To Be or Not To Be Tax Free

As fiscal losses mount at the local level and the back to school season begins,  the discussion surrounding tax free holidays is building.   Some states view these holidays a stimulus to help local businesses and consumers while others are clearly seeing incremental sales tax as a source of revenue.  As we head into the critical back-to-school selling season, it’s important to understand what’s different this year vs. last from both a timing and magnitude perspective.   And, with June sales reported tomorrow,  we expect to hear the first indications of how tax free holidays may be expected to impact July and August results. In an effort to capture the various shifts in timing and program parameters versus last year, we present the following graphics below. Here are a few noteworthy observations:

  • There are typically 3 different types of sales tax holidays: hurricane preparedness, clothing and school supplies, and energy efficient appliances.  For the purposes of this post we are focused on the clothing and school supplies.
  • The top 5 states most exposed to teens in the 15-19 year-old demographic are CA, TX, NY, FL, IL, representing 37% of the entire domestic teen market.  However, only three offer a tax free holiday (TX, NY, & FL).
  • The two biggest teen states (CA & IL) that don’t offer the tax free holiday have some of the highest state sales taxes in the country.  CA and IL are also #1 and #4 respectively on a list for highest projected budget gaps as a percent of the state’s general fund budget.
  • So far, FL and MD are the only two states adding events vs. this time last year.  They are adding 3 and 7 day tax-free events respectively.
  • GA, Washington DC, and South Carolina have either repealed or suspended their respective tax free holidays.
  • NY just repealed it’s tax-free status on shoes and apparel under $110, however this will not take effect until October 1st.  The suspension will last until April 1st, 2011, at which point a $55 tax-free threshold will be established for a year.  Then, in 2012, the original exemption will be reinstated.

With municipalities struggling to meet budgets, we should expect continued contraction in this list of tax free events as well as growth in efforts to add or boost sales tax overall.  


To Be or Not To Be Tax Free - TeenStateExp 7 10


To Be or Not To Be Tax Free - taxfree


Continuing a trend from last week the MACRO calendar continues to provide us with disappointing news.  Yesterday, the ISM non-manufacturing index fell to a four-month low of 53.8 in June from 55.4 in May, as new orders fell for a third straight month, declining to 54.4 from 57.1 in May.  The biggest concern was the demand outlook as order backlogs slipped to 55.5 from 56 and the employment index edged back below 49.7 from 50.4 in May.


Despite this, the S&P 500 experienced a Bear Market Macro bounce, as the S&P 500 finished higher by 0.54%.  The upside was driven by the strength in global markets, especially China.  The euphoria faded as the Consumer Discretionary (XLY) names underperformed heading into same-store sales Thursday.  The XLY was the only sector to be flat on the day.


The biggest divergence yesterday was the decline in the Russell 2000 which declined 1.5%.  Within the small cap space the S&P 600 Restaurant Index declined 3.6% on the day.  Yesterday, the S&P Retail Index declined 0.5% on a flurry of June same-store sales previews which focused on the favorable impact from the calendar shift, but raised concerns over 2H10 expectations.


The RISK AVERSION trade was evident yesterday as Treasuries were stronger with some help from the weaker-than-expected non-manufacturing ISM data.  The dollar index closed lower, closing at $84.03 down 0.62%.  The Hedgeye Risk Management models have the following levels for the USD – Buy Trade (83.80) and Sell Trade (85.18).  The VIX moved lower by 1.5% - the Hedgeye Risk Management models have the following levels for the VIX – Buy Trade (25.65) and Sell Trade (30.61).


With a sharp decline in the Dollar index, it’s worth noting a big spike in the euro - the euro traded up 10.87%, closing at 1.26.  The Hedgeye Risk Management models have the following levels for the EURO – Buy Trade (1.22) and Sell Trade (1.28).


