Working Women

Takeaway: Here’s why employment among your women is increasing.

Here’s a number from today’s jobs report that most overlook – the employment growth among women aged 20 to 34. As the chart below shows, that year-on-year employment growth among those women is accelerating.


Those numbers dovetail with Healthcare Sector Head Tom Tobin’s theme of rising birth rates as employment often comes with health insurance, which is pretty much a necessity before having a child.


Working Women  - wecantdoit


Working Women  - women

KSS: Risk Of Share Loss Is Greater Than Most People Think

Takeaway: We think KSS stole as much as $800mm in sales from JCP. JCP wants it back. Succeed or not, JCP will inflict damage on KSS as it tries.

Conclusion: We think that KSS stole as much as $800mm in sales from JCP last year. JCP wants it back. Succeed or fail, JCP will inflict damage on KSS that is not appreciated.


We’d been assuming for much of the past year that the primary beneficiaries of JCP’s share loss have been Macy’s and GPS (Gap and Old Navy US). At face value, the sheer dollar shift in 2012 supported this thesis. But our recent work has presented us with new data that make us think we’ve been negative on the wrong names. Specifically, we recently conducted an extensive consumer survey to understand why consumers have shifted dollars away from JCP, and where the share has gone. And the big winner (and soon to be loser) turned out to be Kohl’s. Macy’s came in at number two, but by a wide margin. Gap looked surprisingly good.


Survey Says: As outlined in the chart below, consumers claim that almost 19% of items that they shifted away from JCP are now being purchased at Kohl’s. The math is pretty simple. $4.3bn in sales lost * 18.6% share shift = $800mm.  But the obvious counter-attack is “That can’t be right. KSS has been putting up horrible numbers – that’s way too high as KSS only gained $475mm in net sales in 2012”. It’s a logical question, and we’d ask the same one.


But our sense is that what’s actually happening is that the $475mm sales gain includes upwards of $800mm in sales gains from JCP.  In other words, sales on an organic basis were likely down at JCP last year by several hundred million.


We understand that there is sampling error associated with every form of survey – ours included. But we should note that this is not a typical ‘ask a bunch of people at the Garden State Plaza Mall what they think’ kind of survey. We put this up any other one out there.


Even if you do want to adjust for sampling error, these numbers are still so high that we can raise a very large red flag for anyone modeling KSS’ comp or Gross Margin out over the next 1-2 years. Customers are never easy to win back, but we surveyed how consumers would respond to pricing, promotions, private label and remodels, and we feel pretty confident that KSS is going to have a problem on its hands.


Stores Shopped Instead of JCP (blue column) vs Items Dispersion of Where Items Where Purchased (Gray)

KSS: Risk Of Share Loss Is Greater Than Most People Think  - shareshift

Source: Hedgeye Research


Share Gain From JCP By Income

KSS: Risk Of Share Loss Is Greater Than Most People Think  - share2

Source: Hedgeye Research

Labor Pains?

Takeaway: Here’s how to really understand what the labor force participation rate really means.

Lots of Tweets tweeted. Lots of ink spilled. Lots of pundits, well, punditing. Lots of noise. It’s the first Friday of the month after all, and the government just released its monthly unemployment report. As Keith says, all that really matters in today’s report is how the market reacts to it.


You will hear, though, a lot about the labor force participation rate today, which today’s report showed declined to 63.2% in August, its lowest level in 25 years, and down from 63.4% last month.


Rather than just making noise about this topic, we have been doing real research on it. Here’s an excerpt from a note that Macro Analyst Christian Drake wrote about the labor force participation rate.


Despite its descent to old-hat, punditry talking point over the last five years, Trend movement in labor participation remains critical to the forward growth outlook. 


After all, if population growth is slowing and the share of that population that is working is declining, productivity has some heavier lifting to do to keep real per capita output going in the right direction. 


Demographic, cultural, and institutional trends are generally glacial and collectively serve to drive the broader, directional Trend in the Labor Force Participation Rate (LFPR).  Over the last 5 years, the straightforward, central question facing economists is what temporary (and potentially permanent) impact the shock of the Great Recession had on labor participation. 


From a research perspective, the aspirational goal has been to discern what the prevailing gap is between where we are currently on the LFPR and where we would have been without the cyclical impacts. 


Academic literature over the last 5 years is replete with analyses attempting to decompose the cyclical and secular components impacting labor force participation.  On average, the research suggests around 40-60% of the decline in the LFPR since 2007 could be attributed to cyclical factors. 


The truth is that attempting to parse the Cyclical and Trend components of Labor Force Participation, with precision, is a quixotic pursuit.  It’s some amorphous combination of the two. 


From an investment perspective, understanding the principal drivers of the LFPR, the key considerations facing the forward outlook, and the highest probability TREND trajectory hold more practical significance than decomposing the Cycle/Trend impacts with exact precision.   


With that in mind, let’s take an abbreviated, Socratic tour of Labor Force Participation.   


What has been the larger Trend in Labor Force Participation?

