly, this puts the January Employment report on the table now as having to the potential to be as awful as November’s. One of the main reasons why I was bullish, for the immediate term “Trade”, in December was that weekly claims continued to decline sequentially (on a week over week basis). The end of that trend lines up almost in sync with the recent SP500 top on January 6th. The last 2 weeks of jobless data is what it is – as the math changes, I do.

In a perverse way, breaking the buck will help ease this problem. The biggest part of the country’s issue is that we have invalid corporate executives who are firing people now rather than 6-9 months ago when they proactively should have.

When you don’t have a proactive risk management process, this is what bad corporate execs do – they react to the news, buy back their stock and build capacity at economic tops, and do nothing but cut costs at bottoms. A weaker dollar will make their export business find a bid, and make these underperforming executives look as bad as they should – cutting into the bone right before demand begins to bottom is not what these guys should have their Boards sign off on paying them for.

I remain very cautious on the immediate term “Trade” in this US market – yesterday’s highs sucked a lot of people in at the high end of a straightforward trading range that we have been locking in for the last 6 weeks.

Keith R. McCullough
CEO / Chief Investment Officer

COLM Into 4Q: It's All About Duration

Keith and I just had a healthy debate on COLM. I think it’s shaping up as a fundamentally positive risk/reward. His near-term inclination is to wait for the print. It comes down to duration.

Why I’m Liking COLM.
This is a perennially underperforming business – for good reason. It managed the transition from a small family-run specialized model into a larger mass-market portfolio of brands while tightening its wallet and starving its content of dollars needed to grow. As such, a host of brands including The North Face (VFC), Spyder, Marmot, and dozens of others have been nibbling away at its share. COLM has maintained a decent-enough top line growth rate overall, but margins came down to 10% from 20% 5 years ago as it lost relevance and ability to hold price.

But at the beginning of last year, COLM started to plow more capital into its brands – both R&D and marketing – and is finally putting capital to work in growing its footwear business. For the record, COLM has only a $200mm footwear business – which is a joke when considering that it owns brands like Columbia, Sorel, and Mountain Hardware. Just because it had 20% margins once it does not mean it is owed them again. In fact, COLM grossly over-earned then. But I think that the resources are finally being put in place that will prove this to be a margin level from which COLM can climb. All we need is flat margins and this name works. I can find a point or two of upside.

As for the business, it goes without saying that it is not good today. But with 1) the Street expecting a 50% earnings decline in the quarter, 2) a 5% earnings slip for 2009 (the first time ever that COLM went into a year w down Street expectations), 3) only 1 buy rating on the stock, 4) 35% of the float short the stock, and 5) trading at 4.5x EBITDA – I think that the results and outlook need to be really really bad for this stock to tank from here.

Fundamentally… Yes, I am concerned that the top line compares for the next 2 quarters are tough as COLM anniversaries a 4-5% FX boost, as well as the launch of Techlite and Omni-Shade – which is represented in the -11% spring backlog already reported. This should be offset in part by sales from the additional 15 outlets in COLM’s plan. Margins, however, go up against extremely easy comparisons (-4-6pts last year) in 1H at the same time it will be benefitting from the $7-$8mm from recently-announced headcount cuts. Some of this will go to additional lease expenses, but the reality is that there’s never been a better time to negotiate with landlords. I’m usually not a fan of new stores for brands like this, but the timing lowers the sales hurdle needed to leverage occupancy costs over the long-term. Finally, I loop this into what should be a decline in capex for ’09, and inventory relative to sales (see SIGMA chart below), and this all adds up to be a pretty nice story in this tape.

Oh, and by the way – inventory of cold weather gear is not exactly fat out there. After a string of mild winters, it’s been very cold in key regions of the US relative to past years. I hate bringing up the weather card, but it has always been a factor here, and that fact remains.

This company has a lot of wood to chop, but for every negative fundamental factor, I can come up with two positives. It is not a 'big idea' for me here, but the risk/reward can't be ignored.


HOT’s fundamentals are worse than we thought yet guidance was better. While 2009 EBITDA guidance was worse than the Street it was much better than our estimate by about $100MM. This happens to be the amount of cost savings indicated by the company.

While we are impressed by the cost cutting progress HOT management has made, our enthusiasm is tempered by the timing and categorization of expenses. In Q4 HOT recorded “non-recurring” charges and expenses of $350-400MM offset by a gain on asset sale of around $175 million. Some of these expenses will clearly benefit 2009, making the margin gains somewhat suspect. The initial reaction of investors may be to push the stock higher due to less than toxic guidance but the stock is not cheap, the underlying fundamentals are much worse than the guidance indicates, and estimates are likely to continue you to come down.

The following are some of our observations:

• The fundamentals are awful in lodging and timeshare
• HOT continues to beat and lower guidance, a trend we expect to continue
• Timeshare write downs totaled $101MM – Q4 timeshare margin was 45%, around 20% higher than normal. The write down will likely continue to benefit margins and the margin gain is reflected in guidance. However, this does not change the economics at all.
• Q1 guidance is much worse than full year – It looks like HOT is banking on a 2nd half recovery which won’t happen.
• A deferred gain on sale of assets of $27MM is likely included in 2009 guidance as fee income, which already includes $83MM of amortizations of deferred gains from 2008
• The stock looks like it is trading over 9x EBITDA which is not cheap, particularly since some of the margin improvement (especially timeshare) is not sustainable.