Leadership Note of The Day

We get a lot of mail. Some of it is the most thought provoking of our day.


Attached below is a note we received from a subscriber friend. He’s a veteran hedge fund manager, a thought leader, and one heck of an American.


We can change this business for the better, but we have to be the change we want to see out there every day.




Keith –


So here we are again - another "leader" (notice the small "l" and quotes) willfully blind to reality, unable to hold up a mirror to see his/her own face as responsible and to compound the first 2 errors, capable of mustering misguided audacity, as a victim, to try and call out someone else as responsible for their own mess.


This situation seems to repeat with alarming regularity these days and made me think about why.  I will continue to think it through but two thoughts that come to mind are: a) consistent under-funding of education has created an electorate (here and abroad) largely incapable of critical thinking to see the vacancy in the arguments these leaders put forth; b) the race for the victim seat in the early stage of any event is intense because the party that gets that seat gets to frame the discussion to meet their ends (which are often unclear but certainly include not being held accountable). 


So what is to be done?  Accountability has to make a comeback and more people must be spoon-fed the framework of real counter arguments in hopes that the remaining critical thinking energy left of the planet can gather enough momentum to create conditions where accountability retakes the field.


Which leads me to a better understanding of the value of your call-outs - by name and in quotes of all these dopes.  The more sunlight these guys get the better for all of us.  Keep it up as this battle is waged!


Have a good weekend. -



Leadership Note of The Day - Orb


Keith R. McCullough
Chief Executive Officer

UA: Reasons to Revisit the Long Side

UA: Reasons to Revisit the Long Side


In my conversations over the past 2 weeks, one thing is clear about UA – sentiment stinks. Here are some reasons why I think it’s worth revisiting UA on the long side.


  1. In this climate, I like names that can drive the heck out of the top line mode. UA has been investing in the right areas to do so for the past 3 years. Footwear might not have its big breakout until 2011, but it will begin to accelerate this summer. That’s enough for me.
  2. The cycle for this space is at the start of a 2-year upswing. All boats will rise. It will be product-driven, which will be the tail wagging the dog – and is misunderstood. I’ll never bank on a cycle hoping for consumer preferences to change. But after capacity has been pulled from the market (stores), the brands have invested in the R&D, the goods on the water, and the marketing dollars ready to spend, this will all synch. Sports Authority will go public later this year. Dick’s will comp higher. And yes, doggy FL will work. That’s good for all, including UA.
  3. Funny how people beat up UA in the past when Europe was strong because UA failed to really penetrate that market (yet). Are investors going to tout that now the company lacks exposure to a market that the world is waiting to implode? Probably not. Well guess what…if we see broad-scale downward revisions due to Europe, UA won’t be included.
  4. The stronger dollar allows UA to opportunistically put capital to work in Europe today – which they are, in fact, doing.
  5. The quarter I was concerned about this year just passed. Growth should accelerate from here.
  6. I’m only a few percent above the Street for this year – but have an upside bias’ to my $1.12. Next year I am at $1.70 vs. the Street at $1.27. If I’m right, then this stock is going parabolic.
  7. Mind you, my estimate still has UA at less than a 12% EBIT margin. This name is all about sheer unmitigated top-line growth.
  8. Sell-side ratings remain net negative (only 5 out of 25 are Buy), and short interest near 15%. I like that.
  9. The biggest negative? Nike announced at its analyst meeting that it will grow its apparel R&D by a factor of 4x this year. Even though that’s coming off a 50% cut last year, this is still a force to be reckoned with. Nike is not very good at losing anything.  But I’d consider several factors…

A)     Nike has 50% of the US athletic footwear market, and about 35% of the market globally. UA has less than 1%, and there are only 2-dozen brands that make up 95% of the market. In apparel, Nike is less than 10%, UA is low single digits and there are hundreds of brands that compete. Both of these companies could grow apparel double-digit for years without even touching the other.

B)      More R&D at one company helps the space. As noted, all boats rise. Why has the athletic space been in a funk for 3 years? Innovation has been nada. Why? The demise of Adidas/Reebok after the merger in 2005 took away all incentive for Nike to plow capital back into the market. That was also when Nike management was transitioning (remember Bill Perez?!?). It was simply a different time. R&D and product capital reaccelerated about 9 months ago, which means that product comes to market starting this spring.

