Ball Underwater

“Do not dwell in the past, do not dream of the future, concentrate the mind on the present moment.”



Last week, when addressing the selloff in China, Andrew Barber wrote a fantastic Early Look titled, “The Present” – and no matter where you go this morning, here we are. Don’t get excited. Don’t freak out. Take a deep breath and a sip of your coffee. It's time to grind with the newly issued facts on your screens.


One of our top performing clients is a swimmer. While there is no secret that I have a confirmation bias for athletes, that certainly doesn’t mean everyone on my Research Edge Team had to have been a good one. Barber is one of our best players - ask him how fast he can run 100 meters!


My point here is a simple one. And it’s one that my client made to me last night. She just finished swimming a mile and wrote, “it settles my mind.” Simple is as simple does. Rinse and repeat. She is a testimony to that discipline – her track record ranks her at the very top of all Mutual Fund Growth and Income Funds. No, super duper momentum Fund of Funds dude, not last month - over the cycle of the last 5 years, when plenty an emotional PM was set out to sea.


From the Top, to the Bottom, and Back Again. We’re looking to learn from those who have successfully swam both with and against the current of consensus. Up or down, side to side. Being a successful investor in The New Reality requires a settled mind that does “not dwell in the past” or “dream of the future.”


Dreaming of becoming a billionaire or waking up with that on your mind doesn’t register with me as good pre-game prep. So, let’s do up our chin straps and get ready to settle our minds into the dirty stuff. Ranges, deltas and spreads – risk management style. This next part of this market’s move is going to be all about the grind.


The SP500 hasn’t budged this week. On a closing basis, over the course of the last 3-days, it has traded in a 0.30% range. It’s a grind. So settle your mind, and deal with it.


When we grind like this, we’re setting up for a big move. You don’t need to be a swimmer to get the analogy that I like to use with my team – the grind is the time where we’re holding a Ball Underwater.


The question here is which Pain Trade is going to explode out of this grind? The answer, as you’ll probably guess, lies with one global macro factor – the US Dollar.


Dollar up = everything priced in dollars down. Dollar down = everything priced in dollars up. If you don’t like getting dirty, get wet – and rinse and repeat this inverse correlation until you are soaking with alpha.


While the SP500 was dead flat yesterday, the componentry of the US market was very much anchoring on this dominant inverse correlation. Consider the following 3-factor setup of closing prices:


  1. US Dollar Index up +0.35% to $78.60
  2. US Financials (XLF) down -0.27% to $14.58
  3. US Consumer Discretionary (XLY) up +0.57% to $36.55


If Dollar down gets the Bankers, Debtors, and Politicians paid. Dollar up gets the American Consumers and Creditors paid. Yesterday gave us a sneak preview of what a Dollar rally scenario could look like.


This will sound counterintuitive to the legions of hedge funds that remain short the Pain Trade (short the US Consumer), not because of the math – more so because anything that doesn’t rhyme with what gets them paid is sometimes hard to reconcile. Trust me, I have tried shorting these consumer stocks for the last 3 months – I understand pain.


As bearish as I have been for the last 9 months on the US Dollar is as bullish a breakout it can have if that’s the Ball Underwater that we are going to have to deal with. In the last 3 weeks our call on the US Dollar has definitely morphed into consensus (Buffett, PIMCO, etc…). Consensus groupthink can be a scary place.


Not surprisingly, of the four SP500 Sectors in our Sector Views Risk Management product that were down yesterday, the aforementioned Financials (XLF) were one of them, and so were Basic Materials (XLB). These are two of the highest beta sectors in the market. Both are REFLATION sectors. So, AFTER, the most expedited short squeeze in US stock market history, we’re now forced to deal with a scenario that is potentially much different than the lay-up we have had for the past 6 months.


Bernanke now has his job security. On the margin, that means he doesn’t have to pander as much. Less political pandering = less US Dollars for sale. Why? When reported inflation accelerates in Q4 (it will), he will start to move to where the bond market is already headed – HIGHER THAN ZERO on the Fed Funds rate.


