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Who Wants Uncle Sam as a Business Partner?


German Export data is one of the barometers of European economic health we follow closely; as of Q3 of last year exports totaled nearly 45% of GDP for Europe’s largest economy. Data released this morning showed total exports dropped a seasonally adjusted 3.7% month-over-month in December, rebounding somewhat from the -10.8% level registered in November, potentially signaling a higher low for industry in Europe’s largest economy. Exports increased 2.8% for the total year with shipments to countries outside the EU showing + 6% vs. +1.1% for intra-EU sales.

Imports slid by 4.1% M/M during the same period, with the total trade surplus tapering to €6.9 Billion from €9.9 Billion in November.

The clear trend emerging from German export data for late 2008 is a sharp decline in demand for manufactured products, particularly cars and engineered metals products, and a particularly strong drop off in intra-EU sales:


One signal that global confidence in the German economy is waning is being provided by the yield curve, which has widened to a spread of over 200 basis point between the 2 and 10 year bunds as capital continues to flow into short term German debt to the determent of long term paper, which faces pressure with a large auction later in the week –in the wake of last month’s cooling demand.

German leaders, after initial slowness, now appear to be proactively responding to the situation. Over the weekend two important policy changes were announced:

Following a Security Council conference in Munich over the weekend German Chancellor Angela Merkel issued a joint statement with French President Nicolas Sarkozy saying that they are working on ideas for a common European Union response to the economic and financial crisis. Merkel invited European leaders to meet in Berlin on Feb. 22 to discuss changes in the global financial system before an April 2 summit of Group of 20 government heads in London.

Also over the weekend Germans received the news that German Economy Minister Michael Glos has tendered his resignation, just seven months before national elections. By all accounts, Glos has taken a back seat in recent weeks to the increasingly popular Finance Minister Peer Steinbrück (a member of the SPD party) in handling Germany’s response to the financial and economic crisis. Glos, 65, garnered criticism for struggling to show a command of economics like his predecessor, Wolfgang Clement. He has made embarrassing references to Deutschmarks instead of Euros in speeches and was absent for a long trip to Asia during critical early stages of the crisis.

This morning Karl-Theodor von und zu Guttenberg of the Christian Social Union (CSU)—the Bavarian sister party of Merkel’s Christian Democratic Union (CDU)—was named in Glos’s place. Merkel, who leads a Grand coalition with the Social Democratic Party (SPD), is fighting for her party’s reelection in September. Glos’s poor performance and resignation in this environment cast a poor light in confidence for Merkel’s party in the wake of the CSU losing its decades-long absolute majority in Bavaria.

The hope for a CDU led coalition election victory now seems to lie in Merkel’s ability to resuscitate German leadership in EU economic policy making and to steer the ship forward again. The German economy contracted by 2% in the final three months of 2008 alone and consensus forecasts predict another 1-1.3% decline in 2009. Any further signs of indecisiveness could be politically and economically fatal for her party.

We continue to believe that the German economy is the strongest in Europe on a relative basis, but that strength will mean little if there is no confidence it its leaders. We will keep our eye firmly on the situation there.

Matthew Hedrick

Andrew Barber

The Line That Matters: US Dollar

Below we have outlined where I think the SP500 can either find her next up leg, or break it.

The white dotted line in the chart below is at $84.47. If the buck breaks that line (like it did in December), I think stocks breakout to test the December/January highs. Today, the US$ Index is down another -0.79% at $84.61, and the stock market likes it.

If we fail to break the buck, there is a massive wall of resistance at SP500 885 that I do not believe will be overcome. This is the line that matters.

Keith R. McCullough
CEO & Chief Investment Officer

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CAKE – It’s been a long Time

Anybody can look at a map and read the news and tell you that a majority of CAKE’s units operate in some of the most economically challenged parts of the country. Even better than that, we can use Malcolm Knapp’s regional data for a very specific look at CAKE’s regional performance. While we don’t yet have December data, my guess it will look like November. For the November same-store sales data, there was not much movement among the best and worst performing regions of the country. The same regions of the country are still performing both above and below average so in November, CAKE still had 62% exposure to the worst performing regions of the country (third worst exposure behind only CPKI and MSSR). This is old news and consensus thinking.

The Research Quantitative Edge

The Research Edge quant models suggest that CAKE just turned bullish on both the “trend and trade.” On the trend line we see $8.51 as support and for a trade it broke the $9.26 shark line on Friday. If there is any turn in the fundamentals (see below), the stock looks like it’s going to $15.00. I would also note that the short interest is surprisingly low (6.3% of the float) relative to years past, and on balance that’s bearish. There has not been any insider buying recently, but there are no sellers for a while either. The composition of the shareholder list is a net positive – guys that probably buy more as fundamentals turn, plus you have the big slug owned by CEO Dave Overton that isn’t on the offer. Importantly, the high turnover hedge fund beta appears to have been drained from the top holders list.

Here are some of the fundamental aspects to think about when looking at CAKE over the next four quarters.

