Is The Manheim Index Signaling A Market Crash?

Takeaway: If correlations serve us correctly, we're due for a big drop in the S&P 500 rather soon.

The Manheim Index is a used car index that essentially values what used cars are worth. The company is the largest buyer of used cars in America, which it then auctions off. An index reading of 100 corresponds to January 1995.


If you look at the chart we’ve posted below, there appears to be a correlation with the S&P 500 vs the Manheim Index. In periods when the index went negative in terms of year-over-year growth (the black dips), the S&P 500 dropped hard and fast. This occurred back in 2001-2002 (dotcom bubble), 2007-2008 (credit crisis) and if we look at the chart now, it appears the S&P 500 is about to turn along with the index. This could be a sign that we’ve peaked at the 1400 S&P 500 level.


Correlations are just that, but we think this one has legs. It’s rarely discussed in the media and we think that it’s only a matter of time before stocks drop.



Is The Manheim Index Signaling A Market Crash?  - manheim SP500



Is The Manheim Index Signaling A Market Crash?  - manheim spx

Abysmal Volumes

Takeaway: It's tough being a broker. NYSE volumes have fallen off a cliff since July and continue to trend lower.

These days, a rally doesn't take much. Pump the bid a few times and you'll get whatever price you want. It's not secret that volume in the stock market has been awful, but just how awful is the question? The answer will blow your mind.


We continue to see massive drops in NYSE volume day after day and this chart clearly illustrates just how bad the situation has become. Since the end of July, volumes have fallen off a cliff. For the broker-dealers out there trying to make a buck of equities - it just isn't happening. And if the trend is any indication of what's to come, volumes are going to get even worse by year's end.



Abysmal Volumes - NYSE Volume

UA: Going For Growth

Takeaway: UA international growth has slowed. The company needs to work extra hard to grow on a global scale.

Under Armour (UA) is a company that has enjoyed domestic growth over the last decade. The company hasn’t made inroads or attempted to penetrate international markets. International sales account for a low percentage of overall sales. Getting UA into the UK could prove even harder on news that Dick’s Sporting Goods (DKS) won’t be making a grand entrance into the UK via JJB Sports.  


UA will ultimately make it into the UK and will grow its business there but it will be costly and will take more time with Dick’s out of the picture. As you can see from the chart, growth has slowed year-over-year between 2010 and 2011. That trend could continue into 2012 without an international push from UA.



UA: Going For Growth - UA intl

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Did We Mention Growth Is Slowing?







Old Wall loves to spend its time forecasting earnings and pounding its chest about how great its calls are. That is, until they’re wrong. Then they get quiet or say something like “oh, but revenue doesn’t manner – only EPS does.”  That’s not a risk management process. In fact, that’s what  got us in trouble back in 2007. Value at Risk models and all that poppycock went out the door and the game was up. If you’re comfortable with a sellside report, you’ve got a tough stomach.




We’re really biting our lip here with the VIX dropping below 14. Did you know the VIX hasn’t dropped below 14 since 2007? That’s scary. Every single asset manager is running around chasing beta and reallocating assets in an attempt to make some kind of return on their capital. We’re clearly overdue for a big drop in the market and with the VIX this low, it can’t be far off. NYSE volume continues to be abysmally low, but no matter. As long as the brokers have order flow coming their way, all is right in the world.




Hey, it may sound like a broken record at this point, but that IS the point. Growth is slowing and you’re stuck with it. Keynesian economics has worked real well for us thus far, hasn’t it? All this bailing out and printing of money and you’ve got a 1400 S&P 500. Buying anything here with the SPX this high and the VIX at 14 is maniacal. What do you think is going to happen? Are you that confident that we can pull off 1500 by year’s end? That’s wishful thinking for sure.






