Takeaway: Credit card loan growth appears to be quietly accelerating. COF remains one of our favorite names on the long side.

What Once Was Old ...

We haven't written about the Federal Reserve's G.19 consumer credit report in ages, and that's because there's been nothing to say. U.S. credit card loan balances have been muddling sideways at a 0-1% rate of growth for the last two and a half years. But in the last two months there's been an upturn, and suddenly it looks like it might be interesting. 


One of our guiding principles is that we try and take note of inflection points in the rate of growth, i.e. the second derivative, since it's these second derivative changes that precipitate changes in the multiple.


Along those lines it's interesting to take a step back and consider whether the sleepy credit card space may have just entered such an inflection point. 


On Friday afternoon of last week the Fed released its G.19 report for the month of April and it showed that US revolving consumer credit balances rose at a month-over-month annualized rate of +12.3%, the fastest rate of growth in, well, a really long time. In fact, you'd have to go back to the early/mid 1990s to revisit that rate of growth on a sustained basis. To be fair, we've followed the G.19 data for years and, speaking from experience, it's a very choppy and often-revised data series. We wouldn't get overly excited about it but for the fact that Capital One's numbers for the month of April also reflected a sharp upturn in the rate of growth in US credit card receivable balances. 


We should know more on Monday next week when we get the May data from the various credit card companies.


In late January we issued a report arguing investors should get long Capital One following the 4Q earnings "blow-up". Our analysis showed that there was a quantifiable advantage to owning shares historically from the late January through mid-July timeframe. This owes largely to the fact that, like a clock, Capital One misses the 4Q numbers and beats the 1Q numbers every year. Our original intention was to exit the long trade ahead of reporting 2Q numbers, but now that growth is starting to show signs of life we may be interested in extending our duration. We'll know more on Monday.












On a separate note, we just couldn't resist the temptation to flag the unstoppable force that is student loan growth in this country. The chart below, also taken from the G.19 data, shows the amount of federally-backed student loans sitting on the books of the United States. Currently the figure stands at $775 billion, up $112 billion (+16.9%) in the last 12 months. For those wondering why there seems to be no recovery in the first time homebuyer market we offer the chart below as "Exhibit A".





Joshua Steiner, CFA


Jonathan Casteleyn, CFA

Foreign Policy Briefing: Professor Charles Hill

Last Friday we hosted a call with Diplomat-In-Residence at Yale, Charles Hill. A replay link is included below along with a brief summary:


Prior to his current position as professor of Grand Strategies, Charles Hill has held a number of posts including but not limited to the following:

  • Senior Adviser to George Schultz, Henry Kissinger, and Ronald Reagan
  • Deputy Assistant Secretary
  • Chief of Staff for the Middle-East at the State Department

On a high-level Professor Hill touched on four major geopolitical hotspots and painted a clear picture of a somewhat opaque interconnectedness between the four:

  1. Russia
  2. China
  3. Syria
  4. Iran

As a precursor to Professor Hill’s view of the current geopolitical reality, he described the differences in the current dynamic from the Cold War:

Throughout the Cold War, there were three main centers of influence:

  1. Western (free-world)
  2. Communism
  3. Third-World

Our current globalized society has now shifted into an entirely different but by no means antonymic world:

  1. Corporate circle of globalization:  fueled by rapidly evolving technology and social media. Those on the inside are either flourishing or sitting on the opportunity to flourish
  2. Structural Foundation: a world referred to as an “international state system” in which treaties, ambassadors, and global alliances rule. This system is being aggressively and deliberately challenged and is currently in poor shape
  3. National Identity Crisis: The West, Middle-East, Europe, and especially China are all experiencing an identity crisis currently 

Russia: Russia has suffered an identity crisis after the desecration of traditional Russian values from years of communist experimentation during the cold war. Attempts to return to a more democratized society over the last decade have been largely unsuccessful. Putin has addressed this situation by combining communism with, more traditional, pre-communism values.

Putin’s intent is to take advantage of an apparent deterioration in the power of the nations that have sat atop of the current international system. The takeover of Crimea and involvement in Eastern Ukraine is a violation in and of itself, but the fact that Russia is infiltrating into eastern Ukraine in guerilla-like fashion confirms the speculation that he believes the current structural foundation, dominated by the West and EU, is highly vulnerable.


Syria: Russia has both supplied a helped strengthen Assad's regime in Syria. A Russian intelligence agenda has taken deliberate steps to obstruct those in opposition. With this direct involvement, Russia is gaining leverage in the Middle-East. The Arab Spring movement in 2011 was suppressed with deadly violence and terrorism. A more-traditional, Islamist movement into Syria led by Al-Queda influence has succeeded with brute force and terrorism. This radical camp is gaining steam in Iraq, Iran, Lebanon, and Syria. The militarism that has signified the Assad regime is being legitimized as the international community has been largely unsuccessful in intervening.         


