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What's Next For The Manheim Index?

Takeaway: With the Manheim Index continuing to fall, it's likely the S&P 500 will follow in its footsteps based on past data.

Last month, we examined the relationship between the S&P 500 and the Manheim Index of Used Car Values. The Manheim Index is the de facto standard for determining the prices of used cars and is closely correlated with the S&P 500, meaning it can be viewed as a barometer of where the market is headed (to an extent of course). 

 

 

What's Next For The Manheim Index? - Manheim   SPX growth normal

 

 

Today, the Manheim Index posted its fifty consecutive month-over-month decline in August, falling 0.4% vs. July. On a year-over-year basis, the index is down 2.4%, which is an improvement vs. the July year-over-year decline of 3.7%. Suffice to say, the consecutive declines in the Manheim Index indicate that the S&P 500 will continue to fall as growth slows and the economy struggles to recover. We expect that the index will continue to decline going forward, albeit at a slower rate. 

 

 

What's Next For The Manheim Index? - Manheim   SPX normal

 

 

Of course, today’s announcement of QE3 by the Federal Reserve may change things in the short-term, but we’re confident that the rally will be short lived and that the market will post a correction soon enough.


CRI: Competitive Set Heating Up in Baby

Takeaway: Carter’s ~15% share of the kids apparel market is going to start feeling the heat from new(er) entrants.


The baby apparel market is getting increasingly crowded with the latest entry of Gilt Groupe. The company best known as a flash-sale pioneer is introducing Little Gilt as its first private label line highlighting a void in upscale baby essentials such as onesies, footies, and whatever else you care to swaddle your little one in.


This comes just weeks after JCP announced that it will be opening both Carter’s and Giggle shops for kids. While the Carter’s announcement was largely expected, not much was made of Giggle. We think this presents an underappreciated competitive threat to what is understood as broad channel fill for CRI at Penney's. Now we have Gilt entering the space. This isn’t exactly a direct competitor for CRI, but it’s the second announcement in the past month suggesting the Big 4 in children’s apparel (PLCE, Gymboree, Dressbarn, and Carter’s) are going to see increasing competition for their share of the market.


This is notable for a couple reasons:

  1. Gilt Groupe isn’t a start-up company/brand making yet another push into the space, but one that is quickly closing in on $1Bn in revenues with a significant online presence. The baby category is one of its largest. If we assume that it accounts for 20% of the business then were talking a retailer with nearly 2% share making a concerted effort to expand.
  2. Giggle is largely unknown due in part to the fact that it’s a smaller concept with only 13 retail stores – but not for long. At the risk of being anecdotal, we were in a Giggle store for the first time the week before the announcement and remarked at the time at what a great retail concept it was. It’s more one-stop-shop than apparel store, but as a result it’s a grandparents’ and parents’ dream for gifts or simply picking up a ‘couple’ things. It too is at the higher end compared to Carter’s, but they will compete in apparel. More importantly, Giggle will offer shoppers gift giving alternatives to basics that will likely pressure CRI’s traffic at JCP.


With much of Carter’s growth over the last decade coming from Playwear where it competes with Old Navy, the core baby business (36% of sales) has largely been considered untouchable. We won’t argue the merits of CRI’s baby  business – we think it’s great, and more importantly, so do the retailers and consumers. But increasing competition at the higher end of its pricing scale and availability of baby products both online and at retail (i.e. Giggle) provides consumers with more alternatives. At a minimum, that keeps the value proposition honest and price in check.


What this ultimately means for CRI is that it will have to spend more to protect its share of the pie. With the company also ramping less productive store growth in order to drive revenues, we see SG&A deleverage over the next three years continuing to pressure operating margins. The Street expects SG&A deleverage this year, but this year only. Based on the factors we’re seeing, we think the dynamics of the baby retail market are starting to change on the margin. As such, the rebound in CRI’s margins are likely to be less profound than expectations currently suggest.

 

CRI: Competitive Set Heating Up in Baby - Giggle SIS

 

CRI: Competitive Set Heating Up in Baby - CRI Mkt Sh 22bn

 

CRI: Competitive Set Heating Up in Baby - CRI Mix

 

 


CHART OF THE DAY: WILL BERNANKE GO FOR GOLD?

