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A Tale of Two Commodities

Yesterday we added a long position in oil to our portfolio and gave a brief synopsis of the investment thesis in a follow-up research note.  The primary bullish factor in the longer term for oil, as we noted yesterday, is supply.  Global supply is constrained by almost any measure.  Some argue that Goldman Sachs manipulates the price (we heard this the other day), and maybe these pundits are correct, but the reality remains that there are serious supply issues globally for oil based on the current normalized demand picture.


Conversely, natural gas is exactly the opposite scenario.  The primary issue facing natural case pricing in the United States is natural gas supply.  Natural gas is primarily a local market, and therefore priced locally, with the swing factor being the increasing global supply of LNG (liquefied natural gas). 


Domestically in the United States, natural gas storage is well above the 5-year average.  In fact, as of the most recent report from the Energy Information Administration, natural gas in storage in the United States is 12 percent above the 5-year average.


Interestingly, the EIA expects natural gas consumption to increase 1.9% year-over-year in 2010.  In contrast, the current pace of production growth over the past six months has averaged 4.4%.  Needless to say, the combination of above average gas in storage with production growth outstripping projected demand, will be bearish for the price of natural gas.


LNG will also create a bearish overhang on the price of natural gas in 2010.  By some estimates, a 1% change in global liquefaction impacts global supplies by approximately 360 mmcf/d.  According to the IEA, from a mid-2009 report, LNG supply globally will increase by 50% between 2009 and 2013.  This will be a massive increase in supply, with the marginal amount being exported into the United States.


Below we’ve charted the price performance between oil and natural gas in the year-to-date, and the bifurcation is very clear.  We would expect the next couple of quarters to continue to be A Tale of Two Commodities.


Daryl G. Jones

Managing Director


A Tale of Two Commodities - Oil vs Nat Gas


Nike Outperforms During Modest Slowdown in Sports Apparel Industry

Nike Outperforms During Modest Slowdown in Sports Apparel Industry    


Sports apparel sales slowed modestly after last week’s surge. NKE stands out as a clear outperformer as the only company that grew sales on a sequential basis.



This week’s industry data reflects a modest slowdown in sports apparel with total industry sales up 3.9% vs. the 5.7% increase last week. Weakness was driven by a deceleration in the Athletic Specialty channel, which slowed from 15.8% to 10.8% while both Discount/Mass and Family retailers improved on the margin. At the same time we continue to see a divergence of ASP trends in the athletic specialty and family channels.  Both Mid-Atlantic and South-Atlantic regions had a strong week backed by warmer weather while portions of Mid-West experienced more precipitation than normal hampering sales.


Nike stands out as the clear outperformer for the week as the only company that grew sales sequentially accelerating share gains from 460 bps to 560 bps y/y driven by basketball and running.  Outdoor and outerwear categories dropped off this week and significantly dropped Columbia and TNF’s sales growth rates.


Nike Outperforms During Modest Slowdown in Sports Apparel Industry     - 1


Nike Outperforms During Modest Slowdown in Sports Apparel Industry     - 2


Nike Outperforms During Modest Slowdown in Sports Apparel Industry     - 3


Nike Outperforms During Modest Slowdown in Sports Apparel Industry     - 4


Nike Outperforms During Modest Slowdown in Sports Apparel Industry     - 5


Nike Outperforms During Modest Slowdown in Sports Apparel Industry     - Weather Maps

Inflation: Reality's Illusion

The stock market bulls cannot get into my inbox fast enough this morning. Bernanke hasn’t raised rates since 2006 and they are cheering him on to keep a Japanese status quo. My inbox is usually a contrarian indicator. A hope that Americans aren’t experiencing an accelerating rate of inflation right now remains just that – a hope.


Rather than trust the data in the calculation of headline CPI (the government has numbed it down 9x since 1996), let’s look at both the absolute level of the government’s conflicted and compromised report (relative to itself) and the components of the calculation (without weighting them to the government’s benefit).


