What We're Reading ~ 10/7/15

Superforecasting: The Art and Science of Prediction [Philip Tetlock & Dan Gardner]

Fat tails, thin ice [Jason Zweig]

Are you prepared for the next bear market? [Fortune]

Most CFOs think the US market is overvalued [Alpha Architect]

Putting a price tag on the Volkswagen scandal [Aswath Damodaran]

A pitch on beaten down Sun Edison [Bronte Capital]

Case study on capital allocation and Rockwood Holdings [Before Losing My Sanity]

Do as they do: a guide to insider activity [Dead Companies Walking]

A look at Cable One [Punch Card Blog]

Some stock picks from François Rochon [Montreal Gazette]

How the Bloomberg terminal made history and stays relevant [FastCompany]

Sneaker wars: inside the battle between Nike and Adidas [GQ]

The decline of 'big soda' [NYTimes]

China's middle class dreams in peril [WSJ]

Can Comscore/Rentrak go toe-to-toe with Nielsen? [Variety]

Google Fiber's real innovation [Beyond Devices]

Why we fall for bogus research [Bloomberg View]

Alcoa and the painful business of making aluminum [Reuters]

The frustrating life of a McDonald's franchisee [Bloomberg]

Glenview Capital Q4 Letter on McDonald's, T-Mobile, Auto Dealers & More

Larry Robbins' hedge fund firm, Glenview Capital, is out with its fourth quarter letter to investors. Glenview's Opportunity Fund returned 25.25% net in 2014. 

In the letter, Robbins outlines his thesis on auto dealers (Group 1 Automotive ~ GPI), Flextronics (FLEX), McDonald's (MCD), PHH (PHH), T-Mobile (TMUS), and pharma roll-up plays like Actavis (ACT) and Endo (ENDP).


Glenview's Q4 Letter Takeaways

On McDonald's (MCD):  This is a new stake for Glenview and they feel there's basically 5 ways to make a 'happy meal' to help the company: operational turnaround, SGA rationalization, refranchising, additional leverage, and real estate.  They feel this could trade as high as $169 (currently trades around $99.)

On MCD, Robbins writes, "Fundamentally, McDonald’s has a number of characteristics that we look for in good businesses. Approximately 75% of EBITDA is driven by royalties and rent, which is a secure, stable earnings stream free of operating leverage. Food, in general, is a defensive end market, and McDonald’s positioning at the value end of the spectrum provides further insulation from material cyclicality as evidenced by positive same store sales in the U.S. and positive consolidated EPS growth in every year throughout the last recession."


On T-Mobile (TMUS): Glenview has owned this company since 2013 but bought more shares in December 2014.  They feel the company has a few positive things going for it to continue its growth: aggressively going after new subscribers, deploying spectrum to address new customers, and seeing positive FCF generation this year. 

They also like that the company is a "key strategic asset" and that their parent company Deutsche Telekom is looking to sell.  Glenview feels TMUS could either: try to tie-up with Dish Network and their spectrum, seek a sale to a foreign buyer, or again try to merge with Sprint once a new political administration takes office in 2016.


Embedded below is Glenview's Q4 letter:



For more from this hedge fund, yesterday we posted up some more of Glenview's recent portfolio activity.

What We're Reading ~ Analytical Links 12/10/14

The Focused Few: Taking a Multidisciplinary Approach to Focus Investing [Richard Rockwood]

On paying up for quality stocks [Clear Eyes Investing]

A look at Interactive Brokers (IBKR) [Punch Card Blog]

On the behavior of individual investors [UC Berkeley]

Old but still good: a checklist for investors [Jason Zweig]

Latest interview with Mohnish Pabrai [Barrons]

William Blair's top stock picks for 2015 [StreetInsider]

On Tracy Britt Cool, the education of Warren Buffett's protege [Fortune]

Peak Google [Stratechery]

Why activist investors are getting even more active [Fortune]

Fallen arches: can McDonald's get its mojo back? [Fortune]

