Slight Sports Apparel Rebound

Slightly better SportscanINFO numbers last week, but the headline is deceiving. There was a marked improvement in the athletic specialty channel, but additional weakness in mass and family channels. That drop-off is so severe that any sane analytical mind needs to question the validity of the data.

Slight Sports Apparel Rebound  - table

Slight Sports Apparel Rebound  - chart1

Begin With Doubt

"To believe with certainty we must begin with doubting."
                Stanislaw Leszczynski
After a big market decline on Monday on concerns surrounding the uncertainty of the global recovery, yesterday's performance lacked any real overriding theme.  The most dominant macro theme in the past six months seemed to lack certainty; the dollar fell to its lowest level in two weeks, finishing down 1.1% yesterday as the S&P was virtually unchanged.
On the back of the declining dollar, Materials and Energy outperformed while the underlining reading on the health of the consumer continued to weaken.  No matter where you look to, housing, confidence or retail sales, the incremental news on the consumer continues to suggest that momentum is slowing; the Consumer Discretionary (XLY) was the worst performing sector yesterday, declining 1%.    
The set up for the market today centers on the FOMC meeting and interest rate expectations.  The debate surrounding the meeting revolves around the implications of the balancing act on the part of the Fed to try to both dampen near-term tightening expectations and also try to mitigate inflation concerns by outlining an exit strategy from the free money strategy.
The FOMC committee members will be waking up today to the fact that the Organization for Economic Cooperation and Development (OECD) has raised its forecast for the economy for the first time in two years as the U.S. economy shows signs of improving in the second half of 2009.
As part of my research process, I connect with the management teams of three or four companies every week to try to gauge how business is tracking.  I have yet to find one that will tell me that the trends are getting better.  President Obama is correct to say that "the American people have a right to feel like this is a tough time right now" because it is!  The 32% move from the March 9th low has allowed consumers to be more optimistic "than the facts alone would justify."  I feel much better now that the President has given me permission to feel like crap.
Early this morning, the dollar is weaker and the futures are higher and there are lots of doubts about what the Fed will do.  While the FOMC is unlikely to raise rates today, you can be certain they will need to plan an exit strategy.  
Good luck out there today,
Howard Penney
Managing Director


EWZ - iShares Brazil-President Lula da Silva is the most economically effective of the populist Latin American leaders; on his watch policy makers have kept inflation at bay with a high rate policy and serviced debt -leading to an investment grade credit rating. Brazil has managed its interest rate to promote stimulus. Brazil is a major producer of commodities. We believe the country's profile matches up well with our re-flation theme.

QQQQ - PowerShares NASDAQ 100 - We bought Qs on 6/10 to be long the US market. The index includes companies with better balance sheets that don't need as much financial leverage.

EWC - iShares Canada - We want to own what THE client (China) needs, namely commodities, as China builds out its infrastructure. Canada will benefit from commodity reflation, especially as the USD breaks down. We're net positive Harper's leadership, which diverges from Canada's large government recent history, and believe next year's Olympics in resource rich British Columbia should provide a positive catalyst for investors to get long the country.   

XLE - SPDR Energy - We think Energy works higher if the Buck breaks down.  

CAF - Morgan Stanley China Fund - A closed-end fund providing exposure to the Shanghai A share market, we use CAF tactically to ride the wave of returning confidence among domestic Chinese investors fed by the stimulus package. To date the Chinese have shown leadership and a proactive response to the global recession, and now their number one priority is to offset contracting external demand with domestic growth.

TIP- iShares TIPS - The iShares etf, TIP, which is 90% invested in the inflation protected sector of the US Treasury Market currently offers a compelling yield on TTM basis of 5.89%. We believe that future inflation expectations are currently mispriced and that TIPS are a compelling way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.

EWI - iShares Italy - Italian Prime Minister Silvio Berlusconi has made headlines for his private escapades, and not for his leadership in turning around the struggling economy. Like its European peers, Italian unemployment is on the rise and despite improved confidence indices, industrial production is depressed and there are faint signs at best that the consumer is spending. From a quantitative set-up, the Italian ETF holds a substantial amount of Financials (43.10%), leverage we don't want to be long of.

