October 26, 2009





Less than 30 minutes after winning the pennant in game six of the ALCS, DKS sent out an email offering freshly-printed American League Champions gear to New York Yankee fans [and disappointed Yankee-haters alike].  If we factor in the 20 minutes of lead-time needed for a message to get through a mass marketing platform, then we’re looking at a sub 10 min response time from the end of the game for DKS marketing team. Not bad at all. Like it or not, the Yankees being in the World Series is a positive for DKS – if not the whole sports retail space. We’re already seeing elevated levels of NFL Jersey sales, which has been propping numbers in recent weeks to trends not seen in over 3 years. Now tack on what is perhaps the most marketable team in American sports making a run at the championship for the first time in 6 years, and it adds natural momentum to the space. VFC will likely hit on this later on their call, as its Majestic subsidiary owns the right to sell replica Jerseys and authentic MLB product. Unfortunately, it’s  only 3% of sales. The better bet here is the retailers – especially DKS, HIBB and to a lesser extent FINL.






Some Notable Call Outs


  • According to the latest E-Tailing Group survey, 55% of frequent web shoppers plan to shop online, up from 49% last year. Overall holiday spending share for e-commerce is forecast to be 26%, up from 21% this year. 91% of respondents cited free shipping as an important factor to shopping online while 81% cited free returns. We know we’re repetitive, but it’s fair to say the free shipping wars are likely to be a big factor this holiday.


  • While the average price for gasoline is still 12 cents below last year, the last two weeks marked a substantial increase in average prices at the pump. The two-week rise of 18 cents is the largest gasoline price increase since early August. Historically, the Fall season has typically showed a seasonal decrease in prices at the pump.


  • In an effort to spur growth in the very profitable gift card business, there are some signs that retailers are selling the pre-paid cards at a discount. While this is just another creative form of promotion, it is still likely to be a more profitable proposition than outright discounting of merchandise. Remember, that while it may take a while for the accounting to kick in and allow a retailer to drop unused gift card reserves to the bottom line, eventually the “breakage” is realized.



MORNING NEWS Breaks Dot-Com Record as Profit Beats - Inc., cited a decade ago as an example of an overvalued dot-com stock, rose to a record in Nasdaq trading today after third-quarter earnings trounced analysts’ estimates. The world’s largest online retailer climbed $25.04, or 27 percent, to $118.49, a day after reporting a 69 percent jump in profit and a 28 percent gain in revenue. The shares have more than doubled this year. <>


-Adidas Will Get Record Soccer Sales From World Cup, CEO Says - Adidas AG will get record sales from its soccer business next year, boosted by the World Cup, Chief Executive Officer Herbert Hainer said in an interview. The world’s second-largest sporting equipment maker will make the jerseys of as many as 12 teams participating in the South African-hosted event, up from 8 squads in the 2006 tournament in Germany, Hainer said Oct. 23 at the Global Sport Summit in London. “In 2010 with the help of the World Cup we will break a new record in terms of sales for our football business which will be bigger than 2008,” Hainer said. “We will definitely hit the new record.” <>


-Jordan’s Son Refuses to Wear Adidas Shoes - Michael Jordan’s son Marcus, a freshman guard at Central Florida, is refusing to wear shoes made by Adidas, which has a six-year, $3 million contract with the university for all of its sports. He said he would wear only his father’s Nike Air Jordans. The university said it was working with Adidas “in determining how this unique set of circumstances will work for both parties.” <>


-Rite Aid Sells Debt as Fed Policy Lowers Credit Costs - Rite Aid Corp., the third-largest U.S. drugstore chain, and satellite-communications provider ViaSat Inc. led a 19.2 percent rise in high-yield, high-risk bond sales this week as borrowing costs fell to the lowest since January 2008 on investor optimism that defaults have peaked. Rite Aid offered $270 million of bonds as part of a $1.57 billion refinancing, and ViaSat sold $275 million to fund a purchase, according to data compiled by Bloomberg. High-yield sales rose for the third straight week as issuers sold at least $5.2 billion of debt, compared with $4.4 billion last week. <>