Rates up = Dollar up = REFLATION trades down. Most will probably agree with me on that. I have the immediate term TRADE breakout line for the US Dollar 8 cents (and 8 seconds) away from breaking out. That line is $78.62. That’s The Present. That’s your Ball Underwater.


I have immediate term TRADE resistance for the SP500 at 1041, and immediate term downside support at 1009.


Best of luck out there today,






EWH – iShares Hong KongThe current lower volatility in the Hang Seng (versus the Shanghai composite) creates a more tolerable trading range in the intermediate term and a greater degree of tactical confidence.  


EWZ – iShares BrazilPresident 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 reflation call. 


QQQQ – PowerShares NASDAQ 100We bought Qs on 8/10 and 8/17 to be long the US market. The index includes companies with better balance sheets that don’t need as much financial leverage.  


CYB – WisdomTree Dreyfus Chinese Yuan The Yuan is a managed floating currency that trades inside a 0.5% band around the official PBOC mark versus a FX basket. Not quite pegged, not truly floating; the speculative interest in the Yuan/USD forward market has increased dramatically in recent years. We trade the ETN CYB to take exposure to this managed currency in a managed economy hoping to manage our risk as the stimulus led recovery in China dominates global trade.


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. We believe that future inflation expectations are currently mispriced and that TIPS are a efficient way to own yield on an inflation protected basis, especially in the context of our re-flation thesis. 


GLD – SPDR Gold - Buying back the GLD that we sold higher earlier in June on 6/30. In an equity market that is losing its bullish momentum, we expect the masses to rotate back to Gold.  We also think the glittery metal will benefit in the intermediate term as inflation concerns accelerate into Q4. 





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 that bonds will give some of that move back. Shorting ahead of Q4 cost of capital heightening as access to capital tightens.


XLP – SPDR Consumer Staples – We shorted XLP on a bounce on 6/21. One way that investors chase a bearish USD is buying international FX leverage in global consumer staples. Shorting green.


DIA  – Diamonds Trust- We shorted the financial geared Dow on 7/10, 8/3, and 8/21. 


EWJ – iShares Japan –We’re short the Japanese equity market via EWJ on 5/20. We view Japan as something of a Ponzi Economy -with a population maintaining very high savings rate whose nest eggs allow the government to borrow at ultra low interest levels in order to execute stimulus programs designed to encourage people to save less. This cycle of internal public debt accumulation (now hovering at close to 200% of GDP) is anchored to a vicious demographic curve that leaves the Japanese economy in the long-term position of a man treading water with a bowling ball in his hands.


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.



 AUGUST 27, 2009


Another day of upside with results largely better than expected.




  • It’s hard to believe the conservatism that WSM management is trying to convey when they produce $0.14 of upside in a quarter when the Street is forecasting a loss of $0.09. The bullish conference call included commentary that Q3 results are running ahead of plans and guidance, merchandising changes at Pottery Barn are beginning to take hold, and cost containment remains the key to upside leverage as sales accelerate. With all these positive data points, why is the outlook for 4Q unchanged? It seems that management is concerned about the holiday being promotional as a result of weaker competitors looking to either boost sales or actually liquidate. Even if this holds true, the benefits of competitive liquidation far outweigh any near-term sales impact. With WSM’s lean cost structure, each incremental sale (i.e. market share gain) will ultimately drop to the bottom line at a profitable rate. Now, if sales growth actually turns positive, there will be very few believable reasons to remain conservative on the company’s outlook.


