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Bear Droppings

This note was originally published at 8am on January 29, 2014 for Hedgeye subscribers.

“Daddy, that looks like bird poop.”

-Jack McCullough

 

Nah, he wasn’t talking about the complexion of yesterday’s stock market bounce or Obama’s class warfare speech. My son was talking about the risk-on trade my 2.5-week old baby girl placed all over my shirt last night.

 

Risk happens fast, and slow.

 

Back to the Global Macro Grind

 

Given that the Russell 2000 hit an all-time high on January 22nd, I think most of you will agree that the “risk-on” trade in being long of big US equity beta happened pretty fast.

 

The speed of an information surprise (real-time prices) to the downside can kill both confidence and returns. And I think this is what will keep volatility above @Hedgeye TREND support (VIX TREND = 14.91) for longer than consensus might think.

 

While consensus isn’t as bullish as it was 4 weeks ago, here’s one way to contextualize sentiment:

 

  1. The II Bull/Bear Spread (one of my favs) peaked at +4650 basis points wide to the bull side in DEC (all-time high)
  2. This morning’s Bull/Bear Spread is +3780 bps wide (that’s a 16% correction)
  3. The peak in Bulls was 61.7% and this morning it’s down to 53.1% (that’s a 14% correction)

 

As for the Bears, there still are none that survived all of 2013. By the time it was all over, very few long-only managers were allowed to remind clients they’d been bearish for the last 12 months. Even after last week’s -2.6% drop in the SP500, Bears went from 15.1% to 15.3%. I know, #scary.

 

Unlike the last three 3-4% US stocks market corrections that we told you to buy, this one has a glaring difference – rather than accelerating both month-to-month and quarter-over-quarter, on the margin, US growth is slowing.

 

Slowing? Yes. And very evidently so in some of the big stuff that matters:

 

  1. HOUSING: New Home Sales missed big on Monday and Case/Shiller Home Prices declined m/m (both are new)
  2. CONSUMPTION: from Retail Sales to ISM Services and every company check from my analysts = #GrowthSlowing
  3. ECON CYCLE: yesterday’s New Orders in the DEC Durable Goods report dropped -4.3% m/m (vs +2.6% last)

 

And sure, people who are in the business of being bullish will give you plenty of excuses (including the weather) as to why slowing is occurring, but few made the call 2-4 weeks ago when the call needed to be made.

 

Blame Turkey.

 

No thanks. Did consensus seriously think all these dysfunctional emerging market countries could try what we did (burn their currencies) and not see local inflation rise, consumption growth slow, and social unrest rip?

 

NEWSFLASH: devaluing the purchasing power of The People is called inflation.

 

And inflation pays the rich and starves the poor.

 

Obviously that whole money printing and political power thing (which crushes upward mobility in a society) didn’t make it into last night’s State of The Storytelling. But I digress.

 

Political digressions, transgressions, and obfuscations aside, what markets cannot seem to get away from is this thing called economic gravity. So let’s try an if/then risk management exercise. If…

 

A)     #InflationAccelerates

B)      #GrowthSlows

 

Then… the stock market sees multiple compression. Period.

 

If stagflation gets really amped up (think 1970s when American socialists perpetuated it through things like currency devaluation, price controls, and government spending), stock market multiples really get whacked.

 

Sorry Abby (as in Goldman’s Cohen, who says the SP500 is going to 18x EPS = 2088 this year). If inflation continues to ramp and growth continues to slow, you might have to slap a lucky 13 on that super-duper-magic-market-multiple thing you do.

 

Actually, god just called and told me 13 “feels a little low.” How about 14x the 2014 consensus EPS = 1624? Jack, that would look and feel like bear poop to me.

