“We don’t see things as they are, we see them as we are.”
We are short the consumption growth components of the US stock market. And that means we were wrong yesterday. It’s ok to say it that way – we see the real-time score for what it is, not what we want it to be.
Ellen Langer uses the aforementioned quote in a #behavioral psych book I just finished called Counterclockwise. Her concept of “mindfulness” fits how I see things in macro (on the margin). “Noticing differences is the essence of mindfulness. Don’t imagine, however, that all this needs to be exhausting… mindfulness is actually energizing, not enervating.” (pg 52)
Being wrong for a few days is a little different than being wrong for a few months (or years). When I was younger and wrong, I’d get mad. Now that I am less young, being wrong energizes me – especially when I notice something that isn’t consensus.
Back to the Global Macro Grind…
To be clear, I’m not the only one who has noticed that Janet Yellen is re-opening Pandora’s real-world inflation box with another Federal Reserve ideological “innovation” (the #untapering). Mr. Macro Market has been front-running her for 6 weeks:
- Dollar Down
- Rates Down
- Inflation Expectations Up
That, of course, is fantastic for slow-growth-yield-chasing asset prices like:
- Gold +7.1% YTD
- MSCI REIT Index +6.3% YTD
- Utilities (XLU) +3.5% YTD
Not to be confused with US #GrowthAccelerating asset prices like:
- Consumer Discretionary (XLY) -4.1% YTD
- Consumer Staples (XLP) -3.3% YTD
- Russell2000 -3.0% YTD
Alongside Boehner waiving the debt limit last night (without conditions!), what we have here is another Big Government policy investing-style shift towards #InflationAccelerating. This isn’t new. It’s what happened to the Dollar in both Q1 of 2008 and 2011. Inflation is a tax.
The inflationary concept that zero isn’t zero is what the Fed calls “policy innovation.” Happy #Darwin Day! #1806
In Q1 of 2008, Bernanke whispered to his boys that he was going to do the “shock and awe” thing and cut to zero; so, while demand was slowing, Oil prices ripped humanity a new one by the summer time ($150/barrel), perpetuating US #GrowthSlowing.
In Q1 of 2011, Bernanke continued to send sweet nothings down his communication pipes that zero really wasn’t zero – it was zero minus whatever # of QE’s he damn well wanted. The CRB Commodities Index, Gold, etc. ripped to all-time highs, US consumption growth slowed, and Utilities (XLU) closed the year +14.8%.
In Q1 of now, zero still really isn’t zero because you have to:
- Subtract 2 tapers from the 0 minus 3-4 QE’s
- Then add expectations of un-tapering to the 2 tapers…
- And add a minus taper to a real-rates # … and you get a dovish Dollar
Or something like that.
The Fed, of course, doesn’t see it this way. But no matter how they want to see their theoretical world, market expectations and prices see them the way the real-world is.
While I am sure this will all end well, can the US stock market continue higher? Obviously the answer to that is yes. But what parts of the market will lead? Will they be food/energy inflations, real-estate inflations, and/or some of those beauty MLPs?
I don’t know anything about nothing, but I am certain that everything that you eat, put in your car, and pay for from a housing perspective has nothing to do with inflation or your cost of living.
In other news, as both the British Pound and Euro gain strength versus Yellen’s Burning Buck, both the UK and German governments are taking up their GDP growth estimates for 2014 (British Pound remains our favorite currency vs USD).
How that #StrongCurrency correlation to growth thing works is cool. It’s too bad that un-elected and unaccountable US central planners aren’t paid to see the history of currency appreciation, real-purchasing power, and consumption growth for what it is.
Our immediate-term Macro Risk Ranges are now (all 12 macro ranges are in our Daily Trading Range product):
Nat Gas 4.57-5.34
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
daily macro intelligence
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TODAY’S S&P 500 SET-UP – February 12, 2014
As we look at today's setup for the S&P 500, the range is 98 points or 4.93% downside to 1730 and 0.45% upside to 1828.
CREDIT/ECONOMIC MARKET LOOK:
- YIELD CURVE: 2.41 from 2.36
- VIX closed at 14.51 1 day percent change of -4.91%
MACRO DATA POINTS (Bloomberg Estimates):
- 7am: MBA Mortgage Applications, Feb. 7 (prior 0.4%)
- 8:45am: Fed’s Bullard speaks in New York
- 10am: New York Fed issues small business credit survey
- 10:30am: ECB’s Draghi speaks in Brussels
- 10:30am: DOE Energy Inventories
- 2pm: Monthly Budget Statement, Jan., est. -$10b (pr +$2.9b)
- Senate may consider legislation to extend debt ceiling following House passage yday
- 9am: Treasury Dept meeting of Financial Literacy and Education Commission, with Sec. Jack Lew, Delaware Gov. Jack Markell, CFPB Director Richard Cordray
- 9am: CFTC’s Division of Market Oversight public roundtable on application of Commodity Exchange Act’s trade execution requirement to so-called “package transactions”
- 10am: Senate Health, Education, Labor and Pensions Cmte Chairman Tom Harkin, D-Iowa, holds news conference to reveal the results of a “Seclusion and Restraints Report”