The world reshaped: end of the population pyramid [Economist]

A global explosion in ultra high net worth individuals [Reformed Broker]

Cash is for losers [BusinessWeek]

Are a lot of millennials not investing at all? [GetRichSlowly]

How do people get new ideas? [Farnam Street]

Advertisers pay billions for bogus web traffic [Nasdaq]

What We're Reading ~ Analytical Links 9/4/13

The Manual of Ideas: The Proven Framework for Finding the Best Value Investments [Amazon]

Risk is not a four-letter word [Herb Greenberg]

How the Verizon-Vodafone deal was sealed over gym talk & a breakfast [Globe & Mail]

Vodafone (VOD) spreadsheet post-deal [MicroFundy]

Is discounted cashflow the best way to value a company? [Google Plus]

Profile of billionaire Jorge Lemann [BusinessWeek]

MSFT: Ballmer out, ValueAct in - get ready for the next shoe to drop [All Things D]

Microsoft / Nokia: the deal that makes no sense [Stratechery]

Why is chicken more expensive? Ask McDonald's [BusinessWeek]

The biggest risk Zillow (Z) faces isn't what you think it is [LittleBear]

How 'Teslanaires' made fortunes on Tesla stock [Sun-Sentinel]

CNBC ratings hit 20-year nadir [NYPost]

Bill Ackman on the Fast Food Industry, Booksellers, Retail, and Economy

Pershing Square Capital founder Bill Ackman appeared on CNBC and gave his thoughts on a myriad of topics including McDonald's (MCD), Amazon.com (AMZN), Borders (BGPIQ), and the economy.


On the Fast Food Business

Ackman says that he likes the fast food business after talking about McDonald's (MCD) same store sales. He's been a big shareholder in the industry in the past, owning both Wendy's (WEN) and MCD though he doesn't own any stakes now.

He likes businesses where you can charge a royalty on other people's sales (i.e. MCD collects 4% of the gross revenues of 33,000 stores and another 8-9% in rent).

On Booksellers

The hedge fund manager also commented on what he calls his "worst investment ever": Borders. He highlights the obvious how Amazon.com (AMZN) has taken so much share from brick and mortar bookstores. He thinks it's important for there to be competition for AMZN.

On J.C. Penney

Ackman is on the board of J.C. Penney (JCP) and commented how the company has rolled out a new brand, new pricing strategy, and new store layout as new CEO Ron Johnson (formerly of Apple) puts his 5 year plan into effect. Ackman said that he will be very patient with this investment as it takes time for the turnaround to take hold.

On the Economy

His differentiated view is that "there's a decent chance we massively outperform expectations."

He likes that the effective cost for owning a home is the lowest ever (due to housing prices and interest rates being so low). Ackman attributes the one reason that more people haven't bought homes to the fact that they're afraid of losing their jobs. So employment levels stabilizing would obviously help there.

Ackman also agreed with Warren Buffett's recent comments that buying homes and renting them out, despite being "cumbersome," could be a good play if you have the time and money. He argues you could achieve 9-11% yields in some markets by doing so.

On Lowe's (LOW)

He mentioned he owned Lowe's (LOW) in the past as a potential housing recovery play but sold it as shares rapidly appreciated. He used the cash from this passive investment to buy shares in his activist investment in Canadian Pacific (see Pershing's presentation on CP).

Embedded below is the video of Bill Ackman's interview (email readers click to come view it):



You can view Bill Ackman's portfolio in the brand new issue of our Hedge Fund Wisdom newsletter.

Strategist Jeff Saut Cautious, But Likes Certain Dividend Stocks

It's been a while since we've checked in on what market strategist Jeff Saut has had to say. Given the drastic run up in equities this year, Saut is cautious. Yet while he's cautious, he doesn't want to bet on the downside.

