As we pointed out this week, consumer confidence has been improving largely due to steadily improving expectations. The University of Michigan Consumer Sentiment numbers suggest that expectations may be correcting here, as the reality of still-anemic economic growth and higher food and gas prices hit home.
Earlier today, the preliminary University of Michigan Consumer Sentiment index fell to 68.2 from February’s 77.5 (the decline was the eighth largest since the index began being conducted monthly in 1978). Not surprisingly, the decline was likely caused by recent geo-political events and soaring gasoline prices. Importantly, the bulk of the decline came from plunging expectations, which fell 13.3 points from February to 58.3. Notably, Inflation expectations surged, especially short-term expectations, which jumped more than a percentage point to 4.6%.
In general, economic drivers of confidence remain very mixed; rising gas prices and geo-political events are depressing sentiment, while stock prices and the labor market are a net positive. We recently speculated that we could see an intermediate term bottom in the unemployment rate, as a large number of discouraged workers remain out of the labor force, but are likely to start looking as the economy improves. Another coming drag on confidence and spending is the necessary-but-significant austerity measures being adopted at both state and national level. The housing market, which is now in a double-dip (See our Financial team’s post, “DOUBLE-DIP IN HOME PRICES…” from yesterday for more), is an additional drag that the market seems to have paid scant attention to of late. This housing scenario is playing out in an ugly fashion and when – not if – the market has no option but to pay heed to this, it will be a significant depressant for confidence.
The outlook for confidence is suddenly less optimistic and I believe there are plenty of catalysts ahead that may further pull expectations, and sentiment, down.
We disagree with the noise about Nike’s futures growth rolling over. The underlying trend-line numbers should accelerate. Our call on the name and the space remain intact.
It used to be about two out of every three quarters where I’d have to come out and add context to an errant report about futures slowing (or accelerating) a week before Nike’s quarter.
Well, it’s been a while, but I’m back. OTR (or some ‘channel checker’) is out saying that Nike’s order rate is slowing ahead of its 3Q report on March 17.
I disagree. Here are a few considerations.
- Let’s face some facts, being a ‘channel checker’ might work on tiny brands like K-Swiss, or in monitoring the popularity of certain styles or consumer preferences. But, is it viable to check with stores (where most managers don’t know the difference between year-over-year and sequential growth) and use such a small sample as a proxy for a $21bn global company? That’s like going into a Duane Reade and making a call on P&G based on shelf space for Crest.
- Last quarter Nike reported a 16% growth rate in North American futures. To put that into context, that’s about the dollar-equivalent size of Under Armour. NO ONE I have spoken to believes that this is sustainable – not even me, and my EPS estimates are well ahead of consensus for the next 2-years.
- Keep in mind that the 2-year comp for the past two quarters in North America is 5-6%. Technically speaking, Nike can report a NA futures number as low as 3% and sustain the 2-year run rate. We’re still looking for something closer to 10%. In other words, we’re modeling an acceleration in the 2-year comp for North America.
Backing our confidence is an extremely powerful product cycle in the athletic space, which is not surprisingly led by Nike.
For the past several months, we’ve been noting that Nike was about to set out on a campaign to re-define it’s “Free” concept – which is a technology originally launched in 2004 to mimic the sensation of running barefoot on grass. Nike might seem dismissive of the toning category, but mark my words – they’re miffed, BIG TIME. Our call has been that they’d start with the Free platform, and re-define the toning category. Now we’re starting to see it play out. Most notable is that the first big splash is in none other than China. This marks the first time we recall a new platform being launched anywhere except the US.
Make sure you scroll through all the pages for all the images. Looks like there’s Free Run 2 and Free 3.0
The 3.0’s are now available in one colorway on Nike.com and at Foot Locker. 99% of what was shown in China is not yet available for purchase here or anywhere. However, they’ll trickle out within a few weeks. A quick check on Nike.com reveals a Free platform that spans running, training, walking ,and even a bit of fashion. Some of this already existed. Importantly, we have yet to see the big marketing push that goes with the launch but our sense is that it’s coming real soon…
We’d also bet that this next wave of product innovation makes its way into the first three minutes of Nike’s March 17th 3Q EPS call.
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POSITION: No position in SPY
In this morning’s Early Look I posed the simple question: Quake or Correction?
I answered the question with Correction – and no that doesn’t mean I am bullish on US Equities. It doesn’t mean I am bearish at every time and price either. I’m trying my best to be Duration Agnostic.
1. The TRADE - from an immediate-term TRADE perspective, the SP500 is oversold at the 1288 line (see chart). It will also be immediate-term TRADE overbought on The Bounce at the 1312 line. Therefore 1 is the immediate-term TRADE range and I plan on managing my risk exposures accordingly.
2. The TREND – from an intermediate-term TREND perspective, the SP500 is overbought and oversold at 1343 and 1265, respectively. Therefore 1 is the intermediate-term TREND range and I plan on managing my risk exposures in the intermediate-term accordingly.
There should be plenty of emotion around the 1301 line. That’s the 50-day moving average that, for better or worse, a lot of people without a multi-factor, multi-duration, risk management process use. So watch the VIX, USD, and OIL as you keep all of the factors in mind.
Keith R. McCullough
Chief Executive Officer
Risk Managed Long Term Investing for Pros
Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.