Cash:                  UP


U.S. Equities:   Flat


Int'l Equities:   Flat   


Commodities: Flat


Fixed Income:  DOWN


Int'l Currencies: Flat   








This company is transitioning from cash burn to $75mm annual free cash flow generation thanks to completion of a reimaging program and refranchising of JIB units. Qdoba is the leverage; a maturing and growing store base will bring higher margins. We see 8.5% upside over the next 6-9 months.

  • TAIL:      LONG            



The former Liz Claiborne (LIZ) is on the path to prosperity. There’s a fantastic growth story with FNP. The Kate Spade brand is growing at an almost unprecedented clip. Save for Juicy Couture, the company has brands performing strongly throughout its entire portfolio. We’re bullish on FNP for all three durations: TRADE, TREND and TAIL.

  • TAIL:      LONG



LVS finally reached and has maintained its 20% Macau gaming share, thanks to Sands Cotai Central (SCC). With SCC continuing to ramp up, we expect that level to hold and maybe, even improve. Macau sentiment has reached a yearly low but we see improvement ahead.

  • TAIL:      NEUTRAL







“Everytime I meet somebody who laughs at my trading methods or my rules, I sleep easy.” -@persist2end




“The only function of economic forecasting is to make astrology look respectable.” – John Kenneth Galbraith




NYSE volume was only down -42% versus our intermediate-term TREND duration average yesterday.




The Macau Metro Monitor, August 14, 2012



Nevada regulators are investigating whether LVS's dealing in mainland China violated bribery laws. The Nevada investigation of LVS adds to the existing investigations by the SEC and DOJ. 


The Nevada authorities recently obtained a detailed but preliminary report by an outside law firm for the Sands board's audit committee, which concluded that under previous management, the company's controls on executive actions were too weak. While the document, did not find conclusive evidence of corrupt payments it did question a series of deals on the mainland dating from before Jacobs' stint at the company.  



Visitor arrivals in package tours increased by 8.4% YoY to 662,109 in June 2012. Visitors from Mainland China (465,860) up 3.8%, with 167,266 coming from Guangdong Province; those from Taiwan, China (58,971); Hong Kong (28,649); the Republic of Korea (23,808); and Japan (22,225) increased by 66.2%, 23.4%, 22.1% and 25.8% respectively. In the first half year of 2012, visitors in package tours totalled 4,082,895, up by 25.9% year-on-year to account for 30.1% of the total visitor arrivals.


At the end of June, Macau had 66 hotels and 33 guest-houses with a total of 24,268 guest rooms, an increase of 2,592 rooms (+12.0%) YoY. 5-star hotels accounted for 61.1% of the total supply.  In June 2012, the average length of stay decreased by 0.16 night to 1.3 nights. Total Occupancy stood at 80.2%, down by 2.3%; hotel occupancy was 80.8%, with 4-star hotels leading at 86.7%. Number of guests increased by 12.2% year-on-year to 4,476,310 in the first half year of 2012 while occupancy stood at 81.6%, down by 0.4% YoY.

The Search for Value

This note was originally published at 8am on July 31, 2012 for Hedgeye subscribers.

“Freedom, however is not the last word.  Freedom is only part of the story and half of the truth. Freedom is but the negative aspect of the whole phenomenon whose positive aspect is responsibleness.  In fact, freedom is in danger of degenerating into mere arbitrariness unless it is lived in terms of responsibleness.”

                -Viktor E. Frankl


“Man’s Search for Meaning” by Victor Frankl is one of my favorite books.  It is the chronicle of Frankl’s experiences in Nazi Germany’s concentration camps and was written in 1946 shortly after the end of World War II. The book has sold over 10 million copies and is often noted on the lists of the most influential books in the United States.


Frankl was uniquely qualified to analyze the experiences in a concentration camp as he was a psychologist by training.  Undoubtedly, his academic training allowed him to separate his actual experiences from the analytical lens under which he observed his, and other prisoners, broad experiences in the camp. 