(1) EPS NEXT WEEK - I don’t expect the tone of the earnings call to be good next week. Same-store sales are an issue, but we know that. I do think that street estimates are low for the quarter and possibly for 2009, but that is impossible to tell right now. Less than toxic will be the tone from the call.
(2) LOWER COMMODITY PRICES - CAKE will benefit more quickly than most restaurant companies from lower food costs. Dairy prices have declined substantially over the past year and tend to have a more immediate impact on the P&L.
(3) CONTROLLING CONTROLABLES – CAKE’s capital spending has declined very quickly and now stands at less than 5% of sales, which is one of the lowest levels of spending in the industry. The significant decline in capital spending will make the company a more efficient organization, reducing its cost structure and allowing for sequential margin improvement, even with declining same-store sales.
(4) M.E.G.A. - Sticking with the Research Edge MEGA thesis on the consumer, if Knapp Track sales trends become less bad as we head into the spring, the leverage to EPS is even stronger in a company with a more efficient cost structure.
(5) NEW MANAGEMANT – CAKE recently hired Doug Benn as CFO. Traditionally, the role of CFO has been a revolving door at CAKE, and to be honest I don’t view Doug’s position any differently until proven wrong. First, rumor has it that it is a challenge to work for CEO Dave Overton. Second, Doug’s roots are in Atlanta, which is far cry from southern California. Having said that, Doug is a much respected CFO in the restaurant industry and brings significant credibility to the organization. In addition, last July, CAKE hired Mark Mears as CMO. Mark’s hire was the first time that CAKE has had a CMO.
(6) NO BALANCE SHEET ISSUES – CAKE recently entered into an agreement to amend its revolving credit facility, taking a proactive step to increase its financial flexibility in light of the uncertain economic environment.

At 5.3x NTM EV/EBITDA, CAKE is cheap, but who cares – there are a lot of cheap restaurant stocks. What matters to most investors is stability and smart decisions. The actions CAKE has taken to right size the company and add creditability to management will be reflected in the company’s stock price over the next six months.

Washington And Wall Street

“It is a mistake to think businessmen are more immoral than politicians.”
To be clear, I am no Keynesian, but the man did have some great one-liners. I flagged this quote over the weekend while I was reviewing Amity Schlaes, “The Forgotten Man”, which is a historical interpretation of the Great Depression. The political climate in this country is intensifying, and I think there is plenty to glean from the behavioral psychology of political cycles past.
As always, the timing of points of view is critical. Keynes said this in the midst of Franklin D. Roosevelt’s most glaring attacks on corporate America in 1937. FDR needed the populist rhetoric to carry him into his second term, and although this helped him win that short term vote… in the end, the leftist anti-American capitalist tone was arguably one of the main contributors of the second round of crashing in the US stock market. Black Tuesday of 1937 was nasty, and so was the behavior of partisan politicians at that time.
Whether the name is Alex Rodriguez, Tom Daschle, or Dick Fuld – these are all one and the same – people who we lose faith in to do the right thing when no one is looking. This isn’t a Wall Street thing. This isn’t a Washington thing. This is an American thing – and the You Tubes of The New Reality are going to be keeping the score.
On that score, the new head of the US Treasury is off to a horrible start. Not only did Tim Geithner fib about his taxes, now he is failing to deliver on the market expectations that he has set. As Shakespeare wrote, “expectations are the root of all heartache,” and unfortunately Mr. Geithner was too busy being polarized by the politicization of his new seat to have done that required reading. This morning he is “delaying” the Treasury’s plan that he was slated to present. The S&P Futures don’t do delays Timmy. Let’s get with the program.
Geithner isn’t alone. Ben Bernanke may have lost his Goldman buddy, but he is sticking with the program of not delivering on expectations as well. The Fed is pushing out the long anticipated lending of the $200B TALF (term auction lending facility). These tax moneys were supposed to be flowing by February, and now it sounds like that won’t be until at least the end of February.
Michael Phelps smoked pot, and the partisan politicians in Washington didn’t get anything done this weekend. This is what these people are accountable for. If you’re surprised by it – find yourself a cold shower and a reality check. If you’re looking to endorse the “no drama” Obama dream as not having any asterisks, that’s a bid that I am glad to sell on strength…
On Friday, I made sales into the 863-873 resistance levels that I outlined in an intraday note to our clients. That’s not my politics – that’s my investment process. Whether or not it was a “good call” or not will be determined by the tape, and I will be held accountable for making that decision – as I should be. Them be the rules of The New Reality – transparency, accountability, and trust.
After charging +5.2% higher on the week into the face of consensus doubt, the balance of risk versus reward in the SP500’s price has moved to the risk side of the teeter-totter. I am using an upside target of 876 versus downside support of 844.
Combined with the US Dollar having its first down week of 2009, volatility coming down (as measured by the VIX Index) was another big contributor to the upward momentum in the US stock market. On a week over week basis, the VIX was down another -3% to 43.37, taking its cumulative swan dive from the peak of the Liquidity Crisis to -45%. That’s a big differential in expectations. The reality is that all of the 2007 bulls are now bearish, and the 2008 bears are busy writing books… so we are naturally going to see markets climb these walls of qualitative worry, expeditiously, as the quantitative measures go the other way.
This isn’t just a local phenomenon. Globally, stock markets in China and Brazil continue to hammer home the reality that countries who can earn unlevered returns can indeed prosper. Last night the Chinese stock market tacked on another +2%, taking the year-to-date move in the Shanghai Stock Exchange to +22.2%. On Friday, Brazil’s Bovespa charged another +4% higher, taking its 2009 score to +13.9%. While I sold our 6% position in Brazil into that strength, this doesn’t mean that I don’t like Brazil. It simply means that I like to book gains when I have them.
Some investors don’t have gains, some do. If you do have them, and you want to hold onto them for the “long run”, that’s really up to you. Until the US market can close above my almighty intermediate “Trend” line of 885, I’m much more into being a renter than an owner. There are plenty of shoes that have yet to be dropped in the land of the illiquid investor. There are plenty of assets that need to be marked to market that haven’t been.
Every asset has a time, a price, and embedded expectations. Just don’t mistake other people’s liabilities as an “asset” that you need to find a way to think about differently. A handshake can come from an American politician as soon as it can come from an American athlete – whether or not you should expect to trust those handshakes is really up to them. The You Tubes are on – before this stock market takes another leg up, it’s time for everyone to earn back America’s credibility.
Best of luck out there this week,


Washington And Wall Street - etfs020909

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