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CKR – Very Unusual Indeed


In the proxy that CKE filed last Thursday they disclose that they spent just over $60,000 covering CEO Andrew Puzder's medical and dental expenses last year. That's an unusually high number -- the other NEOs run between $5K and $13K.


In checking in with our resident expert on the subject Michelle Leder of Footnoted.org, she said the number isn't just high compared with others numbers there, but it's out of whack when compared with any other companies she has seen this year.


What type of expenses would the company spend on the CEO that would not be covered by ordinary health insurance? Is he seriously ill?


Or did the California Longevity Institute brain wash him into spending thousands on finding eternal life?


Over the years I have been very critical of CKE's excessive compensation and the millions spent on perks like a Cessna Citation X for a company with a market value of only $500 million. I would bet this is just another example of the shareholders getting the short end of the stick.


The board needs to be trying to figure out why Carl's Jr. continues to lose market share!


CKR – Very Unusual Indeed - ap


The impetus for this note was the MGM secondary pitch, "if you put a 10x multiple on 2012 EBITDA and discount it back, the stock is worth at least $15".  The last time one could credibly argue that a Las Vegas operator was worth close to 10x was in 2006-2008, when a casino company could float bonds at 6.5-7%.  Those days are long gone and probably aren't coming back anytime soon, even with LIBOR at 1%.  Neither should the multiples, although history has shown that there is a delay between higher cost of capital and lower multiples.  A more appropriate comparison is probably the late 1990s when the major market operators traded at 7-8x forward EV/EBITDA.


The following chart details the relationship between cost of capital (bond yields) and trailing EV/EBITDA for gaming operators.  The multiples are an average of regional and major market operators so they are not meant to apply to individual stocks.  Rather, we are simply illustrating the causal relationship of cost of capital to valuation.


10X EV/EBITDA? YEAH RIGHT - gaming multiples vs cost of capital 


There are two takeaways from the analysis.  First and not surprisingly, higher cost of capital leads to lower EV/EBITDA multiples.  This can be seen in the chart and in analyzing the regressions.  Second and more illuminating, the strongest relationship occurs with a lag of 18 months, meaning rising cost of capital does not immediately get fully reflected in the valuation.  The R square on the 18 month lag was 0.62, which is very high.  This second point does not bode well for gaming stocks.  Despite very high bond yields, EV/EBITDA multiples remain above historical levels.  If history and current yields hold, current multiples may not be sustainable.

India: Optimism Triumphant


Singh and the INC have been handed an overwhelming mandate, now comes the hard part...


Research Edge Position: Short the Indian Equity Market via IFN


"Prime Minister Manmohan Singh's electoral victory, the biggest any Indian politician has scored in two decades, may loosen political shackles that have restrained the country's economic growth as it struggles to free half a billion people from poverty"  Bloomberg,  May 18


The INC victory announced over the weekend has been received by voters, investors and the global media with near boundless enthusiasm that Prime Minister Singh -the 76 year old architect of the economic miracle of India's recent decade of growth, will now, allegedly, be able to affect dramatic changes with his new mandate and get the subcontinent back on track to resume breakneck growth levels.


The market response to this absolutely ripped our face off when the Sensex spiked upwards by 17% on the open before trading was halted, only to trigger an automatic trading halt upon reopening two hours later.


 India: Optimism Triumphant - indiasenex


The INC and it's close allies have won the most decisive victory in national election that India has seen in decades with 261 of the 543 lower house seats squarely under their control -a massive percentage in the fractured universe of Indian political parties. Singh's administration will know be able to throw off the fetters of previous coalitions which required compromise with hard core leftist parties.


For Singh, the top priorities now include new programs to reduce rural poverty, finding new lending partners to support increased government spending and building a dialogue with the Obama administration to continue the advances made with Bush team on trade -most notably the civilian nuclear program.


