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Morgan Stanley Defends Retail Sales' Seasonal Adjustments From "Crazy Zero Hedge Analysis"; BAC Upgrades Netflix

Tyler Durden's picture


You heard our side of the story. It is only fair you hear the other side too.

From Morgan Stanley's chief economist, David Greenlaw:

There is some crazy analysis on Zero Hedge that seems to be getting some traction because a few clients have asked about it (see their chart below). 



Basically, ZH claims that a bias in the retail sales seasonal adjustment factor distorted the July results to the high side.  However, they are looking at the dollar adjustment for the level of sales in July alone.  Since the main focus in the retail sales report is on the percent change in seasonally adjusted monthly retail sales, the relevant comparison is the percent change in the seasonal adjustment factor between June and July.  Moreover, calendar effects matter.  For example, the Fourth of July holiday was midweek this year and there were only 4 shopping weekends in July 2012 -- one less than in July of the past few years.  The last time the July calendar was identical to 2012 was in 2007.  So, we show below a comparison of the monthly percent change in the seasonal adjustment factor for 2012, 2011 and 2007.  The bottom line is that seasonal adjustment factor for July 2012 added about 2 percentage points to the monthly change in retail sales -- essentially the same as in July 2007. 



Note:  a positive % ch for the SF subtracts from the NSA change and a negative % ch in the SF adds to the NSA change

* * *

And now you know the Morgan Stanley version of things.

What can we say? In X-12-ARIMA we trust:

A Basic Seasonal Adjustment Glossary

ARIMA models     These are a versatile family of models for modeling and forecasting time series data. Seasonal ARIMA models have a special form for efficiently modeling many kinds of seasonal time series and are heavily used in seasonal adjustment. ARIMA is an acronym for AutoRegressive Integrated Moving Average.

Flow series    Time series measuring consecutive changes over a unit of time, such as monthly sales or monthly cash flows, or monthly changes in any stock series.

Irregular component    This is the residual time series that results from the removal of estimated seasonal and other systematic calendar-related components of an observed time series, along with the removal of an estimated trend-cycle component.

Moving holiday effects    These are systematic changes in the values of a time series that are associated with the timing of moving holidays, i.e. holidays whose dates vary from year to year, such as Easter, Passover, Ramadan, Chinese New Year and U.S. Labor Day. Estimates of one or a combination of such effects define the moving holiday component of time series.

RegARIMA models (Also regression+ARIMA models.)    In the seasonal adjustment context, a hybrid model in which some features of the time series, such as moving holiday, trading day and outlier effects, are modeled with linear regression variables while the remaining features (those of the regression residuals, including trend, cycle and seasonal components) are modeled with a seasonal ARIMA model.

Seasonal adjustment    The estimation of the seasonal component and, when applicable, also trading day and moving holiday effects, followed by their removal from the time series. The goal is usually to produce series whose movements are easier to analyze over consecutive time intervals and to compare to the movements of other series in order to detect co-movements.

Seasonal component    A time series whose values quantify (usually in percents or in the units of data measurement, e.g. dollars) variations in the level of the observed series that recur with the same direction and a similar magnitude at time intervals of length one year. (Length is measured in the calendar units of the observed series--usually quarters or months, sometimes semesters, weeks, or other units.)

SEATS (Signal Extraction in ARIMA Time Series)    This approach is used within TRAMO-SEATS and also within the X-13A-S seasonal adjustment packages. It can simultaneously estimate the different components of a time series.

Stock series    For the unit of time of the series, months for example, these are time series like end-of-month inventories that arise as the cumulative sum of inflows and outflows (i.e. monthly net flows) starting from some initial value in the past.

Time series    A sequence of measurements of an economic (or other) variable made at approximately equally spaced times. It is important that the definition of the variable and the method used to measure it be consistent over time.

Trading day effects     As practical concerns, these are systematic effects in monthly times series related to changes in the day-of-week composition of each month and, in some cases, also to changes in the length of February. For flow series (monthly accumulations of daily activity e.g. monthly sales), the increases or decreases from average day-of-week activity associated with the days that occur five times in the month in a given year are important. (If they are days of high sales volumes, the monthly value will be inflated, etc.) For flow series, the length of February can have an impact. (More days than average should produce more sales than average for February.) For stock series, such as end-of-month inventories, the extent to which inventories tend to rise or fall on the day of measurement (e.g. the last day of the month) can have an impact that is different from year to year. Attempts to measure analogous effects in quarterly series are seldom successful. A series of estimated trading day effects defines a trading day component for the time series.

TRAMO (Time Series Regression with ARIMA noise)     This approach is used within TRAMO-SEATS seasonal adjustment sofware. It is an approach to estimate and prior correct time series before seasonal adjustment.

