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Cisco and Pepsi Start Day on Sour Note By: Charles Payne

It might be time for Cisco to consider a new chief after posting earnings and guidance that disappointed the Street for the third consecutive quarter. But, this isn't about a short term lull; the fact is the Company has been a disappointment for a decade. John Chambers isn't the only guy running a giant technology behemoth that should move aside for fresher blood and ideas. Of course when you consider the theory of Creative Destruction there has to be a role for management of major companies that somehow start to miss "it".

On that note, tech stocks are looking like they'll take it on the chin really hard. In the process, some opportunities will emerge but so too will a chance to gauge the actual fear or confidence of the Street. Everyone has been thinking pullback (3% correction long overdue) or correction (10% move lower) since the ball dropped in Times Square. Of course it's been the exact opposite, but the 2011 rally has lacked conviction as measured by volume. I bet any corrective move would also lack conviction, too.

Today, we come out of the gate limping and looking for new leadership to emerge. I should say new, young, leadership in the form of companies, management, and ideas.

Attacking the Inflation Debate from a Different Angle
By: Brian Sozzi, Equity Research Analyst

The topic grabbing the headlines is undoubtedly inflation. Cotton, wheat, soybeans, and rice, you name it and chances are the price has gone through the roof in the past six months. Many companies will seek to prosper from the daily inflation drumbeat by raising prices much higher than their cost of production. After all, we are part of a capitalistic system where opportunities to make money are there to be exploited. If a company has a unique product or service, then by all means pound the ole chest and charge a premium. Hopefully the consumer, which has pricing knowledge within the palm of their hand, will oblige and buy the product. In spite of the inflationary oriented headlines and spikes on commodities exchanges, the broader market has continued to march to new highs. The S&P 500 has been trading above its 50-day moving average for 111 straight sessions. To find a two-year run comparable to the current bullish ascent we have to go back to the March 14, 1935 to March 10, 1937 period. Aghast, Steve Jobs wasn't even born yet! Fact is we have made a heck of a move off the March 2009 lows, with the only true hiccup being the summer swoon that began in mid-April of last year and ended quickly thereafter.

Stocks have defied the known knowns (sort of mix on words from Donald Rumsfeld's new memoir). The known knowns include the aforementioned inflationary headwinds brought about by cheap money that has flowed into emerging markets as well as supply shortages, intense debate on the prospects of municipal bond defaults, and the EU losing credibility (hard to imagine the EU in its present form looking out five years). So what is an unknown variable amidst all the general hoopla in the markets?

I think a variable that goes unattended to is the growth in the money supply and its potential to ignite an inflationary firestorm. Let's face it money supply is a boring topic, and one that is left open to far-ranging interpretations by economists and market goers. A headline reading "Money Supply Swells" just doesn't provide enough juice to a news website attempting to optimize searches. The topic seriously deserves attention, however.

Thus far, the rapid expansion in the money supply has not been an issue because loans (1) have stricter terms; and (2) demand for loans has waned as entrepreneurs are hesitant to invest alongside an anti-business regime in the White House. Moreover, the common consumer is lukewarm on paying a lofty interest rate, given a less than perfect FICO score, in order to go out and buy new stainless steel appliances, out of fear of job loss, higher taxes, and higher healthcare expenditures in the not too distant future. I realize that revolving credit borrowing was recently stated as increasing, but it was the holiday period and confidence was no longer in the doldrums, hence supporting the tacking on of debt by the consumer.

According to Federal Reserve data, for 2010, lending was down in commercial and industrial loans (-8.8%), real estate loans (-5.7%), home equity loans (-4.3%), and consumer loans (-8.7%) to name but a few categories. I think Bernanke & Co. is walking a thin line by maintaining the ambitious and market propping quantitative easing program and ultra-low fed fund rates; clearly there is pent up demand by consumers and businesses for loans to add a little something extra to one's life or to expand the capital base domestically or abroad. Since the Fed last lowered interest rates in February 2010, M1 (currency, travelers checks, demand deposits, and other checkable deposits) has increased 7.5%. The growth rate suggests that as we return to more encouraging economic data, specifically on jobs and GDP, it will trigger a desire to formulate income producing capital. In many instances, leverage is the obvious way to form that capital (think small startup business). As the rush begins to funds sporting low interest rates (thanks to Fed policy) it is likely to join the not so fun happenings in various commodities classes, bringing about inflation in the "core" PCE the Fed so loves. In the end, the "little bit" of inflation the Fed was clamoring for may turn out to be a monster that tests its inflation fighting credentials.

The Real Deal on Retail

J Crew and Jo-Ann Stores are in the process of becoming part of a private equity portfolio. BJ's Wholesale (NYSE:BJ) is finally waking up and has decided to explore strategic alternatives. Big Lots (NYSE:BIG) is not feeling the fact its stock is severely undervalued, and rumors have it that it's shopping itself. Build-A-Bear (NYSE:BBW), having its own takeover rumors running around it, is another one to keep an eye on. I am getting inundated by questions, all of them with the same basic premise; why is retail once again attracting the attention of private equity?