  • In one of the most eye opening examples of how the consumer prefers to shop on promotion, Brown Shoe provided some interesting commentary on its “BOGO” (buy one, get one) strategy at Famous Footwear. It appears that after eliminating its BOGO program in favor of single pair promotions early in 2Q, the consumer rejected the new strategy and sales tailed off. As a result of the negative trends, the company reinstated the BOGO, following exactly what the consumer wanted. Sales picked up immediately. Unfortunately, BOGO’s carry lower gross margins which ended up negatively impacting the quarter. Management’s comment that, “Unfortunately, right now BOGO is a way of life” suggests that promotional activity and margin pressure are likely to persist until overall underlying demand improves.


  • Running shoes are the leading category within Famous Footwear’s athletic offering. This now the third major retailer to confirm that the running category is one of the few bright spots in what is otherwise a volatile environment for footwear.


  • In an effort to drive traffic and build brand awareness, DSW is returning to TV with an advertising campaign this September. While it is unclear so far if TV has had any impact on sales (the last spot aired in May), management is still committed to incremental marketing spend over the back half of the year.


  • While many retailers have articulated success in renegotiating lower rents or renewals, New York and Company highlighted a benefit of the current vacancy trend. During its second quarter, NWY signed short-term or temporary leases in an effort to test outlet locations. These leases provide the highest levels of flexibility given their minimal commitment and capital requirements. We have seen pop-up stores and vacant store fronts used for sample sales in major cities, but this may be a sign of things to come if vacancies continue to remain high. The market for temporary real estate is especially interesting as we near the holiday season- a time when both landlords and retailers aim to maximize both sales volumes and profits.


  • With a strict adherence to the $1 price point, Dollar Tree is sometime faced with having to drop a product from its offering due to price increases or inflation. However, with improved sourcing costs and increased capacity in China (~40% of DLTR’s imports) the company is now able to bring products back that were dropped from the mix over the past couple of years. Additionally, cost savings allow the company to offer more “value” to the consumer, either in the form of higher quality or increased pack size. Given that there is a finite amount of pennies in a $1 price-point strategy, the trend in China could be particularly beneficial to companies like DLTR and NDN.


  • As Charming Shoppes management continues to execute a major turnaround of all three of its brands, it has been upfront about plans to close unprofitable and cash-flow dragging locations. As an update to the original plan which called for 100 closures in 2009, the company is now expecting to close 145 units for the year. With 2,258 total stores, there is likely room for further cuts.


  • On the Guess, Inc. 2Q call, management discussed their views on what is motivating their U.S. consumer to shop. If you guessed good prices and some type of promotion, then you probably don’t need to read any further.  According to GES, customers are shopping for compelling values around events and spending less time in malls during non-event periods.  In response to this very obvious discovery, GES has made adjustments to its promotional calendar to benefit from those “events” that drive traffic to the mall. This sounds like basic planning to me around key holiday and seasonal transition times, something that most retailers figure out a year in advance. Despite these efforts to boost sales trends stateside, the business remains strong across the globe.


  • As most multi-channel retailers are substantially reducing catalog circulation in favor of more cost effective marketing and ecommerce distribution, Coldwater Creek is set to ramp up. With increased confidence in its merchandising changes, the company is planning a 40% increase in catalog circulation in 3Q. While the delta in mailings is large by any measure, it is worth noting that last year circulation was cut in the same period. Regardless, this may be one of the few retailers that is not seeing huge potential from a shift to online marketing and a move away from the costly catalog business.





-Hot categories of 2009 - Men’s underwear is need-based, typically on an 18-to-24-month cycle and the consumer is out there spending on necessity. Fleecewear was a standout, it was a category that did reasonably well for teen retailers (hoodies have been a key category for firms like New York-based Aéropostale). Intimate apparel is an industry bellwether to see how women are feeling, and it reflects how much desire they have to buy. Denim has been a top performer for retailers such as True Religion Inc., Chico’s FAS Inc. and Buckle. Gap Inc. is introducing an overhaul of its denim offering this month.  <>


