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UA Incremental Trends Are Net Positive

Yeh, I know, the overwhelming sentiment coming out of the channel is bearish on UA. I get it. But let me throw out a few nuggets…

1) UA just gained share for the 5-the week in a row at an accelerating rate – per SporscanINFO (+96bps, 101, 161, 189 and 213 for each of the 5 weeks ending this past Sunday).

2) Footwear sales continue to track in line with my expectations.
a. Average selling price trends for UA running footwear actually increased in the latest week from $90.8 to $92.5.
b. In fact, Foot Locker just added to that on its call by saying…
i. “In an effort to reinvigorate the domestic apparel segment, FL will be increasing offerings from UA by increasing the number of doors from ~800 to ~1300.”
ii. When asked how the running launch for UA has performed, response was that it “was off to a very good start.”
iii. Also working closely with FL to sell into Europe.

Granted, I have yet to hear any retailer ever bash one of its major vendors. The outcome if that were to be the case would be ugly to say the least. But the numbers and checks I have support what Foot Locker is saying.

My call on this continues to be that it is a company that should double in size over 3 years as it takes advantage of the consumer’s appetite for UA to succeed in footwear. I can’t find any other company that will grow to the same magnitude (except maybe Lululemon). My biggest worry at this point is that it is a ‘tweener.’ It is nowhere near cheap enough for a value investor at 15x EPS, but no growth manager will touch it until the top line starts to accelerate more meaningfully without sacrificing margins. I think that will be a 1H event.
Apparel Share Gains Are Accelerating


The Wholesale inflation numbers released today registered at the lowest level since 2002 hot on the heels of yesterdays rate cut which moved the Repurchase Rate to an all time low of 5%. The rapid decline in wholesale price levels is not even across all commodities, nor has it been felt by the consumer fully –CPI for industrial workers (a measure of urban living costs) registered at 10.45% for January while CPI for farmers came in at 11.62%.

One specific component of Indian commodity matrix that we follow closely is fertilizer. Although agriculture officially accounts for less than a quarter of GDP, 60% of all employed Indians work in the sector. The majority for these workers are small farm operators, of which most are operating barely above subsistence level.

The impact of sustained higher costs for fertilizer, a subsidized commodity for which the country is officially 20-30% import dependent, are a constant concern for the Congress party as election loom.

Prime Minister Singh’s government is attempting to improve domestic capacity – fertilizer minister Ram Vilas Paswan has unveiled plans to the waive government debts of producers as part of an ambitious program overhaul the most antiquated factories by 2012 ( including the re opening of eight closed plants) and leave the country fertilizer self sufficient. The industry is currently in a complete shambles however, having been neglected during the past decade of unbridled growth, making the prospects for meeting these new goals dim without more significant stimulus measures.

Despite subsidies and government infrastructure projects, The grimness of Indian farmer’s lives cannot be overstated.

During the 90’s, the agricultural areas of Maharashtra, particularly the Vidarbha region, received the unwelcome nickname “the suicide belt” due to the high rate of such incidents among poor farmers there ( reportedly over 1,000 farmers took their own lives in Vidarbha in 2006). Although the national outcry caused by these deaths led to new government programs to improve rural life, the average Indian farmer is barely able to get by making any cost increase for fertilizer or pesticides untenable.

Anecdotal reports of increasing numbers of farmers that are going without fertilizer due to cost, despite the subsidized prices, are becoming more frequent. The impact on crop yields of going without, particularly if combined with poor weather conditions, could be catastrophic for the rural economy (and by extension relate consumer food prices nationally).

We continue to have a bearish bias on India, and will look for opportunities to short the equity market there again into any rallies.

Andrew Barber

Maybe A WMT Fund Was A Better Idea

I’m torn as to which datapoint from retail sales day is more relevant. A) The fact that the 9.1% spread between comps at Wal*Mart and Target is running at the highest 3-month rate since 1993. Or B), the conjecture from ‘people close to Pershing Square’ that despite a 93% decline in Ackman’s Target Fund since its ’07 inception, he has enough cash to pay the "modest" redemption requests it faces without selling TGT off.

I’m not going to go there – that’s his business…but I will say that WMT still looks like a name to stick with here. I struggle to find a fundamental reason to buy Target.

Raging Bear: SP500 Levels, Refreshed...

The Good News here is that not everything is as financially geared as some of these horse and buggy whip US Financials and Industrials… If everything was, the US market would be down 6-8% today...

