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April Flowers: SP500 Levels, Refreshed...

All they needed was a day-and-a-half of selling on well-placed Regulation Fear and the bulls are back!


I don’t know if I want to laugh or cry about some of the 2007 type behavior I am watching out here, but it is what it is. I guess we’ll know it’s a top when Ackmanism raises another $2B one-stock idea fund and calls it Yummy Targ-eh!


If there is no consensus shame in buying the SP500 up here, I certainly have no shame in reminding you where I am going to be selling it again. We issued this call on Friday and labeled our Q2 Theme April Flowers, May Showers. The overbought price level for this part of a massively bullish cycle remains 1214 (dotted red line).


Potential catalysts on the downside:


  1. AAPL earnings – oops, or is that still everyone and their brother’s catalyst on the upside?
  2. GS breaking down to $156? GOOG breaking down to $538?
  3. Producer Prices (PPI) will be another inflationary report on Thursday
  4. Dodd and his circus of clowns who live in the Bubble of US Politics performing under the Big Top (Thursday)?
  5. Gordon Brown will likely go at Goldman in the UK election debate Thursday night
  6. Home Buyer Tax Credit expires at the end of the week


The first line of immediate term support is now 1183. From today’s low volume intraday high of 1208, taking a peek at 1183 will definitely get people’s attention (a down -2% correction). Don’t forget that Friday’s down -1.6% day was the first down move of over 1% for the SP500 in 2 months. A down -2% move might be needed to remind people in this country that what goes up, can come down.


Keith R. McCullough
Chief Executive Officer


April Flowers: SP500 Levels, Refreshed...  - S P

Framing Up Volatility

Position: Closed our long position in the VIX on yesterday


We had a very astute subscriber ask about volatility and our view of risk / reward on being long volatility, specifically the VIX.  This subscriber’s point of view was that if the future of volatility was similar to the 2003 – 2007 time frame, there is potentially limited upside to being long the VIX.  In that period, broadly speaking, the VIX ranged from 10 – 20, so his point is a fair one to consider.


For starters, in our view, there are two key reasons to potentially be long volatility. 


First, volatility is potentially a hedge against the world unraveling with exponential risk / reward if the world does unravel. 

  • As a frame of reference, during the financial crisis of 2008, the VIX peaked at 79.2, which is ~360% upside from the current level of 17.3. In terms of downside, the lowest level the VIX has ever hit is 10.2, which~ 40% below current levels.  In aggregate, this is a risk / reward ratio of 9:1. In a scenario where the financial markets theoretically become unwound, like say in a spiraling sovereign debt crisis, being long volatility is very good protection.
Second, if we are expecting a market correction in the short term, which is our call, and believe that investors are getting complacently bullish, being long volatility as a way to play the correction is an effective instrument. 

  • From our perspective the Bullish / Bearish survey from the American Association of Individual Investors is a good indicator of emerging complacency, the bullish indicator hit 48.5% this week, which is the highest level since December and nine points above its historical average.  The Institutional Investor Survey that came out last week was even more extreme, with institutional bulls at 51% and institutional bears at 18.9%, which is the one of the widest divergences we’ve seen in the last decade.  In the first chart below, we’ve outlined our current trading levels on the VIX.

Longer term, the question remains whether the period from 2003 – 2007 is an accurate assessment of normalized volatility.  In fact, history actually suggests that that period may have been abnormally low versus history.  In the second chart below we’ve charted the VXO, which is the VIX normalized for a 2003 change in calculation, going back its inception in 1986, which emphasizes that there are periods of both low volatility and high volatility, with 2003 – 2007 being a low period.


At this point, we are not making a call on whether the upcoming period of volatility will be low or high, but I think we do need to keep in mind the context that the 2003 – 2007 was an abnormally low period of volatility when considering a position in volatility.