-Consumer spending is down with a few exceptions - The NPD Group has released its latest report detailing spending in apparel product categories from January through June. Spending has been need based — but consumers are still spending. Bright spots included number-one-ranked male underwear, and fleecewear at number two. Both showed sales gains from the same period last year. Although the tops category ranked first in overall spending, it decreased 7.6%compared with the same period a year ago. The results for 1H 2009: Male Underwear + 4.9%, Fleecewear + 2.1%, Outerwear - 0.9%, Intimate Apparel - 3.3%, Sleepwear - 4.2%, Hosiery - 6.4%, Tops - 7.6%, Bottoms - 7.8%, Swimwear - 9%, Tailored Clothing - 11.4%. <>


-The American waistline may be expanding, but plus-size shoppers are tightening their belts - People just aren't buying plus-size clothing at the rate they used to. Apparel in general — being a discretionary purchase — is suffering because of the economy, but plus-size has been particularly hard hit. According to the NPD Group, a market research company, the overall women's apparel business is down about 5% and plus-size is down almost 10% from the 12 months ending in May 2009 compared to the same time the year before. It's hard to account for the dip at a time when more than half of American women are estimated to wear plus-sizes, generally considered size 14 and up, but analysts have some theories. Some retailers don't want to lure overweight customers and send out the "wrong" image, experts said, and the customers themselves may feel put off by many stores. Some retailers, including Old Navy, Banana Republic and Ann Taylor, have taken their plus-size collections out of stores and are selling only online — which some experts say plus-size shoppers prefer. Others, including H&M, have dropped out of the plus-size market. And there's also the uncomfortable connection between obesity and lower incomes, which might help explain the dip. A study of nationally representative data on American workers by two professors at Stanford University found that obese workers at the same level of job experience, education and gender earned less than their thinner colleagues. <>


-A new luxury e-commerce site is launching here as online sales gain momentum in Japan -, a new invitation-only Web site, goes live today with an inaugural sales event dedicated to Longchamp. Owned and managed by a group of French nationals, the Web site will sell lifestyle products ranging from Prada eyewear to packages at luxury hotels and cars from Peugeot. Initially the site will be limited to Japanese users, but the company plans to launch Glamour-sales in both China and South Korea next year.  During each brand-specific 48-hour sale, the site will feature a brief film to showcase the products and encapsulate the brand’s essence. For example, Japanese model Hinano Yoshikawa is featured in the Longchamp film, a live-action fashion shoot of her posing sensually with the French company’s handbags. The site will also feature information about each brand’s history, an online catalogue and blogs, which members can use to interact with one another. <>


-Consumer spending was hardly affected by last year’s reduction in VAT, a survey has revealed - Consultants PricewaterhouseCoopers said 88% of the 2,000 consumers surveyed said the cut from 17.5% to 15% did not encourage them to spend more on either goods or services. Respondents said the Government’s £12 billion VAT cut from last November’s pre-budget report was insignificant compared to other economic factors, adding that economic uncertainty and salary cuts influenced their spending more. Only 8% of those surveyed said they spent more because of the cut, while 5% were unaware that there had even been one. The cut in VAT is expected to be reversed on 1 January.  <>


-Williams-Sonoma’s online sales declined 21% in the second quarter - Home furnishings retailer Williams-Sonoma reported second quarter e-commerce sales of $210 million, a 21% decrease compared with $265 million in Q2 of 2008. The web accounted for 31% of sales in Q2 2009 vs. 32% in Q2 2008. <>


-Apparel merchants logged the best response time in July - Apparel and accessories merchants continued their run, delivering the best response time to shoppers with a high broadband connection for the third month in a row, says Gomez. <>


-Nike INC. brought out some of its brightest tennis stars on Wednesday to preview their U.S. Open attire and raise money for local youth charities - The company assembled a regulation-size tennis court right on Broadway, just below 23rd Street, and allowed hundreds of local youths to watch Serena Williams, Rafael Nadal, Roger Federer and John McEnroe in some light, on-court action. Four kids got a chance to receive coaching from the champions and play to win donations for their organizations.  Williams, Nadal and Federer donned the daytime ensembles they plan to wear in the U.S. Open, which starts Aug. 31. <>


