Sorry - No Crash Again Today: SP500 Levels, Refreshed...

Crash callers were all over my screens at 6AM… “did you see China”… “did you see China”…


Yep – I was up for a few hours at that point, and guess what… a lot of people see China. Lots of people live there.


If you’re looking for negatives, I can assure you that you will find them. If you are looking for positives for anything priced in US Dollars, just watch the Buck Burn. As the US Dollar reversed today, so did all of the hope of the bears that their dreams of calling a crash anytime soon would come true.


At my 999 immediate term TRADE level of resistance, the SP500 is only -1.2% off of her YTD high. It’s not a crash; it’s called a correction. I’m a better buyer lower. If you show me green bananas, I’ll sell them short to you at 999. That said, a close above 999 puts higher-highs back in play.



Keith R. McCullough
Chief Executive Officer


Sorry - No Crash Again Today: SP500 Levels, Refreshed...  - 819


Charting China...

Having been bulls on China since December of 2008, and having published a “China Black Book” recently, you know we have an opinion on the monkeys calling China a “bear market” today. Stock market drops of -19.8% since August 4th matter, but so do year-to-date gains of +53% that include a -19.8% drop!


As a point of accountability, in Andrew Barber’s “China Black Book” there was a tactical overview section called “The Path Ahead.” It was there that Barber put some responsibility behind our recommendation, reminding our clients that the big YTD move in China was behind us.


Barber wrote on July 21, 2009:


“We believe that after this extended rally in Chinese equities, the “easy money” is now behind us and that at present the Shanghai composite has the potential to correct to its immediate term TRADE line of support of 3020 (a 7.5% correction from its peak) without any significant fundamental change in the underlying data. Price momentum carries risk. If there is a sustained breakdown of the 3020 level, the intermediate term TREND line of support for the SSEC is 2713 (a 17% correction from the peak) and that would be a critical risk management level in our model. Furthermore, the likelihood of a pullback of this magnitude occurring has increased exponentially as more “hot money” has surged into the market.” 


Today, of course is August 19th, and one month later we are looking at the manic media freaking out about China being “over” at a closing price of 2,785 on the Shanghai Composite Exchange. Again, Barber’s TREND line of support is 2,713.


Could we, should we, will we, see a breakdown of 2,713? We will have to see about that wont we. For now, all we saw in China that was “over” was a bull market that was OVERBOUGHT.


In the chart below, my man AB and his crystal ball shows the long term TAIL line of support for the SSEC at 2,364. We suggest you use the manic media as your backboard to generate alpha in global macro. We remain “bullish of” Chinese equities, at a price.


Our long term China piece can be found at the link below.




Keith R. McCullough
Chief Executive Officer


Charting China...  - a1


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Dick’s: Same Store Sales Trend Correlation with Sports Apparel and Footwear Data

As many of you know, we pay careful attention to the weekly footwear and sports apparel trends from two data service providers (Sportscan and NPD).  We recognize that weekly data can be both a blessing and a curse.  On one hand, we see trends develop and change with a great degree of frequency, while on the other hand we see the volatility that exists in the “real world” of retailing.  Nonetheless, we are often asked the question about the relevancy of the data and if there is any conclusion to be drawn for the publicly traded athletic footwear retailers and manufacturers.


As shown in the chart below, the footwear and apparel data suggests that the industry backdrop was less favorable in Q2 for DKS and sales results may not substantially exceed expectations (as we saw last quarter).   At the end of 2008, DKS’ management guided Q109 comps to a range of -9% to -12% and ultimately reported a -6% result.  This prompted a change in quarterly and annual guidance from a range of -8% to -12%  to a new range of -6% to -9% (the Street is currently expecting a -6.7% comp).  Yes the backdrop is getting better on the margin in recent weeks, but the to-be-reported quarter was marked by a sequential deceleration following a post-holiday rebound.


A little more detail on our analysis.  It is important to note that Dick’s does not report their weekly sales to the two data providers that we use.  However, given geographic, product, and pricing trends represented in the sample set, there is value in the comparison.  The bottom line is, quarterly sports apparel and athletic footwear trends have a strong historical correlation with DKS’ reported same store sales.  Based on our analysis, the correlation between a weighted average of apparel/footwear trends and DKS’ historical same store sales is 80%.  To arrive at this conclusion, we aggregated our weekly data sets in order to properly align DKS’ fiscal quarters with the corresponding Sportscan/NPD information. 


Ultimately, we can’t claim 100% accuracy in the predictability of using the weekly trends to forecast DKS same store sales for any given quarter.  However, marrying the data with historical sales results shows directional changes and inflection points with a high degree of accuracy.  Based on Sportscan and NPD alone, we see that Q209 trended down measurably from Q109.  Again, this suggests 2Q results could be weaker than the slight deceleration expected by the Street.  On the other hand since June, it appears that sporting apparel sales are holding even, while athletic footwear is showing a slight uptick.  Consistent with many other retailers and recent weekly data, we expect commentary on back to school to be incrementally positive.