Ultimately, Frankl concluded, from analyzing the broad collection of experiences in the concentration camps of Nazi Germany (he himself lost the vast majority of his family), that life never ceases to have meaning.  In fact, according to Frankl, there is meaning in every moment.  Further, we all have the freedom of choice, even if our circumstances are incredibly dire.  In fact, the only scenario that truly dooms a person is when they lose all hope.


Now, admittedly, this is deep stuff for a Tuesday morning.  Further, it is obviously not even close to analogous to compare our lives as stock operators to Frankl’s analysis of life in a concentration camp, except for the fact that both are about a search.  For Frankl, it was the search for the meaning of life.  While for stock market operators, it is the search for value.


At the end of the day (to use an overused expression), investing is solely about value.  For those that follow more quantitative strategies, value can simply come in the form of the price and volatility of the asset.  For those steeped in more fundamental company analysis, value comes from deriving a value for company on both a standalone basis and versus comparable companies.


As many of you know, the vast majority of our firm is comprised of fundamental analysis.  In fact, we currently have seven sector heads doing fundamental company and industry research.  In aggregate, we cover energy, industrials, retail, gaming lodging & leisure, healthcare, financials, and restaurants & food processing.  Similar to a multi-strategy fund, we also integrate both macro analysis and quantitative analysis into our research process. 


In earnings season, we get bottom up data points that combine to inform our macro view.  On face value, based on data from Zack’s, earnings season has been reasonably positive.  In fact, as of yesterday 300 companies in the SP500 had reported earnings and aggregates earnings were up 5.5% versus the same period last year and almost 2/3rds of them beat earnings estimates by an average median surprise of 2.8%.  As always though, the devil is in the details, especially in the search for value.


A key driver of this “not too bad” earnings season is the easy comparisons of the financial sector.  In fact, if we back out the financial sector earnings reports, the positive 5.5% growth noted above actually becomes a year-over-year decline of -1.5%.  Moreover, revenue performance has been particularly anemic with revenue coming in basically flat versus the same quarter last year (including financials) and only 1/3 of companies beating revenue expectations.


If you are a fundamental equity investor, you are likely either looking for stability of cash flow or cash flow growth to justify your valuation.  Unfortunately, not many discounted cash flow models spit out compelling valuations if cash flow is declining on a year-over-year basis.  Thus, from a top down perspective, the old adage that the market is cheap based on its multiple doesn’t hold much credence when earnings are declining, and not growing, versus the prior year.


Just as important as this quarter are future earnings and revenue expectations.  Typically, fundamental investors focus on earnings seasons as a key catalyst to for the market to reward them for the hidden value in their investments.  Currently though, future earnings growth expectations are very high with Q1 2013 consensus earnings growth at 12.9%, Q2 2013 at 13.0%, and Q3 2013 earnings growth at 16.4%.  Given the GDP growth outlook, these numbers will be coming down meaningfully.


The search for global macro value will begin in earnest tonight and tomorrow.  Tonight, we have Chinese Purchasing Manager’s Index at 9pm.  While tomorrow we get the PMIs for both Europe and the United States.  Based on the collective macro data points we’ve been analyzing, there is no reason to believe this slew of data points will do anything but reinforce our thesis that growth is slowing.


Ironically, the Chinese stock market seems to be the one market that is credibly signaling this continued slowing of global economic growth.   Chinese stocks were down another -0.3% over night and are now down -14.5% since May.  This despite rumors that Premier Wen will boost stimulus measures in China in the second half of 2012.


In the Chart of the Day, we once again highlight the VIX.  Currently at 18, the VIX is not completely bombed out, but we would stress that it is at a level where you don’t want to begin your search for value in earnest.  This is a point that has already been fundamentally validated by earnings season and will be reinforced as future earnings expectations are lowered.


Our immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, Spain’s IBEX, and the SP500 are now $1606-1633, $102.52-108.36, $82.33-83.23, $1.20-1.23, 6656-6943, and 1363-1398, respectively.


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research.


 The Search for Value - chart2


 The Search for Value - VP

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