-Olsens to Launch Junior Brand for Penney’s - Mary-Kate and Ashley Olsen are expanding their fashion reach. The sisters, entertainers and marketers almost since their infancy who last week became members of the Council of Fashion Designers of America, have signed a deal with J.C. Penney Co. Inc. to launch Olsenboye, a junior brand that will be exclusive to the chain. The collection will have a major rollout, set for 600 Penney’s stores in February. <>


-Apparel recall widens; more deaths reported - 300,000 items are recalled due to burn hazard; 9 deaths in total. The U.S. Consumer Product Safety Commission and Blair LLC, of Warren, Pa., are expanding Blair’s voluntary recall of women’s full length chenille robes to include additional chenille robes and three other chenille products all manufactured by A-One Textile & Towel. CPSC and Blair also are re-announcing the earlier recall of women’s robes. In April 2009, Blair recalled 162,000 chenille robes after it learned of three robes catching on fire, including one report of second degree burns. Blair then received several reports of deaths allegedly due to robes catching fire. <>


-Escada Bidding Nears End - Escada’s search for a buyer is nearing the final phase, with unbinding offers from six interested parties now on the table and binding offers from these and possibly a seventh to be submitted next week. A signed agreement is expected in the first week of November, a source close to the proceedings said. Those bidding, the source said, involve more family groups than the typical private equity and investment firms, though some of the latter are in the running. He declined to be more specific. <>


-Delta Apparel Net Climbs to $2.6M -Delta Apparel Inc. soared 24.2% Friday after it saw its first-quarter profits more than triple on improved sales and margins. In the three months ended Sept. 26, the Greenville, S.C.-based vendor recorded net income of $2.6 million, or 30 cents a diluted share. The results were an improvement from a year ago, when first-quarter earnings totaled $674,000, or 8 cents a share. <>


-For CVS customers, just what the doctor ordered: refills on the go - CVS/pharmacy believes it has just what the doctor ordered for customers on the move— Mobile, a mobile commerce web site. The site,, provides customers a secure, on-the-go pharmacy resource to find store locations and refill, transfer and manage prescriptions. <>






  • Diane Irvine, CEO, sold 1,000 shares ($65k) after exercising options to buy 1,000 shares.
  • Dwight Gaston, Senior VP, sold 2,000 shares ($130k) after exercising options to buy 2,000 shares.


COH: Michael Devine, EVP, CFO, sold 16,000 shares ($546k).


LULU: Christine Day, CEO, purchased 3,000 shares ($75k).


NKE: Phillip Knight, Director, sold 531,000 shares ($34.5mm).


SWY: Oder Kenneth, Director, purchased 10,000 shares ($222k).




As we often say at Research Edge, prices don’t lie. The market is always telling us something. Here are some names that are showing outside movements relative to the market, peers, and volume trends…


  • Internet and catalogue retailers outperformed the market by a mile, literally, due to gains from AMZN better than expected earnings.  Internet and catalogue retailers was the only positive sector Friday, but household durables, sporting goods, and food and staples retailers performed better than the average.  Leisure equipment and products, family footwear, and auto retailers underperformed. 
  • Of the 42 stocks that were positive in retail, only 8 made gains on low volume, meaning that the gainers on Friday earned their positive move.
  • The four biggest outperformers of Friday were AMZN, DLA, RCKY, and NFLX which were up 27%, 24%, 19%, and 11%.  The top four stocks were positive across all durations with positive volume.
  • NDN deserves a positive callout due to its turnaround on Friday.  NDN was one of the top 5 worst performing stocks last week on every duration imaginable between 1 day and 6 months and the negative moves were confirmed by positive volume.  After preannouncing its lower than expected sales, the stock has been hit aggressively.  This will be an interesting stock to follow over the next two weeks as it nears full earnings report on the 4th of November.
  • SMRT, TUES, SSI, ACAT, HZO, and BBW were significant underperformers on large volume. 
  • BGFV took some significant losses on Friday on strong volume to flash negative for a couple of reasons.  On fundamentals, BGFV has been an outperformer with comp trends leading the sporting goods retailers.  Something is fishy here with BGFV down 7% while the sporting goods sector was an outperformer for the day.  That marks a serious divergence from the group and from the fundamental position.





