NAV: Outlook Grim, But Revised Penalties Not So Bad

Takeaway: Revised EPA NCPs are minimal and may be challenged. Looking like a failure risk can make $NAV a failure risk. Owning $PCAR a way to benefit.


Best Outcome on Non-Conformance Penalties, Outlook Still Pretty Grim


Still Expect NAV to Lose Market Share, Generate Losses.  Paccar a Potential Winner.


Surprisingly Small Changes:  Navistar avoided retroactive fines, outright bans and prohibitively high fines.  The new maximum penalty is $3,775, increasing “several hundred dollars per engine each year for later model years.”  The EPA release can be found at  


Breathing Room:  Navistar can continue to sell its existing 13L engine at this penalty level for quite some time.  That may give NAV additional time to integrate the 15L engine from Cummins, which we expect to take longer than the company’s current January 2013 forecast.  It may allow Navistar to delay the new 13L engine and develop a more practical solution.  The revised NCPs help to ease selling risks in CARB states in the near-term.


Expect Challenges:  Competitors may not see this as an adequate penalty and the court may well agree.  The advantages of noncompliance probably exceed the increased (straight-line) cost addition of $400-$800 per year.


Navistar a Potential Zero (Reflexive Risk)That Navistar looks like it could end up in distress increases the probability that Navistar WILL end up in distress Customers need a strong corporation providing warranties, service and replacement parts for years to come.   Residual value guarantees and off balance sheet commitments could add to the concerns should the resale market falter.   Customers depend heavily on their trucks and do not want supplier risk.  Once confidence is lost, it will probably require an outside buyer like VW or Hino to get it back.  The CDS chart below shows how confidence in NAV is trending.  Looking like a failure risk could make Navistar a failure risk.


Products Matter:  Navistar does not have a successful product strategy, in our view.  There are already concerns regarding the reliability of the current 13L MaxxForce engine.  The 15L from Cummins looks like the most promising answer, but 15L engines represent less than half of the class 8 market and it isn’t obvious that they can get it out by January 2013.  At least initially, we expect NAV’s EGR cum SCR 13L engine to be uncompetitive.


Navistar Losses:  Heavy discounting has allowed the company to maintain market share amid product uncertainty.  Losses could accelerate as the company runs out of emissions credits and NCPs increase.   We expect NAV to lose market share as its financial situation looks more acute and the company struggles to deliver compliant products.


Market Share Losses:  Even if NAV is purchased by a stronger company, International  is likely to shed market share in 2H 2012/2013.  Navistar cannot maintain heavy discounting indefinitely.


PCAR and Volatility, Not NAV:  Navistar is most likely not going to resolve these problems as an independent company, in our view.  The brand and dealer network are valuable assets and Navistar could get bought, though probably not at a price above $40/share.  That makes shorting very risky.  However, the company may well be purchased in distress or even bankruptcy, if this drags on.  That makes long positions a tough bet.  We would keep an eye on implied volatility, though, and consider January straddles if they get cheap, with the Cummins 15L, a potential acquisition and market share losses as catalysts.  Better, the best way to play problems at Navistar is to be long PCAR, in our view, a company likely to benefit from Navistar’s market share losses.



NAV: Outlook Grim, But Revised Penalties Not So Bad - cds


The Economic Data calendar for the week of the 3rd of September through the 7th is full of critical releases and events. Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.




Takeaway: We continue to expect Bernanke to disappoint his #BailoutBeggar followers.

Hedgeye CEO Keith McCullough appeared on CNBC’s The Kudlow Report last night to chime in on today's market activity and expectations for Ben Bernanke’s meeting at Jackson Hole today and throughout the weekend. To access the video, please click on the following link:


The fact of the matter is that the general public is a proponent of a stronger US dollar and will continue to be bullish going forward. Mitt Romney and Paul Ryan are both advocates of a stronger US dollar; this is clearly something people can get behind.


