The Bull Shark Chart: SP500 Levels, Refreshed...


We're getting a lot of questions today as to why we won't ride this perceived to be Bull into the land of perpetuity. The answer is basically because we don't think it's a Bull. We don't think it's a Bear yet either. We think it's a Bull Shark that we don't want to mess with, and we are very price sensitive.


For the past three months we have ostensibly picked up a few of the professional Bull riding fan base, but that wasn't our intention. To be clear, we were making the REFLATION call that Squeezy The Shark was going to expedite a short squeeze of generational proportions.


After a +40% trough-to-peak move, I'm establishing an intermediate term target that's only 5% higher than yesterday's close (at the 989 in the chart below), this is hardly the time to be pleading for me to be as bulled up about Squeezy as I was... been there, done that.


As the US Dollar broke down through the $80 line into the end of December, I got sucked into overstaying my welcome long US equities into mid-January. I have no need to replay that mistake all over again. January was a month where I was wrong, and I don't want to repeat the mistake of buying an overbought tape like that again here in June for the sake of pandering to a stale thesis.


Everything has a time and a price. I have an immediate term TRADE line of SP500 resistance that's formidable at the 955 line (dotted red) and if I see that print, I'll only see another 3.5% upside left from there. With the only support line of resistance all the way down at 910 (dotted) green, for now the best decision I can make is to do nothing and wait. Both the US currency and US Treasury market are in crisis - that will have unintended consequences.


Being in a YTD position to sit on performance and wait is reserved for those who didn't miss the last 3 months of performance. Chasing bulls is not what I do.



Keith R. McCullough
Chief Executive Officer


The Bull Shark Chart: SP500 Levels, Refreshed... - sp12

Restaurants – Ranking today’s Presentations

Given the environment, there was nothing earth shattering from any of these companies. It was notable that the tone was still one of caution.

Burt Vivian started the day off at 8am with his typical dour tone that we have become so accustomed to. He noted that there continues to be small steps of progress being made at the Pei Wei brand. Although the tone at the bistro is the same; weekdays suck (down double digit) with the weekend showing better trends, allowing the overall trend to be down mid single digits. Favorable cost trends remain a big tail wind for the company. Right now PFCB has a 36% short interest; I'm having a hard time seeing what the short story is on PFCB.

JACK presented next with very typical commentary on current business plans. The focus continues to be on the new platforms and refranchising. I'm actually becoming more favorably disposed to JACK as we head toward the back half of its fiscal year. JACK has the potential to end the year with a blockbuster FY4Q09. With Carl's Jr. lost in its premium product strategy, there is some market share for JACK to take in the California market, so sales trends should continue to show better trends as we finish the fiscal year. At the same time, commodity trends will continue to improve for the balance of this fiscal year, with commodity costs down 2% in FY4Q. With JACK trading at 5.5x EV/EBITDA and the group trading at 7.5x there appears to be at least $6-$12 of upside on accelerating business momentum.

CAKE was next with a very solid presentation. I really think Doug Benn adds a lot of credibility to the CAKE cost cutting story. With CAKE generating $90 million in FCF, which will go to reduce the debt on the balance sheet by $100 million, the focus is on cost cutting and the company ability to offset the MACRO environment. The real opportunity for CAKE is to get the average unit volumes back to $11 million from the current run rate of $9.8 million. Barring a big change in sales trends, the CAKE story is solid and with a 14% short interest there is risk to the upside.

SONC was more depressing. Over the past 12-months, the company raised the prices of its combo meals to the point where consumers are now buying more à la carte putting pressure on the average check. According to the company, the fix is to raise prices on the à la carte products to make the overpriced combo meals look better! How does that work? How did such a well run company get so screwed up? SONC has seemed to have lost its way in a very competitive QSR segment, and the short interest only stands at 10%.


Cry Baby


As many of you know, we have been consistently bearish of Billy Ackman's investment strategy on Target and the activist strategy more generally.


In fact on January 13th, 2009, we wrote the following:


"A primary reason we are negative on activist investing is that it typically includes an inability to sell easily due to large, and thus illiquid, positions in a Company's stock.  Additionally, being a "successful" activist often means becoming an insider by way of a Board seat.  The problem with this "success" is that it does not allow an investor to change their view, by way of selling stock, when the investment's prospects change.  The net result is what we call thesis drift, which occurs when your original thesis is no longer intact and you invent a new thesis to justify your investment."


Ackman's thesis on Target was the perfect example of thesis drift.  As Target's management acknowledged, "Bill Ackman is an idea machine."  Now ideas are cool and all, but if you are just wrong, either on timing or the investment, a new idea is not going to get the stock up and is merely indicative of thesis drift.  Now Billy manages more money than we do and probably has a higher net worth, but he has also reputedly managed two funds to 90%+ losses, the Target fund and his prior partnership, Gotham Partners.


That said, the loss on the investment is not really the worst part.  The embarrassing part is that Billy cried after losing the proxy battle for Target late last week. According to Joe Nocera from the New York Times:


"It was pretty startling when, in the middle of his speech to Target Corporation shareholders, William A. Ackman, the hedge fund manager who had waged an expensive, high-profile proxy fight against the company, suddenly choked up and stopped speaking, The New York Times's Joe Nocera writes in his Talking Business column.  Mr. Ackman, he notes, actually wiped away a tear."


Billy, if you want to be a big boy activist . . . don't cry.  The "boo hoo hoos" won't get your investors their money back.


Daryl G. Jones
Managing Director




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Housing - Easy Money and Affordability


Our call on the housing market bottoming in Q2 continues to play out. Now we must answer the question-what's next?