Thinking Chinese

"Learn without thinking begets ignorance. Think without learning is dangerous.”
I often quote Confucius because he usually has the most impact with the least amount of words. As an amateur writer in a crack-berry country, I want to keep my word count down!
This weekend, The Economist focused on Confucius and China’s image in a 14 page special report on “China and America – The Odd Couple”. I have cited Harvard historian, Niall Ferguson, in recent weeks – he calls this “Chimerica.” Putting the “Chi” before the “merica”, capitalizing the “C”, is an important point to think about.
Some of the points of focus from The Economist were:
1.      “America is the world’s biggest debtor and China its biggest creditor”

2.       “China is building its first aircraft carrier”

3.      “Economic freedom is one value that Mr. Obama should not sacrifice on his first visit to China next month”

>Ok. So. What’s new about any of those points? Nothing.
China, or The Client as we like to call her, has $800 Billion in US Government Debt, and she doesn’t have to buy any more of it. China won’t let the Pentagon see what’s underground at her military headquarters in Beijing. And China certainly doesn’t need a lesson from Bush or Obama on what the Greenspan version of “free markets” can inspire!
All this said, it is important to recognize that the world is figuring all of this out. Like a Confucius’ quote, it’s pretty straightforward. China has economic leverage. China wants to build some form of military leverage with that economic leverage. And China’s want for a globally managed economic system that diversifies away from a US centric “free market is the best path to prosperity” (Kudlow/CNBC) view is becoming an important geopolitical consensus.
So how do you make (or not lose) money understanding this? My answer, throughout the year, has simply been this - follow the money.
As long as you understand what the US Dollar is doing, and can handicap what it could do next, your hard-earned capital will be fine. On Thursday, the US Dollar was down, and the SP500 closed up +1.1%. On Friday, the US Dollar was up, and the SP500 closed down -1.2%. No, this inverse correlation won’t last forever (the R-Square actually dropped this week to 0.79, using a 6 month duration); but for now, this continues to be the macro factor that matters most to your portfolio.
Correlations aren’t perpetual, so when does this all end? There are plenty of times in recent US history (as in the last 40 years) where the US Dollar had a positive correlation with the SP500. In fact the R-Square, using a 5-year duration, is only 0.05! Duration always matters. We know this. But do we learn without thinking?
“Think without learning is dangerous.” The Economist exemplifies this in another piece they did this weekend titled, “The Diminishing Dollar.” This was what I would call the popular, US centric consensus view, of why the US Dollar has been decimated:
“This dollar declinism is overblown. It exaggerates the scale of the slide and misunderstands its cause. Much of the recent weakness simply reverses the earlier safe-haven flight to dollars, a sign of investor optimism about riskier assets rather than their fears about America’s currency.”
There are so many Washington/Wall Street narrative fallacies embedded in that editorial view that I can’t waste your time going off on it this morning. Understanding that the words “declinism” and “misunderstands” are more metaphors for how incompetent financial journalism has become is probably the most important point. The Economist is a great magazine, but they should stick to what they do well.
The dollar isn’t “diminishing” – it’s burning. The US Dollar getting remotely close to Lehman levels is the lowest price it has ever seen – EVER is a long time. The US Dollar representing some form of “safe-haven” is a long lost hope – hope is not an investment process.
Is the Buck going to keep Burning, or has consensus made this a Bombed out Buck that’s ready to recover? Unfortunately, in the immediate term, only Ben Bernanke can answer that. Will he move to where marked-to-market prices have in recent months? Or will he pander to the most politicized wind that the American citizenry has ever realized as a rate of return for her Savings Account?
November 4th is the Game Time date. Until then, rather than depending on someone’s said “inside information” about what he is going to do with the FOMC’s “exceptional” and “extended” political language, just let the real-time price of the US Dollar tell you. The Burning Buck will lead the way.
So far this morning, the US Dollar is trading down pre-US stock market open. Prices of US futures are indicated higher, as a result. Now is the time to study the histories of global reserve currencies. Whether they be gold bars, pounds, or dollars, the reality is that when it comes to Americans understanding currencies, “more than half of the respondents said they had learned ‘not too much’ or ‘nothing at all’ about financial issues” (Niall Ferguson, Ascent of Money, page 13). Thinking, “without learning is dangerous.”
My immediate term support and resistance levels for the SP500 are now 1072 and 1103, respectively.
Best of luck out there this week,