Daryl G. Jones

Managing Director


Framing Up Volatility - VIX


Framing Up Volatility - VXO

Gordon Brown's Losing Game

Position : Long Germany (EWG); Short Spain (EWP); Short Euro (FXE)


We’ve been vocal on rising inflation globally, a theme we’ve named Inflation's V-Bottom and outlined in our recent Q2 Themes call.  Certainly, today’s CPI reading out of the UK confirms as much, up +3.4% in March Y/Y, and is also a mark against Gordon Brown’s insistence that “staying the course” of Labour’s economic policy will bring prosperity.


The inflation print, which is up from an annual 3.0% rate in February, is now above the government’s soft cap limit of 3%, which itself was upwardly revised from 2%. As we noted in recent work, the UK economy continues to have its hands tied, struggling off its bottom, and we expect to see inflation continue to rise as commodity prices are up significantly over the previous year, nearing the prospect for stagflation. 


As the General Election approaches on May 6th, we continue to believe that party victory will hinge on the economic policy debate (it’s the economy, stupid!). Does Brown’s “stay the course” message have a chance?


Recent daily tracking polls show that the Liberal Democrat Clegg gained significant approval following last week’s initial political debate, one that set a historical precedent as the first political debate of its kind hosted on live television in the UK. While Clegg’s positive showing was a surprise, the recent average of most daily polls tracking the candidates shows a tight spread (YouGov for instance has a 6 point spread in conservative Cameron’s favor over Brown, or 33% to 27%, versus the Liberal Democrats at 31%), however Intrade, typically a stealth indicator in our opinion, would suggest that the favored candidate is Cameron, with a lead of over 70%.


While last Thursday’s debate focused on domestic issues, we’d expect the two subsequent Thursday night debates to cover such topics as banking issues (Goldman likely debated this Thursday) as well as the UK’s relationship to the EU, a position that especially pits Cameron’s Euro-skepticism against Clegg’s support.


Matthew Hedrick



Gordon Brown's Losing Game - 1

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R3: Seasonality Debunked – Toning Rebounds in March


April 20, 2010





The March monthly data out last night reflects continued momentum in sales for the toning leaders, debunking concerns of a post holiday slowdown. Yes, we are still in the early stages of a nascent category so fits and starts are to be expected, but a sharp rebound following a seasonally induced (prior) peak is an important indicator for broad-based toning demand.


Following strong holiday sales in December, sales of both Shape-Ups and Easy Tones rolled off; impacted primarily by strong holiday sell-ins and out of stocks for Reebok. New shipments expected to hit shelves in March materialized as reflected in a reaccelerated ramp headed into the Spring season. While overall demand is rather evident in the chart below, there are a couple other key observations to highlight as it relates to our refreshed data set.


First, despite continued anecdotal evidence that Easy Tones are preferred to Shape-Ups among athletic specialty and sporting goods retail customers, the sheer magnitude and trajectory of Shape-Ups sales reflects just how broadly it’s distributed. While Reebok is primarily sold through athletic channels, Skechers sells into the athletic channel, department stores (i.e. Nordstrom, Macy’s, JCPenney, etc.) and well-known 3rd party branded channels such as the Victoria Secret catalog. Moreover, this suggests a substantial runway ahead for Skechers and highlights the fact that this doesn’t have to be a one dog fight between the two as the category expands.


In addition, with lower-priced competition entering the marketplace (Payless, New Balance, GH Bass, Avia, et al.) ASPs are holding steady – for the most part. With Easy Tones maintaining price levels I’m less concerned about the $3 erosion in Shape-Up ASPs given the introduction of sandals for the Spring season that sell at roughly half the price of the original sneakers. In fact, I’d expect to see a similar trend over the next several months as sandals become a larger part of the mix as we head into Summer.  


The bottom-line here is that investment implications are positive for SKX with Street estimates looking light heading into earnings next Wednesday. For starters, compared to Q4, sales over the past 3-months suggest an incremental sequential increase of ~$60mm from Shape-Up sales alone at retail. Keep in mind that these figures capture only a subset of SKX’s sell-throughs and at wholesale, equates to ~$30mm. If we look at the $90mm of incremental sales y/y in Q4 and assume that Skecher’s core sales were up ~10% in the quarter, it would suggest that Shape-Ups contributed ~$60mm to the top-line last quarter – roughly half of what was captured by NPD monthly data. Our view is that domestic wholesale sales from Shape-ups alone are likely to account for the $70mm in incremental sales consensus expects in Q1. Given that initial sales of Shape-Ups are starting to ramp internationally as well as an incremental contribution of ~$10mm+ at retail, we expect the top-line to exceed expectations.


