“There is no terror in the bang, only in the anticipation of it.”
More than seven years ago, when the lads started @Twitter, I’m not sure they were anticipating today. At the time, there were simply brainstorming new business ideas and an idea for group SMS-ing was sketched out and not too long thereafter Jack Dorsey sent out the first tweet, which was:
“just setting up my twttr”
As I wrote in our Twitter IPO report earlier this week, it was certainly an inauspicious start. I mean, who would have thought a 140 character revolution would have started with that, but it did and with the anticipation of the $TWTR IPO now gone, and all we have left is today’s bang. (Not to be confused with the free fall in the #Euro from the 25 basis point cut in European interest rates.)
I can’t tell you for sure, but given the number of times the investment bankers have raised the offering price (and who doesn’t trust investment bankers!), there seems to be little doubt that there is demand for the offering. So, at the very least, we won’t have a $FB debacle on our hands. Of course, where the stock trades today is anybody’s guess.
In the face of the optimism around @Twitter today, we thought we’d offer some contrarian counter points to the positive outlook for the company. Yesterday, my colleague Hesham Shaaban (to give credit where credit is due Hesham did most of the work, but that’s why I’m the boss after all) and I gave a presentation on Twitter and raised a few flags. So, if you are going to own $TWTR for the long run, here are few things we would consider:
1. #OverseasUnderwhelming – Currently, @Twitter has 179 million monthly active users outside of the United States. This is compared to 53 million MAUs domestically. Shockingly, the company only generated 26% of its consolidated revenue from international markets in Q3 2013. On the metric of advertising revenue / monthly active user, the contrast is even more startling as US ad revenue / user is $2.10 in the U.S. versus $0.23. Or an almost 10x difference. The implication here is that there are structural constraints to monetizing international users, which leads us to the next key issue.
2. #UserGrowthSlowing – In Q3 2013, $TWTR has its lowest sequential growth quarter ever as global monthly active users grew only 6% sequentially. Now, admittedly, this is still meaningful grow off a base of more than 230 million MAUs, but compared to the prior four quarters, which showed 11%, 11%, 10% and 7% sequential growth, this is a marginal slow down.
Interestingly, @Facebook which has a penetration of 55% in the United States, compared to @Twitter’s penetration of 22%, has actually added more absolute users in the U.S. over the past three years. This of course leads to the next question as to how penetrated @Twitter is currently.
3. #Penetration - A recent poll from Reuters/Ipsos suggested 43% of people that have registered for a $twtr accounts have either shut their accounts down, or don’t use it. This compares to 12% for $fb on the same metrics. The implication for @Twitter is that the implied penetration may be much lower. For example, if 43% of users are actually inactive, this suggests a true penetration rate of all internet users in the U.S. of 39%, which implies a short runway of growth domestically.
Certainly, being one of the power users of @Twitter in finance, we do get the blue sky opportunity that @Twitter could evolve into a global cable network and become a true second screen for consumers. The pie for T.V. advertising is north of $70 billion by some estimates, so even a small share of this pie would be meaningful for @Twitter, but between now and then we have a richly valued company that faces business model headwinds.
In the Chart of the Day, we’ve provided a table that shows the multiple you’d have to be willing to pay of market cap / sales to get a certain level of return. As an example, if you buy the stock at $27 per share (effectively the IPO price) and you want a 20% return over the next year or so, you’d have to be willing to pay 15.0x our 2015 revenue estimate. (We have included the 150 million shares that will be dilutive post the IPO in our calculation of market cap.)
I’m not saying that won’t happen, but as Albert Einstein famously said:
“The distinction between the past, present and future is only a stubbornly persistent illusion.”
That all said, even as we have some issues with the @Twitter business model in the short run, there is no denying that the platform is revolutionary in its ability to allow the world to communicate, interact and engage. As my colleague @KeithMcCullough tweeted in 2010 to @matterhornbob:
“twitter is a very comfortable arena for an accountable athlete in this business to compete – we don’t want to hide”
Keep your head up and your tweets on the ice,
P.S. In other news, we’d like to wish a bon voyage to our long-time teammate @RoryAGreen who is leaving us for the confines of @Insead and a MBA. In celebration of this exciting move for Rory, and in appreciation of all his hard work, we will be tapping a keg of Guinness (he is Irish after all!) at our Stamford, CT office at 4pm.
