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When Schwab Sells

Takeaway: Chuck Schwab's recent insider selling of $SCHW stock is a warning sign that the stock may encounter trouble very soon.

Insider transactions can be a barometer of what’s to come vis-à-vis stock price movements and company health. In the last five years, Charles Schwab (SCHW) founder Chuck Schwab has sold off several large blocks of stock. In 2012, he's made 3 significant sales. He sold $55.5 million in April, 2012 preceding a 15% drop over the next 6-7 weeks, and in July and August of this year sold a further $30 million, bringing his April through August, 2012 sales to $85.5 million.

 

We’d say this is a clear warning sign of things to come and the outlook for the back half of 2012 for SCHW. He has a solid track record of getting rid of stock before significant sell offs and his latest transaction appears to be no different.

 

 

When Schwab Sells - chuckschwab Selling

 


CHART DU JOUR: BYI RECEIVABLES

IGT remains the least aggressive

  • Closing the circle of examining customer financing by the suppliers, BYI is more aggressive than IGT but way below WMS in terms of financing to its customers
  • Given BYI’s large systems business, some of the trade and notes receivables also represents consumer financing for that segment.  This inflates the receivable size vis-à-vis product sales.
  • BYI's use of financing has generally been on an up trend although this past quarter was slightly down sequentially

CHART DU JOUR:  BYI RECEIVABLES - BYI


JOBLESS CLAIMS: SIX MONTHS OF TAILWINDS ON TAP

Takeaway: Six months of reported job data tailwinds are ahead. We profile both claims and NFP.

Tailwinds, Anyone?

We think the charts below illustrate the situation pretty plainly, but nevertheless we'll explain. The first chart shows rolling initial jobless claims from September through August for 2009/10, 2010/11 and 2011/12. On the left half of the chart we show the September through February period and on the right half the March through August period. Looking back over the past three years, a very consistent pattern has emerged. Seasonally adjusted jobless claims see ALL of their improvement from September through February and then worsen from March through August. We've quantified this by showing the trend line slope equations for each series. In 2009/10 September through August saw average monthly improvement of 4.7k fewer initial jobless claims. This moderated to 2.8k in 2010/11 and to 2.5k in 2011/12, but the trend was highly consistent in each of the past three years. Conversely, the March through August period saw claims rise 0.7k/month in 2009/10, 0.8k/mo in 2010/11 and 0.3k/mo in 2011/12. We show the strength of the relationship between claims and the market each week in this note, so we think it's worth noting that the employment data has just entered a period of tailwind, after having been facing a headwind for the last six months.

 

In the second chart, we show the same dynamic, but for Nonfarm payrolls (private). The trend is the same. Tomorrow's report on August NFP will bring to a conclusion the headwind data, and usher in the next six months of tailwind data. In case anyone's curious why this is the case, it's principally a byproduct of errors in the government's seasonal adjustment factors stemming from the dramatic deterioration in the economy immediately following Lehman Brother's collapse. This distortion will be with us for two more years, becoming slightly less significant each year and then will disappear entirely three years from now (government models use a 5-year lookback).

 

JOBLESS CLAIMS: SIX MONTHS OF TAILWINDS ON TAP - Claims September

 

JOBLESS CLAIMS: SIX MONTHS OF TAILWINDS ON TAP - NFP September

 

JOBLESS CLAIMS: SIX MONTHS OF TAILWINDS ON TAP - sine wave

 

SNAP: Food Stamp Participation Growth, While Trending Lower, Ticks Up In June (the Most Recent Month)

The number of people receiving government assistance to buy food in the U.S. reached 46,670,373 people in June, 2012, or 14.8% of the population. In terms of households, there are 22.4 million receiving assistance, or roughly 19.3% of U.S. households. In June alone, 173,612 additional people joined the program vs. May 2012. That's a lot. The number of people on food stamps has risen 75% since June of 2007. Said differently, in the last five years, an additional 20 million people have begun receiving food stamps. For reference, that's just slightly more than the entire population of New York State (19.5 million). 

 

If there's any silver lining here, it's that rate of growth (YoY) among food stamps participants has been slowing. We show that in the black line in the chart below. Although it's worth pointing out that the most recent data was actually a sequential acceleration on a YoY basis. 

 

JOBLESS CLAIMS: SIX MONTHS OF TAILWINDS ON TAP - SNAP 3

 

Claims: The Data

Initial claims fell 9k to 365k last week. After incorporating a 3k upward revision to the prior week's data however, claims fell 12k.  Rolling claims rose 0.25k WoW to 371.25k. On a non-seasonally adjusted basis, claims fell 4k. 

 

We also saw some modest improvement in the YoY change in the rolling NSA series, which came in at -8.2% versus -7.7% in the prior week. As a reminder, this is the series we use to gauge actual underlying improvement in the jobs picture. It's still improving.