- 1pm: Intl Trade Commission begins 2-day public hearing on India’s trade, investment, industrial policies
- 2:30pm: Senate Energy panel hearing to consider lessons for federal policy from state efficiency and renewable programs
WHAT TO WATCH:
- House passes measure suspending debt limit until March 2015
- Fed seen easing capital requirement for smaller foreign banks
- N.Y. Fed awards primary dealership to Toronto-Dominion Bank
- China’s exports unexpectedly accelerate as imports increase
- Ford China says Jan. sales up 53% vs yr earlier
- Ashland water-chemicals unit said to get 3 bids by deadline
- MSCI to announce quarterly index rebalancing post-mkt
- Imerys to buy Amcol for $1.6b to add industrial clays
- SocGen profit exceeds estimates on consumer banking
- ING 4Q profit beats ests. as banking unit earnings climb
- Toyota recalls 1.9m Prius worldwide for software update
- Pimco boosts government holdings as bonds gain most since 2008
- SoftBank profit beats ests. as iPhone spurs customer growth
- Las Vegas Sands sites hacked as posts criticize Adelson
- Wm Morrison founding family said to sound out buyout firms
- Reckitt Benckiser sees slowdown as emerging markets weaken
- Total’s quarterly profit drops as refining margins narrow
- China’s crude imports surge to record high on stockpiling
- Air Canada (AC/B CN) 6am, C$0.11 - Preview
- AllianceBernstein (AB) 7:15am, $0.43
- Alpha Natural Resources (ANR) 7am, $(0.63) - Preview
- BGC Partners (BGCP) 8am, $0.11
- Deere & Co (DE) 7am, $1.53 - Preview
- Dr Pepper Snapple (DPS) 8am, $0.84 - Preview
- EZchip Semiconductor (EZCH) 8am, $0.33
- Hospira (HSP) 7:30am, $0.50 - Preview
- Husky Energy (HSE CN) 7am, C$0.38 - Preview
- Incyte (INCY) 7am, $(0.13)
- ING US (VOYA) 5:50am, $0.69
- Lorillard (LO) 7am, $0.85
- Owens Corning (OC) 7:28am, $0.27
- Pinnacle Entertainment (PNK) 8am, $0.34
- Rogers Communications (RCI/B CN) 6:50am, C$0.74 - Preview
- Sinclair Broadcast (SBGI) 7:30am, $0.43
- SPX (SPW) 6:30am, $1.82
- Thomson Reuters (TRI CN) 7am, $0.52
- Valspar (VAL) 7:30am, $0.66
- Vonage Holdings (VG) 8am, $0.03
- Agnico Eagle Mines (AEM CN) 5pm, $0.20 - Preview
- American Equity Investment (AEL) 4pm, $0.50
- Angie’s List (ANGI) 4:05pm, $0.13
- Applied Materials (AMAT) 4:02pm, $0.22 - Preview
- CBS (CBS) 4:01pm, $0.76 - Preview
- CenturyLink (CTL) 4:07pm, $0.59
- Cheesecake Factory (CAKE) 4:15pm, $0.59
- Cisco Systems (CSCO) 4:05pm, $0.46 - Preview
- Corrections of America (CXW) 4:15pm, $0.41
- Fidelity National Financial (FNF) 4:03pm, $0.35
- Intrepid Potash (IPI) 4:05pm, $0.01
- Kinross Gold (K CN) 5pm, $0.03 - Preview
- MetLife (MET) 4:05pm, $1.29
- Mondelez Intl (MDLZ) 4:02pm, $0.44
- NetApp (NTAP) 4:01pm, $0.71
- NetEase (NTES) 6pm, $1.42
- NVIDIA (NVDA) 4:20pm, $0.24
- Regency Centers (REG) 4:30pm, $0.17
- Rovi (ROVI) 4:05pm, $0.57
- Ruckus Wireless (RKUS) 4:05pm, $0.05
- Sun Life Financial (SLF CN) 5:10pm, C$0.69
- SunPower (SPWR) 4:05pm, $0.28
- TAL International (TAL) 5:01pm, $1.00
- Taubman Centers (TCO) 4:01pm, $0.70
- Whole Foods Market (WFM) 4:03pm, $0.44 - Preview
- Zillow (Z) 4:30pm, $0.07 - Preview
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- Natural Gas Rises for Second Day on Outlook for Inventory Drop
- Rice Tumbling as Thailand’s Unpaid Farmers Demand Stockpile Sale
- Soy Switch on U.S. Corn Farms Expanding World Glut: Commodities
- Copper Advances as Imports of Metal Into China Jump to Record
- Gold Falls From 3-Month High on Stocks as Advance Curbs Demand
- Credit Curbs Help Fuel Record Chinese Imports From Copper to Ore
- LME Aluminum Benchmark Challenged as CME Plans New Contract
- Rubber Exporters in Thailand to Avoid Selling Below Output Cost
- Corn Slides a Third Day Amid Expectations for Record World Crop
- Glencore Joins Trafigura Cutting LME Warehouses Before New Rules
- Gasoline Profit Seen Gaining in U.S. as Refineries Shut: Energy
- Storm Bringing Ice to Atlanta as Northeastern U.S. Faces Snow
- China Eating 50% of Global Pork May Spur Industry Consolidation
- WTI Rises to 7-Week High as Distillate Supplies Drop Amid Freeze
The Hedgeye Macro Team
This note was originally published at 8am on January 29, 2014 for Hedgeye subscribers.
“Daddy, that looks like bird poop.”
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:
- The II Bull/Bear Spread (one of my favs) peaked at +4650 basis points wide to the bull side in DEC (all-time high)
- This morning’s Bull/Bear Spread is +3780 bps wide (that’s a 16% correction)
- 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:
- HOUSING: New Home Sales missed big on Monday and Case/Shiller Home Prices declined m/m (both are new)
- CONSUMPTION: from Retail Sales to ISM Services and every company check from my analysts = #GrowthSlowing
- 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.
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…
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,
Keith R. McCullough
Chief Executive Officer
Hotel shopper growth a little disappointing in Q4 but meta hit neutrality in December
- 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.
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