Client Talking Points
The Nikkei does not like the idea of the Yen breaking out again versus US Dollar. Nikkei was down -0.8% last night and has done nothing but make a series of lower-highs ever since when? September 18. That of course was the day Ben Bernanke decided to devalue USD vs YEN. Yep.
A big breakdown in Brent continues this morning. The TAIL risk line is plenty snapped now up at $108.67. This is one of the few good things going on for the global consumer right now. You can buy European stocks on this inasmuch as US stocks, but Wal-Mart (WMT) acts great.
See that? That's the 10-Year Treasury Yield sitting in no man’s land. It's plunked down right on @Hedgeye TREND line of 2.63%. Make no mistake: the next move here is going to be big (up or down). My bet is on Down Yields if US Dollar fails versus the Euro and US GDP slows. More to be revealed.
|FIXED INCOME||6%||INTL CURRENCIES||26%|
Top Long Ideas
In line with our #EuroBulls Q4 theme, we’re long the German DAX via the etf EWG. With European fundamentals showing improvement off low levels, we expect outperformance from Germany, and in turn for the region’s largest economy to pull the rest of the region higher. ECB policy remains highly accommodative and prepared to aid any of its sovereign members to preserve the Union. Inflation remains moderate and fundamentals are positive: confidence readings and PMIs are up since June, with factory orders trending higher and retail sales inflecting to push the trade balance higher. Finally, the unemployment rate has held steady at the low level of 6.9%, all of which signals to us that Germany’s economic climate is ramping up.
WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.
Financials sector senior analyst Jonathan Casteleyn continues to carry T. Rowe Price as his highest-conviction long call, based on the long-range reallocation out of bonds with investors continuing to move into stocks. T Rowe is one of the fastest growing equity asset managers and has consistently had the best performing stock funds over the past ten years.
Three for the Road
TWEET OF THE DAY
I'm the only one on Twitter who didn't think the ECB should or would cut, allegedly @KeithMcCullough
QUOTE OF THE DAY
Twitter is my bar. I sit at the counter and listen to the conversations, starting others, feeling the atmosphere. -Paulo Coelho
STAT OF THE DAY
From April to June, 75% of Twitter's users accessed the service from mobile devices, compared to 66% in the same three months in 2012. In addition, 65% of its ad revenue came from mobile. Facebook, in comparison, gets 41% of its ad revenue from mobile devices.
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Takeaway: Sports apparel solid. Adidas rev miss, inventories dicey. WMT PR takes punch to the jaw. Labor unrest building in Bangladesh and Indonesia.
EVENTS TO WATCH OVER THE NEXT 24 HOURS
FNP - Earnings Call: Thursday 10/7 10:00 am
BEBE - Earnings Call: Thursday 10/7 4:30 pm
TUMI - Earnings Call: Thursday 10/7 4:30 pm
Athletic Apparel Data
Takeaway: Trends in athletic apparel are like a broken record -- but not broken. The industry put up 27% growth vs last year. We estimate that about 1,000bps is due to easy comparisons from a storm-impacted 2012. But still…a mid-teens organic growth rate is nothing to shake a stick at. The biggest surprise for the week was Reebok, which has been a perennial dog. But over the past three weeks its' sales went from -28% to +22% to +74%. UnderArmour is also putting up some solid numbers. One thing worth noting is that this Sportscan data tends to include the more marginal retailers in its sample. Perversely, we almost don't want to see a high-end brand like UA do too well with this sample.
ADS - Adidas looks to World Cup as sales and profit drop
- "Adidas, the world's second largest maker of sports gear behind Nike, said third quarter operating profit dropped 6% on sales down 7%, hit by distribution problems in Russia, currency effects and poor sales of golfing products."