Taking a long-term view, the Chart of the Day below illustrates the 3 primary labor participation trends which have prevailed over the last 65 years.  Briefly, from 1948 to the mid 1960’s, participation was largely stable. 


From the 1960’s until the turn of the century, driven by Baby Boomers (born 1946-1964) entering prime working age (24 – 54) and a secular increase in female participation, LFPR showed a persistent increase. 


From 2000 to present, the trend has been one of decline as the median age of the workforce rose, Boomers began matriculating towards retirement and dual recessions all weighed on the participation rate.


Is Labor Force Participation sensitive to the Business Cycle?

The correlations aren’t exceedingly strong, but yes.  Here, it’s sufficient to simply observe the LFPR in the post-recessionary periods in the chart below.  In each instance, the participation rate dips in the wake of the cyclical downturn. 


So, labor participation shows some economic/business cycle dependence and the broader Trend since the turn of the century has been one of decline.  With no peri-recession tailwinds from cyclical or secular factors, the fact that Labor Force Participation declined in the wake of the Great Recession is not a surprise. 


What has been the impact of domestic demographic Trends?

We’ll explore the multitude of factors impacting the LFPR in more detail in a subsequent note.  Here, we’ll consider the impact of age demographics on the Trend movement in the LFPR. 


Historically, different age groups have shown typical, largely fixed, participation rates.  Labor Participation peaks progressively from age 16 into the mid 40’s, gradually declines to age 64, then drops precipitously.  Thus, as population shares of the different age groups change it impacts the prevailing, aggregate participation rate. 


In addition to plotting the actual LFPR (blue line), in the Chart of the Day, we show the estimated trajectory of participation based on the average 1997-2007 participation rate by age for those aged 16 years and older (orange line).  The extrapolation suggests greater than ~40% of the decline in the LFPR post-2007 could be attributed purely to age demographic trends.


Extending the forecast, demographic trends, in isolation, would predict LFPR to decline to 64.1% in 2015 and a further decline to 62.5% in 2020.  Clearly, the Trend remains one of decline. 


What sits as a primary swing factor for LFPR over the intermediate term?

The level of long-term unemployed associated with the great recession was unprecedented.  If the long-term unemployed do come back then we can expect upward ‘cyclical’ pressure on labor force participation as economic conditions improve. 


If, however, the LT unemployed fail to return to the labor force, the recessionary shock could be viewed to have changed the structural and secular outlook for labor market participation.  In effect, shifting the LFPR Trend line lower, compressing the existent cyclical gap (i.e. the spread between the orange & blue lines below), and lowering the potential upward pressure on the LFPR (& unemployment rate) as economic conditions improve. 


Regardless of the cyclical impacts on Labor Participation, growth in the supply of labor will continue to slow vs the multi-decade average. 


A TREND deceleration in working age population growth alongside a decline/flattening in labor force participation rate will put secular pressure on domestic labor supply, serving as a headwind to potential GDP and a tailwind to real wage growth.   As a result, productivity gains will be an increasingly important driver of real output growth over the coming decade(s).


Innovation drives productivity.  Human Capital drives innovation.  Circumstance will necessarily drive our collective pursuit of human capital.  We’ll be increasingly responsible for our own (economic) fate – fancy that.   


Labor Pains? - Jobs


Labor Pains? - LFPR Demographics

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Jobs and Bonds

Client Talking Points

Jobs and More Jobs

Today’s unemployment report came in largely as expected, but don’t get too fixated on it. We don’t believe the government’s monthly report  is necessarily predictive of economic growth – we take our cues from the non-seasonally adjusted jobless claims numbers, and those numbers are showing their fastest rate of improvement in more than a year.  We’ve been making the call that the economic growth is accelerating and that the jobs picture is improving for months now.

Bills and Bonds and Rates, Oh My

They say, “Don’t fight the fed.” We say, “Don’t fight economic gravity.” If you look at soaring yields on two-year and ten-year Treasurys, the bond market is doing anything but fighting economic gravity. It’s telling us economic growth is real.

S&P 500

The Institutional Investor survey just  his year-to-date lows in the percentage of investors who call themselves bullish (37.1%).  Will the S&P  to hit its all-time high of 1709? That number is in play just as most investors are not positioned for it.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.


Health Care sector head Tom Tobin has identified a number of tailwinds in the near and longer term that act as tailwinds to the hospital industry, and HCA in particular. This includes: Utilization, Maternity Trends as well as Pent-Up Demand and Acuity. The demographic shift towards more health care – driven by a gradually improving economy, improving employment trends, and accelerating new household formation and births – is a meaningful Macro factor and likely to lead to improving revenue and volume trends moving forward.  Near-term market mayhem should not hamper this  trend, even if it means slightly higher borrowing costs for hospitals down the road.


Financials sector senior analyst Jonathan Casteleyn continues to carry T. Rowe Price as his highest-conviction long call, based on the long-range reallocation out of bonds with investors continuing to move into stocks.  T Rowe is one of the fastest growing equity asset managers and has consistently had the best performing stock funds over the past ten years.

Three for the Road


“Was there an eclipse? France is considering cutting the corporate tax rate from 33% to 30%.”