Should Romney win the election, he’ll need to give Bernanke the boot. He’s got no growth, no employment gains and consumer confidence is down. Obama and Bernanke’s strategy is to keep the stock market up and yesterday the Dow dropped 100 points. As far as our strategy goes, we’re basically on the sidelines playing it safe until Jackson Hole is over and done with. It’s sad that we need to wait for central planners to speak before making moves, but that’s life. Deal with it.


Enjoy the long weekend with your respective families.




The Hedgeye Macro Team

See You At Jackson Hole







Japan is getting hit in the gut and no one is lending a helping hand to help them stand back up. On top of the $26.3 billion loss suffered by their Public Pension Fund, the Nikkei is down -1.6% into month end for August and is down -3.7% since August 23. Oh, and it’s also down -13.8% since the all important month of March. For 20 years this country has been in the gutter. But as long as they follow the path of Keynesian economics and keep printing that yen, everything will be OK (until it’s not).




The truth can be hard to swallow but sometimes you need to buck up and face it head on. Let’s look at some recent economic data and number play that reflects the global environment we live in where growth slows and printing presses never get shut off, shall we? We’ll make it easy on you and will focus on US numbers only. If we gave you the full breakdown, we’d have to call you a doctor:


1.                    US Jobless Claims rose wk-over-wk to 374,000 vs 366,000 two weeks ago

2.                    US Consumer Confidence fell -8% month-over-month in AUG to 60.6 vs 65.9 in JUL3

3.                    US GDP Growth for Q212 slowed to 1.73% vs +1.97% in Q112




Today’s the big day. Will we get another round of quantitative easing from the Federal Reserve or not? That is THE question. And furthermore, is QE already priced into the market? Will it even matter if we get another round? Unfortunately, we have to stay on the sidelines while we wait for Bernanke to speak. That’s the problem with these central planning catalysts; you basically can’t do anything until you have them come out, clear the pomp and circumstance and tell the investing public what they plan on doing. At least after today we can return to trading knowing what the state of monetary policy is.






Cash:                  Flat


U.S. Equities:   Flat


Int'l Equities:   Flat   


Commodities: Flat


Fixed Income:  Flat


Int'l Currencies: Flat  








Nike’s challenges are well-telegraphed. But the reality is that its top line is extremely strong, and the Olympics has just given Nike all the ammo it needs to marry product with marketing and grow in the 10% range for the next 2 years. With margin pressures easing, and Cole Haan and Umbro soon to be divested, the model is getting more focused and profitable.

  • 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







“figured trading volume will fall off a cliff at 12 noon today... holiday weekend” -@tjtakes




“Eccentricity is not, as dull people would have us believe, a form of madness. It is often a kind of innocent pride, and the man of genius and the aristocrat are frequently regarded as eccentrics because genius and aristocrat are entirely unafraid of and uninfluenced by the opinions and vagaries of the crowd.” -Edith Sitwell




$26.3 billion. The amount of the loss suffered at the Japan Public Pension Fund.





Duration Neglect

“Duration neglect is normal in a story, and the ending often defines its character.”

-Daniel Kahneman


That’s one of my favorite risk management quotes from Kahneman’s Thinking, Fast and Slow. It comes from Chapter 36 titled “Life As a Story.” After this morning’s central planning event, take some time to think this weekend. Re-read the last 30 pages of one of the most important books of the year. If there ever was a time to embrace the uncertainty of Behavioral Economics, it’s now.


Storytelling is at the core of everything we do. Storytelling can be personal and political. Storytelling can be short or long-term. But no matter what your confirmation bias or duration, storytelling, at some point, meets a fork in the road between fact and fiction. Whether or not you are proactively prepared for that moment is purely up to you.


Two weeks ago, the Bailout Bull Storytelling was that “Bernanke and Draghi are going to provide a one-two punch in Jackson Hole.” Stock were higher and bonds were lower. Since then: 1. Draghi bagged the meeting, 2. Bernanke’s boys are waffling with “it’s too close to call”, and 3. US Equity Volatility (VIX) is up +34%.


As Ray Dalio likes to say, look in the mirror and ask yourself, “what is true?”