The three best performing sectors yesterday were Utilities (XLU up 1.2%), Energy (XLE up 1.0%) and Technology (XLK up 1.0%).  The oil services group finished higher for a fourth straight session with the OSX +0.5%.  Despite a reversal in natural gas, coal stocks still finished mostly higher with some help from M&A activity.


The XLK outperformed as the S&P Software index rose 1.8% on the day, with CTXS +2.5%, MSFT +2.4%, ORCL +2.2% and RHT +1.8%.   


The Materials (XLB) was a laggard, weighed down by the paper and forest products group, where falling pulp prices have gained some attention.   The S&P Steel Index also declined by 0.8% on the day. 


In early trading copper is trading down for the first time in four days as the dollar is rallying.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (2.83) and Sell Trade (2.98).


In early trading gold is trading at a six-week low.  The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,187) and Sell Trade (1,229). 


The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (70.79) and Sell Trade (75.29). A slowing global growth outlook and a cyclical build-up in U.S. stocks are exerting downward pressure on the price of oil. 


As we look at today’s set up for the S&P 500, the range is 50 points or 2.6% (1,001) downside and 2.2% (1,051) upside.   Equity futures are trading below fair value continuing the weakness from yesterday afternoon.  On the Macro Calendar today, we have MBA Mortgage Purchase Applications.


Howard Penney













The Crossroads

“We have arrived at that point in time in which we are forced to see our own humiliation, as a nation, and that a progression in this line cannot be productive of happiness, private or public.”

-Henry Knox


I just finished reading 1776, by David McCullough.  He’s of no relation to Keith, but he, too, is a fine Yale man; even if not a hockey player. 


So why am I wasting my time reading early American history? Well, very simply, because the United States is at the crossroad of political and economic policy leadership.  The future will look remarkably different than the most recent past, and that future will be shaped by the decisions made by those who take leadership roles in the years ahead.


This is a year that is not unlike the year of 1776.  While the battle for independence was fought for many long years, the Founding Fathers changed the trajectory and future of America by declaring independence in 1776.  Many well known names played critical roles that year and in the continued battle for independence, but the name Henry Knox was one that jumped out at me from my readings.


Knox was a book seller from Boston, who quickly earned the trust and confidence of General George Washington.  Like much of the American Army in those days, he had very little real military experience.  But what he liked in experience, he made up for in courage and leadership.


The crucial recommendation that Knox made to General Washington, as a 26-year old, was that the Guns of Ticonderoga should be retrieved as they could have a crucial impact on ending the Siege of Boston. Washington appreciated the importance of increasing his artillery surrounding Boston, so he sent the young colonel on the mission to retrieve the Guns of Ticonderoga.


From early December of 1775 to late January of 1776, Colonel Knox and his men transported 59 cannons and mortars weighing more than 60 tons over 300-miles through the dead of winter.  Knox and his team averaged over five miles a day, and despite death and hardship, eventually arrived in Boston.  The British quickly realized they were outgunned, and shortly thereafter withdrew from Boston, which ended the Siege of Boston.


The key current strategic question facing the nation also relates to resolving a siege, the Siege of Deficit and Debt.  The United States currently has more debt on its balance sheet than any year since World War II.  You don’t have to be a student of history like David McCullough to realize that is not ok.


The Keynesians will have you believe that the way to reignite the American economy, and ultimately narrow deficits, is to Pile Debt Upon Debt. The flag bearer for this school of thought is none other than Nobel Laureate Paul Krugman. In a New York Time column on July 1st Krugman wrote:


“What’s the evidence for the belief that fiscal contraction is actually expansionary, because it improves confidence? ( By the way, this is precisely the doctrine expounded by Herbert Hoover in 1932.)”


While this is a synopsis, Krugman has consistently argued that the recent stimulus was not substantial enough and that austerity will lead to slow growth and, by the aforementioned association to Herbert Hoover, a Depression.