This is because he thinks there's a likelihood the market could just as well see a sideways consolidation. In general, Saut has long believed it's imprudent to be bearish because a turn in the economy would translate into profits exploding, inventory rebuilding, and a capital expenditure cycle, topped off with a reduction in unemployment.

Lack of Down Days in the Market

Saut is most intrigued by the fact that the market has been able to jump over a ton of hurdles (a 21% rise in the price of gas being one of them).

He writes, "the SPX has now gone 35 trading sessions in 2012 without suffering a 1% down day. There have been 12 other years since 1928 where the SPX has traded higher for 30 sessions, or more, without a 1% down day. In all but one of those occurrences the SPX was higher at year's end with a median gain of more than 15%."

Dividend Stocks Saut Likes

So while he does think this bodes well for the market, he is still a bit cautious in the near-term as the market's recent rise has felt "unnatural" to him. As such, he has recommended the following conservative dividend stocks: Abbott Labs (ABT), Aflac (AFL), Chevron (CVX), McDonald's (MCD), Norfolk Southern (NSC), and Huntington Bancshares (HBAN).

Embedded below is Jeff Saut's recent commentary:



You can download a .pdf copy here.

For more recent market commentary, yesterday we posted up Eric Sprott's February commentary on why 2012 is the year of the Central Bank, as well as Passport Capital's John Burbank saying this is a stockpicker's market.

Scout Capital Starts Arcos Dorados Stake (ARCO)

James Cricthon and Adam Weiss' hedge fund Scout Capital has started a position in Arcos Dorados Holdings, Inc (ARCO). Due to a 13G filed with the SEC, Scout has revealed a 5.2% ownership stake in the company with 6,733,263 shares.

The company recently priced its initial public offering (IPO) at $17 per share in the middle of April and it's very likely Scout participated in this. Shares now trade around $22.50.

The name of the company in Spanish literally translates into "gold arches." They purchased McDonalds' (MCD) operations in Latin America back in 2007. Scout's interest in the name shouldn't come as a surprise given that they've also held a very large position in McDonald's (MCD).

Scout manages over $4 billion. Before founding their hedge fund, Crichton worked at Zweig-DiMenna and received his MBA from Harvard while Weiss worked at Dan Loeb's Third Point and received his MBA from Columbia.

We've detailed some other recent portfolio activity from this hedge fund including an increase in their Domino's Pizza position (DPZ).

Per Yahoo Finance, Arcos Dorados "operates and franchises McDonald's restaurants. The company has operations in 19 territories, including Argentina, Aruba, Brazil, Chile, Colombia, Costa Rica, Curacao, Ecuador, and more.".

Mark Foley & Tina Larsson's Pendo LLC: International Value Investing

Today we're taking a look at the latest commentary from Tina Larsson and Mark Foley's investment firm, Pendo LLC. Pendo seeks absolute returns (or as they put it, "We don't hug an index") through in-house bottom-up fundamental analysis in order to find undervalued companies outside the United States while remaining agnostic regarding market cap, industry, sector, geography, traditional weightings, etc. As of the end of August, Pendo's International Strategy Fund was -5.34%. Their trailing twelve month return is 8.83%.

In the letter, Larsson and Foley note that despite tumultuous and volatile world markets, they remain quite optimistic about the future of their international investments, and not just for the long term, as they believe their investments will out perform their benchmark indices over the next 6-12 months. While not satisfied with their recent performance, they believe their strategy is now ready to outperform as the global economy improves and they continue to hold businesses that are insulated from the ails of the US market and dollar.

Their portfolio is currently trading at 13.5x trailing earnings, down from an ~18x multiple at the beginning of the year. A PE expansion back to previous multiple would provide a 33% return on its own. They believe this is reasonable considering that the MSCI EAFE benchmark currently only trades at ~20x but has traded at an average PE ratio of ~25.5x real earnings since 1982. Larsson reiterates that they are not market timers, but they remain committed to actively managing their long-term value approach by reducing positions as they become over-valued while increasing positions that become undervalued.