With the XLF (Financials) getting smoked for another -8.5% day, and XLI (Industrials) down another -5%, these are the crosses of leverage that this fine country still has to bear… The New Reality remains this: in an environment where the cost of long term capital continues to rise as the access to it (without government regulation attached) declines, companies geared to those P&L factors lose relevance…

Underneath all of this, after the 11AM refresh of prices, I come out with SP500 support at 670. Yes, that would be a lower low, and yes, that would make Obama just as wrong as every American is in their 401k right now. Lower lows are bearish.

In a raging bear market like this, bounces are to be sold. Unfortunately, for me at least, I did not do enough of that yesterday. In preparation for the next bear market bounce, I have the first line of SP500 resistance at 730 (dotted red line in the chart below).

Keith R. McCullough
CEO & Chief Investment Officer

Want Vs. Need

"It is a capital mistake to theorize before one has data. Insensibly, one begins to twist fact to suit theories, instead of theories to suit facts."
-Sherlock Holmes

Sherlock Holmes is one of my favorite analysts, and I have that quote taped into the insert of my research notebook. Whenever I find myself reaching to be right, that simple reminder brings me back to where I need to be - data dependent.

At the beginning, end, and in between of my every day, no matter where I go... there real market prices are. If you make enough mistakes trading markets like I have, over time you come to respect this reality. Shaping one's thesis to what Nasim Taleb refers to as a "narrative fallacy" is something that anyone one in this business can do. However, if you don't have Warren Buffett's terms and duration (preferred and forever), your storytelling can quickly become problematic - especially when your client, boss, or Mr. Market, takes your capital away or, God forbid, marks it to market...

What people WANT to happen in markets, and what NEEDS to happen are often different things. Obama bashers wanted the man to make a call on the market, and be wrong - for a day at least, he wasn't. China short sellers wanted China's manufacturing growth to crash in 2009 - for the year-to-date, it hasn't. Chinese momentum chasers who were looking for their storytelling of "increased stimulus" to be confirmed last night didn't get that either.

In Asian trading last night, the trading impact of WANT vs. NEED was profound. I am long China via the CAF closed end fund - and for the life of me yesterday, I couldn't understand how anyone would be chasing this ticker into a +14% daily move with the thesis that China's Premier announcing another stimulus is a bullish thing? Stimulus is what floundering economies who are socializing themselves (Japan, USA, UK, etc...) are provided. If Wen Jiabao admitted to needing stimulus last night, I would be selling my entire position here on the open.

In order to achieve sustainably higher prices, what markets NEED is confidence. Confidence is what higher prices are built on, not government supports and stimulus. If you disagree with that, check the math on the USA SP500 price of 696, fully loaded with everyone in the manic media and their brother WANTING bailout moneys.

Overnight, despite not delivering on the manic media's WANT for Chinese stimulus, the Shanghai Stock Exchange had another great day, closing up +1% at 2,221. Now isn't that interesting... a country that is spending what they NEED rather than what the crackberry crowd WANTS. While I think estimates for 8% GDP growth in China are too aggressive, I don't think you can show me any point in American economic history where GDP was growing in the mid to high single digits and the US Government bowed down to populist cries for free stimulus moneys on the order of half a TRILLION dollars...

The New Reality is this. China's opportunity in the 21st century is not unlike that of America's in the 20th or Britain's in the 19th. Because their baseline of per capita GDP is so low, their long term opportunity is too hard for the bearish storytellers to comprehend. Ask the "hedgie", who was "short China" for that +14% move in the CAF, how he felt yesterday. I'm thinking that if his boss or investor got the memo on that accelerating Chinese PMI number, he was covering into the highs of the day - facts are hard to hide from.

Sherlock Holmes would be smiling. Isn't the data on those billion people still residing in China the same as it was when Investment Banking Inc. was long everything "Chindia" in 2007 still accurate? Or has some rogue from Parts Unknown killed off some of that demand and Beijing is making up the numbers on what their real headcount is?

Guys like Vikram Pandit, who built his hedge fund using "long India" as one of his big theories, are learning right now that the storytelling of a place called "Chindia" was fiction. The fact is that India got hammered again last night, losing another -2.9%, taking the Sensex Index to down -15% for 2009 to-date. Unlike China, India's currency (the rupee) looks like what it is, an emerging market currency with no-confidence on the offer. Unlike China, India could run negative GDP growth with positive mid single digit inflation. That would be bad - and that's what the marked to market prices of Indian equities having been telling you that your NEED to understand.

Despite rallies in China and Japan, Korea was down modestly overnight. They have the worst performing currency in Asia right now - that's not new. What is new is that when you pile their leverage issues on top of an accelerating cost of global capital (bond market's are breaking down), things can go from really bad, to toxic... in a hurry.

Korea is not China, and neither is Hong Kong. Despite the Chinese telling us that all is well, the Hang Seng index lost another -0.97% overnight - how could that be? Don't those who WANT everything that resembles China to go up NEED to get paid? Well, yes... they do... but that doesn't mean they will.