- "Adding to its woes, it has been outperformed by Nike on its home turf. Nike reported an 8% rise in sales in western Europe in its first fiscal quarter to the end of August, compared with a fall of 6% for Adidas at constant currencies in its third quarter."
- "One bright spot for Adidas this year has been the Reebok brand, which saw sales rise 5% in the three months to the end of September, the second quarter in a row of growth as a renewed focus on fitness pays off."
Takeaway: Adidas puts up a slight miss -- entirely driven by top line weakness. (looks like the stronger Reebok apparel sell-through is happening just in time). The company missed top line expectations in every region of the world except Western Europe. Most troubling is the company's inventory levels, as its sales/inventory spread plummeted by 1,500bp. As evidenced by the SIGMA chart below, Adibok is looking at bloated inventories and positive margins. That's one of the worst places to be -- as the margin level gives management some degree of confidence that it can clear inventory profitably. But that it almost never the case. The company reiterated guidance…we'd question that move.
AEO - American Eagle Outfitters Updates Third Quarter EPS Guidance to $0.19
- "American Eagle Outfitters, Inc. is updating its third quarter EPS outlook to $0.19 per diluted share, which excludes non-cash charges associated with closing a distribution center, as previously disclosed. This compares to EPS from continuing operations of $0.41 for the same period last year. The company’s previous EPS guidance was $0.14 to $0.16. The revised outlook reflects slightly better than expected margin results."
- "Total net revenue for the thirteen weeks ended November 2, 2013 decreased 6% to $857 million from $910 million for the thirteen weeks ended October 27, 2012. Total consolidated comparable sales decreased 5%, including sales from AEO direct, against a 10% comparable sales increase last year. AEO direct sales increased 17% during the period."
Takeaway: This was pretty much AEO kicking sand in Abercrombie's face, which slashed guidance yesterday in its latest admission that it can't do anything right.
NKE - Nike Names New Vice President of Action Sports
- "Nike, Inc. announced that effective immediately Scott LeClair, currently VP and GM of Nike Skate and Nike Snow, will become Nike's new VP of Action Sports. He will be responsible for leading the category as well as for Hurley International, LLC. Nike veteran Roger Wyett, 56, who was previously in the role, has decided to retire."
- "LeClair, 47, joined Nike in 1992 and has led Nike's skate and snow business since June 2012. He has held previous roles in North America and was GM of Nike's West Territory based in Los Angeles, before moving to Japan to lead the running category and then the merchandising function. He will report to Jayme Martin, VP & GM of global categories."
Takeaway: Roger Wyatt is a loss for Nike. The level of role shuffling inside the company right now is unprecedented in Nike's history. We don't love it.
WMT - Wal-Mart Web Glitch Creates a Frenzy
- "Wal-Mart Stores Inc. suffered from a website glitch Wednesday that set off a shopping frenzy as customers tried to snap up expensive items, such as computer monitors and televisions, for less than $10."
- "The retailer said it would not honor customer orders. Instead, it will send these customers a $10 Wal-Mart gift card in the next five days that can be used toward future purchases.
- 'Given the wide discrepancy in pricing, we are notifying customers who ordered these items that their orders have been cancelled and that they'll be refunded in full,' said spokesman Ravi Jariwala. 'We apologize again for any inconvenience this may have caused our customers.'"
- "The error led to very low prices being displayed for items such as treadmills that normally cost $600 being offered at $33, televisions priced at $2,000 on sale for a couple hundred dollars, and videogames such as 'Grand Theft Auto V' that typically sell for $60, going for $18 on Walmart.com."
Takeaway: WMT simply can't get out of it's own way. First there was the debit card debacle several weeks back, and now this. It's hardly going to hurt customer loyalty in aggregate, but for a company that is in a constant battle to enhance its image, this hardly helps.
GPS - Old Navy will give away $1 million to one lucky Black Friday shopper
- "Gap Inc.’s. Old Navy discount clothing chain will be giving the first 500 shoppers in line at North American stores when they open at 7 p.m. on Thanksgiving Day the chance to enter a sweepstakes to win $1 million. The sweepstakes game is titled 'Overnight Millionaire.'"