As of August 31st, Pendo International Strategy's top ten holdings are as follows:

1. Sichuan Expressway (China)
2. Tsingtao Brewery (TSGTY)
3. Canadian Natural Resources (CNQ)
4. Hong Kong Exchanges & Clearing (Hong Kong)
5. Philip Morris International (PM)
6. JSE Ltd (South Africa)
7. CEMIG (Brazil)
8. CNOOC (CEO)
9. Anglo American (UK)
10. Silver Wheaton (SLW)


Pendo's Global Value Strategy holds different names and here is their top ten:

1. BM&F Bovespa (Brazil)
2. Deluxe Corp (DLX)
3. McDonald's (MCD)
4. Sanofi-Aventis (France)
5. Vodafone (VOD)
6. Walt Disney (DIS)
7. Canadian Natural Resources (CNQ)
8. Newmont Mining (NEM)
9. Philip Morris International (PM)
10. Leucadia (LUK)

There are some names worth highlighting above because Warren Buffett's Berkshire Hathaway has been fond of Sanofi-Aventis. Additionally, David Einhorn's hedge fund Greenlight Capital has a large position in Vodafone (VOD) and you can see their investment thesis here. In terms of overlap between both of Pendo's portfolios, Philip Morris International (PM) and Canadian Natural Resources (CNQ) are found in both strategies.

The second half of Pendo's letter focuses on recent developments in China where the visiting Premier Wen Jiabao addressed the need for political reform, or more specifically, the need to curtail excessive political control. Such sentiment reassured Larsson that China understands they will have to continue to allow more freedom in the marketplace in order for China’s 30+ years of overall growth and development to continue.

Larsson and Foley feel that centralized planning can work very well in steering a nascent economy towards a more developed, functioning entity. Yet, she also acknowledges that, “in order to fully develop and remain an expanding, dynamic, and innovative powerhouse, free markets must be respected and embraced.” Like China, Brazil is another country that has benefited from starting to separate itself from socialism, as GDP growth is expected to be a robust 7.34% in 2010. Brazil is becoming a global leader through providing financial and technological aid to developing countries, and thus building good will and valuable trading partners (Larsson notes that these developing countries are notably commodity-rich).

Pendo cites a quote from July 17th issue of The Economist to drive home their point: “This aid effort—though it is not called that by the government—has wide implications. Lavishing assistance on Africa helps Brazil compete with China and India for soft-power influence in the developing world. It also garners support for the country’s lonely quest for a permanent seat on the UN Security Council. Since rising powers like Brazil will one day run the world, argues Samuel Pinheiro Guimarães Neto, the [minister for strategic affairs], they can save trouble later by reducing poverty in developing countries now.”

Embedded below is Pendo's latest commentary:



You can download a .pdf copy here.

We almost exclusively cover fundamental bottom-up stockpickers and you can follow our coverage of these hedge funds and their investments here. For more commentary and market analysis, head to our compilation of recent hedge fund investor letters as well.

John Griffin's Blue Ridge Capital Buys McDonald's, Adds To JPMorgan Chase: 13F Filing

(This post is part of our series on tracking hedge fund portfolios. If you're unfamiliar with tracking investments they disclose via SEC filings, check out our series preface on hedge fund 13F filings.)

Next up is John Griffin's hedge fund Blue Ridge Capital. Griffin graduated from the University of Virginia and holds an MBA from Stanford. Before starting Blue Ridge, he was Julian Robertson's right hand man at legendary hedge fund Tiger Management.

Blue Ridge invests in dominant companies and shorts those that have fundamental problems, all in search of absolute returns. Blue Ridge generally puts an investment into one of two categories: catalyst driven or time arbitrage. They realize that there are times where markets will be mis-priced as investment time horizons compress more than normal. They like to look for situations where people 'stop thinking.' To learn to invest like John Griffin, check out hedge fund Blue Ridge's recommended reading list.

