MCM Macro Morning 12/24/07... 'Just Stocks for them Stockings'

Stocks Discussed: CAKE, UWN, ERTS, TIP, GPS, DWA, KGC, NKE, BAGL, GE, TLF, TGT, RIMM, and HAS

MCM Trades/Fades
1. bought a starter position in Cheesecake Factory (CAKE) last week, $23.31... 70M shares out, $1.6B mkt cap, ($68M cash, $150M Debt) = $1.7B Enterprise Value = 1x and 8.5x my Revenue and EBITDA estimate for 2008, respectively.

-While the Street attempted to digest what the Federal Trade Commission giving antitrust approval to Pelt'z Trian Star Trust for a transaction with the company might mean, i took out my trusty notebooks and went back to work on this one. The stock has corrected since the Trian announcement, so patience is paying off, and is giving us a solid entry point.
-Recently, I've been very critical of the "Concentrated Activists", and with good reason. There is a laundry list of case studies, but to name a few, the Economic History of 2007 will not look back kindly on what the Karsch Capital's did with CSK Auto (CAO), or Pershing Square's with Borders Group (BGP). They'll have their own chapters, and the titles wont be complimentary. However, in this case, if Trian does with the Cheesecake asset what i would do, this is the way "activist" investing should be done. The integrity of the Peltz investment track record stands the test of something that the Bill Ackman's of the world dont have - time.
-Since 2000 (when all i followed were US Retailers & Restaurants as a hedge fund analyst) i've had multiple one on one meetings with CAKE company executives, and have come to appreciate CEO David Overton's bare knuckled approach to running great restaurants. If i'm Trian, thats all i need him to do - operate.
-One of the advantages of being an aggressive short seller, is that you can equip yourself with the mindset that your opponent may have when you get long a stock. And, at this stage of the war, i think the short case on CAKE is as stale as a 5 month old carton of milk. If you disagree with me, get in line - last count has 10.3M shares short, thats 17% of the float.
-So, wheres the rest of the float? Lets start with Overton - one of the greatest restauranteurs this country has ever given birth to; founded the company in 1978; and has one of the highest sales per square foot in all of US Consumer based consumption assets - Overton has > 5% of the CAKE outstanding shares. Trian is at 14%, Ron Baron 11%, Goldman 7%, and T Rowe at 7%. A casual observer of this story might ask, what about Robert Olstein's position? He's at, 2% but very vocal as of late with his call to arms that Overton "step down". Olstein's comments this week can assure you that he is in no way shape or form driving this investment story from here. He seems bitter about how the stock has performed in his portfolio, and thats fair enough. My sense is that Peltz's thesis, and cost basis, with this CAKE investment are much more aligned with mine.
-Fundamentally, (away from taking almost everything Olstein said in his letter, and doing the opposite) what i like most here is Overton's proactive decision to cut capex in 2008, and put himself in a free cash flow positive position for the 1st time since he had to manage his business that way in 2002 (yes, your cycle analyst alarm bells should be ringing... the last time the economic cycle moved against him, this capitalist hunkered down and did what great operators do, and generated positive free cash flow from 2000 until 2002). Even if Overton only half listens to Peltz, i have him generating well over $35M in free cash in 2008.
-Technically, CAKE is putting in what McDonald's did when i bought it in 2003 - a triple bottom. Opportunities to own American brands like these are very hard to find. Closing prices on August 7th, November 2nd, and December 17th of 2007 all bottomed between the prices of $21.65 and $21.69. I dont think there is any irony in the linearity of these prices. That looks to be where someone with real capital, and real conviction, drew a line in the sand.

2. bought another 1/3 of Nevada Gold Casino (UWN), $1.31... MCM Value thesis remains; 12.9M shares x $1.31 = $16.9M mkt cap + proforma debt $16M = EV of $33M versus a book value of $49M = 0.67x Book.

3. bought another 1/3 Electronic Arts (ERTS), $58.20; stock was weak on Fridays open... MCM Momentum long thesis remains into holiday selling results; channel check sales indications remains strong, and Activision put up great #'s this week as well.