  1. Headline CPI accelerated sequentially (month over month) from +2.1% last month to +2.3% - that, on it’s own, is inflationary
  2. The Medicare and Education components were up a lot more than the Index, moving to +3.7% and +4.9% year-over-year, respectively
  3. Owner’s Equivalent Rent (which composes 40% of the Index) was down -0.1% sequentially and completely toned down the broad inflation in the report


So, what to do with in an America where the government tells you there is no inflation when there is? Assuming you live in DC and have a full medical plan and you don’t use gas in your car, eat, or have kids who go to school, you probably call this conflicted CPI report goldilocks. That’s just plain sad and that also speaks to the high-low society that this very wealthy nation is willing to continue to perpetuate. One out of every four children in America now eats off of food stamps.


There was a day when Bernanke was, in theory, “data dependent”; but that was as silly as the ideologies that Greenspan espoused. If these people didn’t see the inflation that you can see in this chart in 2008 (on their own compromised calculation), don’t expect them not to be willfully blind to it this time around.


The divergence between the Institutional Investor Survey (a contrarian indicator) and the ABC/Washington Post consumer confidence reading this morning is striking, but it makes sense. Americans aren’t stupid. Inflation is here until the Fed tones it down by raising interest rates.



Keith R. McCullough
Chief Executive Officer


Inflation: Reality's Illusion - US CPI

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R3: Don’t Forget About Levi’s


April 14, 2010





Most equity analysts skip the Levi Strauss conference call in favor of letting their fixed income peers do the dirty work.  And while there’s no equity to trade here for one of the world’s largest apparel companies, there’s actually some interesting commentary.  There were two big takeaway’s from the company’s FQ1 results.  First, it is clear that a recovery is underway for the global denim maker.  This was evident with the company reporting positive sales trends across all three of its major geographic regions- the first time we’ve seen this in five quarters.   Secondly, Levi’s is extremely focused and dedicated to investing in its two major brands- core Levi’s and Dockers.  This year and likely next will be major investment years for marketing and in-store brand presentation.  This will directly impact SG&A and is a 100% offensive move to grow market share and resurrect Dockers.  Our immediate reaction here is to turn to VF Corp and its denim business.  Could this be the beginning of some sort of mass-market denim war?  Probably not, but we’re watching closely to see how VF Corp plans to defend its share in the wake of a meaningful and sustained step-up in marketing activity from the company’s primary competitor.


- For the first time in five quarters, all major regions of Levi’s business trended in positive territory.  Strength was driven by a continued improvement in the core business, coupled with incremental sales from recently acquired outlet stores.  Areas of weakness included Docker’s in the U.S (now stable but still down) and the company’s Signature brand at Wal-Mart.  Asia continues to benefit from expansion initiatives in China and India.  Management also noted that is saw domestic strength in its more fashion-forward jr’s categories.


- The company is pursuing a meaningful step up in advertising and in-store marketing for both its core Levi’s brand and Dockers.  While the effort is a global one, particular emphasis is centered in the domestic market.  This effort includes the rebranding of Docker’s with the “Wear the Pants” campaign as well as a meaningful step up in in-store display and fixturing efforts.


- Competitively, Levi’s is extremely focused on market share for its core brand and as such believes 2010 and perhaps 2011 will be heavy investment years to support brand building/reinforcement.  It was clear that this incremental spend should be expected to have an overall negative impact to the bottom line in the near-term, with future results coming in the form of international growth (primarily China & India) and market share growth in existing markets.


- Sourcing and transportation costs are on the rise, but the company is not seeing anything beyond what they would have expected with an overall global economic rebound.  Cotton costs were singled out as being on the rise, but were not specifically addressed as a major risk factor.


- Efforts to revitalize and re-position Dockers are off to a good start, but management was cautious on the length of time it would take to see meaningful results.  In the America’s the brand was still down for the quarter, but appears to be stabilizing.  The biggest marketing push (so far) for Docker’s will come with Father’s Day.  The efforts will include a meaningful step up in in-store presentation.


- The company continues to manage its business with shorter lead times and with lower absolute inventory levels.  Management believes its wholesale partners are very comfortable with operating on lower inventory levels on average and believes higher turns are more the norm going forward.


- Management noted that the Japanese market remains sluggish, especially in the department store channel.  Interestingly, the company also noted that the “fast fashion” trend continues to impact their business and the overall market.  This trend towards high volume, low priced denim was described as causing the market to recalibrate.   UNIQLO’s $29 denim is clearly having an impact here.