Hong Kong is not unlike Switzerland or Dubai for that matter right now. What these countries NEED is for the last 25 year cycle of cheap money and its high velocity of availability to continue. What the global market WANTS is to mark all of these countries and the companies operating within them to ditch their addiction to leverage (General Electric?). That's The New Reality.

Do I WANT the SP500 and Nasdaq to go higher this morning? Of course, I am long both. Does the market NEED to go higher every day? Of course not...

Let's keep it real out there, and not "Insensibly, twist fact to suit theories, instead of theories to suit facts"...

In the immediate term, my upside/downside targets in the SP500 are balance at +4% and -4%, respectively (683 and 738).

Best of luck out there today.



  • QQQQ - PowerShares NASDAQ 100 - We bought QQQQ on a down day on Monday.

  • SPY - SPDR S&P500- We bought the etf perhaps a smidgen early with the S&P500 at 715, yet will take it at a discount.  The market is also close to three standard deviations oversold.

  • CAF - Morgan Stanley China fund - The Shanghai Stock Exchange is up +22% for 2009 to-date. We're long China as a growth story, especially relative to other large economies. We believe the country's domestic appetite for raw materials will continue throughout 2009 as the country re-flates. From the initial stimulus package to cutting taxes, the Chinese have shown leadership and a proactive response to the credit crisis.

  • GLD - SPDR Gold- We bought gold last Thursday with the S&P500 in the red and gold down. We believe gold will re-find its bullish trend.

  • TIP - iShares TIPS- The U.S. government will have to continue to sell Treasuries at record levels to fund domestic stimulus programs. The Chinese will continue to be the largest buyer of U.S. Treasuries, albeit at a price.  The implication being that terms will have to be more compelling for foreign funders of U.S. debt, which is why long term rates are trending upwards. This is negative for both Treasuries and corporate bonds.

  • DVY - Dow Jones Select Dividend -We like DVY's high dividend yield of 5.85%.

  • VYM - Vanguard High Dividend Yield -VYM yields a healthy 4.31%, and tracks the FTSE/High Dividend Yield Index which is a benchmark of stocks issued by US companies that pay dividends that are higher than average.
  • LQD -iShares Corporate Bonds- Corporate bonds have had a huge move off their 2008 lows and we expect with the eventual rising of interest rates in the back half of 2009 that bonds will give some of that move back. Moody's estimates US corporate bond default rates to climb to 15.1% in 2009, up from a previous 2009 estimate of 10.4%.

  • SHY -iShares 1-3 Year Treasury Bonds- On Thursday of last week we witnessed 2-Year Treasuries climb 10 bps to 1.09%. Anywhere north of +0.97% moves the bonds that trade on those yields into a negative intermediate "Trend." If you pull up a three year chart of 2-Year Treasuries you'll see the massive macro Trend of interest rates starting to move in the opposite direction. We call this chart the "Queen Mary" and its new-found positive slope means that America's cost of capital will start to go up, implying that access to capital will tighten. Yield is inversely correlated to bond price, so the rising yield is bearish for Treasuries.

  • UUP - U.S. Dollar Index - We believe that the US Dollar is the leading indicator for the US stock market. In the immediate term, what is bad for the US Dollar should be good for the stock market. The Euro is down versus the USD at $1.2567. The USD is up versus the Yen at 99.4850 and up versus the Pound at $1.4144 as of 6am today.

CKR – Disappointing Numbers

The good news is that in period 1 Hardees’s same-store sales increased 3.2% vs. 1.6% last year. The bad news is that Carl's Jr.’s comparable sales decreased 3.6% vs. a 1.4% increase in the prior year. In the current environment discounting is the only way to generate incremental traffic and management has no intention of “trying to compete with free because, no matter what anyone says, you can't make that up on volume."

At the same time, management wants to blame rain in Southern California as the reason for the sluggish trends at the Carl’s Jr. concept. The fact is that rain may have had an impact on the current period sales trends, but that should not be mistaken for 5 months of decelerating trends at Carl’s Jr.

It’s hard to single out a reason why Carl’s Jr. is slipping, but value for the money is going to be the one that appears at the top of the list. Carl’s Jr. has always been more expensive than any of the other “big three” competitors and the focus on value by its competition is a major issue for the company, particularly in the current environment. Holding the line on value becomes harder to do as the decline in traffic trends begin to accelerate.

Trading at 4.3x NTM EV/EBITDA, CKR is one of the cheapest stocks we follow and deservedly so. In addition to the core concept losing market share to the “big three,” management at CKE is one of the least shareholder-friendly management teams in the restaurant industry.

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