Back to the Global Macro Grind


The other thing Ray Dalio reminds us (from the Introduction of Ray Dalio’s Principles) is to “above all else, think for yourself.” That’s pretty important when considering what sources are credible in this profession. Many of them have not evolved since 2007.


Duration Neglect is one thing, but being unable to tell the difference between fact and fiction can bankrupt you at the poker table as fast as it can in your personal and professional life. From a Global Macro perspective, no matter what these broken sources tell you this weekend as they live large on your dime in Jackson Hole, Growth Is Slowing.


When I say Growth, I mean Global Growth Data – here it is in the last 48 hours:

  1. US Jobless Claims rose wk-over-wk to 374,000 vs 366,000 two weeks ago
  2. US Consumer Confidence fell -8% month-over-month in AUG to 60.6 vs 65.9 in JUL
  3. Japanese Retail Sales fell -0.8% year-over-year
  4. Hong Kong Retail Sales volumes dropped from +8.3% year-over-year to +1.3%
  5. Brazil cut interest rates as inflation ramped +100bps month-over-month to +7.7%
  6. Spain’s Retail Sales fell -7.3% in JULY (year-over-year) vs -5.2% JUN
  7. Italy’s unemployment rate ramped to 10.6% in Q2 vs 9.8% in Q1
  8. Italy’s inflation rate remains at +3.5% in AUG vs +3.6% in JULY (stagflation)
  9. US GDP Growth for Q212 slowed to 1.73% vs +1.97% in Q112

So, even if you’re still in the “growth is back and earnings are great camp” (Tom Lee, Ed Hyman, Laszlo Birinyi, etc.) from March of 2012 – at this point, if your storytelling is based on the USA alone – you’ve just gotta change your story to begging for bailouts.


To review, the call we made in March of 2012 was that Global Growth Slows As Inflation Accelerates. That, on the margin, is precisely what’s happened here in August versus July – primarily because of the inflation part of that statement. Food and Oil prices matter.


Now if you turn around and tell me that inflation fell in May versus where it was in March, I’ll agree with you. It did. That’s why we bought the SP500 at its long-term TAIL support line of 1283. But, to be consistent, don’t forget what central planning does: A) It Shortens Economic Cycles and B) Amplifies Market Volatility. So you have to keep moving.


Back to that US GDP Growth print this week of 1.73%:

  1. It implied a “Deflator” of 1.59% in Q2 versus +2.16% in Q1; therefore GDP, inflation adjusted, was overstated in Q2
  2. Assuming inflation is the same as the government says it was in Q1 here in Q3 (it’s higher), #GrowthSlowing continues
  3. Irrespective of the storytelling on what inflation rate you use, US GDP is down -57.8% from Q411 to Q2 of 2012

In this No Trust; No Volume market, one of the most neglected long-term issues remains confidence. Small business owners in America like me aren’t morons. We aren’t going to ramp Fixed Investment growth, Inventories, and Hiring into a central planning event.


That’s not me telling my own story – the only inventory I have in oversupply are tweets. That’s the story within the latest US GDP report:

  1. US Fixed Investment Growth was basically cut in half, sequentially, from Q1 to Q2 (+0.63% vs +1.18%)
  2. US Inventory Growth went from +2.53% in Q411 (when Growth was solid) to -0.23% in Q212
  3. US Export-Import Growth (+0.3% in Q212) remains nowhere to be found as an offset to 1 and 2

Keynesian Quacks will tell you that if you debauch the currency of a nation, “exports will ramp” and a bunch of other stuff will multiply upon that as Ben Bernanke and Larry Summers raise the oceans to escape velocity.


Not true.


Not this time. No dear Sirs; this time is not different. This story will have an ending - and your Duration Neglect will be the cross of the families bearing your name for many years to come.


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, 10yr UST Yield, and the SP500 are now $1, $111.12-113.74, $81.11-82.18, $1.23-1.26, 1.56-1.65%, and 1, respectively.


Enjoy your long weekend,



Keith R. McCullough
Chief Executive Officer


Duration Neglect - Chart of the Day


Duration Neglect - Virtual Portfolio

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