“You worry about your own game. Plenty there to keep you busy.”
- Herb Brooks, Miracle
The last few weeks have been very challenging for our Hedgeye family. We lost an incredible husband, father, partner, and analyst, who embodied the Hedgeye way, and whose impact will forever last across our firm's future. This tragic event has forced us to all step back and collectively reflect on memories, family, friends, and our purpose. At the same time, it has left us hopeful and inspired moving into the new year, knowing we will always be together as a team.
Hearing the incredible stories of those who were close with Todd made us (Willy and Zeegs) all the more thankful to work for Hedgeye. We have been best friends for over 12 years now, starting with youth ice hockey in San Diego, CA in 2011. Now, as junior analysts on the Retail and Communications teams, our friendship looks a bit different than before. But we still love to compete against one another. On the ice, the tennis court, the golf course, and at work.
We stop at nothing less than full speed, and, true to hockey culture, let chirps fly left and right. But, that's what allows us to get better every day. Constantly pushing each other to improve and be the best version of ourselves… While we are both relatively new to Hedgeye, we can feel that this has been a key staple of the culture since the firm's inception and is a big part of what has made Hedgeye successful. Competing against the best at the highest level. Iron sharpens iron. Fortunately, we have incredible role models to look up to, who set the best examples of how to thrive in this industry. And that's what it’s really all about. Who you get to know along the way.
So, on this December 26th, hug those close to you, tell them you love ‘em, and keep your spirits high as we head into a renewing and hopeful 2024.
Back to the Global Macro Grind…
Despite our competitive nature in and out of the office, we have our own roles at Hedgeye to keep us busy. Thus, the above Herb Brooks quote is thrown around frequently. For me (Ryan), the US Consumer is at the center of the my (and the rest of Team Retail’s) heart and mind. Every macro data point that we track week-to-week—from inflation & consumption to new/existing home sales to something seemingly small like shipping rates—gives us insight into the current and future health of the consumer, which is paramount to our process. Over the past few weeks, November data points rolled in with conflicting evidence of consumer health.
On one hand, we saw an acceleration in Retail Sales from +2.5% YY in October to +4.9% in November, continued softening inflation, and lower rates. On the other hand, the percentage of consumers having difficulty paying usual household expenses is at cycle highs, credit card delinquency rates passed 2019 levels and continue to rise rapidly, bankruptcies and foreclosures are accelerating at a rate not seen since the GFC, and auto loan delinquency rates are near all-time highs. The bottom-heavy bifurcation—in which the elites are in fine shape, while normal middle-to-lower-income folks struggle to survive—remains.
We find it hard to be long of retail in aggregate while the vast majority of the US population is in rough shape, but we will continue to measure and map the consumer landscape, letting the data lead the way.
For me (Billy), I’ve been taught to approach the Comms sector (and really everything) with a data-driven process. While the state of the consumer is perhaps not as important to our space as it is retail (it is still very important!), we make sure we are on top of data that gives us an advantage across all our names, like the digital ad market, mobile user data, or download and engagement data. Finding an edge in the data is essential to providing a differentiated and useful perspective on a stock.
For example, we can utilize ad spend and revenue data to inform calls on a digital advertising name like META. META was one of our best-performing longs in 2023. While it may have seemed like an easy call-in retrospect, the data we track every single week helped us move META off the short side in 4Q22 and then go long back in February. A part of that call was tracking the advertising data through what Freebird calls the Advertising Cycle - where we went from the ‘Reduce’ phase in late 2022 / early 2023 to the ‘Ratchet’ phase in mid-2023. That phase transition took us from a period where we had marketing budgets cut across the board in response to a drop in consumer demand to a period where spend increased thanks to improving ROAS (return on ad spend) and marketers increasing budgets to capture incremental revenue.
Where does the data come in? We saw META’s average CPM (cost-per-mille, or how they price advertisements) inflect from four straight quarters of negative YoY growth in 2022 to +6.8% YoY (1Q23), +4.6% YoY (2Q23), and +10.4% YoY (3Q23). So, while narratives definitely help drive a stock (‘year of efficiency’ or AI, for example), we believe it is paramount to have a sense of what the data is telling you.
Data is unemotional and it can confirm or deny a narrative. Over the next few weeks, we’ll be going through our data - new and old - to see where the tides are moving as we enter 2024. As always, we’ll make data-driven decisions and separate emotions from the process.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets
UST 30yr Yield 3.86-4.30% (bearish)
UST 10yr Yield 3.74-4.19% (bearish)
UST 2yr Yield 4.18-4.70% (bearish)
High Yield (HYG) 75.65-77.75 (neutral)
SPX 4 (bullish)
NASDAQ 14,436-15,128 (bullish)
RUT 1 (bearish)
Tech (XLK) 186-194 (bullish)
Utilities (XLU) 61.49-65.30 (bullish)
VIX 12.05-14.81 (bearish)
USD 101.01-103.02 (bearish)
Oil (WTI) 68.27-76.14 (bearish)
Gold 1 (bullish)
Uranium (URA) 28.11-30.12 (bullish)
Bitcoin 41,588-44,575 (bullish)
Best of luck out there this week,
Billy Zegras and Ryan Wilson
Billy & Ryan, Summer 2012
