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Quote Of The Week: Gina Rinehart

“I have confidence that China will get it right and it will be booming again soon. This dip that we are seeing right now is a great time to focus our thoughts on how we should be doing things better.” -Gina Rinehart

This is a simple quote that every “its global this time” asset allocator would have signed off on less than 18 months ago. Today, I am not sure who is actually allowed to be bullish on China, but the locals are enjoying a +9% year to date move in the Chinese stock market as they head into this week’s Chinese New Year (The Year of the Ox).

Gina Rinehart was quoted above by Andrew Hobbs at Bloomberg this week in an article titled “Australia’s Richest Woman Seeks Chinese Mine Partners”, and her comment was a breath of fresh Australian capitalistic air. Rinehart is only 54 years old, full of energy, and now looking to take advantage of this crisis of confidence that the manic media continues to perpetuate.

There is a big difference between the Liquidity Crisis of October 2008, and the 2009 Illiquidity Crisis that has been born out of the Crisis of Credibility. Most investors have found themselves in the newfound position of not owning the duration of their investments. This, of course, is the problem with managing other people’s money – once in a while they ask to have it back!

Have no fear however, the Darwinian rules that have been at work for hundreds of years will solve all that creatively self destructs. Those capitalists who are liquid long cash will start to rake in the prized pieces of property on the global monopoly board, one by one – everything has a price.
KM

Keith R. McCullough
CEO / Chief Investment Officer

U-G-G-L-Y

I kept my nose out of getting involved in Decker’s – because I simply lacked the fundamental edge on the distribution model. But as I peel back the onion, I don’t like what I smell.

Let’s look at Ugg market share for a minute. In the latest holiday season, Ugg had a 38% market share of department store shoe sales. 38%!!! I don’t EVER recall seeing a brand with share of this magnitude.

Chart 2 below is vital. It shows how Ugg went from a 2 month winter season in ’06, to 3 months in ’07, and now 5-months in ’08. It seems to be expanding its seasonal growth given inability (or lack of desire) to push above 40% share.

Now the brand is selling at a 10%+ share as early as August. To expand this footprint much further, we need to see a much bigger push into warmer-weather footwear, which usually carries a lower price point.

The emotion over this stock is massive. On one hand, short interest is 28% of the float – but that’s down from 40% in late summer, and historical peak of 70%. Also, all but one sell side analysts has a buy rating, and the average price target calls for a 110% gain from here (the only Hold rating is calling for 40% price upside). Those targets are likely to come down.

I kept my nose out of getting involved in this name – because I simply did not have the fundamental edge on the business model and distribution. But as I peel back the onion, I don’t like what I smell.


Disclaimer: I am sitting here on my couch this fine Sunday afternoon wearing a pair of Uggs. The product is so dang comfortable, but once an aging hipster like myself embraces it, I’ve gotta question how cool it is.

Chart Of The Week: 2009 Year To Date SP500 vs. Gold...

On a week over week basis, gold was +7% and the SP500 was -2.1%. For 2009 Year To Date, this puts Gold +2% vs. the SP500 at -7.9%.

In reviewing this past week of price changes across global macro, the most interesting callout here is that the US Dollar has been going up at the same time gold has. A strengthening dollar has effectively hammered equity prices everywhere but in China. Meanwhile, last week at least, the early signals of “re-flation” have manifested themselves in both 10 year yields, gold, and oil (oil had a +27% move this week, and 10 yr Treasuries sold off taking 10 yr yields 30 basis points higher week over week to 2.62%).

What does all of this mean? In the face of an improving American credit and liquidity picture (narrowing TED spread, steepening yield curve, etc…), there remains a Crisis of Credibility in Foreign Currencies, large cap US Financial Stocks, and US Treasury Bonds alike.

Keith R. McCullough
CEO / Chief Investment Officer

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Eye on RL Promos

You don’t need to be a rocket scientist to know that Ralph Lauren’s business is suffering – i.e. Coach, Tiffany, Burberry, Guess!, Nordstrom, Sacks, etc… But I was pretty shocked to see that the online discount activity has changed very little versus this time last year. Better inventory management? Better control over .com business after year 1 of repo from GE? Or simply lack of read through in velocity of sales through discounted price points represented in this advertised sample?? Maybe all of the above.

We’re not making a bull call on RL’s business, but when I stress test the model in the worst way imaginable, I can’t get below $3.50ps. Realistically, I still think that a $4.00 number or better is in the cards. This is something to consider with the stock under 5x EBITDA.

Eye on Earnings Revisions

Lack of erosion in revision factor sent this group higher. Now we’ve got the lowest earnings expectations in at least 10 years on trough multiples. Be VERY selective.

These charts speak volumes. Yes, earnings revisions are bad, but the rate of change has stalled. The SECOND that this happened, the stocks ripped.

Even though we need to see revisions ease from here for another move in the group, now we’re looking at 12x earnings when the Street is looking for 12 month forward earnings to be down 4%. That’s the first time in over 10 years I can find a period where the Street is actually looking for down earnings. Pretty tempting at face value.

It’s near impossible to call the bottom here – as there are so many companies where that -4% decline will prove to be a pipe dream. But there are plenty of names that have been tossed aside, and I think will grow meaningfully better than expectations next year. RL, HIBB, UA, and PSS, to name a few.

US Market Performance: Week Ended 1/23/09...

Index Performance:

Week Ended 1/23/09:
DJ (2.5%), SP500 (-2.1%), Nasdaq (3.4%), Russell2000 (4.7%)

2009 Year To Date:
DJ (8.0%), SP500 (7.9%), Nasdaq (6.3%), Russell2000 (11.0%)

Keith R. McCullough
CEO / Chief Investment Officer

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