AMZN: Adding TRADE, Respecting TREND and TAIL

Conclusion: AMZN already had a favorable TREND and TAIL setup. Now it scores the trifecta by working within our near-term TRADE framework as well. As with all TRADES, it might be a short-lived event. But do not ignore the power of the story across our TREND (3 months or more) and TAIL (3 yrs or less) durations.


TRADE (30 Days or Less)

Keith added it to the Hedgeye Virtual Portfolio as he was looking for names levered to US Consumption with favorable TREND and TAIL setups. In Retail, AMZN clearly fits that bill.


From a near-term perspective, AMZN does not have all the characteristics we’d ordinarily look for in a long idea at face value. First off, while 2Q estimates appear to be in check, this is a company that's not afraid to miss. It's happened in 3 of the past 10 quarters. With the company going up against a 51% revenue comp this quarter, the hurdle is a big one.


From a sentiment standpoint, of the 41 Analysts, there are no sells, and the 71% ‘Buy rating ratio’ just set a 5-year peak. Yes, this definitely concerns us, especially with AMZN facing its toughest yy revenue growth compare in 2Q (51% growth in 2Q11). Its trough, fyi, was 21% in 1Q 2007.


TREND (3 Months or more)

But make no bones about it... after the 2Q print, revenue compares start to ease, while margin compares start to get quite easy effective immediately (including 2Q).  Margins were cut in half last year to 1.8%, with an even distribution across quarters. People beat Bezos up – as usual -- for that investment. But now he has Fire, expanded DC capacity, a new B2B initiative...


We’ve been at a point where AMZN has had Eight quarters is a row where inventories grew faster than sales. Note that this is at the same time capex as % of sales ramped by another 90bps to 3.8%. None of this is sustainable, and ultimately very bullish for cash flow and therefore, the stock.


In the back half of this year, our estimates are 10% above consensus.



TAIL (3-years or less)

Let's not forget that it is the Haley’s Comet of retail. It's a retailer with $48bn in revenue growing at 40% with 2% EBIT margins that's investing on its balance sheet and p&l at a rate to make a third of retailers alive today extinct in 5+ years.  Capex is inflated, margins are depressed, and while sentiment has rebounded considerably from the latest 1Q upside, the fact of the matter is that estimates for next year are likely low as investments today drive sales and margins tomorrow. For a world class franchise like AMZN, you generally don’t want to get in the way of that. The ‘it’s too expensive’ call simply holds no water when the company can earn the $4.50 2014 consensus estimate a year early.


AMZN: Adding TRADE, Respecting TREND and TAIL - AMZN TTT


CONCLUSION: When it comes to spurring growth and protecting its currency, we are of the view that India “can’t have its cake and eat it too” at the current juncture. The benchmark SENSEX Index remains in a Bearish Formation – a clear quantitative signal to us that the recent spate of oft-conflicting policy maneuvers is likely to have a muted effect on turning around the Indian economy and the country’s poor investment climate over the intermediate term. 


The phrase “[insert proper noun] wants to have its cake and eat it too” doesn’t really make sense to me. As a former offensive lineman, I generally enjoyed eating all the cake I could get my hands on. That being said, I believe the saying refers to an individual or entity’s desire to pursue an outcome that is conflict with another one of his/her/its wishes.


In the case of India, a country we have generally remained fundamentally bearish on across asset classes (stocks/rupee/rupee-denominated debt) for much of the past 19 months, the aforementioned phrase is quite appropriate. The Reserve Bank of India, in the midst of battling what we’d consider a full-fledged currency crisis (a peak-to-present decline > 20% over the LTM), is being forced to chose between fighting inflation – which is 270bps above their +4.5 YoY unofficial target (APR) and above it every month since OCT ’09 – or protecting growth, which has slowed to an 11-quarter low of +6.1% YoY in 4Q12 and looks to continue that trend when 1Q GDP is reported on Wednesday.


Rather than biting the bullet and hiking rates to protect the purchasing power of their citizenry, which is what many developing nations have been forced to do historically during periods of international stress (usually accompanied by USD strength), India has chosen the route of easing and tightening at the same time (more on this later). Their policy confusion has been rather unsupportive for the rupee, which has fallen to an all-time low vs. the USD as recently as MAY 23.




As we penned in our APR 17 note titled “IS INDIA OUT OF BULLETS?”, the country’s twin deficits, which have widened in recent years, are a real risk to the nation’s currency in times of heighted global volatility due to the typical slowdown in cross-border capital flows to developing nations like India. Coincidentally, inflows into India’s equity and bond markets peaked in the YTD right around the time we started getting loud about our expectations for a breakout in cross-asset volatility over the intermediate term (mid-MAR).






Per the aforementioned note: “No doubt, a further Deflating of the Inflation will eventually be supportive of the Indian economy; that said, however, we think India’s intermediate-term growth outlook, as well as the country’s financial markets are particularly at risk in an a higher-vol. environment over the intermediate term due to its widening current account and fiscal gap. India’s bloated fiscal deficit is of particular importance given that any slowing of capital inflows or outright capital outflows ultimately translates to a crowding-out of private sector funding.” With money supply (M3) growth at a ~7yr low, we’re seeing this phenomenon show up in the data in real-time.




