He Who Panders To The Political Bubble

Today’s FOMC decision revealed nothing new. The Bubble in US Politics remains, and He Who Panders To The Political Bubble (Bernanke) will most likely retain his job as a result of falling in line with Washington’s revisionist consensus.


What will be most interesting from here is what Bernanke does post this immediate term job retention exercise. After he is confirmed by the Senate, he will have to face that stubborn little critter called the data.


There was a time when the US Federal Reserve claimed to be “data dependent.” Just because we have a Bubble in US Politics does not mean that the data ceases to exist. The most recent US inflation reports for the month of December were much higher than Bernanke’s forecasts (CPI and PPI came in at +2.7% and +4.4% year-over-year inflation, respectively).


We think the inflation data continues to rise sequentially until at least August. For He Who Panders To The Political Bubble, our advice in addressing this inflationary data in the coming months would be in line with the picture we have attached below. Hope and pray that everyone in Washington is as willfully blind to the data as you have become.


All the while, remember, hope is not an investment process.



He Who Panders To The Political Bubble - bern

Greek CDS: Is 300 Bps a Prescription for Pain?

We’ve had our EYE on the run-up of Greece CDS prices over the last weeks. As the chart below depicts, it’s interesting to note that once CDS prices of Bear Stearns and Lehman Brothers broke above the 300 bps level, the end came shortly thereafter. While we’re not explicitly calling for a Greek sovereign default nor a correlation between CDS prices and sovereign default, risk in Greece is heightening. Could the 300 line also govern a Greek breakout? History has a way of repeating itself. Stay tuned.


Matthew Hedrick



Greek CDS: Is 300 Bps a Prescription for Pain? - GR

DKS: Sandbag Confirmed

This morning’s preannouncement out of DKS reflects comp store sales up +2% from prior sandbagged guidance of down 6%-4%, and earnings north of $0.54 vs. the prior range of $0.41-$0.46. Let’s not mistake ‘a good quarter’ for ‘beating low expectations.’ With consensus at $0.49 already discounting what appeared to be overly conservative guidance, and the buyside whisper in the $0.50s, we’re not surprised in the lack of action in the stock today.


A few key points from the preannouncement include:

  • SSS outperformance began in the last week of November and continued through the holidays
  • Better than expected comp across all major categories
  • F09 full year comp includes Golf Galaxy, F08 doesn’t (note that Callaway last night noted that the golf category finally past its bottom)
  • But all that said, the 1 and 2-year comp trends at DKS are right in-line with peers, and in fact, represent a roll-over from what we saw in 3Q


Given the update from DKS, let’s take a look at the natural read through considerations for HIBB and FL. It’s important to note that ~55% of DKS revenue is generated by hardlines with only ~30% from apparel and ~15% footwear. On the other hand, Hibbett’s sales mix is the exact opposite (athletic footwear, apparel, equipment). A few points to note for HIBB in the quarter include Alabama’s national football title, which the company mentioned could add “a few” million to sales (1-2pts in yy rev growth) as well as the pickup in athletic footwear. Highlighted as the most challenging category on its call in November, footwear trends have been improving on the margin since. With the outlook for HIBB’s 4Q comps at -2% to +2%, there appears to be modest upside to this range and earnings.


Additionally, with FL’s mix predominantly driven by athletic footwear there is arguably less to glean from this morning’s news other than what we have already highlighted in recent industry trends. Consistent with our view, the focus on FL’s quarter is going to be less about headline results than Hick’s strategic plan for the business (for more detail see our 12/17 post “FL: The Footlocker Wish List”).


The bottom line here is that this is not really a big deal. For many reasons we’ve highlighted of late, we think that there will be a meaningful turn in the athletic cycle in 2010. THAT’s when we think we’ll see a meaningful acceleration out of Nike – which is the best play here. UA also makes the cut, as does FL and likely HIBB.


DKS: Sandbag Confirmed - Sporting Goods CompTable 1 10


DKS: Sandbag Confirmed - Sporting Goods CompChart 1 10



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Over the last two days we have been making the case that a housing bottom is forming, but it’s a case of “Government stimulus vs. Gravity.”  Today, gravity is gaining momentum as government stimulus may be waning.