The positions listed below were Blue Ridge's long equity, note, and options holdings as of December 31st, 2009 as filed with the SEC. Note that we are only covering the major portfolio maneuvers. All holdings are common stock unless otherwise denoted.


Brand New Positions
McDonald's (MCD)
Teva Pharmaceutical (TEVA)
Charles Schwab (SCHW)
Teradata (TDC)
Credicorp (BAP)
Ares Capital (ARCC)
Xinyuan Real Estate (XIN)
TD Ameritrade (AMTD)
Liberty Media (LSTZA)
Green Mountain Coffee Roasters (GMCR)
Washington Federal (WFSL)
First Niagara (FNFG)
Iberiabank (IBKC)


Increased Positions
JPMorgan Chase (JPM): Increased by 48.7%
Dollar Tree (DLTR): Increased by 22.7%
Range Resources (RRC): Increased by 19.4%
Crown Castle (CCI): Increased by 7.5%


Reduced Positions
Berkshire Hathaway (BRK-A): Reduced by 54.9%
Monsanto (MON): Reduced by 45.3%
Gold Miners ETF (GDX): Reduced by 42.8%
Equinix (EQIX): Reduced by 36.8%
iShares Silver Trust (SLV): Reduced by 36.1%
Blackrock (BLK): Reduced by 28.8%
Pfizer (PFE): Reduced by 24.4%
Visa (V): Reduced by 37.9%


Removed Positions (Sold out completely):
Palm (PALM)
Wynn Resorts (WYNN)
Exterran Holdings (EXH)
Whole Foods (WFMI)
RenaissanceRe (RNR)
Broadridge Financial (BR)


Top 15 Holdings by percentage of assets reported on 13F filing

1. JPMorgan Chase (JPM): 6.78%
2. Apple (AAPL): 5.52%
3. Crown Castle (CCI): 5.49%
4. Amazon (AMZN): 5.31%
5. McDonald's (MCD): 4.53%
6. Western Union (WU): 4.36%
7. CME Group (CME): 4.16%
8. Millipore (MIL): 4.12%
9. Pfizer (PFE): 3.93%
10. Thermo Fisher Scientific (TMO): 3.87%
11. Microsoft (MSFT): 3.53%
12. Express Scripts (ESRX): 3.12%
13. Discovery Communications (DISCA): 3.07%
14. Covanta (CVA): 2.95%
15. Range Resources (RRC): 2.74%
    

Blue Ridge's biggest moves were starting a new position in McDonald's (now their fifth largest US equity holding) and adding heavily to their stake in JPMorgan Chase (JPM). We've seen a plethora of hedge funds playing the theme of: long 'too big to fail' banks and short regional banks. While we can't see Blue Ridge's short portfolio, it is very clear they are confident in JPMorgan as it is their top holding. (However, we did get a glimpse at one of Blue Ridge's short positions previously). The addition of McDonald's to their portfolio was also intriguing given that we saw fellow hedge fund colleague Bill Ackman and his Pershing Square sell out of MCD.

Griffin's hedge fund also seems to be playing the online brokerage theme by adding shares in both TD Ameritrade and Charles Schwab. Competition in this industry has definitely heated up as of late as brokers slash commission prices in an effort to retain/gain customers. Turning to core positions, we note that Blue Ridge has held positions in Apple, Western Union, Millipore, Thermo Fisher, and Pfizer at the top end of their portfolio for multiple quarters now.

Their sale of Palm is notable as we've seen lots of pessimism surrounding this name as of late and many hedge funds out there have shorted Palm. Other complete sales were in casino Wynn Resorts and in grocer Whole Foods. Blue Ridge also reduced exposure across a number of names including Warren Buffett's Berkshire Hathaway and Monsanto. We found this intriguing because many hedge funds have been buying BRK while Blue Ridge reduced their size. On the Monsanto play, Blue Ridge joins a slew of other hedge funds that have been selling MON shares.