- "To be sure, Old Navy has hosted $1 million giveaway contests in the past for other occasions, even though it never had an actual winner, spokeswoman Andrea Hicklin said, adding the Overnight Millionaire sweepstakes will guarantee a winner and is the largest giveaway the company has ever had for Black Friday."
Takeaway: The sad reality is that this will probably work. If it doesn’t, it's a bad sign for GPS.
7936 - Asics Americas Revenues Jump in Six Months
- "Asics Corp. reported revenues grew 21.4 percent in the first six months through Sept. 30, to ¥153.66 billion ($1.56 bn) from ¥126.6 billion a year ago. The gains were due to strong sales of running shoes in the Americas, Europe and other regions and the effect of foreign exchange rates. On a currency-neutral basis, sales grew 12.0 percent in the Americas and gained 7.3 percent in Europe. Sales dipped slightly in Japan."
Takeaway: We see so many US companies getting dinged by FX. But here's the inverse. US sales up 12% -- and is the strongest-performing region. Yet consolidated sales are up 21%.
COST - Costco Wholesale Corporation Reports October Sales Results
- "Costco Wholesale Corporation today reported net sales of $8.15 billion for the month of October, the four weeks ended November 3, 2013, an increase of six percent from $7.66 billion during the similar four-week period last year."
- "For the nine weeks ended November 3, 2013, the Company reported net sales of $18.01 billion, an increase of six percent from $17.00 billion during the similar period last year."
- US - 4% (4 weeks), 4% (9 weeks)
- Intl - 3% (4 weeks), 1% (9 weeks)
- Total - 3% (4 weeks), 3% (9 weeks)
Comps ex. Gas & FX
- US - 5% (4 weeks), 5% (9 weeks)
- Intl - 7% (4 weeks), 6% (9 weeks)
- Total - 6% (4 weeks), 6% (9 weeks)
Takeaway: Note how the big delta in sales is entirely FX-related…per the comment above on Asics. Gas is slightly hurting reported comps as well -- something that will only intensify in the coming two quarters as we anniversary a spike in oil in Jan-Mar of 2012.
BANGLADESH: Factories threaten shutdown over wage plans
- "Bangladesh's apparel manufacturers have reacted angrily to plans announced this week to raise the minimum wage for millions of garment workers by 77%."
- "Factory owners have threatened to shut down all facilities if the government-appointed national wage board does not review its recommendation to lift wages to BDT5,300 (US$68.17) within the next 15 days."
- "'The country's ready-made garment (RMG) sector is not in a position to afford this amount,' says Atiqul Islam, president of the Bangladesh Garment Manufacturers and Exporters Association (BGMEA).
- The BGMEA chief also said the proposed new minimum wage for entry-level workers would be 'suicidal' for the sector."
- "'We'll request the board to revise its proposal to BDT4,500 (US$57.88) as the minimum wage,' Islam said. "If it is not solved within 15 days, the BGMEA and the BKMEA will announce shutdown of all factories.'"
- "Islam also claims the country's garment sector will lose 37% of its competitiveness if the recommended wage is implemented, since the cost of production has increased by 13% over the last few years."
- "Meanwhile, more than 50 factories closed yesterday (5 November) as several thousand apparel workers went on the rampage in the Gazipur industrial belt, protesting that the latest wage proposal is still too low."
Indonesian Workers Stage Massive Protests
- "A recent two-day nationwide strike of Indonesian workers demanded an increase in wages, health insurance coverage and an end to violations of labor outsourcing laws and new legislation to protect workers’ rights."
- "Workers across the board – garment, textile, teachers, transport and other skilled, semi-skilled and non-skilled laborers – formed a coalition of employees who participated in the protest."
- "Although some three million workers were expected to strike, less than 50,000 reportedly took part in the walk-offs and shutdowns."
THE HEDGEYE DAILY OUTLOOK
TODAY’S S&P 500 SET-UP – November 7, 2013
As we look at today's setup for the S&P 500, the range is 20 points or 0.93% downside to 1754 and 0.20% upside to 1774.