EWT – iShares Taiwan
With the introduction of “Panda Diplomacy” Taiwan has found itself growing closer to mainland China. Although the politics remain awkward, the business opportunities are massive and the private sector, now almost fully emerged from state dominance, has rushed to both service “the client” and to make capital investments there.  With an export industry base heavily weighted towards technology and communications equipment, Taiwanese companies are in the right place at the right time to catch the wave of increased consumer spending spurred by Beijing’s massive stimulus package.

XLU – SPDR Utilities We bought low beta Utilities on discount (down 1%) on 10/20. Bullish formation for XLU across durations.

FXC – CurrencyShares Canadian Dollar We bought the Canadian Dollar on a big pullback on 10/20. The currency ETF traded down -2%, but the TRADE and TREND lines are holding up next to Daryl Jones’ recent note on the Canadian economy.

EWG – iShares Germany Chancellor Angela Merkel won reelection with her pro-business coalition partners the Free Democrats. We expect to see continued leadership from her team with a focus on economic growth, including tax cuts. We believe that Germany’s powerful manufacturing capacity remains a primary structural advantage; with fundamentals improving in a low CPI/interest rate environment, we expect slow but steady economic improvement from Europe’s largest economy.

CAF – Morgan Stanley China Fund
A closed-end fund providing exposure to the Shanghai A share market, we use CAF tactically to ride the more volatile domestic equity market instead of the shares listed in Hong Kong. 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. Although this process will inevitably come at a steep cost, we still see this as the best catalyst for economic growth globally and are long going into the celebration of the 60th Anniversary of the People’s Republic.

GLD – SPDR Gold We bought back our long standing bullish position on gold on a down day on 9/14 with the threat of US centric stagflation heightening.   

XLV – SPDR Healthcare We’re finally getting the correction we’ve been calling for in Healthcare. We like defensible growth with an M&A tailwind. Our Healthcare sector head Tom Tobin remains bullish on fading the “public plan” at a price.

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.

XLY – SPDR Consumer Discretionary Consumer Discretionary has rallied from the freak-out “short everything consumer” lows, prompting a short on 10/22 as a hedge for a TRADE.


UUP – PowerShares US Dollar We re-shorted the US Dollar on strength on 10/20. It remains broken across all 3 investment durations and there is no government plan to support it.

FXB – CurrencyShares British Pound Sterling The Pound is the only major currency that looks remotely as precarious as the US Dollar. We shorted the Pound into strength on 10/16.

XLP – SPDR Consumer Staples Strong day for Consumer Staples on 10/16, prompting a short versus our low beta long position in Utilities (XLU).

EWJ – iShares Japan While a sweeping victory for the Democratic Party of Japan has ended over 50 years of rule by the LDP bringing some hope to voters; the new leadership  appears, if anything, to have a less developed recovery plan than their predecessors. 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.


Trends decelerated slightly in September.


Malcolm Knapp reported that September casual dining same-store sales declined 6.1% with traffic down 5.5%.  These reported numbers represent a slight deceleration in trends from August. 


We don’t yet have too much visibility on how October is faring for the casual dining restaurants, but we learned from both McDonald’s and Sonic that trends remain soft quarter-to-date with Sonic citing weather as a problem.  PFCB did say that trends had improved slightly from 3Q but that average weekly sales at the Bistro were still running down 6.5%.  Based on these few comments, I am not expecting much improvement in October.


Comparable guest count growth results in September again came in better than same-store sales growth for the fifth consecutive month, which points to negative average check growth.  Restaurant operators are doing everything they can to drive traffic. 


This weeks we have DIN, BWLD, PEET, PNRA, CEC, RUTH and THI reporting earnings. 