Sales of new homes in the U.S. dropped in December; the number of homes purchased declined 7.6% to an annual pace of 342,000, the lowest sales pace since March 2009.  For all of 2009, sales dropped 23% to 374,000, the lowest level since records began in 1963.


Part of our bullish call on housing in 1Q09 was based on the fact that the government was coming to the rescue of the real estate industry by providing enormous support to consumers wanting to buy a new home.  Not surprising, as the sales of news home began to take off in 1H09 housing prices (as measured by the Case-Shiller home price index) began to improve sequentially; though still declining year-over-year.


Yesterday’s Case-Shiller data, which is a lagging data point, showed that sequential home price momentum is starting to slow.  On top of this, we have now seen new home sales decline 9.3% in November and 7.6% in December.   It would only make sense that price support will wane further. 


As we head into 2Q10 we are starting to get incrementally concerned as we will be lapping the not as easy comparisons from late 1Q09/2Q09, particularly as gravity takes over from government stimulus.  This concern is reflected in our portfolio; we are short Toll Brothers (TOL).



Howard Penney

Managing Director


HOUSING BOTTOM FALLING? - housing v prices

Oil is Broken

We wanted to highlight a point from our morning call today, Oil is broken from both a trade and trend perspective.  As we highlight below, the next big line of resistance in the sand is the $73 level.  From a fundamental perspective, the action in Oil in the year to date is supportive of two of our Q1 Themes, Buck Breakout and Chinese Ox in a Box.


As we discussed ad nausea last year, the direction of the price of the U.S. dollar is critical for determining the price of those commodities priced in dollars.  In the year to date, the U.S. Dollar Index is up ~0.74% and, not surprisingly, Oil is down ~-6.61%.  While last year the inverse correlation was more like 4.5:1, early on this year it seems like that factor is accelerating.  One driver of this is likely the slowdown occurring sequentially in China.


As we wrote in our September 2009 Black Book on Oil, Chinese demand for oil, and demand for oil in China is a derivative of economic growth in China, is the single largest global driver for demand.  As we wrote then:


“China has been the primary driver of global oil demand over the past fifteen years. In 1994, the Chinese used roughly 3 million barrels of oil per day and fifteen years later the country uses north of 8 million barrels of oil per day.


This dramatic growth in aggregate oil consumption should be no surprise given the base from which the Chinese started. At a population base that was estimated at ~1.3 billion in 2008 versus the United States at ~304 million, the potential growth in per capita energy demand is fairly obvious. China has more than 4x the population of the United States, but uses less than half the energy of the United States.”


The decline in the price of oil is a leading indicator for what we will see in terms of economic growth from China in the coming quarter.


Domestically, supply of crude oil continues to be above its 5-year trend.  According to the DOE’s report last week, there are currently 23.8 days of supply of oil, which is ~3% above where supply was last year at this time.  If we compare price year-over-year from the release of this supply data point, so January 20th of this year versus January 20th of last year, the price of oil is up more than 100% . . .despite increasing inventories.


Until further notice, the price of Oil is broken.


Daryl Jones

Managing Director


Oil is Broken - oildj



In Timmy, Do You Trust?

For the sake of my arthritic hockey knuckles and their likely margin for transcription error, here is a paraphrasing of some of Timmy’s opening comments. Predictably, he went with the fear-factor strategy. This is consistent with Investment Banking Inc’s self-compensating view that “we didn’t see it coming” and “we had to purge the citizenry’s savings or we’d all be greatly depressed.”




‘the consequences would have been catastrophic…’


‘our actions cost us far less than the alternative…’


‘we were threatened like no time since the great depression…’


‘Your children, your security…’


‘AIG posed a threat much greater than Lehman…’


‘it stretched across the globe…’



This is a conflicted and compromised view. In Timmy, Do You Trust?  I don’t and neither does Mr. Macro Market. The market is down because the market fears this Bubble in US Politics.


The intermediate term TREND line of 1096 is broken. The next line of support is 1068.



In Timmy, Do You Trust? - geithner2


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