CREDIT/ECONOMIC MARKET LOOK:
- YIELD CURVE: 2.35 from 2.35
- VIX closed at 12.67 1 day percent change of -4.52%
MACRO DATA POINTS (Bloomberg Estimates):
- 7am: BoE seen holding bank rate at 0.5%
- 7:45am: ECB seen holding rates at 0.5%
- 8:30am: ECB’s Draghi holds press conference
- 8:30am: Init. jobless claims, Nov. 2, est. 335k (prior 340k)
- 8:30am: GDP, 3Q, est. 2.0% (prior 2.5%)
- 8:30am: U.S. announces amounts of 3Y notes, 10Y notes, 30Y bonds to be sold at following week’s quarterly refunding
- 9:45am: Bloomberg consumer comfort (prior -37.6)
- 10am: Mortgage delinquencies, 3Q (prior 6.96%)
- 10am: Freddie Mac mortgage rates
- 10:30am: EIA natural-gas storage change
- 11am: Fed to buy $1.25b-$1.75b in 2036-2043 sector
- 1:30pm: ECB’s Draghi speaks in Hamburg
- 1:30pm: Fed’s Dudley speaks in NY
- 1:50pm: Fed’s Stein speaks in Chicago
- 3pm: Consumer credit, Sept., est. $12b (prior $13.625b)
- FAA to outline civilian drone guidelines
- 9:30am: Army Chief of Staff Gen. Raymond Odierno; Chief of Naval Operations Adm. Jonathan Greenert; Commandant of the Marine Corps Gen. James Amos; and Chief of Staff of the Air Force Gen. Mark Welsh III, testify before Senate Armed Svcs Cmte hearing on sequestration and national defense
- 10am: Treasury Sec. Jack Lew tours exporter of telecom equipment in Gaithersburg, Md.
- 10am: Senate Banking, Housing and Urban Affairs Committee holds hearing on “Housing Finance Reform: Essential Elements to Provide Affordable Options for Housing.”
WHAT TO WATCH:
- Twitter IPO raises $1.8b at $26/shr, pricing above range
- Twitter IPO yields one of smallest fee rates this year
- Microsoft’s internal CEO candidate list said to include Turner
- Toll Bros. to buy Shapell Homes for ~$1.6b
- Emirates pressing Boeing on 777X performance before deal
- Southwest, JetBlue showing interest in AMR-US Airways slots
- Qualcomm looked at some BlackBerry assets, CEO says
- Fmr. AIG real estate exec. settles pay case for $274m
- Washington voters defeat measure requiring GMO food labels: AP
- Chinese domestic fund managers to offer U.S. products: WSJ
- U.S. Oct. retail sales may have slowed vs Sept.
- AES (AES) 6am, $0.34
- AMC Networks (AMCX) 8:30am, $0.87
- Ameren (AEE) 7:48am, $1.23
- American Realty Capital (ARCP) 6am, $0.19
- ANSYS (ANSS) 7:09am, $0.75
- Apache (APA) 8am, $2.16 - Preview
- Apollo Global Management (APO) 7am, $0.93
- BCE (BCE CN) 6:52am, C$0.78
- Cablevision Systems (CVC) 8:30am, $0.12
- Calpine (CPN) 6am, $0.65
- Canadian Tire Corp (CTC/A CN) 7:31am, C$1.77
- CI Financial (CIX CN) 11:27am, C$0.39
- Coty (COTY) 6am, $0.29
- Crescent Point Energy (CPG CN) 8am, C$0.30
- Dynegy (DYN) 7:30am, $0.14
- Fifth & Pacific (FNP) 7:32am, $(0.01)
- Flowers Foods (FLO) 6:30am, $0.21
- Great-West Lifeco (GWO CN) 10:24am, C$0.59
- Himax Technologies (HIMX) 6am, $0.11
- IGM Financial (IGM CN) 10:30am, C$0.79