“Losers assemble in little groups and complain. Winners assemble as a team and find ways to win.” – Emlen Tunnell


7 and 43, The number of touchdown passes Denver quarterback Peyton Manning threw in last night’s NFL season opener. It was the first time in 43 years that a quarterback threw that many touchdown passes in a single game.

September 6, 2013

September 6, 2013 - dtr



September 6, 2013 - 10yr

September 6, 2013 - spx

September 6, 2013 - nik

September 6, 2013 - dax

September 6, 2013 - dxy

September 6, 2013 - oil

September 6, 2013 - natgas


September 6, 2013 - VIX

September 6, 2013 - yen

September 6, 2013 - gold
September 6, 2013 - copper


Faster Forecasting

This note was originally published at 8am on August 23, 2013 for Hedgeye subscribers.

“We are almost entirely incapable of predicting the future.”

-George Gilder


That’s the closing sentence to the opening paragraph to “The Need For A New Economics”, which  is Chapter 1 of George Gilder’s latest book, Knowledge And Power. 


The opening sentence is better: “Most human beings understand that their economic life is full of surprises.” And it’s better because it’s more in line with reality than an all-or-nothing statement about forecasting.


For me, risk management isn’t about predicting the future. It’s about probability weighting our decisions within a repeatable, but flexible, process. If you establish a multi-factor, multi-duration process, you’ll find yourself forecasting when you are about to be right and wrong, faster. Changing your mind is more important than anchoring on predictions.


Back to the Global Macro Grind


As I was flying back from Los Angeles last night, I was thinking about everything I always think about when I have time to think – my family, my firm, and the Fed.


What on God’s good earth is the Fed going to do to my family and firm next?


It’s sad, but this is what our said free-market life has become. I was on the road all week seeing clients in California and I couldn’t go through 20 minutes of long-cycle (40-60 years) macro research without having to debate how the Fed can interrupt our analysis of things like economic gravity.

Never mind predicting the future, some of these un-elected central planners think they can “smooth” it! That’s just dumb. And I can only thank progressive information innovations like Google and Twitter for expediting the world’s education on that.


Bernanke’s Fed thought they’d be able to smooth the long-end of the yield curve – nope. Bond Yields continue to rip a series of higher-lows and higher-highs on accelerating US employment growth data. I know, after seeing the Nasdaq and SP500 correct -1.5-3% from their YTD highs, that must be the new bear case for US Equities. The data is now too good.


Got good data? Here’s how the most important leading economic indicator for US bond yields did this week:

  1. Initial Jobless Claims rose 16,000 this week to 336,000
  2. The 4-week rolling avg of claims dropped 2,250 this week to 330,500
  3. The 4-week NSA rolling avg of claims was -10.3% y/y versus last week’s -7.8% y/y

In other words, the bond market has it right. The Fed and bond bulls are still fighting both the data and the market. NSA (non-seasonal adjusted claims) remain our preferred leading indicator, primarily because it fits the 10yr Yield like a glove.


BREAKING: the Fed’s new “forward guidance” model is called the market front-running them.


From our latest Hedgeye Jedi hire, Jonathan Casteleyn, check out this week’s fund flows (i.e. outflow data) in Fixed Income:

  1. Fixed Income outflows accelerated to -$3.9B this week versus -$2.0B last week
  2. Tax-free (municipal bonds) continued their sharp outflow trend, losing another -$2.0B last week
  3. The 2013 weekly avg of Fixed Income inflow has now declined to $469M (vs +$5.8B in weekly inflows in 2012)

That’s not a typo.


Since President Obama is, allegedly, saying “no more bubbles” now, let me write that one more time – this past week’s #RatesRising Fixed Income OUTFLOWS were -$3.9B versus the 2012 Bernanke Bond Bubble weekly avg INFLOW of +$5.8B in 2012.




Nah. This ain’t cool bro. This is what we call another disaster for Americans who got jammed into everything yield chasing from Gold, to MLPs, to anything that looked and/or acted like a low-beta bond used to.


But don’t worry, Bernanke didn’t have anything to do with that or growth oriented investments pulverizing the slow-growth Yield Chasers (like Utilities) since bonds went over The Hedgeye Waterfall in June.


We use the thermodynamic model of the volume and velocity of water approaching its point of entropy (The Waterfall) as an alternative to the broken economic and market forecasting models of the Federal Reserve.


Rather than a crystal ball model, it’s a real-time probability weighted model that embraces uncertainty. And it works. What doesn’t work is attempting to ban and/or smooth things like free-market gravity.


As a result, the only long-term future prediction I will hang my hat on is that American monetary policy will evolve. If I’m wrong on that, as their old boy Keynes would say, in the long-run we’ll all be dead anyway.


UST 10yr 2.78-2.97%

SPX 1642-1671

Nikkei 13330-13845

VIX 13.97-15.65

USD 80.91-81.90

Yen 97.71-99.09


Best of luck out there today and enjoy your weekend,



Keith R. McCullough
Chief Executive Officer


Faster Forecasting - Chart of the Day


Faster Forecasting - Virtual Portfolio

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