While using history as a guide is important, fear mongering as a way of substantiating economic policy, like using erroneous comparisons to Herbert Hoover, is not.  The stimulus undertaken globally over the past couple of years is about as good of a Keynesian experiment as we can analyze.  While the massive stimulus may have served to halt the economic slowdown in the short term, the massive amount of debt that was used has leveraged the economic future of the free world.


So, what’s the solution? Well, for starters, it begins with admitting what doesn’t work.  Massive government borrowing and associated debt that doesn’t create long run economic activity or build new industries, such as after World War II, doesn’t work.  Increasingly, it is also becoming clear that expanding the government doesn’t work either.


To this point, Krugman’s counterpart at the New York Times, David Brooks, offered some quantified support against increasing government spending.  As Brooks recently wrote:


“Moreover, public spending seems to have odd knock-off effects. Professors Lauren Cohen, Joshua Coval and Christopher Malloy of Harvard surveyed 42 years of government spending increases in certain Congressional districts. They found that federal spending increases dampened corporate hiring and investment in those districts.”


Brooks went on to highlight the need for confidence in our economy above all else.  The type of confidence that does not come with burgeoning deficits and fiat currencies.  According to Brooks, Lord Keynes wrote that the state of confidence is “a matter to which practical men pay the closest and most anxious attention.”


One thing I don’t currently have is confidence in the economic leadership of America.  I do have confidence that new leadership will emerge, just as it did with the 26-year old Henry Knox in 1776.


The real work at our firm gets done by the Young Hedgeye Knights who sit on our trading floor every day.  They open the office up at 430 a.m., and they are the guys and gals that shut the office down at night when most of us are already in bed.


Yes, indeed. The future economic leadership of this fine nation is not going to come from the Hallowed Halls of the Fiat Fools in Washington, but will come from the youthful entrepreneurs of our economic future. 


We are lucky to count many on our staff: Darius Dale, Matt Hedrick, Zach Brown, Allison Kaptur, Rory Green, Felix Wang, and Christian Drake.  All of these folks are in their mid to early 20s and collectively show more economic leadership daily than most of the Fiat Fools in Washington have shown in their careers.


The history of this nation has simply taught us this:  when this fine republic is at a crossroads, new leadership will emerge. 


I’m lucky enough to see this every morning.


Keep your head up and stick on the ice,


Daryl G. Jones

Managing Director


The Crossroads - DJ

Early Look

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China: The Great Shift Forward

Conclusion: After a series of shrewd moves by the government which have centered on raising domestic consumption, China is positioning itself as a defensive play in late 2010 and heading into 2011.


Here’s what we know – growth in China is going to slow. After posting +11.9% Y/Y 1Q GDP, calling for a sequential erosion from here in the midst of a sovereign debt scare in Europe which has eroded the purchasing power of China’s largest export market isn’t exactly a tough call to make. The government even said on Friday that their full year growth estimate is 9.1%, explicitly implying a deceleration from 1Q. With the Shanghai Composite down 27.3% YTD as of today, prices confirm this. Using marked-to-market prices as leading indicators, however, Chinese equity prices have been telling us to expect slowing growth all year long.


At a price, China’s growth will become attractive on the long side irrespective of slowing growth in the U.S. and in Europe because their government is proactively preparing them to weather the storm by fueling domestic consumption. Over the past several weeks, China has taken a number of steps to increase their citizenry’s purchasing power – none arriving with more fanfare than the de-pegging of the yuan.


Since relaxing the fixed exchange rate on June 19th, the yuan has gain roughly 0.7% vs. the dollar and today’s 12-month non-deliverable forwards suggest an appreciation bet of roughly 1.5% in a year’s time. Despite the prospects of a stronger currency, the People’s Bank of China has ruled out any sudden large appreciations and still mandates that the currency only fluctuates 0.5% from the daily official rate. As a result, we caution that the yuan’s appreciation may not likely be the silver bullet China is looking for to stimulate domestic consumption, which has fallen from 46.4% of GDP in 2000 to 35.6% of GDP in 2009. As a percentage of GDP, personal income has had an even more dramatic decline: 53% in 1999 down to just 39.7% in 2009.