Although Blue Ridge barely added to their position in Crown Castle, we highlight it because it is now one of their largest positions and they have held it for 3+ quarters now. For those tracking these funds for investment ideas, it's always key to identify a fund's core holdings that they are less likely to turnover frequently. In fact, many hedge funds are bullish on tower stocks as we've highlighted recently.

Blue Ridge is a part of the 'Tiger Cub' portfolio created with Alphaclone where you can replicate top hedge fund positions. We've been very impressed with the solid backtested returns and current market outperformance.

For investing insight from Blue Ridge, we highly recommend checking out their suggested reading list. Assets from the collective holdings reported to the SEC via 13F filing were $5.3 billion this quarter compared to $4.4 billion last quarter, so a noticeable increase in long invested assets. Remember that these filings are not representative of the hedge fund's entire base of assets under management.

We'll be tracking 40+ prominent funds in our fourth quarter 2009 hedge fund portfolio tracking series. We've already covered Seth Klarman's Baupost Group, Mohnish Pabrai's Investment Fund, Carl Icahn's hedge fund Icahn Partners, David Einhorn's Greenlight Capital, Stephen Mandel's Lone Pine Capital, and David Tepper's Appaloosa Management. Check back daily for our new updates.

Consumer Spending During Recessions

Todd Sullivan over at Value Plays takes a quick look at consumer spending from the 1990-91 and 2001-02 recessions. Surprisingly, Tobacco spending was down. We only point this one because in recessionary times, people are quick to point out plays like Altria (MO) and Philip Morris International (PM). When, in reality, the spending in their product category is down. The increase in education spending has already played out again this recession, as the number of MBA program applicants has been very high, if not at historical highs. Lastly, we want to highlight the massive decrease in the category: food away from home. This illustrates perfectly our thesis for shorting casualty dining restaurants in a deteriorating consumer environment and going long McDonald's (MCD) as a hedge. Because, after all, if people do go out to eat, they are going to the cheapest place out there, the golden arches.

(click to enlarge)

McDonald's (MCD) Continues to Dominate

As I mentioned in my post about a deteriorating consumer environment here, I think McDonald's is shaping up to be an excellent play. Earlier in the year, McDonald's (MCD) was touted as a "weak dollar" play due to their extensive international exposure and the massive currency gains they were posting from the exchange rates worldwide. But, things have changed in six months time. Nowadays, a recently strengthening dollar provides currency headwinds for MCD's global business. But, I do not see this as being a major problem because demand and sales should easily overshadow any and all currency implications.

Why might you ask? The answer is simple: consumers worldwide trading down to "cheap" alternatives. McDonald's is the king of cheap. They are a fast-food chain, after all; with a $1 menu to boot. When consumers are in a pinch, they look to save money anyway they can. And, McDonald's allows them to do just that. As I wrote about here, the US economy is accelerating to the downside. Then, add in the fact that Goldman Sachs thinks half the globe is in a recession. Lastly, you've got the former federal reserve chairman Paul Volcker claiming that growth in the US economy will be the slowest of any decade since the Great Depression, as I noted here. Tough times ahead to say the least. The US consumer is in for a wild ride. So, if you're going to play any consumer stock in such a tough environment, make sure it is a company that deals with necessities. McDonald's provides food, and cheap food at that. Don't buy the rationale? Just take a look at McDonald's most recent quarter.

McDonald's delivered yet another dominant quarter last Tuesday. August sales in the U.S. increased 4.5% compared to an analyst expected 3.5% gain. Sales in the Asian Pacific region gained 10% and an 11.6% gain in Europe compared to analyst expectations of only 6% in Europe. On average, analysts pegged McDonald's at a global increase of 4.7%. McDonald's came in with a 8.5% gain globally. Needless to say, it was a dominant quarter. They are winning cash-strapped consumers over in both the US and Europe. And, their market position in Asia continues to be very profitable. Not to mention, MCD is seeing operating margins of 25.78% and a return on equity of 29.71%, both solid numbers which reflect the strong underlying fundamentals.