TRAMO-SEATS     Seasonal adjustment software developed by the Bank of Spain. It uses models to estimate the different time series components.

Trend-cycle component     This is an estimate of the local level of the time series that is expected to include the effects of moderately short- and well as long-term movements associated with the "business cycle". It is often obtained by applying a customized smoothing procedure (a data-dependent "trend filter") to the seasonally adjusted series to suppress its oscillatory movements over short time intervals, i.e. its higher frequency movements.

X-11     Seasonal adjustment software originally developed by United States Census Bureau. It is based on an iterative application of linear filters.

X-11-ARIMA     A Seasonal adjustment software developed by Statistics Canada. It incorporates ARIMA modelling to improve estimation of the different time series components.

X-12-ARIMA     A Seasonal adjustment software developed by the United States Census Bureau. It incorporates regression techniques and also ARIMA modelling to improve estimation of the different time series components.

X-13-ARIMA-SEATS (X-13A-S)     Seasonal adjustment software under development at the U. S. Census Bureau in collaboration with the Bank of Spain that integrates an enhanced version of X-12-ARIMA with an enhanced version of SEATS to provide both X-11 method seasonal adjustments and ARIMA model-based seasonal adjustments and diagnostic.

* * *

In other news, Bank of America just upgraded Netflix from Neutral to Buy with the following logic:

More potential upside than downside; maintaining $72 PO


We are maintaining our $72 price objective based on a sum-of-the-parts (SOP) analysis. Our SOP assigns a 20x multiple to the domestic streaming segment, a 6x multiple to the domestic DVD segment and gives no credit for the international streaming segment. As shown in Exhibit 2, we see a theoretical upside and downside case of $30 and $117 by using the lowest and highest multiples and contribution margins we believe are reasonable, respectively.


Bears have valid concerns…


Bears are primarily concerned about: 1) the likelihood that content prices will be increasing due to Netflix’s exclusive and original content emphasis, which could pressure the streaming bottom line; 2) international will likely suck up consolidated global profitability for years and this is too long to wait in a rapidly changing industry; 3) increasing competition both domestically and internationally; 4) unproven  longterm domestic streaming segment profitability; and 5) rapidly declining domestic DVD profit as the most profitable customers churn off the service.


…but Bull arguments more convincing to us


The bulls are mainly positive about: 1) continued international expansion being a drain on future profits but the right long-term strategic business decision; 2) Netflix becoming better at buying content and eliminating wasted spend as it analyzes audience viewership trends and historical data – likely increasing bottom line streaming profitability; 3) domestic earnings are becoming significant and Netflix can benefit from being the first mover in numerous international countries; and 4) at point of or beyond incremental domestic streaming segment profitability.

In other words, even the bulls admit the company will not make money, but at least it is the best thing they can hope to achieve. After all, who needs cash anyway. Just copy the AMZN model of ever lower gross profits resulting in an ever higher stock price as the former bookseller morphs into a bank-space station-precious metal miner-cloud gamer-retailers' retailer-[everything else you have never imagined].

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Tue, 08/14/2012 - 14:38 | 2704533 Gene Parmesan
Gene Parmesan's picture

Comedy - from the chief economist at MS no less!

Tue, 08/14/2012 - 14:40 | 2704545 NotApplicable
NotApplicable's picture

First they ignore you...

Tue, 08/14/2012 - 14:45 | 2704577 ParkAveFlasher
ParkAveFlasher's picture

...and then they laugh at you...

Tue, 08/14/2012 - 14:52 | 2704608 MillionDollarBonus_
MillionDollarBonus_'s picture

... meanwhile the 10 year continues to trade well below 2%, the VIX is trading at an optimistic 14.32, and the S&P continues its summer rally with another daily close above 1400. The economic fundamentals are so strong now that only the most bitter and masochistic ZH day traders remain bearish. It’s sad that the ZH readership is unable to see the green shoots in the economy, despite the overwhelming positive economic fundamentals.

Tue, 08/14/2012 - 14:58 | 2704639 azzhatter
azzhatter's picture

you should leverage your entire family and buy buy buy

Tue, 08/14/2012 - 15:20 | 2704731 nope-1004
nope-1004's picture

Geithner heads the Treasury.  Like hell I'll buy anything he's associated with.


Tue, 08/14/2012 - 15:44 | 2704825 ndotken
ndotken's picture

Figures lie and liars figure ... it's been that way since math was invented

Tue, 08/14/2012 - 15:44 | 2704823 Stoploss
Stoploss's picture

"Bank of Spain"

"US Census Bureau"

The fucking thing is so broken, add in the leap year, move the holiday forward, and voila'! July Beat!!

