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Keep Your Head Up

“Question every premise, challenge conventional wisdom, and never accept the truth of something merely because everyone else views it as obvious.”
-Albert Einstein

Suffice to say, this market continues to deliver crushing body checks to those without a proactive risk management process. Our virtual portfolio was up on the day yesterday. Don’t get upset with me – this is not my religion, it’s just my performance. Since we had a zero position in US Equities on the long side, the math behind that success wasn’t that complicated.

What is complicated is figuring out the investment process of those who were bearish at SP500 752, then bullish at SP500 896. There is absolutely no reason to be paying people to freak out at bottoms and pat each other on the butt at peaks. The game of momentum chasing is over. If you want to reconcile buying high and selling low as the new new thing, let me introduce you to a 220 pound defensemen from Alberta, Daryl Jones. Your head is down, and you are in his trolley tracks. If you set yourself up like this enough times, you’ll be checking yourself into the clinic for post concussion syndrome.

The good news is that if you are on our side of the bench, it may be all of a sudden be “cool” to be wearing the same jerseys as that “cocky guy” named McCullough. When I played hockey, no one ever accused me of not chirping the competition. On Friday, you can ‘You Tube’ me – I wrote, “I am now warning you of an up +1%, down -15% setup” in the SP500. In hockey speak, I could have just as easily yelled from the bench, “keep your head up!”… this isn’t being cocky – this is called being a team player.

For all of 2008, Hank “The Market Tank” and “Heli-Ben” have been on the losing team’s bench wallowing in their own reactive approach. While everyone scurries to the revisionist historian water cooler, looking for reasons as to why the US market tanked intraday again, keep it simple and watch the replay. There isn’t a worse line that the USA can put on the ice than George Bush, Hank Paulson, and Ben Bernanke – they all had ice time after lunch yesterday. They all spoke. They all reminded us that they need to just stop talking.

Bush repeated that America needs “bold action to prevent another Great Depression.” Bernanke reminded us that he will be flying Japanese B-52’s instead of choppers, dropping free moneys from the heavens. Paulson confirmed that he is indeed clueless. It was truly an embarrassing and sad day for American Capitalism. Thank God it’s over. Get Obama on the ice centering Volcker and Summers. It is almost humanly impossible to play worse than the current lineup has.

The crisis of confidence associated with the loss of the American Financial System’s credibility re-entered the game yesterday. Volatility shot straight up with the VIX breaking out through our critical resistance line of 64.66, closing +23% on the day at 68.51. Volume wasn’t October like, but it definitely picked up the pace, as it usual does, when Paulson gets a shift on TV. Technical stops losses kicked in across the system of the major US indices. For the SP500, the 838 line was an important one per our short term momentum models. Now that support becomes resistance, and my SP500 downside target to manage risk around is 749.

On this day in 1961, a radical by the name of Castro adopted Communism. On this day last week, a new terrorist organization asserted themselves in Asia. The US Financial media should be ashamed for not calling out this new found river card of geopolitical risk onto the table on Friday. The facts were there – this cross border attack from Pakistan to India was not a trivial one to consider. The financial network media simply chose not to highlight it. I’ve said this plenty of times this year, and I’ll say it again this morning – just because the perpetually bullish ignore facts does not mean that those facts cease to exist.

If some of my critics want to call me cocky, overconfident, or whatever it is that they call someone on the other team that just won’t go away, I am cool with that. My goal, like my Dad’s is at the fire hall, is to wake up to this world, ever day, to serve and protect. If I sound snarly, or moody, or too matter of fact, you should try making small talk with a firefighter after his night shift. I guess this all comes with the baggage; I’m just a hockey player from Thunder Bay, Ontario, after all – cut me some slack.

My guess is that all fiduciaries of other people’s money want an investment research firm to stand up at the blue line, and tell them what they may not want to hear in the early morning (particularly if consistently proves to be right). As Churchill said, “if you have an important point to make, don’t try to be subtle or clever… use a pile driver.”

Although CNBC loses track of what narrative fallacy it is that their “money honeys” should be following, we cannot blame them. They have “macro men” who are just as clueless. This isn’t a gender thing. This is a process thing. When there is no leadership, there is no room in organizations to “question every premise and challenge conventional wisdom.” That, fortunately, leaves the door wide open for our best players, like “Big Alberta.” Boom!