Iran: Iran has played the international scene perfectly by building nuclear capabilities while adhering to the minimal requirements of remaining a part of the U.N. The Iranian government has taken a revolutionary roll to help Assad remain in power and free itself of nuclear sanctions (November 2013). In a sense they are opposing the order of the structural foundation of today’s international law while still remaining a part of it.


China: China faces a severe identity crisis with the experimentation of communism and capitalism. Recent moves in the East and South China Sea prove that, like Russia, they believe the current structural foundation of a world policed by the United States and Western Europe is badly bruised. Other than the verbal disdain over Chinese strategy in the Senkaku Island dispute, Washington has been largely unresponsive to China’s direct violation of international law, especially as it pertains to the more recent moves (i.e. planting an oil rig in Vietnamese waters).  


Conclusion: The global powers in charge of the international state system are being directly challenged, and if the current trend of structural deterioration continues, we will see a shift to a much different world. The flourishing globalized economy is going to be effected if this current system is uprooted. The maintenance of an international network dominated by computers has not been kept up, and the threat of an attack in this channel is ever-increasing.


Macro Team

Poll of the Day Recap: 72% Have Noticed More Promoted Tweets

Takeaway: 72% said YES; 28% said NO.

This morning we wanted to know if Promoted Tweets (ads) on Twitter are an annoying issue for you, or if you think it could become an issue for you if Twitter introduced more ads.


In the video below our Internet & Media Sector Head Hesham Shaaban weighs in on Twitter’s advertisement strategy and whether it is sustainable.



The poll asked: Have you noticed more Promoted Tweets or other advertisements on Twitter's Mobile App?


At the time of this post, 72% said YES; 28% said NO.


Those who voted YES to noticing more Promoted Tweets has this to say:

  • Here we go again, with "the people's technology" getting ready to be handed over to the highest bidders.  this will push the compelling case for the next generation, twitter's replacement. I wonder what it'll be...?
  • Promoted tweets are pushing down the real tweets in my feed. Hard to tell the difference after a while. They have to really provide value to not be annoying.


A voter who said NO they hadn’t noted more Promoted Tweets reasoned:

  • I've trained myself to ignore promoted tweets, just as I have banner ads --- it doesn't interrupt or even irritate my experience at all (at least for now)

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Favorable adjustment to our private equity analysis


In our IGT note and presentation ealier today we communicated IGT could be worth $18-22 to a private equity firm and would yield an IRR of 21%-33%. However, we found a data flow through error (related to D&A) from our forecasting model to our LBO calculation.  After updating our model, the IRR on a go private transaction at $18 or $22/share would be 36% and 24%, respectively - about 300 bps higher than our initial analysis. Our leverage and coverage ratios also improve as a result of the higher calculated EBITDA. 

We apologize for the error and inconvenience.  Please see our revised data table for additional details.




Please call us, if you'd like to discuss further.

EHTH: Keeps Getting Worse

Takeaway: Management comments at a competitor's conference introduce new risk to the story. A much bigger risk is yet to emerge. We remain short.


  1. WHAT'S NEW:  Management suggested at a competitor's Healthcare conference that it hasn't seen much improvement in fixing its technical issues interfacing with the government exchanges, and this issue may not be resolved before the next Open Enrollment period.  If true, this will only exasperate its retention/attrition issues, which is the central part of our thesis.
  2. WHAT'S NOT SO NEW:  Management also said 2Q14/3Q14 applications will be a “fraction” of what they were a year ago.  Management already alluded to this during its last earnings call, suggesting applications will be down y/y.  We previously highlighted this as risk to consensus estimates, but this isn’t central to our thesis since applications were accelerated into the 4Q13/1Q14 period because of Open Enrollment.
  3. WHAT'S COMING: What no one on the sell-side is talking about is Individual & Family Plan (IFP) commission rates next year.  The private exchanges (e.g. EHTH) are becoming more obsolete now the government exchanges are operational, which wasn’t the case heading into the 2014 Open Enrollment period.  The mix of new lives on the exchanges in 2014 are older (costlier) than historical experience, meaning Managed Care Companies (MCOs) need to find ways to recoup profitability next year.  Of all options available to MCOs, cutting IFP commission rates will be the path of least resistance.


See notes below for more detail on our thesis.  Let us know if you would like to see additional notes, have any questions, or would like to discuss further.


Hesham Shaaban, CFA





EHTH: Déjà vu

03/04/14 02:15 PM EST


EHTH: Initiating Short

01/29/14 10:38 AM EST


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