First, please be aware that although consumer discretionary stocks were the star performers of 2010, not all stocks basked in the glow of fresh money flowing into the sector. J Crew had a bad second half, its stock got pummeled. Jo-Ann Stores was printing impressive quarters, but the market barely noticed. BJ's Wholesale was catching heat from a shareholder base that wanted an end to profligate spending. Big Lots lost its way in the food category, and its stock went down the tube in a slow, depressing manner. In the view of the management teams, the valuation on the company in no way reflected future potential arising from new strategies being implemented to reinvigorate growth, or simply did not capture the inherent value of the assets held, such as land and buildings. In the hungry for a buck eyes of private equity, they have historically been drawn to retail for its consistent cash flow generation, ownership of land (in some cases), international exposure, or years of built up brand equity.

If you are running a screen to see who is valued to move in the retail sector, the sweet spot seems to be an EV/EBITDA ratio of 5x to 6x. At that valuation level, either management teams are exploring options or private equity is aggressively stepping into the game (such as the story underway at JC Penney).

Toyota Gets a Brake (Pun Intended)
By: David Silver, Equity Research Analyst

As I was preparing to write this piece, I Google searched the crash back in October of 2009 that started one of the largest automotive recalls in the history of the industry, and I found an audio taping of the 911 call of the family before they crashed. It was chilling to hear it again; it is rather cold in New York City, but that call gave me more chills than walking around the canyons of Wall Street ever could. That crash initiated the recall of Toyota (NYSE:TM) vehicles for sticky accelerator pedals and floor mats that caused the accelerator to get stuck and cause unintended acceleration. 12 million vehicles and about 16 months later, and Toyota still hasn't completely emerged from the shadow. Tuesday, the Department of Transportation released a report that was a step in the right direction for Toyota (and auto industry as a whole) that said the electronics were not to blame for the unintended acceleration. NASA scientists participated in the study to see if it was a mechanical or electrical problem that caused these unintended accelerations. While the study says it is not likely that the electronic system caused the problem (apparently they couldn't recreate a similar defect), it does not completely absolve Toyota either as it doesn't prove that it wasn't the electronic system. So everyone who drives a Toyota should feel a little safer behind the wheel; however, they are a mass produced machine so of course there are going to be recalls. There are recalls in just about every industry, but few get the media coverage that Toyota received.

I did about 20 radio interviews Wednesday morning for radio stations across the nation, and it was interesting to see just how strongly some of these hosts felt about Toyota. Additionally, just about each one made a comment about how their wife, son, daughter, or co-worker drives a Toyota and they love it, so apparently the reputation hit wasn't too bad. Hopefully it was a wake-up call for Toyota, which seems to have gotten complacent as the largest automaker in the world, one with the reputation for quality and longevity. During 2010, Toyota lost the number two in the United States to Ford, and lost two points of market share. While two points may not seem like much, tenths of a percent moves are either cheered or scorned.

Every automaker was sitting with bated breath waiting for this nine month long panel to decide if the electronic systems were the cause as just about every automaker now has some sort of computer in their vehicles, and most of these electronics share components. Ford, GM, Chrysler, Honda etc. all have electronics in their vehicles which share parts with Toyota. So an indictment against Toyota would have caused a massive recall across the industry. The next pseudo logical step would be to assume that the Department of Transportation could never allow that to happen to an industry that we bailed out. Well there are conspiracy theorists that think the government orchestrated the massive recalls for Toyota to help the American automakers rebound (don't think I can call them the Big Three anymore). If you believed in those conspiracy theories before, this report won't change your mind. If you are a loyal Toyota customer, you may feel vindicated, but it wasn't a ringing endorsement.

So what has changed? Most of the problems for Toyota were blamed on floor mats and a small piece of the accelerator that rusted and caused some sticking (both were relatively easy to fix), but the third cause was the doosie that not many people wanted to hear, user error. Remember that guy that was driving down the San Diego freeway with cops following him? Those NASA scientists did some tests on that vehicle and it seems that the only way they could produce a similar experience was by standing on both the accelerator and the brake pedal. That leads me to one of the few positives from this whole ordeal. By 2012, every vehicle will need to have a system installed that will prevent such a problem from occurring. User error consists of when both accelerator and the gas pedal are pressed at the same time, and this new fix will cause the brake to have priority. When both are pressed at once, the brake will take priority and cancel out the accelerator's action. I guess no more peeling out and burning rubber; I know it's a sad day for street racers everywhere.

Economic Data

Initial Jobless Claims

The advance figure for seasonally adjusted initial claims decreased by 36,000 to 383,000 in the week ended Feb.5 from an upwardly revised 419,000 in the previous week. Economists were expecting initial claims to drop to 410,000. The initial claims figure is at its lowest level since July 2008. The result was enough to stop the bleeding this morning, but it doesn't look like it will be enough to turn the tide.