Takeaway: If the Fed does incrementally ease monetary policy today, it will be a meaningful step forward in the Fed’s policy to debase the US dollar.

SUMMARY BULLETS:

 

  • Long-term inflation expectations are significantly higher than they’ve been at previous iterations of QE/OpTwist.
  • As a result, if the Fed does incrementally ease monetary policy today, it will be a meaningful step forward in the Fed’s policy to debase the US dollar.

 

As we outlined in a research note Monday titled, “CHINA REMINDS US THAT GROWTH SLOWS AS INFLATION ACCELERATES”:

 

“… if the Fed announces QE3 on Thursday, the action would be a meaningful step forward in the Fed’s aggression towards achieving its mandates, based upon how elevated domestic inflation expectations are relative to previous iterations of QE/OpTwist.”

 

Looking to the charts of US 5yr and 10yr breakeven rates (TIPS), long-term domestic inflation expectations are particularly elevated – especially relative to where they’ve been at previous announcements of QE/OpTwist. As a result, any new LSAP policy announcement today out of the Federal Reserve would be a rather aggressive step forward in its pursuit of a lower USD and higher inflation. Never forget that Bernanke, a student of the Great Depression, remains quite fearful of the specter of deflation and could be ready to step up his efforts to avoid it.

 

CHART OF THE DAY: WILL BERNANKE GO FOR GOLD? - 2

 

Lastly, we’ve outlined in recent notes clear winners and losers from the Fed’s Policies To Inflate:

 

 

Best of luck out there,

 

Darius Dale

Senior Analyst


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INITIAL CLAIMS: HURRICANE ISAAC PUSHES CLAIMS HIGHER, UNDERLYING TRENDS STILL POSITIVE

Takeaway: Tropical Storm Issac added 9k to this morning's claims print. Our expectations for tailwinds over the next six months is unchanged.

Isaac Headwinds

Initial jobless claims rose 17k last week, or 15k after revision. The Department of Labor blamed roughly half of the increase on Hurricane Isaac, noting that "Several states have reported increases in initial claims (approximately 9,000 in total) for the week ending September 8, 2012 , as a result of Tropical Storm Issac.".  

 

Where do claims go from here? We know that there's an embedded tailwind in the September through April data, so we would expect to see a significant improvement over the next six months of data, though week to week changes will remain random. We profiled this historical relationship in last week's jobless claims note: "Jobless Claims: Six Months of Tailwinds on Tap".

 

Stripping out the seasonal adjustment nonsense, jobless claims are still improving. The YoY change in non-seasonally adjusted initial claims was -8.5% this past week, a slight improvement from the -8.1% YoY change in the prior week. 

 

Additionally, the S&P and the rolling claims series diverged this week. These two series are cointegrated, meaning that they can diverge in the short term but mean revert over the longer term. For reference, the current level of claims implies an S&P level of ~1345. The S&P is currently trading at 1436, or roughly 6.7% higher than the level implied by our claims-driven fair value model. 

 

Claims: The Data

Initial claims rose 17k to 382k last week but after incorporating the upward revision to last week's data, claims rose 15k. On a rolling basis, claims rose 3.25k WoW to 375k. The NSA series fell 12k.  

 

INITIAL CLAIMS: HURRICANE ISAAC PUSHES CLAIMS HIGHER, UNDERLYING TRENDS STILL POSITIVE - Raw2

 

INITIAL CLAIMS: HURRICANE ISAAC PUSHES CLAIMS HIGHER, UNDERLYING TRENDS STILL POSITIVE - Rolling

 

INITIAL CLAIMS: HURRICANE ISAAC PUSHES CLAIMS HIGHER, UNDERLYING TRENDS STILL POSITIVE - NSA

 

INITIAL CLAIMS: HURRICANE ISAAC PUSHES CLAIMS HIGHER, UNDERLYING TRENDS STILL POSITIVE - Rolling NSA

 

INITIAL CLAIMS: HURRICANE ISAAC PUSHES CLAIMS HIGHER, UNDERLYING TRENDS STILL POSITIVE - S P

 