People were concerned that economic weakness in Europe would hurt sales. But, I argue the opposite. A weak Economic environment means more people trade down to cheaper alternatives. European consumer confidence is at one of the lowest levels in five years. Their economy is contracting as their consumers face the exact same problems ours do: rising food and fuel prices. In the US, the cost of living rose 5.6% for the year (ended in July). The U.S. Labor Department reports it is the largest jump in 17 years. So, as the cost of living goes up, consumers look to trade down. It's that simple.

And, if you're worried about consumers "shutting down" altogether, then look to go long MCD and hedge your position by buying some puts or by shorting rival discretionary casual dining restaurants such as BJRI or DRI. Those casual dining chains are suffering from rising input costs and slower dining traffic. At any rate, I think MCD is a solid choice going forward. Let's see how it sets up on the technicals. Pulling up a 3 year chart on MCD, we see that it is in a nice long-term uptrend. Every major dip in the name has been a buying opportunity, as you can see below.

(click to enlarge)

Then, zooming in on a closer 6 month time frame, we can see how MCD has been trading recently.

(click to enlarge)

You'll notice it put in a most recent high at around $65/66 and then sold off. That level represents some near-term resistance in the name and you could see some sellers come in as MCD begins to trade back up near those levels as it is doing now. What you'll also notice is that during the months of May, June, and July, MCD was bumping up against severe overhead resistance at around $60/61. This is shown by the lower of the 2 horizontal red lines I've drawn in. You can see it kept bumping up against that resistance level before finally enough buyers came in August to push it through to new highs. After those recent highs, you will see that MCD came back down to that $60/61 level that was previously resistance. And, that level now acts as a support level to the stock as it bounced off those levels, trending back higher. So, in terms of selecting opportune entry, exit, and stop loss points, the chart gives us a pretty clear picture. How you play it is determined by whether or not you are an investor or trader. But, as outlined above, I think McDonald's (MCD) is poised to benefit in the coming months.

Disclosure: marketfolly.com is long MCD

Sources: WSJ, Bloomberg

Deteriorating Consumer Environment: Abercrombie and Fitch (ANF) Evidence

This is just continuing evidence of a lackluster consumer environment. Abercrombie and Fitch (ANF) same store receipts were down in August, setting up what I predict will be a downward accelerating consumer environment. Both Citi and Merrill Lynch downgraded ANF on Friday, citing deteriorating sales and increased markdowns. In fact, Citi went as far as to say that they think ANF could trade at its lowest multiple in 5 years. Just something to keep an eye on as you try to balance your portfolios.

Specialty retail is getting hit hard (and will continue to get hit hard) as effects from the housing market, consumer credit crunch, and inflation take a toll on consumer's pocketbooks. Abercrombie is known for its upscale niche within the teen segment, often selling more expensive items than the likes of competitors Aeropostale (ARO), who seems to be doing alright in this environment. So, look for consumers to "trade down" in this environment.

In any given sector, I like to take a balanced approach and often times am market neutral. For instance in retail, being long the likes of Walmart (WMT) or various other discounters who sell essentials (food, gas, toiletries, medicine) is very appealing to me. Then, you take the other side by going short discretionary retailers, such as ANF. Long cheap and/or necessary items; Short expensive and/or discretionary items. The same logic can be applied to food by going long the likes of McDonald's (MCD) for the "cheap" factor (although they might see some slight headwinds due to their strong international presence and a rising US dollar). Then, shorting casual dining restaurants such as BJ Restaurants (BJRI) or Darden Restaurants (DRI), who are feeling the pinch of rising input costs and slower dining traffic.

The main point to take away here is that we all know the consumer is strapped for cash. However, I think too many people are counting on a recovery. With vast evidence of the housing market accelerating to the downside, I just don't see how that is possible. Add in the consumer credit crunch and the inflationary pressures consumers are seeing on everything they buy, and you've got a recipe for a very thrifty consumer.