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“It was fortunate that the Commodore was not educated; for had he been, he would have been a god.”
-New York Sun, April, 1878
You know I love 19th century American Capitalist history. You know I love the epic story of Cornelius Vanderbilt too. The aforementioned quote comes from Part Three of The First Tycoon (pg 333). We should all thank our respective gods that Vanderbilt wasn’t an Ivy League economist.
Counter to popular Marxist beliefs in this country, the capitalists built the steamships and rails. They blew themselves up trying to make money plenty of other ways too – and they liked it. That’s the only way to learn and evolve – having a very real chance that you can fail.
Yesterday, Janet Yellen failed to convince me that she isn’t the ideologue that her partner in pulverizing America’s poor was. I don’t think she’s going to persuade anyone who doesn’t get paid by QE either. That’s at least 80% of the country, fyi.
Back to the Global Macro Grind…
No worries about the long-term in this country. When I am long dead, maybe my son, daughters, or theirs will have an opportunity to live an American life that doesn’t included an un-elected academic droning on like Charlie Brown’s teacher about how the Fed hasn’t perpetuated all-time highs in asset price inflation.
Cost of living in this country is bubbling up to all-time highs. And instead of talking about that yesterday, Yellen was more concerned about what we have been signaling now for months – a redo of a US #HousingSlowdown.
“So” (in classic groupthink lingo, she prefaced every Keynesian comment she made yesterday with that), instead of following the money, follow how her Policy To Inflate Housing Prices plays out from here:
That’s right. As the cost of living ramps, 80-90% of this country has less dollars to spend. Inflation is real-time, whereas your wages (if you are lucky) adjust on a 1yr lag… and things like rent inflate on a 12-18 month lag to home price appreciation (US Home Prices were +12-13% nationally last year).
“So”, if you are in the 30% (and climbing) of Americans who rent (that’s 1/3 of the cost of living for the median US Consumer – see our Q2 Macro Themes slide deck on the math), Yellen’s narrative on how 0% “is good for housing” is really good for you, right? Yeah, a really good kick in the teeth.
David Einhorn challenged Yellen’s god (Bernanke) on this at a dinner recently (see yesterday’s Bloomberg story: “Einhorn Finds Dinner Chat With Bernanke Frightening”), “so”, take his word for it if you can’t take mine.
Einhorn is obviously a lot smarter than I, but he and the Thunder Bay Bear have a few things in common:
“So”, call our paths experience… or something like that. But don’t call us the guys who were buying-the-damn-bubble-stocks on January 1st, 2014. By the way, Twitter (TWTR) is up +3% this morning. “So”, if you bought it JAN 1, you’re down 50%, and only need to be up another +98% from here to breakeven.
In hedgie land (the difference between a hedgie like Einhorn and a Hedgeye is that he runs money and I run my mouth), we call blowing up in names like Zooolilly (ZU) or Fireye (FEYE) or YELP! “drawdown risk.” For the high-multiple momentum bulls, that risk is #on.
“So”, the real reason why Yellen wouldn’t call anything a bubble yesterday – or why Bernanke didn’t call the all-time highs in Housing (2006-2007), Oil (2008), Gold (2011), Food (2012), Bonds (2012), or Junk (2014 – I think Janet called that “high yield”) bubbles, is that they are bubbles.
The only way to prevent a bubble from popping is to: A) not call it one and B) rhetorically signal why you should buy moarrr of it. Or so the Fed thinks. “So”, I think you should take your time observing this gong show and challenge The Fed’s ideological god by shorting the bubbles that start to pop, with impunity.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.56-2.65%
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
This note was originally published at 8am on April 24, 2014 for Hedgeye subscribers.
“If you prick us do we not bleed? If you tickle us do we not laugh? If you poison us do we not die? And if you wrong us shall we not revenge?”
For those who called it a bubble, the tech sector is seeking its revenge this morning. Two of the mighty horsemen of technology, namely Facebook and Apple, exceeded expectations and as a result the Nasdaq is trading 1.5% higher this morning according to the futures market.
One of our top contrarian sources, The Street (known as the street.com in the last tech bubble) actually predicted this rally. Specifically, two days ago the headline on The Street was, “What Will Cause Tech Stocks to Plunge?” Funnily enough, Jim Cramer from The Street (retire already Jimbo!) actually critiqued one of the world’s top hedge funders yesterday for not making enough money on the social media swoon in March.