The first thing I thought of when I saw the pending home sales number was that the government has gone too far trying to stimulate the housing market.   


The number of people signing contracts to buy previously owned homes climbed 6.7% in April, the fourth increase in five months and significantly more than consensus.


The National Association of Realtors said the index of signed purchase agreements was the biggest in more than seven years.  Importantly, the April reading was up 3.2% year-on-year. 


Significantly lower home prices, historically low interest rates and tax incentives are an aggressive stimulant to the housing market.  This is good news and provides the supporting evidence to the 40% move in the S&P 500 since the March 9th low.  Where do we go from here? 


First, mortgage rates are not going any lower and have been climbing of late.  Second, while confidence is off the lows, the unemployment rate is still climbing.  Third, today's number contrasts sharply with the muted  0.3% rise in new home sales, which suggests deeply discounted used homes are providing stiff competition for the  home builders. 


The positive trends in the housing market are now being priced into the equity markets, however what has not being prices in is the next move from the FED - higher rates!


Howard Penney

Managing Director 


Housing - Easy Money and Affordability - homepend


"I made my money by selling too soon."
-Bernard Baruch
I doubt I made anyone money yesterday. I'd been selling into May's month-end markups last week, and I kicked off the new month making more sales. In the face of a pending US Dollar crisis, I didn't think that the US market could make higher-highs. That was obviously wrong.
The US stock market took continued US Dollar weakness yesterday and did with it what it has been doing for the better part of the US Dollar's recent -12% crash - it REFLATED. Fundamentally, that makes sense to me... in the immediate term.
So what do higher-highs mean? Well, for one, they provide one more rear-view reason for stocks to go higher. Although many market players like to call it something else, the reality is that since the 2002 lows, the US market has been populated with investors who literally buy high with the hope of selling higher. Where do you think CNBC came up with the name Fast Money?
Not recognizing that plenty of investors chase using a one-factor model (price momentum), is plain ignorant. Over the years, I have learned the lessons of price momentum the hard way. Today, I have my own process to measure price momentum within a multi-factor model that considers other critical data like volume and volatility. This isn't rocket science. It's math. And anyone who has proven to be able to make money in the last 18 months is using it, as they should, in order to proactively manage risk.
Risk, as the short sellers of everything Roubini Depressionista low can explain, works both ways. To ignore a +39.3% price move in the SP500 since March 9th and/or to waive it off as "not being based on fundamentals" surely provides the basis for one to have assets under management redeemed. Redemptions also work both ways - and don't underestimate the tail risk associated with an all-out resurgence of the redemption cycle in the hedge fund community where guys are getting squeezed.
I have had my fair share of dances with the bear. I have also been squeezed, royally. But I have learned from those experiences - live ammo leaves a mark. So what does that do for me today? Well, for starters, it makes me wait... acutely address the probability of risk versus reward... and deal with exposures at a measured pace.
In the last few weeks I have made one major move - selling longs. I have taken the number of long positions in the virtual portfolio down from 38 to 13. On the short side, I have done a whole heck of a lot of nothing, keeping the number of short positions I have held in the last 3-months in the range of 8-12. No, that's not a lot of short positions. And yes, that's why I have had such a good 3-month run. Not being short was actually a better call than being long. At this stage of the market's 2009 game, a clanging monkey could perform the former strategy.
Yesterday's game is over - today we are tasked with playing the game that's in front of us - so here are some things to consider in terms of how to manage risk from here:
1.      In the immediate term, I have SP500 upside at 955 and downside at 906 - that's a negative risk reward on a very short term duration

2.      In the intermediate term, I have SP500 upside at 989 - that's 5% left in the trough-peak intermediate term rally

3.      In the intermediate term, I have a significant range of downside support for the SP500 between 828-895 - that's nowhere near the March 9th low

Altogether what does this mean? Well, top to bottom (989 to 828) I see a 16% trading range. And basically it means that, on both sides of the bullish to bearish debate, the BIG moves are behind us, for now...
The Volatility Index (VIX) and the TED Spread (3-month LIBOR minus 3-month Treasuries) are telling you the same this morning, and so is the yield curve. Managing risk towards an October 2008 risk management setup is, for now, plain wrong.
Can these facts change? Certainly. And I'll be right there changing alongside those prices. Every morning we hold an 830AM conference call for our Research Edge Macro subscribers where I go through all 27 factors in my macro model. Market prices are leading indicators, and they dominate that dialogue. There is responsibility in daily recommendation.
Right here and now, the US Dollar moving into crisis mode is what worries me most and I am not alone. Yu Yongding, former Chinese central banker and interviewer for the China Daily, told Investment Banking Inc. President, Timmy Geithner, point blank last night that "I worry about details. We will be watching you very carefully."... "I wish to tell the U.S. government: 'Don't be complacent and think there isn't any alternative for China to buy your bills and bonds"...
This is a game has gone global folks. Big time. Within it, higher-highs should be risk managed as acutely as the US Dollar and Treasury market's lower-lows.

Happy Birthday Dad,


CAF - Morgan Stanley China Fund- A closed-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.

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 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.

UUP - U.S. Dollar Index - We believe that the US Dollar is the leading indicator for the US stock market. In the immediate term, what is bad for the US Dollar should be good for the stock market. Longer term, the burgeoning U.S. government debt balance will be negative for the greenback. The Euro is up versus the USD at $1.4170. The USD is down versus the Yen at 96.0850 and up versus the Pound at $1.6397 as of 6am today.

XLU - SPDR Utilities - As long term bond yields breakout to the upside, Utility investments are the relative yield loser. TRADE and TREND remain bullish. We're wrong so far.

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.

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