With incremental sales coming in at above core margins, we expect to see earnings come in at least 25% above current estimates. To be clear, our call is not necessarily to jump in up here near $40 a share, but that we are increasingly confident that the company will beat expectations and that the intermediate term momentum is likely to continue.  


Casey Flavin



R3: Seasonality Debunked – Toning Rebounds in March - Shape Ups and Easy Tones 





- Prepping for growth? Word has it that Neiman Marcus is opening a prototype discount luxury store, that is not located in an outlet center. While the concept is named “Last Call” (consistent with its existing outlet business), the store is expected to be less of a traditional outlet and more like an upscale off-pricer. A new name is also in the works although it has not yet been revealed.


- Saying and doing are two different things. According to a study from a PR firm, 73% of Fortune 100 companies are actively engaged with Twitter via 540 separate accounts. However, 76% of accounts do not post often, and 52% are not considered actively engaged as measured by engagement metrics such as numbers of links, hashtags, references, and re-Tweets. This reminds me of retailers who have websites but no e-commerce. Embarrassing.


- With “toning” being one of the more common buzzwords in footwear these days, we can’t ignore the growing presence of “shapewear”. The small but growing category continues to gain in popularity as consumers look to shortcut their efforts toward a trimmer look. While the category has been born at the high end with brands like Spanx, Cosabella, and Leonisa, it won’t be long before a mainstream brands makes a major push to take these compression-like items to the masses. As it stands now, growth in the category in the plus range of XL to XXXL or larger saw sales gains of 14.8 percent last year according to NPD.





R3: Seasonality Debunked – Toning Rebounds in March - Calendar





Luxury Sales to Rise 4% in 2010 but Won't Recover Until 2012 - Global sales of luxury goods will rise 4% this year to €158bn, following an unprecedented 8% drop last year, while accessories are expected to see the biggest rebound, with 5% growth, according to consultancy Bain & Co.  <fashionnetasia.com>


China Urging Resumption of Shoe Trade with EU - China's Ministry of Commerce has reiterated its firm stance of safeguarding the legitimate rights and interests of domestic shoemakers and called for early resumption of leather footwear trade with the European Union (EU).  <fashionnetasia.com>


Volcano Effects Fashion Industry - Europe’s flight freeze due to volcanic ash, which entered its fifth day Monday, is already impacting the fashion industry: scuttling or postponing events, stranding designers and executives and raising the specter of dampening the region’s fragile economic recovery. The ongoing disruption as a result of volcanic ash from Iceland has impacted designers from Giorgio Armani to Ralph Lauren, as well as cosmetics industry executives and design editors in Milan for various trade fairs. European authorities said they hoped some flights could begin today but the backlog of passengers and planes is likely to continue to strand people for days. Ferragamo says travel chaos from volcano ash is disrupting sales of handbags. <wwd.com/business-news>


Lawmakers Urge Resolution of Mexican Trucking Dispute - House lawmakers are stepping up the pressure on the Obama administration to eliminate a controversial cross-border trucking program with Mexico and resolve a long-simmering dispute. A bipartisan group of 78 lawmakers wrote letters to U.S. Trade Representative Ron Kirk and Transportation Secretary Ray LaHood last week urging the administration to renegotiate and eliminate from the North American Free Trade Agreement a section that opens up U.S. highways to Mexican trucks. A successful renegotiation would also eliminate retaliatory tariffs, which are negatively impacting our export markets. <wwd.com/business-news>


Talks of Strengthening Ties to Western Hemisphere Textile and Fabric Manufacturers - Textile and fabric manufacturers in the Western Hemisphere must establish a stronger regional identity through coordinated initiatives on issues ranging from trade policy to financing to remain a viable force, executives said. Members of the National Council of Textile Organizations ended their three-day annual meeting here last Wednesday with a consensus that, in order to meet low-cost competition from Asia, they have to do a better job of connecting retail companies with producers in the region to build awareness about sourcing, as well as the benefits of faster turnaround time and knowledge of the consumer base.  <wwd.com/business-news>


