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Hedge Funds Facing The Reality Of Oversupply...

Bloomberg Article today By Katherine Burton and Saijel Kishan - "Hedge Fund Research Inc. show. It's the worst start to a year since the Chicago-based firm began tracking returns in 1990"....
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That story is getting a lot of air time today, and it should - 18 year lows are statistically significant. Can you imagine what these numbers would look like if they back tested 25,000 PM's performance across real bear market cycles like that of 1973-75?

The numbers for June's quarter end are rolling in, and the tide is rolling out on the levered long community. To borrow Buffet's analogy, now we can see who was swimming naked, without a risk management process.

I've been making this call since November of 2007 when I left the buy side. So now, at the very least, I do not have to endure the countless "you have an axe to grind" emails I was getting 9, 6, and 3 months ago from strangers. They were levered long, and ultimately proven wrong.

KM

RRGB - I Have Seen this move before and the ending is ugly

There are currently two major components driving the direction of RRGB's traffic trends: pricing and advertising. As I have said before, specifically as it relates to SONC and CBRL, rising prices often leads to a drop off in traffic. It appears that senior management at RRGB is using price to protect margins, at the expense of traffic trends. Unfortunately, this is a story that has an ugly ending for shareholders.
  • Average check was up 4.3% in 1Q08 (traffic down 0.4%) and RRGB management commented at the Oppenheimer conference today that it implemented its expected late June 2.7% price increase. 3Q08's traffic trends could be hurt significantly by this most recent price increase as the company will be running at about 6% price through mid-August and should average about 4% for the year.
  • RRGB launched its national advertising campaign in April of 2007 and ran advertisements for 11 weeks in FY07. This year the company increased this ad time to 23 weeks and its total spending to $18-$18.5 million from $11.5 million in 2007. RRGB's traffic trends benefited in 2Q07 and 3Q07 from this incremental spending but turned negative in 4Q07 when the ads went off the air. There was some sequential improvement in 1Q08 traffic (still slightly negative) when there were incremental weeks of advertising relative to no advertising in 1Q07. 2Q08 advertising levels, however, will be about even with last year. The chart to the right shows the quarters when there was no advertising, increased advertising weeks versus the prior year (upward arrows) or an even level YOY relative to reported traffic results.
  • RRGB is scheduled to report its 2Q08 results on August 14, but management issued an 8-K today stating that recent sales trends may trend to the low end of the previously guided sales assumption for the full-year 2008. Because the company had just raised its top-line guidance on its 1Q08 conference call in late May to 2.5%-4% same-store sales growth (from 2%-3.5%), $905-$918 million in revenues (from $880-$893 millions), trends must have decelerated during 2Q. Traffic was most likely hurt by both the increased pricing relative to last year (and this is before the most recent increase) combined with the fact that there was no incremental advertising relative to 2Q07.

Uranium: Don't Cry For Me Obama!

Next week will mark the three year anniversary of the meeting between Indian Prime Minister Manmohan Singh and President Bush that laid the groundwork for a proposed nuclear energy agreement.

Today Communist factions of the ruling Indian coalition abandoned Singh's party to protest the deal, threatening both his administration and joint US/Indian nuclear development.

Despite rabid opposition from his own side of the aisle, Singh has signaled continued commitment to the deal -with rampant inflation driven by higher oil and coal costs his administration is under tremendous pressure to find meaningful energy solutions. It remains to be seen if he can actually get the deal done, a process that will require additional approval from the IAEA, NSG and the US congress.
  • Andrew Barber Director Research Edge, LLC

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China Throwing Factories a Bone??

I almost fell out of my chair this morning when I saw a report from the China Securities Journal that the Chinese government may raise tax rebates for apparel exports from 11% to 15%. Definitely a positive gesture, and one I need to consider as it relates to my 'sourcing margin squeeze' thesis. But the bottom line is that this does not come close to moving the needle.

Aside from the narrowing trade gap, the impetus for this move appears to be that Premier Wen Jiabao and his top economic leaders visited major exporting provinces over the weekend, and saw first hand the impact of regional business challenges (quake, floods) as well as rising wage and raw material costs.

Do you think that maybe they should have thought of this before cutting the VAT tax rebate, and then subsequently mandating earlier this year that factories in key regions pay employees back-pay for vacations?

Remember that there were about 4,750 footwear factories in the Guangdong province earlier this year, and that 2,331 of them have closed due to these cost pressures. Perhaps they're showing some regret for the number of factories they put out of business.

Unfortunately, footwear gets no relief here, as these tax rebates in question apply to apparel only.

But even for apparel, we need to do some math. The cash freed up in the supply chain due to these changes equates to about $0.45 on a $100 garment. We need to see 3-4% pricing power to offset cost pressures. Aside from the fact that China accounts for just short of 40% of our apparel imports (vs. 85% for footwear), this is simply not enough to move the needle.

EYE ON COMMODITIES - CORN and WHEAT

  • Corn"The Organization of the Petroleum Exporting Countries is taxing the industrial world into a global depression and Big Oil is behind this year's vicious assaults on corn-based ethanol. The world's largest ethanol conference began with those blunt messages last week here in Music City, USA, where nearly 4,000 people gathered for the 24th annual International Fuel Ethanol Workshop & Expo (FEW), a BBI International event" -Biotech Week G8 climate change agreement includes language about goals to set international benchmarks on biofuels, a move that could require US corn producers to scale back on production for biofuels. The Guardian
  • WheatThe Australian press is reporting that durum wheat prices are on the rise despite a big worldwide crop. Strong demand internationally, particularly in the US, is pushing prices higher. The primary use of durum wheat is to produce pasta.

Copper Is Breaking Down Again: What Does It Mean?

Dr. Copper's class was back is back in session yesterday as indications of loosening current and future supply inspired selling.

Reports that striking workers are returning to the mines in Peru, combined with the return of law and order to Mongolia's capital (with opposition leaders acknowledging that the recent elections where fair, for the most part...), has provided a fundamental backdrop for committed selling in the futures market over the past 24 hours (see chart).

Copper has remains a fascinating leading indicator for me to analyze. On one hand, copper breaking down assures me that Asian economic growth is slowing, which is ultimately deflationary. On the other hand (supply side), copper's June ascent amplified the reality that this brave new interconnected world cannot absorb supply shocks, which is ultimately inflationary.

At this spot price, copper is breaking down. Class dismissed.
KM

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