4. re-purchased another 1/3 Treasury Inflation Protecteds (TIP) $105.10, on the close friday... MCM inflation theme remains; here's your low beta way to own it.

5. sold 1/3 of our max long position (taking it from 9% to 6%) in The Gap (GPS), $21.77 into Friday's strength... long thesis remains; buy low, sell high.

6. sold 1/3 of our max long position in Dreamworks (DWA), on fridays closing strength, $25.30... stock had a phenomenal week moving +9% higher out of management announcing $150M repo program on December 17th. One of the best analysts in the league, Anthony Noto @ Goldman, made positive comments, helping our cause.

7. sold all the Kinross Gold (KGC) into a meltup on friday, $17.74... stock had a bang up day, squeezing the shorts, closing +9% ; MCM Trend remains bullish on Gold, and we're still expressing that via our long Gold ETF (GLD) position; will repurchase the KGC on down days.

8. shorted Nike (NKE) into the strength associated with their earnings report, $67.01... MCM Momentum Modelling short
-498M shares, $33B mkt cap, $30.8 Enterprise Value (phenomenal balance sheet), but at 12.5x LTM EBITDA is grossly overvalued for a business that has risk factors that are cyclical and mounting
-Its been a 5 great years for Bob Drbul (Lehman's analyst), Brian McGough (Morgan Stanley), and i riding this rocket; standing up against the negative views of Jeff Edelman (UBS) and John Shanley (Susquehanna analyst) at the lows, buying all the Nike we could in 2002, had a great deal to do with us being considered "smart" in this business (thats cyclical too by the way!)... Now there are 17 "BUY"'s on the stock (including Edelman)
-The best MCM Momentum Modelling shorts, are those models that i understood best by virtue of being long them - this one looks pretty straightforward to me, but looks far from it to the likes of Omar Saad (CSFB's analyst) who is hammering back the trailing results cool aid saying "Nike's chart increasingly resembles those of the major global consumer staple companies such as MCD, PG, and PEP"... Omar wasnt a lead analyst during the last economic downturn, so his "chart" probably doesnt go back to the 2000-2002 period, when MCD went to $13; PG was cut in half, and PEP dropped 30% from May to September 2002...
-short interest is only 2% of the float, and Mutual Funds will turn into net sellers, quickly, in 2008, if my #'s are right.

9. re-shorted another 1/3 of the Einstein Noah (BAGL) into someone bidding it higher on friday, $17.80... this is the beauty of short selling; you always get a chance to take turns on the best rides, multiple times - thesis remains.

10. re-shorted General Electric (GE), $37.51 on into Fridays market strength... same thesis, and our 2nd turn riding this slide, after covering it at $36.48 last time.

11. covered my Tandy Leather (TLF), $3.05, on friday, for another gain... thats our 2nd time in this one; short gains are meant to be booked.

12. covered my Target (TGT), $49.99, on friday... i was using a $50 top as a limit, and the fine folks at E-Trade cashed in my gift certificate from Mr Ackman, for Christmas. What a great guy! Thats another locked in +9.5% short term capital gain from where we had the sobriety to move and re-short it to a max short position again. Ho ho ho!

13. covered my Research in Motion (RIMM) on friday, $116.98... when the facts change, i do. I was looking for them to show a deceleration in revenues, and that clearly didnt happen. I was wrong. This isnt my 1st rodeo, and certainly not my 1st trading mistake - but i have learned the hard way that letting these losers ride, tend to end up in bigger losses. Out of sight, out of mind now.

14. covered my Hasbro (HAS), $25.80 ... after RIMM, i needed a confidence builder! so i booked this gain.