There have, however, been a number of positive developments regarding wage growth and government stimulus that will help move China forward towards a more consumption-oriented economy, rather than one that has been fueled by manufacturing and exports in recent years. Those developments are listed below and are by no means limited to this summary: 

  • In April, Shanghai raised minimum wages 17% to 1,120 yuan per month. Guangdong (China’s largest export base) took up minimum wages in five locales within the province by an average of 21%.
  • On June 3rd, China extended its home appliance trade-in program until 2011. Sales of such appliances have reached 54B yuan and 5B yuan of subsidies were handed out since the start of the program.
  • On June 8th, a survey of Chinese employer’s hiring  plans reached a six-year high.
  • On June 11th, the IMF reported that the surplus of rural workers for labor-intensive work has fallen to about 25 million from roughly 120 million in 2007, which is bullish for wages in that sector (less supply). Conversely, research from China International Capital Corp. that suggests that 31 million Chinese will return to the labor market in 2011 after the completion of projects resulting from the government’s 4T yuan stimulus package. Net-net: supply of labor-intensive workers is still shrinking but perhaps at a slower rate, which is net bullish for wages.
  • On July 1st, Bejing increased monthly minimum wages by 20% to 960 yuan. In a similar fashion, Henan (China’s most populous province) raised its minimum wage by 33% to 600 yuan per month. 

All told, more than 20 provinces and municipalities plan to increase minimum wages this year, according to the Ministry of Human Resources and Social Security. As a result, we should begin to see evidence of accelerating domestic consumption in the coming months. Furthermore, companies that are positioned to service the Chinese local economy (i.e. domestic retailers and savings deposit institutions) will see an added kick from this wave of wage inflation.


Currently, both the Shanghai Composite and Hang Seng are broken from a TREND perspective and last Tuesday’s 4.3% and 2.3% respective declines in both indices on the heels of a downwardly revised Conference Board Leading Index suggest that consensus still has some ground to cover on the slowing Chinese growth story. When consensus finally catches up, our Hedgeyes will be looking to buy their capitulation on sale.


Darius Dale



China: The Great Shift Forward - Yuan Consumption

Hedgeye Retail: Mind This Freight Train


July 6, 2010


Is anyone paying attention to cost/price spreads in the apparel supply chain? With such a tight historical relationship with margins and the consensus banking on peak margins next year, the ‘proactive vs. reactive’ management style will be front and center in 2H.





Welcome back from the holiday everybody. Unfortunately, if you’re a bull I’m not going to give you much to support any view that lends itself to increasing exposure to US retail. That’s not to say we can’t still make money on the best ideas, but the supply chain headwinds start to kick in  -- well…about now.   Look at the charts below….


1)      Chart 1: This is what we call ‘Apparel Margin Kitty.’ In effect, it takes the change in the Apparel CPI and backs out the change in the import cost for apparel (a better proxy than PPI for the real cost of goods). It’s kinda simple. If the spread goes positive, it means that there is excess margin to be spread between suppliers, brands, retailers, and consumers.  If the spread goes negative, then the rate at which pieces of the supply chain start to beat each other up for margin dollars starts to go up. Anyone notice that we just had an event where the spread was 3-Standard Deviations above the mean (and had 8 quarters where it was 2SDs or better)? Do you also notice the latest point, and how dramatic the change has been as the ratio returns to Earth?

2)      Ok McGough, thanks for the academic exercise. I know that company-specific stories can still work in such an environment (in fact, that’s kind of my point). But check out chart #2. It shows the apparel/footwear supply chain’s margins over time vs. changes in the Price/Cost spread.  That’s pretty tough to argue with.