But, enough talk of side shows and carnival barkers, we actually had some legitimate questions on yesterday’s Early Look on this idea of bubbles and an insightful subscriber from London emailed us back with the following question:
“I’m also not sure why you’re so convinced that we’re in a Social Media bubble. Some Internet stocks are highly valued sure but for the likes of FB and LNKD these are real businesses with major competitive advantages, why are you so bearish on these too?”
Our Internet Analyst Hesham Shaaban had a thoughtful response, which included the following:
“The reason why valuations are so high is because of elevated growth expectations, which you can see in the table below. The market sees Social Media as one collective industry, assuming the rising tide will carry all ships, and historical growth is a sign of things to come.
Social Media is not one industry. These players have varying business models, revenue sources, and growth prospects. We see at least 2 big losers in the group (TWTR and YELP), and once growth expectations come in, their multiples will collapse with it.”
In the table directly below, we’ve included a summary of the growth expectations and valuations of $FB, $LNKD, $TWTR, and $YELP. Certainly if there is a bubble, it is not that all of these companies have broken business models (though we believe some do), but rather, as Shakespeare also said, that expectations are the root of all heartache. (Email us at firstname.lastname@example.org if you’d like to be added to an institutional trial of our internet research.)
Back to the Global Macro Grind...
One of our other favorite contrarian sources, Peter Tchir from TF Markets, actually made a great contrarian statement on Twitter the other day (you can follow him @tfmkts if you’d like access to the contrarian signal) when he tweeted that he wasn’t a bear on housing.
Ironically, in many ways, the housing market and the principal supply-demand-price dynamics underneath it are rather straightforward. Admittedly, in other, sometimes very mechanical ways, understanding the prevailing trends in the housing market can be challenging for the uninitiated or marginally interested.
So, what’s the current state of housing?
Across the 22 primary metrics we track as part of our housing compendium monitor, 15 have worsened sequentially and 18 have worsened from a trend perspective.
Indeed, the housing data released over the last few days offered further support to our expectation for an intermediate term #HousingSlowdown as current demand metrics (Existing & New Home Sales) continued to wane, while mortgage application data is signaling a further deceleration in forward transaction activity.
That the deceleration in activity is occurring in the face of both the positive shift in weather and declining interest rates makes it that much more notable.
To quickly review this week’s data:
So, the demand deceleration has been both significant, geographically pervasive and has extended through March / April – all of which confute the "it’s the weather" in isolation thesis.
While weather probably exaggerated some of the underlying weakness to start the year, we continue to think that the collective impact of stagnant income growth, declining affordability, a reversal in institutional interest, and the implementation of QM regulations will serve to pressure housing demand over the intermediate term.
Home price growth, which follows the slope of demand on ~18mo lag, will follow the demand deceleration. Given that home prices have a very high correlation to discretionary spending and the U.S. economic output is 70% driven by the consumer, we see the slowdown in housing as a looming headwind for economic growth domestically. Aye, there’s the rub!
Our immediate-term Global Macro Risk Ranges are now as follows:
UST 10yr Yield 2.59-2.73%
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.
TODAY’S S&P 500 SET-UP – May 8, 2014
As we look at today's setup for the S&P 500, the range is 29 points or 0.92% downside to 1861 and 0.63% upside to 1890.
CREDIT/ECONOMIC MARKET LOOK:
MACRO DATA POINTS (Bloomberg Estimates):
WHAT TO WATCH:
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
The Hedgeye Macro Team
Takeaway: It's been tough sledding for TWTR bulls.
Twitter shares got totally shellacked yesterday, dropping almost 18% after its IPO lock-up period ended. Shares finished trading around $32. Today hasn't fared much better for Twitter bulls with shares off around 4%. TWTR is down a remarkable 27% over the last five trading days.
We wanted to know where you thought shares were headed next. So we asked your opinion in today’s poll: What’s the next stop for Twitter? $22/share or $42/share?
At the time of this post, 55% said Twitter will soon be trading at $22; 45% said $42.
Of the majority who said trading would drop to $22/share, voters had these diverse explanations:
Here’s what some voters who think Twitter shares are headed to $42/share next (if not more) had to say:
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