At heart, the Singh vision of emerging Indian strength is based on the belief that the country can move forward socially -elevating the majority of the nation's population from grinding agricultural poverty, while largely skipping the industrial phase of development that other emerging economies like China and Brazil embrace. The single biggest criticism of Singh's policies by the left has been that the economic miracle of the past ten years was not felt directly by the poor -with the fastest growth instead largely concentrated in the high tech service industry hubs like Calcutta where job creation has been limited to the well educated and well born.  Without a globally competitive industrial presence, skilled labor job creation for the lower classes has been limited to what internal demand can support - e.g. a nascent automobile industry.


Whether this model works - a thriving minority capable of supporting the social cost of handouts to keep an impoverished majority docile until real change ultimately arrives, remains to be seen.  My immediate suspicion is that only by creating competitive export manufacturing industries can the Indian economy create the kind of jobs that will portion of the nation's poor that are economically enfranchised and build meaningful internal demand.


Poverty eradication, however, is not what emerging markets investing is all about: ultimately the name of the game for a savvy emerging market investor is holding your nose while you try to buy monster growth multiples.  Show me an emerging markets PM talking up social justice and I'll show you a man trying to justify underwater long positions.


While we can appreciate that approach (particularly today!) we still can't rectify the INC strategy with the kind of long term growth that could bring hundreds of millions economically empowered consumers online and build internal demand in the coming years, or with a competitive stance for the global manufactured product export markets. 


In the immediate term, the bulls are winning in a major way. Beyond a technical pull back in the face of today's rally, the biggest near term negative market catalyst I see is currency strength. The Rupee rose +3% in the election afterglow, achieving its highest levels YTD. Presumably, if this TREND continues, it will dampen investor euphoria for tech service sector names.


Andrew Barber


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"Do you know the terror of he who falls asleep? To the very toes he is terrified, because the ground gives way under him, and the dream begins."
-Friedrich Nietzsche
Friday's US market down day terrified me so much that I chased a CNBC fire engine all the way to the airport, put Jack and Laura on a plane, and flew them to Canada (kidding - but I am writing this morning's note from Thunder Bay, Ontario). Today is Victoria Day up here in the homeland.
In his recent quarterly missive, one of my favorite global strategists, Jeremy Grantham, called this stage the game "Reinvesting When Not Quite Terrified." And I must say, that just about pins the hairy tail on the US stock market donkeys.
What is a stock market operator to do in a tape that even a long time bear like Grantham calls "Fair Value" (his fair value target for the SP500 is 880)? Should we stay? Or should we go?
My advice (if you are pressing shorts here) is quite simply this: don't fall asleep.
Two weeks ago, I wrote an Early Look titled "Selling Early", but after a -5% correction in the SP500 last week, I'm more than happy to be covering/buying them early again. In a market where volatility (VIX) and the US Dollar remain broken to the downside, we want to be buying low and selling high. Revolutionary strategy, I know ...
What is revolutionary is the sentiment associated with our manic media and the over-supply of Portfolio Managers who are hostage to their meme machine. On the way up, they can't stop themselves from chasing, and on the way down they can't stop themselves from being terrified. This won't last forever, but you should be picking off this behavioral low hanging fruit as frequently as you can.
Friday's market selloff came on one of the lowest volume days of the year. Volume on the New York Stock Exchange was a stunning -27% lower than that which we saw on the +1% up day (Thursday) prior. Last Wednesday's down -2.7% move came on HALF the average volume that we have seen in Q2 to-date. Selling off to higher lows on low volume is not a sign of another pending apocalypse.
Don't forget that the +37.4% trough-to-peak move in the SP500 from the March 9th Depressionista low marked a short squeeze of generational proportions. It's definitely going to leave a mark in the oversupplied American asset management business and I think there's a good shot that we  could see almost as many hedge funds getting redeemed for missing the UP move as we saw missing the DOWN one. The "ground has given way below" on many of these savants, and now my dreams of Squeezy The Shark have returned.
Trading the range with a bullish bias is not for everyone. After all, some people don't do macro and they don't "trade"... and you can't fault them for that. Some professional athletes don't play in the rain either (but that certainly doesn't change the fact that they lose). If you've got the game to "reinvest when not quite terrified", my simpleton advice would be to strap it on.
Am I terrified of some of the malfeasance that said leaders of the US Financial System are getting away with? You bet your Madoff I am. But I am also very aware that the more we socialize this country to smithereens that the lower her currency will go as a result. As we continue to Break The Buck, everything from stocks, commodities, and debt will continue to REFLATE.
Yes, inflation can be terrifying. And I'm looking for the adult in Washington, Mr. Paul Volcker, to remind the manic media of as much on Wednesday when he finally gets the conch and speaks publically from his ERAB (Economic Recovery Advisory Board) perch. But don't get your pants all tightened around your belly worrying about inflation busting onto the economic scene any time soon. I don't think we start to see it on a reported basis here in the USA until late Q4 of this year and early Q1 of 2010.
If you want to "invest for the long run" in inflation, buy Gold (GLD) or Treasury Inflation Protected Securities (TIP). I own both in the Research Edge Asset Allocation Portfolio, and I own them because price momentum continues to confirm my view. Last week, Gold outperformed everything that had run too far too fast, closing +1.7% on the week with the price of West Texas Crude Oil and the SP500 down -3.8% and -5.0%, respectively.
As a young Portfolio Manager, I learned the art of managing money the hard way - with live ammo. One  of the most critical lessons I ever learned was to always try to find a way to own a portfolio of uncorrelated assets. That puts you in a position to always be a winner somewhere in your portfolio. It also allows you to play this game without being perpetually terrified... and whether you are Canadian or not, that's just a cool way to be.
Don't let the low volume or Shadows of Prejudice lull you to sleep out there. On an immediate term basis my risk/reward levels of resistance/support for the SP500 are now 873 and 904. That's +2.5% reward versus -1% risk, and a heck of a lot better setup than last Monday when I said we had -4% risk versus +1.5% reward. Buy low, sell high.
Best of luck out there this week,



