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Eye on Putin Power...

By the time you're done your morning coffee today, you'll likely conclude that the geopolitical risk factors affecting markets have been stepped up a notch. The Israeli/Iran threat is the obvious one, but how many people are watching this Russian/Chinese alliance?

Putin's Russia joined arms with China vetoing a UN Security Council proposition to impose sanctions on Zimbabwe's Mugabe.

The US and the UK are lashing out against this move this weekend, and they should.

The higher energy prices go, the more amplified Putin's geopolitical power becomes.

Don't think for one minute that the Russians have enjoyed being subservient to US rhetoric for the past 20 years. That was approximately the length of the bull market in US stocks too. When everyone is making money, a lot of risks can get swept under the rug - when people stop making money is when you realize they are still there.

It is global this time, indeed.
KM
(picture: www.globalsecurity.org/wmd/library/news/russia)

Indy Mac: 2nd largest US Bank Failure Ever

Below is a picture of what it looks like when the US government seizes control over a bank, and you want in. Indy Mac's 33 branches will be shuttered this weekend.

Like most levered business models, Indy Mac's didn't end well. An old fashioned run on the bank is now a real time reality.

This is going to cost the FDIC $8 billion in bailout capital, which represents approximately 15% of the Federal Deposit Insurance Agency's "insurance" buffer.

KM
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Picture: Annie Wells / Los Angeles Times

Subway's $5 Price point

There are significant cost pressures on the restaurant industry and its suppliers; fuel related issues, increasing labor, utility and food costs. As a result, it's very difficult for companies to maintain their current price point. If the current trends continue, it's going to weed out the marginal players from the companies with good unit economics and strong balance sheets. The strong franchise systems will gain market share. Nearly every restaurant company has been taking some price (3%-4%) to mitigate margin pressure. What happens if the industry can't raise prices anymore?

Not long ago I wrote about traffic trends on deal in the QSR industry. It turns out that Subway is seeing a lot of price elasticity to the $5 price point. The 14% increase in traffic is nothing short of remarkable in this environment.

The problem for the industry lies in the fact that nearly every competitor is copying it; not just the sandwich guys but also the burger boys. The competition is trying its version of a $5 meal because it is such a good price point in this environment. The segment that could be hurt the most is fast casual. Fast casual chains are well positioned when people have money, but now people don't want to spend $8-$9 for lunch when they can spend $5.

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Prentice Needed the Research Edge...

Now that my performance is back (I had a bad quarter in Q2 of last year -I was too bearish at the market top I guess), if I had a $100 for every time someone in the hedge fund business approached me to run money in "Consumer" land, I may not have as much $ as Prentice Capital has lost year to date, but I'd have plenty enough to fund the next leg of my firm's software development!

As most of you know, I used to be a PM in the hedge fund business, following Global Consumer. Michael Zimmerman, who runs Prentice, has been a competitor of mine since his days working for SAC Capital. Playing at the highest level, I think we both had pretty good runs since 1999. In the past few years, past performance has seemingly provided us both with the opportunity to start our own firms.

Past performance in this business is never a predictor of long term future returns, unfortunately. How hard you play the game doesn't always equate to winning it either. That said, I'm always up for a game, and I get up early.

Michael played tennis at Harvard, so I'd have to line up with my intern Jeff Dawson (Captain of Yale's 2008 Tennis team), if he wants to dance with me on clay. We hockey players are really slow when off the ice. I'd have to play 2 on 1 to even come close!

The market game is a different one however. There I'm happy to play head to head. I called the Morgan Stanley Retail Index out as a short in mid May (see attached, MVR Index), and it has since lost 24% of its value.

Looking at this article in section C1 of the WSJ, Jenny Strasburg has Prentice down -46% year to date, with "almost half of that drop happened during June as the value of the firm's stock and debt investments in retailers plummeted."

There is a winner and a loser in every trade. Mine, fortuitously, has been to leave the hedge fund community, take the short side on the industry, and build a global macro research process that is transparent and saves people money.

Maybe Prentice can become a client!

Play hard, and shake hands when it's over. This game is one of the best in the world.
KM

Scary Chart Of The Day: US Dollar; Going Lower...

Here's an outlook from a confidant of mine who manages 40% of the risk in the fixed income book of a major bond house...

KM
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"Something is not making sense here"

There is a high probability that the US Government will back Fannie and Freddie. OK? But that doubles the debt...

Yet US Treasury rates are barely unchanged today and swap spreads are barely tighter...

The US Dollar not moving enough...

The "Trade" I see here is sell US Treasury rates, receive on UST swap rates in smaller size, and SELL the US dollar....

-The Bond Guy
(chart courtesy of stockcharts.com)

Volatility (VIX) up another +10%: Thanks Hank...

I've been hammering on why I think the VIX is in a bull market. We have "hammerin' Hank" Paulson's confusion to thank for this. This may be one of the worst performances in the history of the US Treasury.

At 28, the VIX is stair stepping towards my target range of 31-32. If the US stock market continues to crash the boards, that target will look very conservative.

Hedge Funds are blowing up. You will see that news hit the tape, after the fact, not before.

KM

(picture: http://www.finfacts.com/irelandbusinessnews/uploads/bushpaulsondec032007.jpg)

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