 

Our immediate-term Macro Risk Ranges (with bull or bear TREND in brackets) are as follows:

 

UST 10yr Yield 2.72-2.80% (bearish)

SPX 1771-1819 (bullish)

Shanghai Comp 1984-2071 (bearish)

VIX 14.91-18.55 (bullish)

USD 80.16-80.79 (bearish)

Pound 1.64-1.66 (bullish)

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Bear Droppings - Chart of the Day

 

Bear Droppings - Virtual Portfolio


TRIP 4Q CONFERENCE CALL NOTES

Hotel shopper growth a little disappointing in Q4 but meta hit neutrality in December

 

 

CONF CALL

  • 25% growth in hotel shoppers in Q4; 36% for the year - strength in UK and USA
    • 50% total traffic growth
    • 4 new point-of-sales in 2013; plan 8 more in 2014
  • In 2014, mgmt wants to integrate photos from Oyster acquisition into TRIP, while working on a more engaging member experience on mobile, and have plans to make TRIP membership further come to life for users. 
  • New TV spot due out Spring 2014
  • Meta: bidding landscape matured in Q4. CPC uptick in Q4, consequently resulting in resident per hotel shopper growth
  • Tablet:  made further improvements on new native app
  • TripConnect:  remains in early stage of adoption curve
  • Display:  sold impressions up 34% YoY (larger global sales force)
  • Business listings:  69k subscriptions, up 38% YoY;  better client-facing tools 
  • 2014 - free to list platform - expect more improvements
  • Daodao:  strong demand for international demand for repeat users; remain in investment mode
  • No margin target
  • May take a short-term hit for the benefit of long-term goals
  • Click-based:  Stronger pricing from meta leads, offset by smartphone growth and international traffic growth; smartphone impact intensifying given strong hotel shopper traffic on that device
  • Meta transition achieved revenue neutrality in December
    • Saw more bidders per property on average
    • More properties with at least one bidder
    • Increasing CPCs
  • Model is highly sensitive to CPC pricing.  Positive trend will continue into 2014
  • Display:  Better sell-through rates in APAC and EMEA; also easy Q4 comps
  • Subscription:  Sales productivity, pricing improvements in business listings and increased brand awareness in vacation rentals
  • International revenue (other than dot com): increased slightly as a % of total growth based on hotel shopper growth globally and strong performance of display/business listings products overseas
  • Q4 expenses increased sequentially to 75% of revenues due to timing of TV ad campaign
  • Effective tax rate of 28% is a good run rate
  • Diluted share count will increase 1-2% by the end of 2014
  • 4Q capex was 8% of revenues; 
  • 2014 capex as a % of revenue will remain in-line with 2013 exit rate
  • Paid $35MM to acquire 6 companies
  • Repurchased $145MM in 2013; $100MM repurchase plan remaining 
  • Click-based revenue expected to accelerate throughout the year; low twenties growth expectations in 2014
  • Mid-to-high teens display rev growth in 2014; up against very strong 2013 comps; does not expect very strong 4Q growth rate to recur
  • Low 50s growth from subscription, transaction, and other business lines
  • 2014 revenue growth guidance:  mid 20s
  • 2014 EBITDA growth guidance in line with revenue growth - mid 20s
  • Try to give conservative forecast

 