3)      Lastly, it exhibit 3 we outline correlations during different periods for different retailers. Statistically, there’s a ton of ways we can look at this. You can argue whether or not looking at the positive margin performers in a positive industry environment and neg. vs neg. is the way to go. Either way, it should give a little something to chew on to see how each company performed during different cycles over the past 13 years.


The punchline is that the industry is coming off a 2-year time period where sales have been down 5%, SG&A has been off 8-10%, working capital -20%, and capital spending down -30%.Margins remain near peak (esp in consensus estimates). Now we’ve got extremely tough cost/price spreads coming down the pike in 2H. We like names that have been proactively investing in their growth over the past 2 years (UA, NKE, RL). We’re downright frightened of those that are the inverse (JCP, JNY, DG, ROST).


Hedgeye Retail: Mind This Freight Train - Apparel Margin Kitty


Hedgeye Retail: Mind This Freight Train - Apparel CPI les Import Price and Industry Margins


Hedgeye Retail: Mind This Freight Train - Apparel CPI Less Import Price Industry Cycles 





- While this may not be the first time such a bill has been proposed, keep an eye on efforts to end tax-free internet shopping from those sites with no physical outlets. The bill’s author, Democrat Bill Delahunt suggests that such a measure to level the playing field between on and offline purchases could generate as much as $23 billion in incremental state taxes. Not surprisingly, Amazon and Ebay are against these efforts, while more traditional retailers are in favor.


- A study by Unity Marketing discovered that luxury shopping by “affluents” was down in 2009 from peak levels in 2006 (no surprise there). Approximately 44% of affluents purchased personal luxury items in 2009, down a full 10% from 2006 levels. Interestingly, those who did spend, spent on average 50% more than they did in 2008.


- According to the 2010 Digital Influence Index, 76% of consumers are less inclined to trust content written by a blogger who received a free sample in exchange for a review. Additionally, less than 20% of consumers trust blogs or posts written by writers being paid for their work. Despite this growing distrust, blogging and paid blogging remains one of the fastest growing PR mediums.





New York Suspends Sales Tax Exemption on Footwear and Apparel Under $110 Until Q2 2011 - The New York Assembly passed legislation last week to include the sales tax on clothing and footwear under $110. The sales tax exemption on clothing and footwear under $110 would be temporarily suspended from October 1 2010 through March 31 2011. Beginning April 1, 2011, the exemption would be reinstated at $55 until March 31 2012. The exemption would revert back to $110 on April 1, 2012. Local governments would be given the option to maintian their current exemptions, or opt into the exemption schedule spelled out in this section of the law.  <>

Hedgeye Retail’s Take:   While this is a blow to those  New York residents, this is hardly a one state trend.  We expect to see and hear about more tax benefits being taken away as local governments look to bridge budget gaps.  As it stands, it looks like back to school will be the last hurrah for New Yorker’s to fill their closets without paying a tax ranging from 4%-8.875%.


WMT's Chief Merchant Stepping Down, Opening Up a Chance to Remake Apparel Division - The impending departure of Wal-Mart U.S. chief merchant John Fleming gives Wal-Mart Stores Inc. a chance to remake the country’s largest apparel business — and Wall Street hopes the world’s largest retailer takes advantage of it. Fleming, a former Target Corp. department store executive who has spent the last decade at Wal-Mart, will step down as executive vice president and chief merchandising officer of the retail giant’s namesake division on Aug. 1. <>

Hedgeye Retail’s Take:  Though somewhat surprising given Fleming’s rise through the ranks, the role of Chief Merchant has never been a glorious one at the world’s largest retailer. In this case, any change should be viewed positively as the status quo was not driving non-food sales.  Given the company’s size it’s likely that the apparel program remains in limbo until a new leader emerges. Gets Investment from Venture Capital Firm Balderton Capital -  Balderton Capital, the London-based venture capital firm, is the latest investor to throw its weight behind online fashion retailing. The firm has taken a $9 mm stake in, a London-based men’s and women’s online fashion retailer that sees its niche as “accessible luxury.” The site specializes in designer labels and diffusion lines such as Alice by Temperley, D&G, McQ, and Vivienne Westwood Anglomania. Balderton joins existing private investors, including the retailer’s founder and chief executive officer Sarah Curran. <>