Regarding the point we made about them easing and tightening at the same time, below is a list of the recent measures Indian policymakers have taken in order to combat either currency deprecation pressures (via fiscal and/or monetary tightening/capital controls) or economic growth headwinds (via fiscal and/or monetary easing/stimulus), which, if done at the same time, can seem a bit oxymoronic, or of the “having one’s cake and eating it too” variety: 

  1. In MAR, the central government introduced an import duty on gold and platinum bars and coins, which facilitated a -33% YoY decline in gold and silver imports in APR;
  2. Raised interest rates on foreign currency deposits by as much as 300bps in addition to easing restrictions on foreign exchange loans for Indian exporters;
  3. Reduced the amount banks can hold in FX derivatives contracts to < $100M or 15% of the total such agreements (whichever is lower);
  4. Reduced the amount of overseas income Indian corporates can hold in foreign currency-denominated assets to 50% from 100%;
  5. Sold $5.4B of FX reserves (USD) to the market over the past 3-4 weeks, taking their total reserves down to $290B (-6% YoY); and
  6. Late last week, the central government allowed the State-run refiners to increase gasoline prices by +11% in a bid to combat fiscal deficit pressures stemming from the bloated subsidy bill (12.7% of total expenditures). 

Interestingly, to point #5 above, providing USD liquidity to India’s FX market can be helpful for the exchange rate, but only because it tightens monetary conditions by curbing supply of Indian rupees in the domestic market. As such, their options here are limited given the Indian banking system’s persistent liquidity deficit (having borrowed nearly a trillion rupees from the central bank on average via reverse repo transactions a – form of monetary easing – over the last five days).






To point #6, we’ve crunched the numbers on the deficit below; the conclusion is short and simple: while the +11% increase can be taken by market participants as a signal that they are willing to cut further, it accomplishes very little in the direction of moving the needle on the fiscal deficit: 

  • In FY12, the subsidy bill on energy-related expenses was 59.1% of the total… holding that flat, we get to 1.123T rupees for FY12;
  • Reducing that by -11% leaves us with 999.45B rupees for on energy-related subsidy expenses for FY13E;
  • That takes our total planned subsidy expense 1.77T rupees or 11.9% of FY13E expenditures;
  • The -123.5B rupees in savings is a mere 0.8% of the total planned expenditures and just 2.4% of the budgeted deficit;
  • All in, the maneuver shaves a whopping -12bps off of India’s FY13E deficit/GDP ratio (assuming all other revenues and expenditures meet their targets). 

All told, the math doesn’t lie. When it comes to spurring growth and protecting its currency, we are of the view that India “can’t have its cake and eat it too” at the current juncture. As the chart below highlights, the benchmark SENSEX Index remains in a Bearish Formation – a clear quantitative signal to us that the recent spate of oft-conflicting policy maneuvers is likely to have a muted effect on turning around the Indian economy and the country’s poor investment climate over the intermediate term.


Darius Dale

Senior Analyst



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Net Long II: SP500 Levels, Refreshed

POSITIONS: Long Healthcare (XLV) and Apple (AAPL); Short Industrials (XLI) and Basic Materials (XLB)


In my note titled “Net Long” at 1140AM EST on Friday, I explained the immediate-term upside scenario. With 1316 TRADE line support intact, we’re looking at finding an immediate-term TRADE overbought signal between 1.


Across my risk management durations, the lines that matter to me most right now are: 

  1. Intermediate-term TREND resistance = 1369
  2. Immediate-term TRADE resistance = 1337
  3. Immediate-term TRADE support = 1316 

With month-end approaching (Thursday) and the Employment Report (Friday) right after that, I don’t think trading the risk of this immediate-term range is going to be easy. Nothing in this business should be.


We currently have 9 LONGS, 6 SHORTS.


Keep moving out there,




Keith R. McCullough
Chief Executive Officer


Net Long II: SP500 Levels, Refreshed - SPX

European Banking Monitor

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .



Key Takeaways:


* American and European bank swaps mostly tightened in the latest week. Notably, French and German banks saw their swaps fall WoW along with the US Global banks. 


If you’d like to discuss recent developments in Europe, from the political to financial to social, please let me know and we can set up a call.


Matthew Hedrick

Senior Analyst





European Financials CDS Monitor – Bank swaps were tighter in Europe last week for 28 of the 39 reference entities we track. French and German banks tightened across the board. The median tightening was 1.6%. 


European Banking Monitor - 11. banks


Euribor-OIS spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread widened by 2 bps to 41 bps.


European Banking Monitor - 11. Euribor


ECB Liquidity Recourse to the Deposit Facility – The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB.  Taken in conjunction with excess reserves, the ECB deposit facility measures excess liquidity in the Euro banking system.  An increase in this metric shows that banks are borrowing from the ECB.  In other words, the deposit facility measures one element of the ECB response to the crisis. The latest overnight reading is €741.86B.