Q & A

  • Hotel shopper comp in 1H 2014 will be tough
  • No comment on assisted bookings product timeframe; fully committed to building it in 2014. May launch on other platforms but right now wait and see
    • Assisted bookings disruptions will be less than the meta disruptions
  • Onsite conversions:  nice progress with travelers moving down the funnel 
  • Leads have been more valuable for clients compared with 6 months ago;  more likely for clients to finish the transaction
  • TV ad campaign:  raised awareness in all 4 markets. Pleased with effort but only the beginning.  Looking for harder-hitting campaign.
  • Display advertising seasonality:  couple of larger orders dropped into the quarter that normally does not happen.  Q4 is seasonally very volatile.  This big uptick is not in the Q4 forecast for 2014.
  • TV ad spend correlation with hotel shopper growth:  expect meaningful growth via TV spend but too early to tell
  • Non-hotel shopper traffic growing worldwide:  nothing but upside  
  • Meta revenue neutrality:  by November, they saw some price increases but pricing picked up in December and continued into January.  Not concerned about breakage. 
  • Monetization on smartphone have not been where it should be
  • Hotel shoppers:  includes tripadvisor mobile website, does not include daodao, does not include native shoppers on Android/iPhone
    • Q1 2014 will have full quarter of native shoppers
  • Marketing/selling expense Q4 ex TV spend impact:  EBITDA margins would have been closer to previous quarters
  • Outside of Summer Olympics, other events are too small to impact results
  • Business subscriptions: 775k hotels on platform; of those, >300k registered owners (69k subscribers)
  • Traffic:  50% hotel shoppers, 50% non-hotel shoppers
  • 4Q headwinds/tailwinds:
    • International/mobile continue to drag on traffic in 5-10% range; mobile headwind has strengthened; favorable FX by a point and a half.  Meta (revenue/per hotel shopper): neutral in December; 
  • 2014 headwinds/tailwinds:
    • Headwinds with international and mobile.  Hope assisted bookings will help the mobile segment.  Meta should be a tailwind.

EHTH: Subsidies=Attrition

Takeaway: "If you're lower income right now, you can only go to a government-run exchange," - Gary Lauer, EHTH CEO

EHTH's CEO was on CNBC today (link) discussing the status of the Government Health Insurance Exchanges.  An interesting takeaway was the above quote, which is somewhat surprising since EHTH is a web-approved broker; meaning it is authorized to sell subsidized plans in the 36 states where the federal government is running the exchange.

 

The issue is functionality.  EHTH and other web-approved brokers can't interface with the federal exchange due to technical issues; therefore it can't sell subsidized plans.

 

As we laid out in our Best Ideas EHTH Short Call today, subsidy-eligible individuals represent a major attrition risk for EHTH.  In the table below, we quantify the size of the subsidy-eligible population among existing Individual & Family Plan (IFP) members using Census data.  We estimate that at least 45% of existing IFP members are eligible for subsidies.  If EHTH can't sell subsidized plans to its existing members, it will lose many of those members to the exchanges.

 

EHTH: Subsidies=Attrition  - EHTH   Subsidy Population 4

 

This is just one of the issues facing EHTH's IFP segment in 2014.  We go into greater detail during our Best Ideas Call.  If you would like access to the replay, please let us know.

 

 

Hesham Shaaban, CFA

@HedgeyeInternet


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RAI—Balancing Profitability and Market Share On Weak Cig Volume

Neutral Outlook on RAI


Reynolds American reported Q4 EPS of $0.77 that missed consensus of $0.81 and revenues of $2.04B that came in slightly below the Street at $2.07B. It announced a dividend increase of 6.3% and FY 2014 EPS guidance $3.30-$3.45. The stock is trading down over -2% intraday.

 

In the quarter sales were down -1.9% versus the previous-year quarter and EPS up +1.3%. The company was able to take pricing across cigarettes and moist-snuff to make up for cigarette volume declines that outpaced the industry average.  

 

Cigarette volume was down a full -7.0% in the quarter (versus the industry average of -4.0%) and fell -6.2% for the full year (vs the industry average of -4.2%); the company cited the decline was due to a slow macro environment and migration to non-combustible tobacco. This volume result compares to the company’s guidance last quarter that its FY volumes would track closer to -4%.

 

Strong brand results came from Camel that grew Q4 market share by 0.4 pp to 9.0%; Camel SNUS that continues to hold about 80% of the category; and Pall Mall that grew market share 0.2 pp to 9.1%. American Snuff’s Grizzly brand also continued to show strong performance, increasing operating income 17.0% on the quarter and 12.1% on the year and boosting its Q4 operating margin 2.5% to 58.9%; and Santa Fe’s performance grew operating income 12.3% in the quarter and 17.9% on the year.