This isn’t a new behavioral reality. It has just found its way into the first genuine global mass market media mania in economic history. We can all profit from this, of course. Just remember – have a process, and keep that head up.

Best of luck out there today,
KM

Long ETFs

GLD -SPDR Gold Shares –LME Gold spot prices rose by 0.4%in trading this morning as the Bombay Bullion association released estimates showing a 26% month-over-month decline in Indian imports following the attacks in Mumbai.

OIL iPath ETN Crude Oil –Light Sweet Crude futures fell as low as 47.36 this morning, testing the lowest levels in 3-years.

EWG – iShares Germany  -- The DAX rose as much as 1.3% to 4,449.6 today, led by an over  6% gain in Volkswagen AG  (EWG: 13.6% )share price.

FXI –iShares China – The Yuan official reference rate was set at 6.8527 today vs.  6.8505 Yesterday, the lowest level since before the last meeting between Secretary Paulson and Chinese envoys this summer.

Short ETFs

IFN iShares India – The Rupee declined as low as 50.45 per USD today in the third consecutive down day for the currency. The Sensex, fell by as much as 315.48, or 3.6 % in trading this morning in a broad market sell-off  with  Infosys Technologies (IFN: 8.43%) down over 3% and copper producer Sterlite Industries down over 6.5%  (IFN:0.57% ).

EWU – iShares United Kingdom – Supermarket Tesco PLC (EWU: 0.619%) beat analysts forecasts with Q3 sales buoyed by discounted staple food pricing,  driving the stock higher by more than 8% and helping the FTSE partially recover from earlier lows.

UUP – U.S. Dollar Index – The pound dropped for the third consecutive day to to 1.4807 USD this morning.

EWJ – iShares Japan –The Nikkei 225 declined 6.4% in trading today to close at 7863.69. BOJ will begin accepting corporate debt rated as low as BBB as collateral for loans to banks. Nippon Steel (EWJ: 1%) is attempting to negotiate the cancelation of contracts to purchase coal and Iron ore with suppliers in light of declining prices and slumping demand.

FXY – CurrencyShares Japanese Yen Trust – The yen traded as high as 92.89 USD this morning -the highest level since Oct. 28.


TRADE VS TREND

Keith – SBUX - is a layup long at 7.18, waiting on it

Howard – SBUX - As I said in my most recent SBUX post, I see fundamental support at $7-$8 and that has not changed. I would include SBUX as a stock to benefit from the same trends I laid out in the Casual Dining post over the weekend

Keith - WEN - if WEN can hold 3.48, it’s a buy

Howard - WEN - I have a positive bias to WEN and a meeting with new CEO in two weeks.

Keith – EAT - EAT really needs to hold 5.68, or the retest of the 3 handle cometh

Howard – EAT – As I said last time, EAT is the poster child for the destruction in Casual Dining. Management is doing everything they can do to offset the macro, including a liquidity event. Three of the Chili’s competitors in the bar and grill segment are in serious trouble – Applebee’s, O’Charlie’s and Ruby Tuesday’s, which should be a net positive as we look toward 2009.

THE DEPRESSION: Then and Now

Despite the emotional rollercoaster that is CNBC, which may have you believing that the country is in a depression, or has slipped into one over the last 12-18 months, fact is, the US is not in a depression, at least not like the Great Depression that engulfed the 1930s.

Although lacking one technical definition, a depression is understood as a 10% decline in real GDP year-over-year. Here are a few clear distinctions between then and now:

First, the stock market lost 89% of its value at its peak during the Great Depression. By contrast, the DJIA is down more than one-third from its high a year ago.

Second, although we saw small bank runs on Washington Mutual in late September, during the Great Depression there was no deposit insurance, which caused the precipitous failure of banks; some 7,000-8,000 fell between 1929 and 1932 due to runs on the bank. Today less than two dozen banks have collapsed, with 171 on the government’s watch list. Two larger banks, Washington Mutual and Wachovia, failed, but were taken over. As of October, the FDIC now has insurance on bank deposit of $250,000.

Third, unemployment hit 25% for most of the decade from 1931 to 1941. October’s unemployment number stands at 6.5%.