-A new fashion trend for denim - After a period of immaculately clean superskinny fits dominating the jeanswear market, the big news for spring is the straight-leg distressed look — coupled with extreme ripped denim, soft whiskering and splattered paint-aged effects. <>


-Sportswear emerges successful at a men's show in Dallas - A continued slide in tailored clothing sales prompted retailers at the Men’s Show Dallas Collective to focus on sportswear epitomized by colorfully striped shirts, bright polos, shorts and denim. Buyers said business overall remains challenging as they slashed budgets 20 to 50%, figuring they can always obtain goods if sales pick up. “It’s much more dressed down,” Bryson observed. Men rarely wear suits, coats or sport jackets, and the only time attorneys wear a suit is in court. "We are looking for new and exciting ways to keep it lively.” Bryson cited colorful striped shirts by Thomas Dean and Polo Ralph Lauren knit tops in solid colors, from basic blue and red to greens, orange and pink paired with shorts in neutral hues. The customer is “price-point driven,” said Luke Abney, co-owner of The Rogue Ltd. men’s shop and Forty Four Fifty women’s boutique in Jackson, Miss. <>


-Levi Strauss & Co. has named Kodak veteran Jaime Cohen Szulc global chief marketing officer, a new position at the company - Szulc (pictured), who was most recently CMO of Eastman Kodak's consumer digital group, will report to Levi's CEO John Anderson. Szulc joined Kodak in 1998 as the marketing head for Latin America, later moving on to become general manager of the Americas region. Before that, he held marketing posts at Procter & Gamble Brazil and SC Johnson Latin America. Levi's current creative agency of record is Wieden + Kennedy, Portland, Ore. The company's current ad campaign features artistic, Americana-soaked visions of the young target audience with the theme, "Go forth." Independent Wieden launched that campaign shortly after its hire by Levi's last December. The brand typically spends $80 million in annual domestic measured media, per Nielsen. Omnicom Group's OMD was tapped in a separate review for media chores last October.  <>


-Arcandor Fires Most Employees of Its Holding Company Amid Insolvency - Arcandor AG, the insolvent German retailer, has fired most of the employees at its main holding company, while the administrator restructures its department store and mail-order businesses. <>


-Esprit Shares Plunge as Krogner Warns Clothes Profits May Continue to Drop - Esprit Holdings Ltd., the biggest Hong Kong-traded clothing retailer, may take until next year to return to profit growth after reporting its first earnings drop in more than a decade. Its shares fell the most in 10 months.  <>


-Italian Consumer Confidence Reaches 2 1/2-Year High on Easing Inflation - Consumer confidence in Italy rose to its highest in 2 1/2 years in August on signs that household spending is benefiting from falling prices, signaling the economy is recovering from its worst recession in six decades. <>


-New regions are emerging as cost competitive in China for low- tech products - Fujian and Zhejiang are now key sourcing centers for apparel, with Zhejiang, for example, accounting for 20% of China's baby and children's wear exports -- an amount equal to Guangdong Province. As manufacturing for a range of products moves to other regions in China, Private Sourcing Events are an ideal platform for buyers to discover new suppliers who can meet their requirements.  Sourcing & Audit Manager of Otto International Shanghai, Vincent Sung, said: "We are already familiar with many of the big name manufacturers in China. However, we cannot afford to overlook new suppliers, who are competitive in terms of pricing and quality and who are willing to work even harder to partner with us. "Private Sourcing Events connect us with new suppliers whom we know can meet our high standards before we even meet them." <>





GPS: Robert Fisher, Director, sold 414,00shs ($8.3mm) less than 5% of total common holdings pursuant to 10b5-1 plan.


FOSL: Tom Karsotis, Chairman, sold 147,718shs ($3.7mm) less than 5% of total common holdings.