 

The company expects cigarette volume to moderate in 2014 to around -3.5%, and it’s unclear if e-cigs will be driving the improvement in cigarette volume loss.  We expect 2014 to be a big year of investment for the company behind its e-cig VUSE as it plans to roll-out nationally (more below) and for it to heavily discount and promote the product to compete with MO’s e-cig offering and play catch-up to LO’s Blu, among the Big Tobacco players.  Recent category weakness remains a concern, which was partially confirmed by a much more cautious outlook on the category from CEO Daan Delen today.

 

We’re currently neutral on the stock. Our preferred play is long Lorillard (LO) and short Philip Morris (PM).

 

 

On E-Cigs


E-cigs were once again a focal point of the call: the company began the call discussing its e-cig business under the brand VUSE and the majority of analysts’ questions in the Q&A were about e-cigs.

 

RAI launched its made-in-America e-cig in its first test market of Colorado in July 2013 and recently expanded to its second market in Utah. The company maintained its plan to have national distribution by mid-year, however took a more critical and cautious tone on the e-cig category, suggesting that expansion will depend on growth in the category. CEO Delen said that for now while trialing is high for the category, repeat purchasing and adopting is very lower, and had no concrete answer for why the e-cig category has recently slowed.  He said consumer trends were based on current products that did not meet smokers’ expectations, and that VUSE is poised to buck that trend.

 

VUSE’s results in CO: Category volume has tripled since its launch with mix driven by 80% cartridges (razorblade) vs 20% disposables. The company believes that higher long-term margins can be achieved by cartridges.

 

On a national rollout: The company is confident with its strategy citing its industry-leading trademark and distribution network, the self-imposed restrictions it has in place (including no self service with its products placed on the back bar so it can assure age verified sales).

  • As we look to a national rollout, we’d expect heavy discounting and promotion to encourage trialing (similar story with Altria’s e-cig MarkTen under a similar timeline) to suggest selling at a loss or at best breakeven for this year (alongside the potential for heavy price competition). 

On the recent growth pick-up in the tank or open-ended system: Delen confirmed the growth pick-up and said it will be interesting to see what happens from a regulatory point of view, noting that in an open-ended system people can put any types of liquids in, whereas VUSE is a closed system that shuts down if the consumer tries to tamper with it/add liquid.

 

On M&A to expand its e-cig business: CEO Delen deflected the question and suggested that he is confident VUSE is a differentiated and experienced brand that can compete in the marketplace. [Note: the recent M&A activity has included MO’s acquisition of Green smoke for $110M on February 3, 2014; LO’s acquisition of SKYCIG for £30M in October 2013; and LO’s original purchase of Blu in April 2012 for $135M].

 

Call or email with questions,

 

Matt Hedrick


Gold Loves the Mother of All Doves

Takeaway: Dollar Down + Rates Down = Heaven for Gold.

Is it time for Janet "Mother of All Doves" Yellen to abandon the Fed's dual mandate and just target rates? The Dollar definitely thinks so. It's down again this week after losing -0.8% of its value last week. Meanwhile, commodity #InflationAcclerating continues to front-run the probability of a devaluation.

 

Gold Loves the Mother of All Doves - doll9

 

Sure, it might be good for a low-volume pop in stocks. But it's horrible news for US consumption growth.

 

Here's a simple formula: Dollar Down + Rates Down = Heaven for Gold.

 

That’s why we are bullish on Gold (see our full research note recapping why from yesterday). What was once TREND resistance of $1272 in our model for Gold is now support. 

 

We will keep adding to the "Gold-Bond" asset allocation move if Yellen targets rates.

 

Gold Loves the Mother of All Doves - drake 

 

Incidentally, do you know who else got away with targeting rates? #Japan. 2013’s Hedgeye TREND support for the 10-year US Treasury yield is now resistance at 2.80%.

 

Maybe she wants a 0.6% JGB-style 10-year?

Join the Hedgeye Revolution.


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