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FASB 166 & 167 go into effect on January 2, 2010.  Income will increase but cash flow will not change.  Here's why



Under the current accounting rules, companies underwrite timeshare loans and collect interest on those loans at an average rate of 13-14%. Periodically, around 2x per year, that company will sell bonds that are backed by those loans. Typically some sort of over-collateralization is required, meaning that if I have $200MM of loans, I can only sell $150MM of bonds; the difference is the "over-collateralization" amount. The over-colleratization pool is meant to absorb any losses that occur in the loan pool that backs the bonds.  The bonds that are backed by the timeshare loans pay a much lower interest rate than the rate paid by the loan holder.  For example, MAR's on Oct 21st pays interest of 4.809%.  The underwriter of the loans and residual holder (i.e. MAR/ HOT), book a gain that consists of the present value of the spread between what they collect on the loans (14%) and what they pay the bond holders (let's say 4.809%) over the duration of the loan pool (2.5 - 3 years on average).  Once the securitization is done, the loans come off the balance sheet (they're typically in receivables), MAR/HOT books a gain on their residual interest, and they receive the cash proceeds from the bond sale.


Under the new accounting rules, those receivables (loans) come back on the books, as do the bonds that are backed by those receivables and non-recourse to MAR/HOT.  MAR & HOT will no longer book a gain that is the PV of the interest spread but rather recognize interest they collect on the loan pools and report interest expense associated with what they pay to the bond holders.  So actually, income statement accounting will more accurately reflect cash flow on timeshare loans.  This is why they will recognize more earnings from timeshare in 2010 versus booking gains and then amortizing those gains over time. The the securitized receivables will come back on the balance sheet, so there will be new line item titled as such.  The securitized debt will also come back on the balance sheet but it will not effect covenant calculations or the way ratings agencies treat this debt - since it remains non-recourse. There will also be a small increase in shareholder's equity, since the receivables exceed the securitized debt amount (due to the over-collateralization issue we already discussed).


We like the new accounting rules since earnings better reflect cash flow and big gains on timeshare note sales are eliminated.  Hope this helps.




PSS: WMT Price Gap Widening

The WMT price point gap is the key call-out of our ongoing survey of like-for-like product in the value-zone. PSS seems to be more closely aligning its competitive price positioning with TGT, KSS and JCP.



Interesting change this week in our survey of price points on like-for-like product at a select group of low-price/discount footwear retailers.  We track this specifically as it relates to Payless, as its strategy is to sell at a 20-30% discount to its competition. That’s when it has historically realized optimum traffic and conversion.  The one thing that did not change is something that is really worth calling out, which is the consistency in price movements between Payless, Target and JC Penney. As the chart below suggests, PSS sells consistently at a discount to Kohl’s, but in a more volatile range. The big notable, however, is Wal*Mart is tracking at a 32% discount to PSS. This is starting to turn into a head-scratcher for me. Over time, I want to see PSS’ price gap with WMT widen and move closer to the TGTs, KSSs, and JCPs of the world, but that won’t happen overnight. But such material fluctuations so quickly require that I at least stay on guard to ensure that I’m not missing something. It helps that we’re so early in the season. If it was December and we saw this price gap, or I did not have the confidence that Rubel and team are proactively managing this price strategy, then I’d be raising a yellow flag about now. But I'm not. Numbers still need to come up.


And yes, I completely realize that our survey can’t adequately forecast the comp in such a complex business with thousands of stores and hundreds of thousands of SKUs. But not only has this been a directionally accurate tool for us, but most importantly it helps us make sure we’re asking the right questions.


Darius Dale and Brian McGough


PSS: WMT Price Gap Widening - 10 25 2009 8 50 30 PM

JNY: The Quantamental Shark Line

JNY: Bullish Formation


Oh the irony that Keith mentions 'The Shark Line' while I sit here watching Jaws on cable with my kids (while going through earnings models). I gave my take on JNY. Here's his...


TRADE = 18.35, so pretty close here – the catalyst will decide its fate

TREND = 15.22, a lot lower… so this one isn’t for the faint of heart as we are testing the TRADE shark line

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