Eric Levine



R3:  Don’t Forget About Levi’s - Levi Strauss Segment Trends


R3:  Don’t Forget About Levi’s - Levi Strauss SIGMA





  • In a large effort to support sustainability and eco-friendliness, Puma announced it will be the first major athletic shoe maker to eliminate the use of traditional shoeboxes. Instead, the company is planning to ship its shoes in reusable bags, supported by an internal cardboard frame. The company estimates that the efforts will save 8,500 tons of paper, though the actual cost of the change may result in immediate savings. Other benefits of the change include water and energy savings as well as reduced transportation costs (due to lighter and more efficient packaging).


  • Levi Strauss indicated that sales of its Signature Brand (primarily sold through the discount channel) were down largely as a result of Wal-Mart’s efforts to de-emphasize non-apparel categories and to focus on lower priced brands in the men’s segment. Given that the Signature product retails for $18-$20 and represents the “best” product category for WMT, this is further confirmation that the world’s largest retailer continues to struggle with its apparel offering. Additionally, by way of eliminating higher priced, branded goods we expect that self inflicted deflation is still very much a large part of Wal-Mart’s topline challenges.


  • Contrary to conventional wisdom, online retailer Zappos.com recently indicated that the higher the return rate, the better the customer. Management claims that even with a 50% return rate for those customers that purchase the company’s highest priced products, the gross margin of the item offsets incremental (and more frequent) shipping costs. And, as result, these are the company’s best customers. While the company is known for its liberal return policy and great customer service, Zappos’ chief marketing officer went on to say, “Customer service is the new marketing”. Oddly, most retailers still don’t understand this concept.





R3:  Don’t Forget About Levi’s - Calendar





Textile and Apparel Imports Rise, Prices Remain Suppressed - Textile and apparel imports to the U.S. posted double-digit increases in February for most major suppliers, showing signs the industry could be on the road to recovery, the Commerce Department’s Office of Textiles & Apparel said Tuesday. Shipments of textiles and apparel to the U.S. rose 19.3% to 3.9 bn square meter equivalents in February compared with a year earlier. Apparel imports to the U.S. were up 15.6% to 1.8 bn SME and textile imports increased 22.6% to 2.1 bn SME. Combined shipments of textiles and apparel from China spiked 36.7% to 1.7 bn SME. <wwd.com/business-news>


R3:  Don’t Forget About Levi’s - US Apparel Import Trends


Malls Still Struggle in the West - The pain of the recession is lingering at U.S. shopping centers, and the sting is worst in the once-booming Western states of California, Arizona and Nevada. Retail vacancy rates keep rising partly because unemployment remains high at 9.7%, and also because stores are having financing difficulties. The foreclosures that ravaged residential real estate in 2008 and 2009 are likely to take a toll this year on the commercial real estate market, including retail. Hardest hit may be newer properties and mid- to lower-tier malls that don’t command marquee tenants. Mall owners lowered rents about 3.6% last year. Retail vacancies in the first quarter of this year rose to their highest level in at least 10 years, despite lower rents intended to lure tenants. Vacancies at the biggest malls increased to 8.9% in the first quarter from 8.8% in the previous three months. Vacancies at smaller neighborhood and community centers rose to 10.8%, the highest percentage since 1991. <wwd.com/business-news>


Fashion Brands Connect with a Clear Marketing Message - A fashion brand’s value is now defined by a clear point of view and a consistent marketing message among consumers trying to decide what to buy, according to a new study. The 10th annual Brand Keys Fashion Brand Index poll found labels with strong images, such as Ralph Lauren, Armani, Nike, Brooks Brothers and Levi’s, were “more important” or “much more important” to 28% of those surveyed, a 14% increase compared with last year. The survey in February of 3,750 men and 3,750 women, ages 21 to 65, from across the U.S. posted the highest increase in a decade and gives a real clear picture of what is resonating with consumers. Five years ago, fewer than 3% of U.S. apparel shoppers rated fashion brands and logos more important when deciding what to buy. Ralph Lauren is the “gold standard” of this new consumer attitude because of its long-standing and unwavering association with classic Americana.  <wwd.com/business-news>


R3:  Don’t Forget About Levi’s - Fashion Brands Table


JD Sports Beats Expectations - Sportswear and fashion retailer JD Sports Fashion predicted a fillip to sales from the soccer World Cup as it beat forecasts with a 26% jump in full year profit and hiked its final dividend 65%. After beating estimates, JD Sports is now looking forward to the lift from the World Cup (begins June 11) that should impact all of its 530 stores. JD Sports is hopeful that a successful World Cup for England (getting to semi-finals) would spark a movement towards sports and leisurewear. Revenue increased 14.8%, benefited from store closures by struggling rival JJB Sports, which came close to administration in 2009. JD Sports was also boosted by the popularity of exclusive product from external brands such as Nike and Adidas and owned brands, such as McKenzie and Carbrini. Same store sales growth has slowed from 2009 at 2.5% to 2% for the 10 weeks to April 10.