XLY - SPDR Consumer Discretionary - We shorted XLY on 6/19 as our team has turned negative on consumer in the last week.  

XLP - SPDR Consumer Staples - We shorted XLP on the bounce on 6/17.   

SHY - iShares 1-3 Year Treasury Bonds - 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. Yields are going to continue to make higher-highs and higher lows until consensus gets realistic.

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. Longer term, the burgeoning U.S. government debt balance will be negative for the greenback.
EWW - iShares Mexico - We're short Mexico due in part to the repercussions of the media's manic Swine flu fear.  The country's dependence on export revenues is decidedly bearish due to volatility of crude prices and when considering that the country's main oil producer, PEMEX, has substantial debt to pay down and its production capacity has declined since 2004. Additionally, the potential geo-political risks associated with the burgeoning power of regional drug lords signals that the country's economy is under serious duress.



With all eyes focused on any signs of slackening demand from China, today's production and export order data from Taiwan was a disappointment. Orders declined by 20.9% year-over year, a sequential improvement from last month, while output registered at -18.31% y/y. Economists had predicted levels over 1% higher.

On a deeper dive basis, the export order data shows that "the Client's" appetite for high margin consumer electronics is demonstrating resilience, with order for electronic products in general  improving sequentially to -11.33%  while information and communication products have improved to -11.9% Y/Y (an increase of over 30% on a 3 year basis).  This demand acceleration has been felt by producers across the tech spectrum, with multiple firms guiding estimates higher for the second half based on rising sales to People's Republic.

Our Technology team posted on this data earlier today, in which they noted that order trends are starting to exhibit familiar expansion patterns on a longer term basis.

Although today's improving data disappointed many, we still see confirmation that consumer demand is strengthening in China -perhaps not enough to offset Taiwan's lost business in Europe and North America completely, but more than enough to support our strategic stance on "the client" himself.

Andrew Barber



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Confidence “Shoots”

Western European indices bounced back mildly today after a substantial sell-off on Monday following the World Bank's downward revision on global growth.  The report reduced the Eurozone's economic outlook for this year to -4.7% from a March prediction of -2.7%.

Mixed signs of economic stability throughout Europe continue, yet recent sentiment data from Germany and France yield an improved picture for forward-looking conditions.  German consumer confidence rose in July for a second month according to a Gfk survey released today. The index rose to 2.9 from a revised 2.6 in June; the uptick comes on the heels of yesterday's report from the IFO that showed German business and investor sentiment improved for a third straight month in June. Business confidence also rose in neighboring France for the third straight month in June, according to the Paris-based statistics office Insee. Yet in contrast to the bullish survey a separate report indicated that French household spending unexpectedly fell 0.2% in May on a monthly basis or -1.6% from the previous year.

As Eurozone's two largest economies, the health of Germany and France will greatly drive the improvement throughout the continent as European countries are highly dependent on the EU as a trading partner.  The Eurozone Purchasing Managers Index out today shows signs of stabilization, yet the numbers are still at a low level (a reading below 50 indicates contraction).  Services PMI declined to 44.5 in June from 44.8 in May, short of economists' expectations of 45.8 and Manufacturing (PMI) rose to 42.4 from 40.7 in May, its highest level since September 2008.

We continue to view Europe's health on an individual country level. CPI for France stood at -0.3% in May on an annual basis, while Germany's came in at the Eurozone average of 0.0%, according to Eurostat. These levels should benefit consumers and increase sentiment, however today's French Services PMI would suggest the opposite as the reading fell to 47.5 from 48.3 in May. We'll be monitoring German unemployment, which actually came in 10 bps to 8.2% on the last reading, to rise sequentially, which we believe should dampen sentiment. We expect modest but improving negative GDP growth in 2H '09 for France and Germany and modest positive growth in 1H '10.