INITIAL CLAIMS: HURRICANE ISAAC PUSHES CLAIMS HIGHER, UNDERLYING TRENDS STILL POSITIVE - Fed

 

INITIAL CLAIMS: HURRICANE ISAAC PUSHES CLAIMS HIGHER, UNDERLYING TRENDS STILL POSITIVE - YoY

 

INITIAL CLAIMS: HURRICANE ISAAC PUSHES CLAIMS HIGHER, UNDERLYING TRENDS STILL POSITIVE - Recessions

 

INITIAL CLAIMS: HURRICANE ISAAC PUSHES CLAIMS HIGHER, UNDERLYING TRENDS STILL POSITIVE - Rolling Claims Linear

 

Yield Spreads

The 2-10 spread widened 13 bps WoW as the 10 yr treasury yield rose 16 bps. QTD, the 2-10 spread is averaging 1.34%, which is down 17 basis vs 2Q12. 

 

INITIAL CLAIMS: HURRICANE ISAAC PUSHES CLAIMS HIGHER, UNDERLYING TRENDS STILL POSITIVE - 2 10

 

INITIAL CLAIMS: HURRICANE ISAAC PUSHES CLAIMS HIGHER, UNDERLYING TRENDS STILL POSITIVE - 2 10 QOQ

 

Financial Subsector Performance

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

 

INITIAL CLAIMS: HURRICANE ISAAC PUSHES CLAIMS HIGHER, UNDERLYING TRENDS STILL POSITIVE - Subsector Performance

 

INITIAL CLAIMS: HURRICANE ISAAC PUSHES CLAIMS HIGHER, UNDERLYING TRENDS STILL POSITIVE - Companies

 

Joshua Steiner, CFA

 e

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.  

 


One Big Mess

ONE BIG MESS

 

 

CLIENT TALKING POINTS

 

PLEASE IGNORE THE RUMORS

Fib after lie after fib, there is always someone out there talking about China and how it has no concern for inflation (it most certainly does) and will still go into another round of easing soon, etc. This is nothing but nonsense. Six weeks of rumors have gone by and the Chinese stock market is still in the gutter. Now what do you say? Is there still hope in the form of central planner bailouts? We think not.

 

 

ONE BIG MESS

If the market goes up, it’s a mess for the economy. How? 0% rates are a bane for retirees with fixed-income portfolios, small business owners and higher commodity prices. If the market goes down, it’s a mess for the market. When stocks fall, everyone feels like a loser. Right now, growth is slowing all around us and while the market is up year-to-date still, it’s nothing to cheer about.

 

_______________________________________________________

 

ASSET ALLOCATION

 

Cash:                Down

 

U.S. Equities:   Flat

 

Int'l Equities:   Flat   

 

Commodities: Flat

 

Fixed Income:  UP

 

Int'l Currencies: Flat  

 

 

_______________________________________________________

 

TOP LONG IDEAS

 

NIKE (NKE)

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.

  • TRADE:  LONG
  • TREND:  LONG
  • TAIL:      LONG            

 

PACCAR (PCAR)

Emissions regulations in the US focusing on greenhouse gases should end the disruptive pre-buy cycle and allow PCAR to improve margins. Improved capacity utilization, truck fleet aging, and less volatile used truck prices all should support higher long-run profitability. In the near-term, Paccar may benefit from engine certification issues at Navistar, allowing it to gain market share. Longer-term, Paccar enjos a strong position in a structurally advantaged industry and an attractive valuation.

  • TRADE:  LONG
  • TREND:  LONG
  • TAIL:      LONG

 

LAS VEGAS SANDS (LVS)

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.

  • TRADE:  LONG
  • TREND:  NEUTRAL
  • TAIL:      NEUTRAL

  

_______________________________________________________

 

THREE FOR THE ROAD

 

TWEET OF THE DAY

“According to the Chinese papers today : Big stimulus will limit economic growth. They get #inflation.” -@HedgeyeDJ

 

 

QUOTE OF THE DAY

“After all is said and done, a lot more will be said than done.” –Unknown

                       

 

STAT OF THE DAY

$7.3 billion. The amount of money offered by Thai billionaire Charoen Sirivadhanabhakdi for beverage conglomerate Fraser & Neave. 