Hedgeye Retail’s Take:  If there’s one area that remains hot in  the world of retail investments, it’s private equity’s focus on e-commerce.  In this case, it looks like growth-starved “accessible luxury” brands are more than comfortable selling online vs. the old model which limited distribution to boutiques and high-end department stores.


Cutters Gloves Acquires Nokona - Cutters Gloves has acquired majority ownership of Nokona, the original American-made ball glove company. Rob Storey, who grew up in the business and has been the President of Nokona for the past 18 years, will remain as VP Operations and will continue to oversee all glove production.>

Hedgeye Retail’s Take: The marriage of innovative technology (Cutters – most commonly used football) with the legacy brnad of Nokona is a natural fit as the company looks to gain share of athlete’s bag. Still a minority player in the baseball glove market after 85-years, the youth of Cutter’s team should help breathe some life into Nokona’s brands.


Gulf Coast Oil Spill Threatens Retailers - As oil continues to flow into the Gulf of Mexico, retailers along the coast are facing a grim summer and an uncertain future. More than 10 weeks after BP’s Deepwater Horizon rig exploded offshore, storeowners throughout the region told Footwear News that their sales are down between 20% and 35%, due, in part, to the shutdown of the oil and fishing industries and the sharp drop in tourist traffic. <>

Hedgeye Retail’s Take: Among the most heavily exposed footwear related retailers to Gulf states (TX, LA, MS, AL, FL) include HIBB at ~31% and SCVL at ~26% of total stores. Interestingly, while SCVL (-23%) has underperformed the S&P (-15%) since the April 20 Deepwater Horizon oil spill occurred, HIBB has solidly outperformed (-11%). Yes, HIBB has less footwear exposure relative to SCVL, but this calls into question the sustainability of demand for $200 The North Face jackets that has driven sales of late at the sporting goods retailer.


Japan Luxury Market Improving According to McKinsey - McKinsey & Company, which surveyed both shoppers and executives, said the Japanese consumer appears to be emerging from her deep slumber although she’s more discriminating and price-sensitive than ever, seeking out deals at outlet malls or online. McKinsey said it doesn’t expect the Japanese luxury market to experience ”significant growth” anytime soon but it emphasized that the mood of both executives and consumers has improved substantially since last year.  <>

Hedgeye Retail’s Take: With the suggestion of “significant growth” aside, which we can’t say is expected by any in retail, improvement on the margin in Japan is an obvious notable for local retailers and those over-indexed to the market (e.g. TIF & COH) – the launch of RL’s ecommerce sites beyond its domestic portal couldn’t come soon enough.


PVH's Tommy Hilfiger To Open Paris Flagship - Tommy Hilfiger confirmed Monday it will open a 9,000-square-foot flagship at 65 Avenue des Champs-Elysées here this fall, solidifying the firm’s presence in one of its fastest-growing markets in Europe and on one of the city’s busiest and most famous boulevards. Daniel Grieder, chief executive officer of Tommy Hilfiger Europe, characterized the flagship as a dream come true for the American brand.  <>

Hedgeye Retail’s Take:  Following in Ralph Lauren’s footsteps, yet another Americana brand planting an expensive stake in the Paris market.  We wonder how Tommy will one-up Ralph and his restaurant which serves beef raised on his Colorado ranch. Steps Up Its Loyalty Program - Inc. announced it has added new benefits, such as a cash back incentive and promotions, to its Club O loyalty program. The program offers 5% in reward dollars for each purchase. Customers can redeem those dollars on future purchases, including gift cards. They can also combine those reward dollars with other coupon offers. Previously Club O offered members a 5% discount that excluded certain categories, such as books and media, and members couldn’t combine the discount with an additional promotion. <>

Hedgeye Retail’s Take:  Subtle but notable convergence towards a more traditional promotional tactic.  Loyalty programs have long been a part of retail, but less so in the e-commerce only world.  