Matthew Hedrick

URBN: Comes Clean on SEC Request

URBN: SEC asks for more details

SEC comment letters are something of a black hole. The SEC never discloses them until at least 45 days after the investigation is closed, which could take months or even years. But some companies -- perhaps out of caution -- choose to come clean about the letters and that's exactly what URBN did late Friday.


In this case, the SEC was asking the company for additional disclosure about the bonuses paid to top executives last year. While URBN initially tried to skate by with generic statements about performance objectives, the SEC asked for solid numbers. It's easiest to illustrate this with an example, so here's how the company disclosed this before the SEC started asking questions:


"The second measure is based on whether the Company's net sales for specified stores meet or exceed a dollar amount specified in each named executive officer's performance objectives"


And here's how they disclosed it on Friday:


"The second measure is based on whether the Company's net sales for specified stores meet or exceed the specified dollar of approximately $1.8 billion (the "Sales Plan Target") and whether the Company's profit for specified stores meets or exceeds the specified dollar amount of approximately $318.5 million (the "Profit Plan Target")."


See the difference? The first disclosure essentially tells you nothing, while the revised one provides some key benchmarks to help build a better model.


Michelle Leder

NKE: Duration, Duration, Duration

It's been a while since I've seen such a gaping hole in buy-side sentiment on Nike heading into a quarter. We all know the consensus sell-side call "taking up numbers because FX is turning positive on the margin, and SG&A cuts will pad any profit erosion from the weak business climate."  But as much as this is the uniform sell-sider view, the buy-side is in to separate ballparks. I think it's all about duration.


The bottom line is that this stock is locked into a trading range for the next 12-18 months at which point the market can start to see, and subsequently discount, Nike's next growth acceleration.  Until then, there will be fits and starts in the business - i.e. sales, inventories, and futures moving a few points here or there. If you want to play those fits and starts, by my guest. In fact, I'll help you do so as the market embraces and discounts information that is out of synch with economic reality. In the high $50s this thing had too much optimism in it - especially with no major swing coming our way as it relate to futures. But with a $54 stock, I'm squarely in the 'do nothing' camp into the print.


Here are some key things do consider.


Fact 1: Nike's current restructuring is definitely the right thing to do. Look back in time... Growth here is anything but slow and steady. This company grows in bursts, then resets the organization. That's what great companies do. They hurry up and evolve. The chart below says it all.


NKE: Duration, Duration, Duration - 6 23 2009 7 01 06 AM


Fact 2. We're only halfway through the current reset. Earnings at this company will not grow at a sustainable rate for another 12-18 months. Will FX help on the margin? Yes. In fact, the quarter Nike is about to report will mark the trough quarter, as evidenced by the following chart (FX weighted by Nike sales by country). 


NKE: Duration, Duration, Duration - NKEFX 6 09


Also, one can argue that the 5% headcount cut will help by around $0.20 per share - or 5%. But do you think that will REALLY flow both FX and SG&A saves through to EPS??? 


Anyone that thinks the answer is 'Yes' is living in a parallel dimension. In fact, if Nike did flow it through, then I'd start to question top line growth assumptions as the next leg of the story starts to rip. EVERY TIME Nike has gone on one of those blistering share-gaining runs of double digit top line growth, it has come after a prolonged period of investment. You can either bank on seeing the cost cut benefits today on the P&L, or the top line growth later. We'd need to have seen a major change in Nike's DNA to ignore the growth. Trust me...that has not happened.


Ok McGough... If that's the case, can we at least bank Nike delivering a knock-out punch to struggling competitors?  Unfortunately, the answer is 'No.'  I can't give a great answer as to why, other than to say that in all my years dealing with Nike, one of my few frustrations has been that the company does not take advantage of competitors being on the ropes as often as it should. It is a fierce competitor, but for some reason is content to leave a competitor on life support instead of pulling the plug. Translation = if you are going to take my comments and look for someone that will feel the pain as a result of Nike's investment rate, you're gonna have a tough time.

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