Burberry Group Second-half Sales Rise 7% (6% cc)- Sales driven by strong full-price sell through of Burberry’s spring 2010 collections at its own stores. Total sales for the third quarter rose 15%, fourth quarter declined 2%. That was due to a 20% fall in wholesale revenue during the fourth quarter, caused partly by the company closing specialty accounts in Europe and weakness in Spain, where Burberry is withdrawing the local collections it sold in the country and introducing its global collection. Excluding those actions, Burberry said wholesale sales would have risen slightly. <wwd.com/business-news>


ESPN, NBA Co-Brand Apparel for Playoffs, from VF Imagewear - A new line of co-branded merchandise inspired by the NBA on ESPN RV advertising campaign from ESPN Consumer Products and the NBA will roll out just in time for the NBA playoffs. The NBA on ESPN line includes T-shirts and hoodies from VF Imagewear, retro-influenced lifestyle T-shirts and hoodies from Sportiqe Apparel, fitted and adjustable hats from New Era Cap, novelty street signs and pennants from Wincraft and exclusive basketballs from Spalding. In addition, VF Imagewear and Wincraft have designed items with player nicknames and Sportiqe has produced illustrated tees.  <licensemag.com>


UA Signs Red Sox Jonathan Papelbon - Under Armour signed a multi-year endorsement deal with Boston Red Sox closer Jonathan Papelbon. Papelbon's endorsement deal with Reebok ended earlier this year. <sportsonesource.com>


Tesco to Step Up China Expansion, Sees Rise in Clothing Sales - Tesco Plc, the U.K.’s largest retailer, plans to make China a central part of an accelerated international expansion plan to fuel sales growth as its share of the domestic grocery market plateaus.  Tesco said that its full-year clothing sales rose 7.3% to hit £1bn, driven by a strong performance from kidswear, its F&F brand in Europe and its online offer.  <bloomberg.com/news/retail>


Gilt Groupe Adds A User Experience Exec From Zappos.com - Online luxury retailer Gilt Groupe Inc. has hired Zappos.com director of user experience and web strategy Brian Kalma as its senior director of interaction design and usability. <internetretailer.com>


Sierra Trading Post Expands Shipping to 44 More Countries - Sierra Trading Post has expanded its international service to 44 new countries, including the Bahamas, Portugal and Thailand. The cataloger and e-retailer now ships to consumers in 92 countries. <internetretailer.com>


GS: Risk Management Update

The GS bulls really tried to love the stock above my intermediate term TREND line of resistance pre-open (red line at $165.58 in the chart below), but the stock failed there, and it is now breaking down again on robust volume (21M shares by 11AM, when the 10-day avg prior to the news was 8.9M shares/day). Our updated line of immediate term TRADE line of support = $156.01.


I said this yesterday, and I’ll say it again. There is a bubble in US Politics that is going to stand in the way of this stock. If anything, this morning’s earnings are going to perpetuate that political bubble’s pressure. Between now and the SEC figuring out of there was fraud at GS, the company will have to get through both Senate Banking Committee meetings (Thursday) and the election in the UK (May 6th). Those forums will not be objective courts of civil law.



Keith R. McCullough
Chief Executive Officer


GS: Risk Management Update - GS


It is now clear that EPS will be up more than 10%-12% in FY11-FY12.


As part of the EAT Black Book we introduced yesterday, our EPS estimate for FY11 was well above consensus estimates.   After listening to management’s opening remarks on today’s earnings call, it seems that they agree with our conclusion.  EAT management just stated that it will not issue FY11 EPS guidance until its fourth quarter call, but that in order to meet its stated target to double EPS by FY15 that EPS is expected to grow 10%-12% in FY13-FY15 and more than that in FY11-FY12 (skewing more to FY12).



Howard Penney

Managing Director

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