 

JOBLESS CLAIMS: SIX MONTHS OF TAILWINDS ON TAP - Rolling

 

JOBLESS CLAIMS: SIX MONTHS OF TAILWINDS ON TAP - Raw

 

JOBLESS CLAIMS: SIX MONTHS OF TAILWINDS ON TAP - NSA Claims

 

JOBLESS CLAIMS: SIX MONTHS OF TAILWINDS ON TAP - Rolling NSA

 

JOBLESS CLAIMS: SIX MONTHS OF TAILWINDS ON TAP - S P

 

JOBLESS CLAIMS: SIX MONTHS OF TAILWINDS ON TAP - Fed

 

JOBLESS CLAIMS: SIX MONTHS OF TAILWINDS ON TAP - NSA YoY

 

Yield Spreads

The 2-10 spread was flat WoW with both 2 and 10yr treasuries falling 4bps. The 2-10 spread is at 1.37%, which brings its QTD level down 18 basis points vs 2Q12. Net interest margin comparisons will still be down linked-quarter.

 

JOBLESS CLAIMS: SIX MONTHS OF TAILWINDS ON TAP - 2 10

 

JOBLESS CLAIMS: SIX MONTHS OF TAILWINDS ON TAP - 2 10 QoQ

 

Financial Subsector Performance

The table below shows the stock performance of each Financial subsector over multiple durations. 

 

JOBLESS CLAIMS: SIX MONTHS OF TAILWINDS ON TAP - Subsector Performance

 

JOBLESS CLAIMS: SIX MONTHS OF TAILWINDS ON TAP - Companies

 

Joshua Steiner, CFA

 

Robert Belsky

 

Having trouble viewing the charts in this email?  Please click the link at the bottom of the note to view in your browser.  


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

Getting Emotional With LULU

Takeaway: We'd probably short LULU when the time and price is right despite how much we like the brand. There's a difference between a stock and brand

Lululemon Athletica (LULU) is one of the hottest brands out there. With the yoga craze in full swing, women are flocking to their nearest LULU store to plunk down a few hundred bucks on yoga pants, mats and accessories.

 

It’s important to be able to separate yourself from the hype. There is Lululemon the brand, the company and the stock. We think the brand is great, the company is good and the stock is below-average…at best. LULU has the ability to go from a $1.2 billion brand to a $3-4 billion brand in the next five years if it can continue to flawlessly execute its strategy. There’s tough competition in the space, namely from Nike (NKE) and Under Armour (UA).

 

 

Getting Emotional With LULU - lululogo

 

 

If you remove the emotions surrounding Lululemon the brand, you’re faced with the underlying numbers and maths. After examining the metrics surrounding LULU, you realize that the company needs to grow its online (.com) presence to eclipse that of existing store sales. There’s also the issue of implied new store productivity. Per Hedgeye Retail Sector Head Brian McGough:

 

“In looking at these numbers on the heels of implied new store productivity going from 175% in 2010, to 95%in 2011, and then down another 30% in 1Q12, we think that we’re going to need to see a massive ramp in comp in order to offset this trend.”

 

So coming full circle, one must separate themselves and their emotions from LULU. Once you do that, the company, despite its sexy yoga styling, looks like a short. At the very least, we are not the buyers, especially in advance of its next quarterly earnings report. In time, we could be short LULU and would do so when the fundamentals and quantitative setups fall into place.

 


WWW: Opportunity Knocking


We've been working more and more on WWW since the PSS acquisition, and while today's pre announcement by no means is positive, it does not change the underlying reason why we've been warming up to it. It draws attention to risks in Europe, which we probably under appreciated. But we're seeing downward revisions in next year's EPS below a level we think the company will earn.

 

Consider the following:

  • WWW’s European business has been a drag on performance for several quarters now and continues to be. Underestimating this headwind has been a big miss by management and has lead to earnings disappointments in each of the last two quarters for the first time in over 4-years. WWW is not alone as the rest of retail has suffered a similar plight. While this underperformance is not new news, continued weakness is coming in below expectations and that’s not good for near-term results – we get that.
  • It’s worth noting, however, that EMEA was already running down double-digit in Q2 so it’s not clear yet if there’s incremental weakness, or simply a delay in sales reaccelerating. We expect the company to elaborate on this later today.
  • EMEA accounts for ~25% of revenues and a similar if not slightly greater portion of WWW’s earnings. Relative to our expectation for Q3 EMEA sales to reflect improvement coming in down –HSD, this update impacts revenues by an incremental $6-$10mm in the quarter and $0.15 in EPS for the year. At historical multiples (~14x EPS), we’d expect this to impact the value of the stock by ~$2/share near-term.
  • Furthermore, once the PLG deal closes (early Oct), EMEA will account for closer to 15% of revenues. With less than 10% of the PLG business coming out of Europe, we expect distribution expansion alone to reaccelerate sales in Europe.  
  • Outside of Europe, the base business is positive and improving with U.S. wholesale and retail both posting positive quarter-to-date performance. In addition, revenue compares getting increasingly more favorable over the next three quarters as the company laps slower European demand and the timing of military orders in 1H.
  • The margin setup also gets more favorable ahead. WWW took it’s medicine last quarter clearing excess fall/winter product. While this accounted for a -200bps gross margin hit, it also resulted in WWW’s sales/inventory
    spread turning positive for the first time in 10 quarters – very positive for gross margins headed into 2H.