Modify it until it shits skittles and tangerines. Never mind next year.

Tue, 08/14/2012 - 16:03 | 2704885 gmrpeabody
gmrpeabody's picture

Sure... why not? Then we can average in July 2007 (probably the single best retail month EVER) and sprinkle a little of this-here dust..., and TA DUHHHH!

This shit is easy!

Tue, 08/14/2012 - 15:00 | 2704649 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Robot Trader does this schtick.  You better find a day job.

Tue, 08/14/2012 - 15:21 | 2704730 I Am Not a Copp...
I Am Not a Copper Top's picture

MDB always getting bashed!  Keep speaking the truth brother!


And yes I was kidding

Tue, 08/14/2012 - 15:58 | 2704870 hungrydweller
hungrydweller's picture

So was he.  /sarc continually on with MDB

Tue, 08/14/2012 - 15:24 | 2704747 sitenine
sitenine's picture

"overwhelming positive economic fundamentals" - idiot. Your 'contrarian' comments aren't nearly as funny as you seem to think they are. Different day, same troll...

Tue, 08/14/2012 - 15:26 | 2704757 bagehot99
bagehot99's picture

The 'economic fundamentals' of which you speak, are totally unrelated to the S&P500 and the VIX and other MARKET data.

Economic fundamentals are liquidity, credit availability in the real economy, commodity prices, order books, consumer sentiment etc., etc., etc.. All of which are in the fuckng toilet.

Change your handle to Million Dollar Bullshitter, and thus be at least an honest little Obamatron.


Tue, 08/14/2012 - 15:32 | 2704779 Inibo E. Exibo
Inibo E. Exibo's picture

Don't ever change.

Tue, 08/14/2012 - 18:35 | 2705205 Surrealist
Surrealist's picture

LOL I love reading this comedic commentary! Nothing like a good laugh now and again.

Tue, 08/14/2012 - 14:53 | 2704615 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

....and then you find them on a dark alley coughing up blood.

Tue, 08/14/2012 - 14:58 | 2704640 fuu
Tue, 08/14/2012 - 15:04 | 2704654 Miss Expectations
Miss Expectations's picture



Tue, 08/14/2012 - 15:07 | 2704683 Tijuana Donkey Show
Tijuana Donkey Show's picture

Then MDB trolls you.....

Tue, 08/14/2012 - 15:18 | 2704722 ParkAveFlasher
ParkAveFlasher's picture

...And then you win. 

Tue, 08/14/2012 - 15:22 | 2704742 NotApplicable
NotApplicable's picture

That'll teach me for putting a post seeking a reply on the initial thread-jack comment.

Tue, 08/14/2012 - 14:46 | 2704586 Mark Carney
Mark Carney's picture

thank you MS for clearly pointing out the obvious you douchebags that you in fact read ZH all day everyday and probably base many trades off of TD's analysis.


Oh and tell Bernak, FUCK YOU

Tue, 08/14/2012 - 15:05 | 2704671 TruthInSunshine
TruthInSunshine's picture

I've just spent the better part of 35 minutes dissecting the analysis presented by ZH in making the case that the retail sales number was significantly skewed to the upside, by what appears to be nothing less than an extreme, and maybe unprecedented, BLS adjustment of the infamous "seasonal adjustment" variety.

At this point, I am leaning towards accepting ZH's analysis of the retail sales datum as closer to the reality versus that of the BLS, but keeping an open mind in the event I'm 'missing something.'

Summary:  I believe there's better reason than not to believe the BLS either intentionally or unintentionally significantly overstated July retail sales numbers.

Be on guard, Muppets of Morgan Stanley, JP Morgan & Goldman Sachs. Are you men & women, or are you Muppets?

Tue, 08/14/2012 - 15:08 | 2704689 Tijuana Donkey Show
Tijuana Donkey Show's picture

Every muppet dies, but not every muppet truely lives

Tue, 08/14/2012 - 15:21 | 2704737 Almost Solvent
Almost Solvent's picture

Thanks for the coffee I just snorted over my keyboard . . .

Tue, 08/14/2012 - 17:19 | 2705054 FMR Bankster
FMR Bankster's picture

I wouldn't be suprised if we see other data sets follow the pattern we now see every week in unemployment claims. Always adjusted in a worse way when the attention is focused on the new number. Note June retail sales were revised lower at the same time July's number exceeded expectations.

Tue, 08/14/2012 - 15:43 | 2704820 Ghordius
Ghordius's picture

thank you TIS, I spent 10 minutes and my head still hurts a bit.

One correction, though. A Master (of the Universe) is never a Muppet. Until he retires and loses touch, that is. Than he is "just a rich man", ergo a Muppet, ergo someone to fleece. The fleecing might be more subtle from the usual retail one, and he gets a bone, from time to time.