Dick’s: Same Store Sales Trend Correlation with Sports Apparel and Footwear Data - 1


Note:  DKS quarterly comp trends correlate most with a blended footwear-apparel data set.  The blend is comprised of a two-thirds weighting in sports apparel from Sportscan and one-third footwear data from NPD.  The blended data set is designed to best represent Dick’s product mix in these categories, with the obvious limitation of not representing any hard goods in the analysis (hard goods represent 54% of DKS total sales).


Weekly Sports Apparel Update


Sports Apparel posted a positive week in the thick of the back to school season, with strength in the Full Line Sporting Goods (increased 12.1%) and Family Footwear channels (up 29.2%).  All channels experienced a sequential improvement in total sales growth.  Average selling prices remained relatively stable while there were some signs of sequential deceleration in  ASP growth.  In general, the environment does not appear to be overly promotional or aggressive.  Sport Retailers have been easing into the 2009 BTS season with incrementally slower ASP growth for the last 5 weeks, culminating with essentially flat ASP’s this week.  Geographically, the South Central and South Atlantic showed the biggest change in sales trends, helping to drive the total sports apparel category back into positive territory.  New England and the Mid-Atlantic (both later back to school markets) showed the weakest trends for the period.


Dick’s: Same Store Sales Trend Correlation with Sports Apparel and Footwear Data - 2


Dick’s: Same Store Sales Trend Correlation with Sports Apparel and Footwear Data - 3


Dick’s: Same Store Sales Trend Correlation with Sports Apparel and Footwear Data - 4




PFCB - Diversification

Earlier this week, PFCB announced that it has entered into an exclusive licensing agreement with Unilever to develop a line of frozen Asian entrées for the U.S. under the P.F. Chang’s brand.  The terms of the agreement were not disclosed and the launch date of the new products has not yet been set. 


This new agreement sounds familiar to the trademark licensing agreement California Pizza Kitchen has with Kraft.  CPKI partnered with Kraft in 1997 to distribute a line of CPK premium frozen pizzas in the U.S. and Canada.  Kraft distributes CPKI’s frozen products, which now include flatbread melts, in about 20,000 select grocers in the U.S.   CPKI collects royalties from Kraft, based on a percentage of Kraft’s net sales of the frozen products.  This licensing agreement has provided CPKI with a high growth and highly profitable royalty stream, contributing $6.6 million to the company’s 2008 sales, up nearly 40% from 2007.  Most importantly, Kraft is required to spend a percentage of net sales on advertising and promotion of California Pizza Kitchen’s licensed products, which acts an extremely effective marketing platform for CPKI.


We don’t know yet how PFCB's agreement is set up.  We don’t know what percentage of sales PFCB will earn, the price point of the new frozen entrees or whether Unilever will provide the marketing dollars for the new products.  I would suspect that PFCB has watched CPKI’s success with Kraft and is working to create its own high-return royalty stream.


PFCB - Diversification - CPKI Kraft royalties

US Housing: Reflation's Rotation

Tightening supply and ZERO rates help stoke the inflation fire for Q4…


July housing starts fell to an annualized rate of 581,000 units, from an upwardly revised 587,000 units in June and below the median expectation of 600,000 units; the July decline was due to a 13.3% drop in multi-family homes. 

(continued discussion post charts)


US Housing: Reflation's Rotation - a1


THE GOOD NEWS - The all important single family housing starts rose 1.7% in July to 490,000 units. The 14.0% gain in the Northeast was the driving force behind the growth in single family starts. 


THE BAD NEWS – There is a housing supply imbalance building.  The chart below provides a clear picture of the true supply of housing in the United States – the number of houses started minus the number of houses completed.


US Housing: Reflation's Rotation - a2


Since 1979 there are three pronounced periods where we see a real reduction in the true supply of new homes being built; 1, 1 and the current housing crisis.  While there are numerous nuances to each time period, each one was followed by a significant increase in inflation.  Intuitively it makes sense that during recessionary periods supply tightening will occur when producers overestimate demand declines, and that the resulting imbalance can create inflationary pressure (particularly if combined with low rates). In the chart below, we have mapped out this ratio against PPI. Note that historically; cycles of declining Starts to Completions have troughed at the same time that inflation has peaked prior to the current cycle.


US Housing: Reflation's Rotation - a3


The reality is that the decline in home values, low interest rates, government incentives and the increase in household formations WILL create real demand for housing units.  As a result, there is a disconnect between the perceived demand that people are not buying houses right now and the real demand, creating a “real” decline in housing supply.  At some point this will lead to future issues – INFLATION.


This is not the sole impact of housing on reflation: after all it is the substantial decline in home prices that created a tidal wave of problems for the economy and our financial system.  This has allowed the FED to keep interest rates artificially low for an extended period and helped the Government to go on a debt fueled  spending spree, killing the value of our currency.  The currency crisis will ultimately lead to imported inflation. We’ve labeled this transition period, Reflation’s Rotation (Q3 prices moving from y/y deflation to Q4 y/y inflation).


THE CONSEQUENCES – We are not just looking for another data point that will help justify our Q4 “reflation rotation” theme, but things are looking more ominous for inflation to return in Q4. 


Howard Penney

Managing Director


Andrew barber


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