Gary Becker, a Nobel prize-winning professor of economics at the University of Chicago notes: “Although we are in the most severe financial crisis since the Great Depression of the 1930s, this is a far smaller crisis, especially in terms of the effects on output and employment.”

The market may be down over 5% today. There is pain, but we’re not in a Depression.

Matthew Hedrick
Analyst


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YUM – Taking Pasta to a whole different level

Initially, I did not pay much attention to the idea of rebranding Pizza Hut to Pasta Hut, because it makes no sense to me and seems to be a complete waste of money. Today, a story in the Korea Herald woke me up to the fact that YUM is actually going ahead with this strategy in some key international markets.

A restaurant concept that incorporates a type of food in its name will always have a difficult time diversifying to a broad based menu. Kentucky Fried Chicken incorporated the name KFC to get away from the stigma of fried chicken. Chick-fil-A sells chicken. Pizza Hut sells pizza. Pasta Hut will sell pasta. McDonald’s and Wendy’s can sell chicken, beef and fish because their names do not define and/or limit their menus.

Following on the heels of YUM’s national launch of pasta at Pizza Hut earlier this year, the Korea Herald reported that Pizza Hut is planning to rebrand three of its 330 restaurants in Korea to “Pasta Hut” in an attempt to broaden both its mid-range menu items and more importantly, its consumer base. All of the 330 units will include the new pasta offering on its menu, but only three units will be rebranded as part of the company’s marketing strategy as they are all located in high foot traffic areas.

Lee Seung-il, managing director of Pizza Hut Korea, stated that with the country’s pizza market believed to have hit saturation point that pasta offers menu diversity from both a taste profile and value standpoint. Lee hopes that pasta sales will account for 30% of Pizza Hut Korea’s next year’s revenues.

"This so-called 'shock' marketing strategy is aimed at raising consumer awareness that Pizza Hut specializes in dishes beyond the pizza," Lee told reporters. Pizza Hut used this same rebranding strategy in the U.S. back in April when it replaced all of its exterior signage at its Dallas headquarters with the new Pasta Hut logo and launched a national print and TV advertising campaign that stated “Pizza Hut is now Pasta Hut.” Pizza Hut followed with similar Pasta Hut rebranding efforts at its 700 units in the U.K. in October in a bid to overhaul the company’s image and menu. The fact that Pizza Hut Korea is now doing the same signals that the company’s pasta initiatives have been successful as a means to increase customer demand. As of YUM’s 3Q08 earnings call, management stated that its Tuscany Pasta has already become a $500 million brand in the U.S. and is on the way to become a $1 billion brand. The company also said that it plans to roll out a whole new line of pastas over the next couple of years.

The true success of Pizza Hut’s pasta launch is subject to whether these growing pasta sales are incremental to the company’s sales versus cannibalizing existing pizza sales and whether they are increasing overall profitability. Because as Lee stated, “For now, we're focused on capturing repeat customers, especially during these sensitive economic times." Right now, the company just wants to get people in its doors. Additionally, Lee said the company is willing to sacrifice a bit of profit-making to raise awareness that Pizza Hut is more than just pizza, which might imply that the pasta offerings do not generate the sale level of profitability. This brings into question YUM management’s statement from its 3Q08 earnings call that its pasta margins are slightly higher than what it earns on a “pure pizza.”

Cliff Diving: UK Economy Style!

Today’s PMI is just the latest nail in the coffin…

Manufacturing PMI data measured by the Chartered Institute of Purchasing and Supply was released today at the lowest level since 1992 with the Index registering at 34.36 in November, adding another negative data point to the crumbling UK housing market and banking sector. With industrial contraction, higher unemployment will inevitably follow (already Jaguar and Land rover have announced layoffs in UK facilities) adding political pressure on the BOE to cut rates further.

We are short the UK market via the EWU ETF. Not only do we continue to have a negative view on the current British economy structurally, we also see no catalyst for growth that could help fuel a recovery in the foreseeable future. Gordon Brown is levering up long at the wrong time.

Andrew Barber
Director

Trading Oil?

Here's how we see the setup for trading crude oil from in the immediate term.

Crude, and commodities in general, remain in a negative intermediate "Trend" (3 months or more) position. Buying crude for an immediate term "Trade" makes sense under $49/barrel. Selling that "Trade" at or better than the $57/barrel price is where we get out.
KM

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