- International Game Technology (IGT) 6:30am, $0.34
- Laredo Petroleum Holdings (LPI) 6:55am, $0.16
- Manulife Financial (MFC CN) 6am, C$0.32
- Martin Marietta Materials (MLM) 8:10am, $1.46
- New Residential Investment (NRZ) 6:30am, $0.18
- Radian Group (RDN) 7am, $(0.07)
- RioCan Real Estate Investment (REI-u CN) 7am, C$0.40
- Rockwell Automation (ROK) 7am, $1.53
- Royal Gold (RGLD) 8am, $0.24
- Saputo (SAP CN) 9:39am, C$0.76
- Scripps Networks Interactive (SNI) 7am, $0.84
- SouFun Holdings (SFUN) 6:45am, $0.88
- Starwood Property Trust (STWD) 6:45am, $0.54
- Stratasys (SSYS) 7am, $0.42
- Tim Hortons (THI CN) 7:30am, C$0.77
- TMX Group (X CN) 6am, C$0.74
- Towers Watson (TW) 6am, $1.33
- Vermilion Energy (VET CN) 6:55am, C$0.77
- Visteon (VC) 6am, $1.16
- Wendy’s (WEN) 7am, $0.06 - Preview
- Westlake Chemical (WLK) 6am, $2.20
- WhiteWave Foods (WWAV) 8am, $0.18
- Windstream Holdings (WIN) 6:15am, $0.09
- WPX Energy (WPX) 7am, $(0.21)
- Allscripts Healthcare (MDRX) 4:01pm, $0.09
- Amarin (AMRN) 4:02pm, $(0.32)
- Arena Pharmaceuticals (ARNA) 4:03pm, $(0.12)
- AuRico Gold (AUQ CN) Aft-mkt, $0.02
- AVG Technologies (AVG) 4:15pm, $0.47
- CareFusion (CFN) 4:02pm, $0.39
- Clean Energy Fuels (CLNE) 4:05pm, $(0.23)
- Credicorp (BAP) 6pm, $2.43
- CubeSmart (CUBE) 4:30pm, $0.24
- Groupon (GRPN) 4:01pm, $0.01 - Preview
- Mettler-Toledo Intl (MTD) 4:01pm, $2.60
- Molycorp (MCP) 4:01pm, $(0.28)
- Monster Beverage (MNST) 4:05pm, $0.57
- Nektar Therapeutics (NKTR) 4:15pm, $(0.40)
- Northern Oil and Gas (NOG) 4:30pm, $0.32
- NVIDIA (NVDA) 4:20pm, $0.25
- Pengrowth Energy (PGF CN) 4:30pm, C$0.02
- Pharmacyclics (PCYC) 4:01pm, $0.76
- Priceline.com (PCLN) 4:01pm, $16.22 - Preview
- Santarus (SNTS) 4:05pm, $0.33
- tw telecom (TWTC) 4:01pm, $0.12
- Walt Disney (DIS) 4:15pm, $0.76 - Preview
- Westar Energy (WR) 5pm, $0.99
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- LME Changes Warehousing Rules to Shorten Withdrawal Times
- Brazil Soy Crop Surpassing U.S. Expands Global Glut: Commodities
- Coffee Falls to 7-Year Low on Latin American Supply; Sugar Drops
- Corn Touches Three-Year Low as USDA Seen Raising Crop Outlook
- Brent Falls to Lowest Since July on Warm Weather Across Europe
- World Food Prices Advance for First Time in Six Months on Sugar
- Rebar Climbs on Speculation Air Quality Efforts May Curb Output
- Gold Swings Between Gains and Losses in London Before U.S. Data
- Tin Shipments From Indonesia Jump as Trade Rule Gains Traction
- ArcelorMittal Turns Optimistic on 2014 as Profit Beats Estimates
- China Seen by Klapwijk Boosting Gold Reserves as Prices Drop
- Crude Forecasters Diverging as Contango Emerges: Energy Markets
- Warmer Start to Winter Weakens Gas Demand Throughout Europe
- Crude Traders Sticking With Brent Amid Manipulation Claims
The Hedgeye Macro Team
daily macro intelligence
Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.