C)      In this space, the brands compete on product, not price. Athletic shoes and shirts are not like lightbulbs at Home Depot or data storage devices at Best Buy. The vendors drive the ship. The tail wags the dog.




I remain skeptical on the housing market and the recovery portrayed in the current numbers.


The National Association of Realtors reported today that purchases of previously owned homes in April rose to the highest level in five months.  Purchases increased 7.6% month-over-month to a 5.77 million annual rate (the median price climbed 4% from April 2009). The housing industry is still being supported by the Government and the positive trends are expected to hold up through next month as buyers who close by June 30th are still eligible for the $8,000 Federal Housing Tax Credit.


Part of our negative thesis on Housing was based on rising mortgage rates, triggered by the end of the Federal Reserve's $1.25 trillion mortgage-securities purchase program.   While we understand the issues surrounding the “Sovereign Debt Dichotomy” in Europe, we did not see mortgage rates going lower.  Sovereign debt issues are forcing money to seek a safe haven in the U.S., pushing domestic mortgage rates to the lowest levels of the year and back to near 50-year lows.


I remain skeptical on the housing market and the recovery portrayed in the current numbers.  Today’s housing data, once again, showed the volatility associated with the government stimulus program and the unsustainable nature of the improvement in the housing market.


It is questionable that the recent drop in borrowing costs, prompted by concern over the European debt crisis, will help underpin sales after the loss of government support.  A more important issue will be employment trends and how fast the Obama administration can get the job growth engine started again.  Based on last week’s jobless claims numbers, a leading indicator, it is likely that the next move in the unemployment rate will be up, not down.


The Consumer Discretionary sector (XLY) and stocks leveraged to the housing sector have been among the best performers today with the XLY up 0.4% and the S&P Home Builders index up XHB +1.2%.   The XHB fell 6.9% last week, underperforming the broader market.  As our Financials analyst, Josh Steiner, pointed out, the news was not particularly good on the inventory front, as the number of existing homes on the market jumped 12% to 4.04M, the highest level since July. This pushed the months' supply to 8.4 from 8.1 in March.  Interestingly, the NAR noted that the jump in inventory was larger-than-normal for this time of the year and is not a "healthy" development, adding that there will be no "meaningful" increase in home prices in 2010 and possibly in 2011.



Howard Penney

Managing Director


HOUSING: A 50-YEAR LOW - existing home sales


HOUSING: A 50-YEAR LOW - mortgage rates

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Squeezy Has Eaten: SP500 Levels, Refreshed...

Our macro risk management models refresh every 90 minutes of marked-to-market trading. Our models are multi-factor and this construction is primarily born out of my career’s mistakes of using price momentum (and the simple moving averages of price) one dimensionally. On balance, multi-factor modeling adheres to the principles of chaos theory much more appropriately than basic algebra.


What’s most interesting about the second meaningful short squeeze (100bps or more) since the closing low of 1071 last Thursday is that volume and volatility studies are flashing bearish on the second squeeze. Not only is the rally from the morning lows 1/3 less in terms of trough-to-peak price percentage, but volume continues to slide and the VIX is running ½ the percentage drop it saw at this stage of Friday’s rally. The VIX continues to hold its most immediate term line of support of $33.09.


For the first time in the last 3 days of trading, I am also registering a lower-low of immediate term TRADE support at 1055. This is important 1. because its new and 2. because a breakdown through the long term TAIL line of 1070 has its implied risks if it were to occur.


Squeezy has eaten the shorts twice now in 2 trading days. I think he’s full, for now, and I am much more comfortable having no position in the SP500. It’s time to wait and watch as Squeezy swims below 1070.



Keith R. McCullough
Chief Executive Officer


Squeezy Has Eaten: SP500 Levels, Refreshed... - S P

Aluminum Inflection Point . . . China Exporting

Conclusion:  Chinese data for April show China being a net exporter of aluminum, which is bearish for the price of aluminum and bullish, on the margin, for the Yuan.            


As it relates to commodities, we watch Chinese supply and demand very closely as China is the key swing factor globally for many commodities.  The April data for aluminum was particularly meaningful as China became a net exporter for the first time since late 2008.