Merry Christmas to you, and yours
Keith McCullough

____________________________________________________________
MCM Themes
Fed Centric/Fed Cut bull case is the Tree; Access to Credit/Capital the Forest... -November07' Rebalancing to the Left; look for Socialism to regain her footing, Globally, in 2008... -Nov07'
Bonds, Banks, and Bailouts; Blue Magic is bad, in the end... -November 07
''US$ Bottoming is a Process, not a Point' -November07' '
YouTubing America' - Transparency/Accountability will transform Washington to Wall Street -Dec08 '
Paulson & the Fed Centrists want you to call 1-888-995-HOPE' -Dec08'
'The Double Edged Fear Sword: Fear is now the dominating market factor, not Credit - Fear for Fed Centric Bulls & Consensus Bears alike'-Dec08' '
Global Basic Food Consumption Growth will takeover from the consensus "Its Global this time" Industrial Production Growth story in 2008'-Dec08'
Litigations & Redemptions' - The Tide has rolled out on the Levered Long Community'-Dec08' _________________________________________________

Closed Out Positions (realized gains in green, losses in red)

Long
EWH (bought 20.70, sold 21.35) = +3.1%
BBY (bought 46.60, sold 49.40) = +6.0%
MLHR (bought 26.70, sold 27.65) = +3.9%
HOG (bought 45.10 , sold 49.96 ) = +10.8%
EAT (bought 21.54, sold 22.44) = +4.2%
EBAY (bought 31.70, sold $34.91) = +10.1%
TOL (bought 22.30 , sold 21.51) = -3.5%
EWH (bought $22.73. sold 21.98) = -3.2%
COST (bought 69.67, sold 68.74) = -1.3%
RSX (bought 49.32, sold 51.36) = +4.0%
HOG (bought 48.20, sold 46.55) = -3.4%
KGC (bought 17.33, sold 17.74) = +2.4%

Short
RIMM (short 113.90, cover 111.60) = +1.0%
DAVE (short 14.24 , cover 13.60) = +4.5%
DLTR (short 28.51, cover 26.47) = +7.2%
HTZ (short 19.29, cover 18.58 ) = +3.7%
TGT (short 57.93 , cover 59.04 ) = - 1.9%
SPG (short 90.60, cover 94.10) = -3.9%
LIZ (short 25.58, cover 24.19) = +5.4%
BKC (short 26.74 , cover 25.80 ) = +3.5%
EWP (short 68.03, cover 67.47) = -0.82%
HAS (short 27.51 , cover 26.35) = +4.2%
DLTR (short 29.52, cover 28.18 ) = +4.5%
CPB (short 35.62, cover 36.76) = -3.2%
IPAR (short 20.48 , cover 16.47) = +19.6%
TLF (short 4.04, cover 3.27) = +19.1%
AN (short 16.99, cover 16.70) = +1.7%
WYN (short 28.19, cover 27.39) = +2.8%
MCD (short 63.35, cover 61.22) = +3.4%
DLTR (short 29.46, cover 27.66 ) = +6.1%
MA (short 219.44, cover 212.72) = +3.1%
SHLD (short $112.51, cover 104.37 ) = +7.2%
BKC (short $28.02, cover 27.70 ) = +1.3%
EWW (short 59.40, cover 55.83) = +6.0%
GE (short 37.60, cover 36.48 ) = +3.0%
JBX (short 28.49, cover 25.74) = +9.6%
BAGL (short $20.15, cover 16.43) = +18.5%
KSS (short 52.64, cover 45.37) = +13.8%
TLF (short 3.25, cover 3.05) = +6.2%
TGT (short 55.23, cover 49.99) = +9.5%
RIMM (short 103.53, cover 116.98) = -12.99%
HAS (short 27.15, cover 25.80) = +4.97%

MCM Disclosure/Disclaimer: This email and/or blog is for a select group of my friends, and represents a beta test of an idea that i am incubating. My email and blog writings are prepared without regard to the unique circumstances or goals of those who read them. They do not provide investment advice that should be specifically acted upon without considering the all encompassing range of investment information and/or considerations available in the public domain and/or without considering all appropriate professional advice. This should not be considered a solicitation to buy or sell any security or to participate in any investment strategy. The information and editorials in these writings are not necessarily complete or perfectly accurate and are not guaranteed by Keith McCullough or MCM. This information is protected from disclosure and constitute opinions only as of the date of their issuance. Opinions are subject to change without notice, and Keith McCullough or MCM do not accept any liability whatsoever for any losses estimated to be attributable to any use of this content. Keith McCullough and/or McCullough Capital Management, Inc. likely owns and/or is currently trading in all of the securities cited in these emails and/or blogs.