DKS: Lawrence Schorr, Director, sold 35,000shs ($793k) nearly 50% of total common holdings.


FL: Ken Hicks, CEO, was awarded 500,000shs via stock options as part of corporate incentive plan.



  • Michael Jeffries, Chairman & CEO, sold 4,090shs ($131k) upon exercising the option to buy 12,800shs a fraction of total common holdings.
  • Charles Kessler, EVP-Merchandising, sold 3,834 ($123k) less than 5% of total common holdings.



  • David Brandon, Director, sold 7,000shs ($256k) representing the remainder of his common stock holdings.
  • John O’Brien, Director, sold 20,000shs ($732k) upon exercising the option to buy 20,000shs less than 50% of total common holdings.

BWS/DSW: Industry Read Through

DSW and BWS results were consistent with what we saw last week from the Sporting Goods retailers – weak results overall, with an increasing delta between the quality and junk. BWS is definitely the junk – always has been, always (likely) will be. While DSW is not quite the quality in the group, it is certainly doing and saying things that are far more ‘quality-ish’ than it has in the past. The only similarity between the two is guidance of a low-mid-single digit comp decline in 2H driven by lower traffic. DSW took up guidance and is investing in growth, while BWS is upping the ante on cost cuts – again (the latter is going to run out of steam early in ’10).


Not a surprise that both companies are expecting heavy promotions in 2H; however, BWS was the first we’ve heard state that promotions won’t be about the price, but about the brands. Additionally, BWS suggested that they are underinventoried heading into the BTS season, which is in stark contrast to it’s eroding sales/inventory spread. In an attempt to find the silver lining in the quarter for BWS, all we could come up with is that the company is heavy in athletic inventory, which continues to outperform non-athletic by a wide margin. But that’s a stretch to point to as a positive. 


Our bet in this space is still with PSS, which is far better positioned with price points, inventories, branding, and sourcing benefits. We don’t love PSS into the print, but it is the name to own over 12-18 months. Numbers are way too low.


BWS/DSW: Industry Read Through - Footwear SIGMA 8 09


Key Points:

Notable Thematic Trends:


Athletic vs. Non-Athletic: BWS noted that athletic shoes significantly outperformed with comp declines in the low single digits compared to low double-digits for non-athletic shoes.             


Women’s vs. Men’s: Women’s and women’s junior business showing early signs of life at BWS and DSW (sandals) while Men’s remains soft.             


Private Label vs. Branded: with private label accounting for half of the BWS’s 21% decline in wholesale, branded shoes continue to outperform. Management also noted BOGO sales more brand centric than price.


BOGO vs. Single Pair Promotions:  After disappointing promotions on single pairs, BWS transitioned to BOGO promotions driving traffic higher towards end of Q2.


Lateral Call Outs:


ZQK (+): DC shoes remains ‘very healthy’ at BWS consistent with recent trends in skate.

PSS (+): Saucony key driver in running, which is leading outperforming athletic category at BWS.

SKX (+): women’s and women’s junior business showing early signs of life at BWS, still early.

NKE (+/-): Converse positive at BWS while consumer price sensitivity likely to impact sales of top-line styles.


Company Call Outs:


DSW: Similar to FL, has a new CEO taking over the reins at a low point in the company’s performance:

  • Compared to the last call in which MacDonald highlighted 10 opportunities for improvement, with 120 days under his belt, the new CEO appears to be much more focused. Initiatives that will drive assortments, value, and improve the shopping experience in the 2H are the primary focus, anything else has been pushed out until 2010.
  • Raising guidance while investing in growth initiatives such as IT projects, BTS marketing/advertising spend, and new store growth suggests a level of flexibility in case trends deteriorate.
  • DSW is showing greater discipline in expanding its store base despite greater availability of real estate. While mgmt suggests growth in 2010 will be similar to 2009, we would expect an increase given the improved productivity of newer store formats (since 2007).
  • Cash position grows to $179mm ($4/sh) providing DSW with multiple options to grow the business.