 

 

 


Walking Away

This note was originally published at 8am on August 30, 2012 for Hedgeye subscribers.

“In many cases, they simply walked away.”

-Hampton Sides

 

That’s a quote about the Anasazi people of Chaco Canyon in Chapter 31 of Blood and Thunder. By 1150 AD, “just as quickly as they had burst upon the scene, the Chacoan culture ebbed… the Anasazi had overfarmed, overhunted, and overlogged.

 

After a 200 year (950-1150 AD) “cultural boom that has no parallel in North American pre-history… archeologists have come to call this the Chaco Phenomenon… this environmental upheaval led, predictably enough, to a social upheaval.” (pages 266-267)

 

Whether some study history doesn’t matter. Markets do. They rise and fall. For centuries,  ideologies, regimes, and civilizations have lived and died by the sword of evolution. Just when you don’t think it could never happen to yours, it starts happening.

 

Back to the Global Macro Grind

 

How long can Keynesian governments over-spend, over-consume, and over-promise on bailout resources that they do not have?

 

I don’t know. And neither did Jim Rickards on our Currency Wars conference call yesterday. What we both agreed on, however, is that within the framework of considering global markets as a complex system, we’re getting real close to the tipping point.

 

Rickards explained it using “critical threshold” math. I always discuss it internally within the Chaos Theory of emergent properties triggering phase transitions. For those of you who are Keynesians or Monetarists, we’re talking a different risk management language here. Alongside physics, applied math, etc., we’ve chosen to think outside the Western academic box. We’ve evolved.

 

To simplify the complex, a “phase transition” is the transformation of a dynamic system (global markets, across asset classes) from one state to another. Pundits don’t get why they call it this, but they call it something like “risk on, risk off.”

 

Unfortunately, phase transitions don’t happen like the Karate Kid learning how to wax. There is no centrally timed “on, off.” There is no “smoothing mechanism” or certainty in analyzing when emergent properties (risk spreads) move into a phase transition.

 

In thermodynamics, you can understand what a phase transition is by reading an 8th grade Chinese textbook (they have them in English too). “For example, a liquid may become gas upon heating to the boiling point.” (Wikipedia)

 

What’s the market’s boiling point?

 

To answer that question, many people who have not evolved their process in this business would answer using the US stock market and maybe a 50-day moving average sprinkled with some storytelling dust.

 

*Risk Manager Note: the US stock market is not the dynamic and globally interconnected currency, commodity, bond, etc. market that our 27 multi-factor, multi-duration model is writing about every day.

 

Jim Rickards is very good because markets have humbled him enough over the years to answer the aforementioned question with “I don’t know.” That’s also a cornerstone of what we (Chaos and Complexity Theorists) do vs. what they (Keynesian Policy Makers) do.

 

We Embrace Uncertainty.

 

One suggestion I had to answering the most frequent question I get from clients (again, what’s the boiling point, or point when this entire centrally planned gong show of broken policy promises implodes) was measuring Spread Risk in key Global Macro relationships:

  1. The long-term spread between Money Supply (rising as they print money) and Velocity of Money (falling, fast)
  2. The long-term spread between the US Dollar and the CRB Commodities Index
  3. The long-term spread between the SP500 priced nominally versus priced in Gold (see Rickards’ Chart of The Day)

I’ve probably geeked out enough on the math this morning, but since Paul Ryan is going all-math on CNN’ers, I’m cool with it.  I’ll also leave you this morning with more questions than any of us have answers.

 

But that’s cool too - if that’s the story of your professional life, you really are constantly learning and evolving.

 

The Hedgeye Portfolio is beta adjusted net short for this morning’s US market open. We continue to think you sell stocks and commodities at VIX 14-15 and buy bonds there too.

 

Timing matters; especially when entire populations of investors are Walking Away from something that’s been abused and broken – the market’s trust.

 

My immediate-term risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, 10yr Treasury Yield, and the SP500 are now $1652-1679, $111.79-113.76, $81.11-81.97, $1.23-1.26, 1.58-1.71%, and 1401-1419, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Walking Away - Chart of the Day

 

Walking Away - Virtual Portfolio


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.64%
  • SHORT SIGNALS 78.57%
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