Continued weakness overseas begs the question regarding the timing of the PLG deal to be completed in early October. While it will likely tarnish the timing suggesting an offset to what might be an eroding base business, we expect WWW’s base business to stabilize near-term and continue to post top and bottom-line growth in the single-digits and double-digits respectively.


More importantly, the positive impact of the PLG acquisition on NewCo is still largely underappreciated and outweighs this latest delta. While the company continues to guide to $0.25-$0.40 and $0.50-$0.70 in EPS accretion, we expect closer to $0.50 and $1.00 in F13 and F14.


To be clear, this incremental weakness out of Europe is unfavorable on the margin, but is not material enough for us to alter the positive outlook we have on the intermediate-to-longer term upside in earnings. We’re shaking out at $3.45 and $4.30 in EPS for FY13 and FY14 well above consensus, which still does not fully reflect the pending acquisition. All things considered, we’d be buyers on weakness this morning.

 

 

 WWW: Opportunity Knocking - WWW S

 

 


Draghi’s Newest Rescue Plan Revealed in September ECB Presser

Takeaway: the ECB’s sovereign bond buying resumes but it is far from the elixir to cure Europe’s ills in one shot. Growth will remain under pressure.

Positions in Europe: Long German Bonds (BUNL); Short EUR/USD (FXE); Short Greece (GREK)

 

Central Bankers of the World Unite!

 

Today ECB President Mario Draghi issued much of what was leaked in recent days – the newly invented Outright Monetary Transactions (OMTs) program. It will buy bonds on the secondary market of Eurozone member states, targeting bonds with maturities of 1-3 years. Draghi stated the program’s goal as: “OMTs will enable us to address severe distortions in government bond markets which originate from, in particular, unfounded fears on the part of investors of the reversibility of the euro.”

 

Draghi shied away from calling the scope of purchases unlimited, instead he stated that the buying size will be adequate to reach objectives and provide “a full and effective backstop that removes tail risk from the Euro area.” Draghi stated that OMTs buying will be fully sterilized (as to not influence money supply growth); will cover any country to the extent it is warranted (and/or request) with strict conditionality (including the adherence of ongoing fiscal consolidation programs); and that these bonds do not carry a senior creditor status. Of note that is that the Securities Market Program (SMP) will be terminated as of today.

 

Our skepticism runs high that such market intervention would end favorably for the region or that Draghi can truly remove tail risk from the region, however we expect a significant bounce across European capital markets and the common currency in response to the changing of the goal posts. This is very apparent today, but is it sustainable? Certainly Draghi is out to prove that he can maintain price stability and preserve the common currency – “full stop”.

 

Concerns with the OMTs:

  • While buying on the shorter end of the curve may suppress yields on short-term maturities, what will prevent the longer end from running away?
  • How will the ECB decide on the size of its purchases?
  • Could this OMTs intervention be complicated by the German Constitutional Court decision on 9/12 regarding the ESM?
  • How does Bundesbank President Jens Weidmann, who was the one voice of dissent in today’s decision, complicate the Eurozone’s united policy voice?
  • How impactful can this program be – similar to the SMP – until the Eurozone has a structured Fiscal Union?

 

Interest Rates on Hold

 

Regarding the policy decision, the council decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.75%, 1.50% and 0.00% respectively, which was in line with our forecast.

 

Interestingly, growth targets were revised down (versus the staff projection from June) as inflation projections were revised up. Again, this represents our fundamental case that despite all the market intervention, prices will (in time) reflect the underlying health (or lack thereof) in the region.

 

GDP growth:

-0.6% and -0.2% for 2012 (versus -0.5% and 0.3%)

-0.4% and 1.4% for 2013 (versus 0.0% and 2.0%)

 

HICP inflation:

 2.4% and 2.6% for 2012 (versus 2.3% and 2.5%)

 1.3% and 2.5% for 2013 (versus 1.0% and 2.2%)

 

For Draghi’s complete Introductory Statement click here.

For the press release of the Technical features of the OMTs click here.

For the press release of Collateral requirements click here.

 

Draghi’s Newest Rescue Plan Revealed in September ECB Presser - 2222. eur

 

Matthew Hedrick

Senior Analyst


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