BWS: Despite a more stable cost base, uncertainty on the top-line and increased promotions limit visibility in 2H.

  • The expectation of positive earnings in Q4 could prove challenging. While management’s view is largely based on gross margin expansion from sourcing benefits, our sense is that management is discounting the potential for a heightened promotional environment by insisting that “it’s not about the price” for consumers, but instead about the brands.  
  • With inventory levels elevated due to the Eddleman consolidation and a build of athletic product ahead of BTS, margins remain at risk barring a notable pickup in comp trends despite management’s assertion that inventories will be down 3% yy by the end of Q3.
  • Nearly all of the comp decline at Famous Footwear was due to lower traffic trends, which improved in the back half of the quarter with the introduction of BOGO promotions. Given their success, we expect BOGOs to continue in order to drive comps and margin pressure to remain as a result.
  • Reduction in store base is likely to continue as a key source of savings with expectations for FY09 expense reductions of $40mm up from $30mm earlier in the year.
  • Early read from BTS markets is that they are trending positively both in sales and traffic counts after starting 2-weeks later than expected.
  • Wholesale to remain weak through 2H with new launches and brand momentum offsetting private label driving improvement in 2010 though too early to tell if there will be growth.


BWS/DSW: Industry Read Through - PSS BWS DSW Footwear Comp Table 8 26 09

BWS/DSW: Industry Read Through - PSS BWS DSW Footwear Comps 8 26 09

BWS/DSW: Industry Read Through - PSS BWS DSW Footwear Comps 2Yr 8 26 09


I have recently completed a black book on SBUX.


At Research Edge, black books provide an in-depth look at our strongest fundamental ideas.  I have recently completed a black book on SBUX.  My thesis on SBUX has not changed, but this black book looks at the company from both a fundamental and macro (Keith McCullough) perspective.  Please email me if you would like a copy.


SBUX – BLACK BOOK - sbuxbb


Corn futures have been in sharp decline in recent sessions as lower demand has been amplified by improving USDA crop reports for this harvest. September Contracts have been below 3.20 in today’s session –down 21% YTD.




This price action reflects a converging set of factors:


CORN SUPPLY - The USDA recently updated its crop forecast and is now calling for a near-record U.S. corn harvest this fall.  This is happening at a time when the global economy and other factors have reduced the need for corn, creating a potential supply imbalance.  The USDA forecasts the corn crop will be 12.8 billion bushels, just slightly lower than the 2007 record crop of 13 billion bushels.  The large crop is projected in a year when the number of acres planted is down: 6.5 million fewer acres in the U.S. than in 2007. This year's crop continues to benefit from improved seeds and an ideal growing season for much of the Corn Belt.

CORN DEMAND - In 2009, corn exports for this year's first six months were down 40%.  While the BURNING BUCK could help to boost the export picture, uncertainty prevails.  Gas prices have started to move higher, and thus one could expect the ethanol producers to see increased need for corn, but I’m not convinced.  The economics of ethanol never made sense, and there is less capital chasing the business; as a result, we are unlikely to see a repeat of 2007.  Approximately half of the corn produced in the U.S. is used for animal feed.  Due to last year’s spike in corn prices and the slowing economy, there are fewer animals out there to feed, so the need for corn is less.





ADM and BG grow corn and as such are hurt from lower corn prices as their crops command lower prices on the market.

MTC and D produce corn seed and they stand to feel the pinch if farmers buy less corn seed.  Additionally, improved seeds allow farmers to get bigger yields per acre, suggesting the need to buy fewer seeds.


POT and MOS may see less business from farmers if they use less fertilizer on their crops.

Consumer staple companies will benefit.  Food, Beverage and the meat processing industry will benefit from lower ingredient costs.  The Restaurant industry will continue to be the beneficiary of benign food cost trends.     



Howard Penney

Managing Director

Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.