China is currently the world’s largest producer and user of aluminum, so its influence on that market can be dramatic.  As mentioned, for the first time since 2008, China exported more aluminum than it imported.  Specifically, exports rose to 48,546 tons, which exceeded imports of 28,987 tons.  This inflection of exports is not surprising, as Chinese aluminum productive capacity has expanded 20% this year, which has led to a massive building of aluminum stock piles in China.  These stock piles are estimated to be at 489,495 tons, up ~61% year-to-date, based on data from the Shanghai Futures Exchange.


There is also a political implication to increased exports from China.  In late April, the U.S. Commerce Department indicated they planned to investigate whether some Chinese aluminum products are getting unfair subsidies.  The crux of the argument is that the artificially low price of the Yuan provides cheap manufacturer costs for aluminum and aluminum products within China, which provides a competitive advantage on the world stage.  As the production of aluminum in China continues to exceed its internal demand, the potential for this to become a political issue will further increase and are likely supportive of an eventual revaluation of the Yuan.


While this data point is bearish for the price of aluminum and bullish, on the margin, for the Yuan, it is difficult to read much into the implications for China.  Aluminum is the world’s second most produced metal, after iron, and is used in a myriad of end products, including: vehicle production, construction (windows, doors, siding, etc), household items, power lines, and electronics.   Given the wide varied of end use, the Chinese government has ramped up its internal production of aluminum well ahead of even its normal use of aluminum.  Thus, this inflection does not necessarily suggest a slowing of the end markets in China.


On the bullish side of the equation for aluminum price, last week China also indicated that it may raise power surcharges on some aluminum companies by as much as 100 percent in June, to curb this growing over capacity.  To the extent this goes from rhetoric to policy, it will certainly slow production of aluminum in China, which will serve to draw down stock piles and put supply and demand back into balance.


Daryl G. Jones 

Managing Director


Aluminum Inflection Point . . . China Exporting - 1


The Macau Metro Monitor, May 24th, 2010


1Q Retail sales surged 36% YoY to MOP 6.85 BN.  According to IM, higher shopping spending in Macau have benefited many malls such as the Venetian's Grand Canal Shoppes and Shoppes at Four Seasons which have seen sales double and up 80% YoY, respectively.


Customers seem to be more receptive to shopping promotions than gaming promotions.  Also, an important aspect of the resorts' success is the ability to use their retailers as an effective customer-relations tool with high-end gamers. For example, by having a partnership with Rolex as its 2nd largest supplier, Wynn is able to incentivize gamers to come back for more rolling-chip sales.


On Cotai, the relaunch of the Sands Rewards Club seems to draw in more mainland customers, while One Central at MGM Grand Macau seems to be underperforming, though it is still early as more shops will open in the coming months.



The near completion of Marina Bay Financial Centre's (MBFC) many suites and apartments comes at a time of a robust Singapore housing market.  As part of the first stage of MBFC's complex, the new Marina Bay residences (55-story block) are set to be "topped out", which means construction internally will begin in earnest in the near term.


The executive director of residential for CBRE, Joseph Tan, believes that the Singapore residential market is continuing the momentum from the mass market achieved in 2009. Eventually, it will trickle up to the mid and prime segments.  He also said that prices are generally higher in 2010 and that the total value of transactions at the end of 2010 should be higher YoY ($S16.22 BN) but lower than that in 2007 ($S23.52 BN).



Total visitor arrivals increased by 13.1% YoY to 2,111,563.  Visitors from Mainland China grew by 17.3% YoY to 1,052,610, with 390,031 traveling to Macau under the Individual Visit Scheme, up by 13.9% from April 2009 (342,458).



Macau registered a budget surplus of MOP17.8 billion in the first four months of 2010, a YoY increase of 96%. Direct taxes from gaming rose 54% YoY.



All licensed businesses and activities registered until December 2009, including hotels, guesthouses, restaurants, nightclubs, bars, sauna and massage parlours, health clubs and karaokes, travel agencies, as well as tourist guides, will be exempt from renewal fees for licenses and ID cards issued by the Macau Government Tourism Office (MGTO).  The exemption is valid until the end of this year only and has retroactive effects to October 2009.

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