European Banking Monitor - 1. ecb overnight


Security Market Program – For an eleventh straight week the ECB's secondary sovereign bond purchasing program, the Securities Market Program (SMP), purchased no sovereign paper for the latest week ended 5/25, to take the total program to €212 Billion.


European Banking Monitor - 11. smp

Economic Identities

This note was originally published at 8am on May 15, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“There is, so I believe, in the essence of everything, something that we cannot call learning. There is, my friend, only a knowledge - that is everywhere.”

-Herman Hesse


Last week I was on vacation and had some time to turn off the crackberry (or iCrackberry in my case) and do some reading.  Most of my reading was centered on my day job as Director of Research at Hedgeye, but I also had a chance to read some fiction, including Hermann Hesse’s classic, “Siddhartha.”


For those of you that haven’t read Hesse’s novel, it is the classic example of a man’s search for meaning and identity.  In the story, the protagonist, Siddhartha, lives in the time of the Buddha and is in search of enlightenment.  On this path, he forsakes his family as a teen and leaves a comfortable lifestyle to the sparse life of an ascetic that is characterized by abstaining from worldly pleasures.


Siddhartha then has an awakening of sorts and leaves the ascetics to become a trader (in this day and age he would clearly have been trading CDS), and also takes on a lover.  Siddhartha then again turns his back on the materialistic world to once again return to the ascetics.  Eventually Siddhartha realizes that that his “understanding” is enhanced by the collection of his experiences.


From my purview, this short novel is the classic existential angst and search for identity story.  In people, this often occurs years immediately following college, but also manifests itself in the “midlife crisis.”  Nation states also struggle in the search for identity.  In the United States this struggle has recently been on the social side of the equation as both Republicans and Democrats have taken up the gay marriage debate with fervor, but in Europe the search for identity continues along the economic path.


This morning's GDP numbers were released for the majority of the Eurozone.  In the Chart of the Day, we’ve highlighted the y-o-y GDP growth rates for the EU-27.  While the architects of the euro may have envisioned a scenario where economic progress is shared across the region, the reality has proven to be much different.  Clearly, Germany has been, and continues to be, the key beneficiary of the common currency. This will only continue with the euro trading below the 1.30 line versus the U.S. dollar.


In aggregate, the EU27 grew 0.0% from Q4 2011 and 0.1% from Q1 2012.  This was largely driven by Germany, which grew at 0.5% sequentially and 1.2% y-o-y.   Germany has benefitted from strength in its industrial sector, in particular solid results from the automakers.  As a result, exports have been a meaningful tailwind for Germany.


On the disappointing end of the GDP report were France, Italy and Spain.  France’s growth effectively evaporated on a sequential basis to 0.0%, and Italy was -0.9% sequentially while Spain was down -0.3% sequentially.  Clearly, Europe is seeing the impact of austerity in short-term GDP growth numbers.  The open ended question remains how tolerable austerity remains, especially as Germany’s economy continues to dramatically outperform its neighbors.


To answer that question, we probably have to look no further than Francois Hollande’s first action as leader of France.  Specifically, immediately after being sworn in today Hollande is flying to Germany to discuss a growth pact with Angela Merkel.   While Merkel has been adamant that no new sovereign debt will be issued to support growth, she too is feeling the pressure to implement policies that are, at least in perception, more pro-growth by her political opposition in Germany.  The economic identity crisis in Europe continues.


The European sovereign debt markets are clearly signaling their confusion around the lack of economic identity.  While they had seemingly been reacting better to certain austerity policies, many periphery yields are now trading back near all-time highs.  The key market we watch, of course, is the Spanish 10-year yield which is now solidly above the rhetorically critical 6% line at 6.25% this morning. 


With France’s political identity resolved, at least temporarily, Greece is now in focus on the political front.  My colleague Matt Hedrick highlighted this on Friday when he noted:


“This week saw each of the three main Greek parties (New Democracy, Syriza, and Pasok) try to form a coalition with each another, only to come up short each time. There’s new hope from some that Pasok leader Evangelos Venizelos can put together a unity government given a shift in stance on the part of Democratic Left leader Fotis Kouvelis, who has broken ranks with Syriza, which it had backed earlier in the week. (Syriza is thoroughly against the mandates of austerity, and may be the most divisive partner in a coalition build).”


Clearly, the search for political identity in Greece is going to be protracted.


Changing gears for a minute, I wanted to highlight a recent note from Howard Penney and Rory Green on our restaurants team titled, “The (Coffee) Prince”.  As they wrote:


“For Howard Schultz, it is all about winning.  Even when he doesn’t want to communicate it, he does.  The word “Machiavellian” has come to represent, for many people, any human behavior that is cynical and self-interested.  While Schultz seems to have a strong social conscience – and this is meant as a compliment – we can’t help but believe that the single-serve strategy being employed by Starbucks seems to rhyme with The Prince, Machiavelli’s most famous book.  An appearance by Mr. Schultz on CNBC yesterday illustrates this perfectly.”


Their general point, and email if you want to trial their research and read the entire note, is that the identity, or search for identity, of corporate leaders can very much impact financial results.



Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research








Economic Identities - Chart of the Day


Economic Identities - Virtual Portfolio

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.