Or he speaks up and requests that the Muppet-Shield-Laws he destroyed are brought back online.

Tue, 08/14/2012 - 14:47 | 2704589 Mark Carney
Mark Carney's picture

thank you MS for clearly pointing out the obvious you douchebags that you in fact read ZH all day everyday and probably base many trades off of TD's analysis.


Oh and tell Bernak, FUCK YOU

Tue, 08/14/2012 - 14:52 | 2704609 spastic_colon
spastic_colon's picture

Methinks MS just F'd with the wrong ZH

Tue, 08/14/2012 - 14:52 | 2704611 ndotken
ndotken's picture

"Seasonal adjustment software under development at the U. S. Census Bureau in collaboration with the Bank of Spain"

When did the BofS become a statistical forecasting guru? That statement tells me everything i need to know

Tue, 08/14/2012 - 15:37 | 2704798 Matt
Matt's picture

Stealth bailout? Send a couple hundred billion $ over to the Bank of Spain in exchange for their contribution to the Seasonal Adjustment software?

Tue, 08/14/2012 - 15:08 | 2704690 smlbizman
smlbizman's picture

...and thanks to the zero hedge crazies, we were aware of the joke that gm, grpn, fb, zyng, et.al 

so with all due respect ill stick with the crazies, they are more trustworthy than thieves.....

Tue, 08/14/2012 - 14:41 | 2704548 vast-dom
vast-dom's picture

If you are still MS client you deserve the muppet raping that you have been getting!

Tue, 08/14/2012 - 14:46 | 2704584 NotApplicable
NotApplicable's picture

I'm having a hard time wrapping my head around the idea that MS clients can operate a phone, let alone read ZH.

Okay, so which one of you told them?

Tue, 08/14/2012 - 14:57 | 2704633 vast-dom
vast-dom's picture

it was operation mayhem : one of the many TD's pretended to be MS client and called it in. 

MS use ZH to trade while telling "clients" to do opposite : between that spread and their free fed money then cook the books for "profits" -- it's quite amazing how few days the "big boys" have in the red. they seem to have winning trade days like 98% of the time -- if it's too good to be true it must be fed induced SEC backed Ponzi market. 

Tue, 08/14/2012 - 16:24 | 2704929 TruthInSunshine
Tue, 08/14/2012 - 14:57 | 2704636 i_call_you_my_base
i_call_you_my_base's picture

Their AOL browsers have text-to-speech.

Tue, 08/14/2012 - 14:59 | 2704644 azzhatter
azzhatter's picture


Tue, 08/14/2012 - 15:37 | 2704801 Nobody For President
Nobody For President's picture

Even on ZH, there are few LOL posts - but this was one of them!


Tue, 08/14/2012 - 15:08 | 2704694 BooMushroom
BooMushroom's picture

I've been reading ZH enough to know perfectly well what that means.  But I still can't get out of my head the image of Gonzo and Beaker having their way with Miss Piggy.

Tue, 08/14/2012 - 15:22 | 2704743 Things that go bump
Things that go bump's picture

Oh dear, I'm afraid you have infected me with that image.  I'm quite traumatized.

Tue, 08/14/2012 - 14:47 | 2704591 FL_Conservative
FL_Conservative's picture

Figures lie and liars figure.

Tue, 08/14/2012 - 14:48 | 2704595 slaughterer
slaughterer's picture

MS 0 : ZH $$$

Tue, 08/14/2012 - 15:13 | 2704707 LoneStarHog
LoneStarHog's picture

Sheesh!  I went from the church (ZH) across the street to the whore house (MS) and now have to go back to the church (ZH) and beg for forgiveness.

Tue, 08/14/2012 - 16:03 | 2704883 exi1ed0ne
exi1ed0ne's picture

The church is close, but the road is icy
The bar is far, but I will walk carefully

Tue, 08/14/2012 - 15:18 | 2704720 LoneStarHog
LoneStarHog's picture

"...a few clients have asked about it..."

Hey, MS, in this case "few" is a euphemism for ALL, which is probably how many dumbasses still use the WHORE STREET firms.

Tue, 08/14/2012 - 15:18 | 2704721 I Am Not a Copp...
I Am Not a Copper Top's picture

Love it


Tue, 08/14/2012 - 15:47 | 2704840 Imminent Collapse
Imminent Collapse's picture

MS, the first day, you have to fight.  Welcome to Fight Club, Bitchez!

Tue, 08/14/2012 - 14:40 | 2704540 Christoph830
Christoph830's picture

Haha.  No comment on ZH article about MS IPOs of GRPN, ZNGA, FB?  THE SILENCE IS DEAFENING!



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