EWA - iShares Australia-EWA has a nice dividend yieldof 7.54% on the trailing 12-months.  With interest rates at 3.00% (further room to stimulate) and a $26.5BN stimulus package in place, plus a commodity based economy with proximity to China's H1 reacceleration, there are a lot of ways to win being long Australia.

EWZ - iShares Brazil- Brazil continues to look positive on a TREND basis. President Lula da Silva is the most economically effective of the populist Latin American leaders; on his watch policy makers have kept inflation at bay with a high rate policy and serviced debt -leading to an investment grade credit rating. Brazil has managed its interest rate to promote stimulus. Brazil is a major producer of commodities. We believe the country's profile matches up well with our re-flation theme: as the USD breaks down global equities and commodity prices will inflate.

XLE - SPDR Energy- We bought Energy on 5/13 with the dollar up. We think it works higher if the Buck breaks down.  Bullish TRADE and TREND remain.

XLY - SPDR Consumer Discretionary-The TREND remains bullish for XLY.  The US economy is showing faint signs the steep plunge in economic activity that began last fall is starting to level off and things are better that toxic.  We've been saying since early January that housing will bottom in 2Q09 and that "free money" for the financial system will marginally improve the US economy in 2H09, allowing early cycle stocks to outperform.  The XLY is a great way to play the early cycle thesis.

CAF - Morgan Stanley China Fund- A close end fund providing exposure to the Shanghai A share market, we use CAF tactically to ride the wave of returning confidence among domestic Chinese investors fed by the stimulus package.  To date the Chinese have shown leadership and a proactive response to the global recession, and now their number one priority is to offset contracting external demand with domestic growth.

EWD - iShares Sweden-We bought Sweden on 5/11 with the etf down on the day and as a hedge against our Swiss short position. From a fundamental setup, we're bullish on Sweden. The country issued a large stimulus package to combat its economic downturn and the central bank has effectively used interest rate cuts to manage its economy. Sweden's sovereign debt holds a strong AAA rating despite Swedish banks being primary lenders to the Baltic states. We expect Sweden to benefit from export demand as global economies heat up.

XLK - SPDR Technology - Technology looks positive on a TREND basis. Fundamentally, the sector has shown signs of stabilization over the last eight weeks.   As the world demand environment becomes more predictable, M&A should pick up given cash rich balance sheets in this sector (and the game changing ORCL-JAVA deal). The other big potential catalyst is that Technology benefits from various stimulus packages throughout the globe - from China to USA. Technology will benefit from direct and indirect investments.