E-retail in UK to Grow Big, To Become 50% of Total Sales by 2020 - E-retail sales in the U.K. will grow by 110% in the next 10 years, reaching 123 billion pounds ($186.7 billion) in 2020, predicts trade association the Interactive Media in Retail Group and technology and consulting company Capgemini in its 10th annual report on online sales. Moreover, the report suggests that online retail will account for half of all retail purchases by 2020 and retailers’ online presences will influence most other retail sales.  <>

Hedgeye Retail’s Take:  This has got to be one of the more bullish studies on e-commerce we’ve seen.  Historically, the a direct business has tapped out at around 13% of total retail sales, but this suggests otherwise.  If this holds true, we’re likely to see retail real estate enter a slump while margins (in theory) should rise.


Mango Ramps Store Growth - Spanish fast fashion retailer Mango plans to open about 60 new stores in China this year and double the number of stores around the world in five years from 1,400 stores that they currently hold to almost 3,000. CEO of Mango, Enric Casi, stressed that the company’s long-term goal is "to be present in all cities of the world, exceeding its average of three openings a week, approximately 150 new stores a year”. <>

Hedgeye Retail’s Take:  Without getting into the nuances of Mango’s business, any retailer looking to double its store base over a 5 year period, globally, is likely to hit some speed bumps along the way.  Growth for the sake of growth does not appear to be a concern for the Spanish retailer at the moment.  Clearly the family ownership structure keeps Mango less worried about outside concerns.


More Taiwanese Shoemakers Moving to the Mainland - In view of ever-increasing wages and currency fluctuation, Taiwanese shoe manufacturers have been relocating their business focus to the mainland in order to meet the growing domestic demand, according to the China Leather Industry Association.  <>

Hedgeye Retail’s Take:  More inflation drivers.

US Growth Continues To Slow...

Conclusion: the June ISM Non-Manufacturing report supports Hedgeye’s Bear Market Macro theme for Q3.


This morning ISM released its Non-Manufacturing report for June. Relative to May’s reading of 55.4, this morning’s 53.8 should be seen for what it is – a sequential slowdown in growth on a month-over-month basis.


We like to think our risk management process is duration agnostic. That is, we consume immediate term data within the framework of a multi-duration model (TRADE, TREND, and TAIL). From an immediate term (TRADE) and intermediate term (TREND) perspective, what’s clear in the chart below is that the slope of the line has turned negative. What was probably less obvious to the bulls is how this morning’s ISM Non-Manufacturing report fits within the context of the longer term picture.


We have circled 2 monthly reports with red circles – June of 2007 and 2010. What’s most interesting to us now is considering not only how elevated a reading of 53.8 is relative to where the US Consumer can take this chart (lower), but that there is a big seasonal factor to how this country thinks about the future. This is probably why bear markets tend to growl in the summer time and capitulate in the fall. The bulls are hungry for a bid that’s based on a forward growth outlook that just isn’t coming.


We’re not calling for a crash yet, but with every fleeting rally the SP500 has to a lower-high, we are asking ourselves why we aren’t. From ISM and housing reports to weekly jobless claims, the most recent data pertaining to US economic growth is bearish. To change the course of this chart’s path to the upside in the coming months would require a hope that we aren’t brave enough to sign off on as a probable outcome.


Our refreshed (as of 1PM EST) immediate term support and resistance levels for the SP500 are now 1001 and 1052, respectively.


Keith R. McCullough
Chief Executive Officer


US Growth Continues To Slow...  - ISM Non Manufacturing

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