"In our field we are the trend setters rather than the trend followers," said Cowgill. <uk.reuters.com>


WMT Says Foreign Investment Will Help Tame India's Rising Inflation - Wal-Mart Stores Inc. said India’s inflation would slow by at least two percentage points should the government agree to allow an increase in foreign investment in retail.  <bloomberg.com/news>


Best Buy and Wal-Mart Gained Most of Circuit City’s Market Share - Since consumer electronics retailer Circuit City closed its doors and sold its assets to Systemax, Best Buy and Wal-Mart have taken about two-thirds of their former rival’s market share, according to a new NPD Group report. <internetretailer.com>


Nike Sues Businessman - Nike Inc. is is suing a businessman who licenses the names and images of famous dead people and the family of Hall of Fame coach Vince Lombardi.  <sportsonesource.com>


LaCrosse Footwear Expands Workboot - LaCrosse Footwear Inc. is expanding its presence in the workboot market with launches under its LaCrosse and Danner labels. The company is introducing the Extreme Tough series of boots, made for maximum protection and durability. Available for immediate delivery, the series retails for $90 to $125. Danner’s new Corvallis series of core work product with an athletic influence includes an abrasion-resistant toe and heel, speed lacing for a more secure fit, waterproof Gore-Tex lining and Danner’s proprietary Terra Force X platform for enhanced side support. Priced at $146 to $160, the line hits stores in July. <wwd.com/footwear-news>


 R3:  Don’t Forget About Levi’s - BOOT boot


Birkenstock Launches Steel-Toe Chef Shoes - Alpro by Birkenstock is giving chefs a new kitchen tool with the addition of a steel-toe version of its popular polyurethane clog. The slip-on also comes equipped with an oil-and slip-resistant outsole and can even be dishwasher cleaned in up to 149 degrees. For added comfort on the job, there’s an anatomically designed cork and latex footbed that can be washed in temperatures up to 86 degrees. Set to hit stores in July, the clog retails for $95.



 R3:  Don’t Forget About Levi’s - Birkentstock Boot



Although the S&P 500 finished slightly higher (+0.07%), the upside momentum has waned to the point where there virtually is none.   Volume improved 8% day-over-day, but the breadth continues to deteriorate.  Looking at the sector studies four sectors actually declined yesterday while the remaining three outperformed. 


There were no dominant MACRO themes yesterday and there was a lackluster start to Q1 earnings season.  Today, we get a very important reading on inflation and shortly thereafter Fed Chairman Bernanke will testify before Congress on the outlook for the US economy.  With inflation expectations accelerating in March from February, will the FED Chairman lay the groundwork for slightly more hawkish guidance language at the next FOMC meeting?


Yesterday, the National Federation of Independent Business Optimism Index dropped to 86.8 in March from 88.0 in February, the lowest level since July 2009.  Also, after the close, the ABC confidence index fell to -47 in the week ending April 11, down 4 points from a week earlier. 


Despite lack luster confidence figures, Consumer Discretionary (XLY) outperformed the S&P 500.  Leading the XLY higher was Retail and Restaurants.  The Retail index finishing higher for a fourth straight session and both S&P indices were up +0.7% on the day.  Home-improvement stocks HD +2.6% and LOW +2.4% also provided some upside leadership to the XLY.


The Industrials (XLI) also outperformed, benefiting from both upbeat sell-side commentary and positive start to the earnings season. The rails were a bright spot with the S&P Railroads Index +1.1% ahead of earnings after the close from CSX +0.8%.


The Energy (XLE) and Materials (XLB) sectors were among the worst performing sectors yesterday. Energy commodities lower on the day and were significant laggards in the CRB; crude fell for a fifth straight day.  In the XLB, AA was a laggard among the industrial metals following its Q1 earnings, which missed top line expectations. 