XLV - SPDR Healthcare-Healthcare looks positive from a TRADE and TREND duration. We've been on the sidelines for the last few months, but bought XLV on a down day on 5/11 to get long the safety trade. 
TIP- iShares TIPS -The iShares etf, TIP, which is 90% invested in the inflation protected sector of the US Treasury Market currently offers a compelling yield on TTM basis of 5.89%.  We believe that future inflation expectations are currently mispriced and that TIPS are a compelling way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.

GLD - SPDR GOLD -We bought more gold on 5/5. The inflation protection is what we're long here looking ahead 6-9 months. In the intermediate term, we like the safety trade too.  

EWW - iShares Mexico- We're short Mexico due in part to the repercussions of the media's manic Swine flu fear.  The country's dependence on export revenues is decidedly bearish due to volatility of crude prices and when considering that the country's main oil producer, PEMEX, has substantial debt to pay down and its production capacity has declined since 2004. Additionally, the potential geo-political risks associated with the burgeoning power of regional drug lords signals that the country's economy is under serious duress.
IFN -The India Fund-We have had a consistently negative bias on Indian equities since we launched the firm early last year. Despite recent election results likely proving to be a positive catalyst, long-term we believe the growth story of "Chindia" is dead. We contest that the Indian population, grappling with rampant poverty, a class divide, and poor health and education services, will not be able to sustain internal consumption levels sufficient to meet targeted growth level. Other negative trends we've followed include: the reversal of foreign investment, the decrease in equity issuance, and a massive national deficit.

LQD  - iShares Corporate Bonds-Corporate bonds have had a huge move off their 2008 lows and we expect with the eventual rising of interest rates in the back half of 2009 that bonds will give some of that move back. Moody's estimates US corporate bond default rates to climb to 15.1% in 2009, up from a previous 2009 estimate of 10.4%.  


EWL - iShares Switzerland - We believe the country offers a good opportunity to get in on the short side of Western Europe, and in particular European financials.  Switzerland has nearly run out of room to cut its interest rate and due to the country's reliance on the financial sector is in a favorable trading range. Increasingly Swiss banks are being forced by governments to reveal their customers, thereby reducing the incentive of Switzerland as a tax-free haven.

Retail Chart of the Week

Check out the consumption divergence below. Apparel and footwear continues to recover nicely, but furniture and household equipment flat-out tanked. The soft goods component of the Home category remains strong (BBBY, WSM), but the higher-ticket durables and furniture took a meaningful step-down. There are so many 'what if' scenarios. With tax checks coming earlier this year on top of deferred wardrobe upgrading and an early Easter, perhaps apparel is seeing disproportionate share gain in total PCE. Perhaps beneath all the noise people remain flat-out afraid to spend on high ticket items. Either way, this is something to watch.


Retail Chart of the Week - 5 17 2009 9 19 15 PM

Don’t Look Through This!

The latest month's data (March) shows the greatest diversion we've seen in cost vs. consumer price in almost four years. A measly $0.35 per garment might not seem like much. But For an industry that sells 19bn units per year, that extra $0.35 per unit comes out to an incremental $560mm in profit that was freed up in the apparel retail supply chain. This was not a onetime event, and plays into our 2H margin call.


There are two components of the CPI that are misunderstood.


1) The yy change in CPI for a given category is meaningless without looking at the cost side of the equation to manufacture and import. The rate at which one changes compared to the other is what is the primary margin driver is for the supply chain. (I.e. I am fine with a given increase in costs as long as the consumer is willing to pay for it and then some).


2) Wall Street looks at CPI based on a yy % change. This is flat-out wrong - at least in retail. Why? In apparel, for example, the average import cost is $3.50, while the average retail price is around $10. We'd need roughly 3x the % change in import costs to equal the same percent change at retail. This makes the positive divergence in the chart below even more noteworthy.


Don’t Look Through This!  - 5 17 2009 9 22 04 PM

Hedgeye Statistics

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

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