The Dollar Index was down 0.07% yesterday and 1.26% over the past three days. 


In early trading, crude oil in New York ended a five-day decline as the dollar’s weakness countered concerns stockpiles in the U.S. will continue to increase. 


In early trading gold is trading higher, as the dollar is looking lower. 


Copper prices are trading higher and the dollar is weaker for the fourth straight day.   


In early trading, equity futures are trading above fair value after Intel's better than expected Q1 results and positive outlook for Q2.  As we look at today’s set up the range for the S&P 500 is 18 points or 0.9% (1,186) downside and 0.6% (1,204) upside. 


On the MACRO calendar today:

  • MBA Mortgage Applications,
  • April Bloomberg Global Confidence
  • March CPI
  • Retail Sales
  • Feb Business Inventories
  • Fed Beige Book


Howard Penney

Managing Director

Miles High

“I’ve experienced the highest of highs and lowest of lows. I think to really appreciate anything you have to be at both ends of the spectrum.”

-John Elway


I was flying from Denver to Kansas City last night and had one of those nights where nothing went my way. This is the game and nothing teaches you how to play it better than the game itself.


Over the last few years plenty has gone right for my family and firm. For that, I am plenty grateful. No matter where I want to go this morning, the best place is to get right back to where I have always been – feet on the floor, starting from the lowest of lows.


Mile High Stadium stood in Denver, Colorado from 1948 until 2001. That’s where legendary quarterback, John Elway, played his entire career. It’s also where Denver Broncos fans sustained the world’s loudest roar for 10 seconds (October 1st of 2000 with a reading of 128.74 decibels). Interestingly, the hearts and minds of Broncos fans registered loudest after John Elway was gone. I’d say that’s because the image of the man and his teams never left.


Not many players in this game of life win at the highest level in what is their last game. John Elway did. After beating the Atlanta Falcons 34–19 in Super Bowl XXXIII, Elway was voted MVP in one of this world’s biggest games. That proved to be the last game of his career. He decided his fate. No one else. That’s something I can believe in.


This morning you are waking up to a US stock market that is Miles High relative to the lowest of lows in expectations. While this game tends to oscillate between both ends of the spectrum of greed and fear, the expectation of what is coming next is really what its all about.


To understand where to go in the market or in life, you truly need to understand where you’ve been. Otherwise you will have learned nothing and will not evolve. The SP500 closed up +0.07% last night at 1197. That’s what we call a higher-high. That’s also what we call bullish, until it isn’t.


This morning’s Institutional Investor survey (weekly) shows one of the widest spreads between “bulls” and “bears” since 2007. After the SP500 is miles higher than most would have expected, this is what we call a contra-indicator.


Before markets correct, institutional investors get either too bullish or not bearish enough. After markets rally, institutional investors fear missing the next leg up or getting squeezed. Most great players in this life don’t wake up living in fear. They wake up with a repeatable process that they can trust, and they carry on.


On a week-over-week basis, “bulls” in the Institutional Investor survey moved from 49% to 51%, while bears remained completely depressed at 18.9%. I measure the spread between bulls and bears across multiple durations, and anytime the spread in this data set exceeds 30 points, it’s significant contrarian indicator. This morning’s spread between bulls and bears, of course, is 32 points.


The only sad parts about being on the road is missing my wife and kids and having to endure watching CNBC. While I have the manic media channel on mute, the body language of it all can make any accountable American want to leave this stadium of conflicted one-way players for good. After cheering the market right off a cliff in 2007, then calling for a Great Depression at the bottom, right before a +77.1% rally – and getting bullish up here again, after the move… well, its just sad to watch.


This morning’s ABC/Washington Post consumer confidence reading confirms that our high-low society is indeed what Americans won’t cheer for no matter what CNBC pipes into their homes. This week’s confidence reading dropped from minus 43 to minus 47. This too, is just sad. This is the new America we have created.


The US stock market may very well be Miles High relative to the fear-mongering expectations of some who never saw the crash or the recovery coming, but it never forgets. I won’t either. Today is a new day, and everything starts from this price.


My immediate term support and resistance lines for the SP500 are now 1186 and 1204, respectively.


Best of luck out there today,



Miles High - Pic of the Day


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