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THE HEDGEYE MACRO PLAYBOOK

Takeaway: The Hedgeye Macro Playbook is a daily 1-page summary of our core ETF recommendations, investment themes & noteworthy quantitative signals.

CLICK HERE to view the document.

 

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Thanks in advance,

 

Darius Dale

Associate: Macro Team


TWTR: Has the Story Changed?

Takeaway: 2Q14 results would suggest as much, but there are still too many question marks to believe that this type of upside is sustainable.

 NOTE SUMMARY

  1. What We All Know: 2Q14 was a monster quarter, with accelerating revenue growth across both segments.  The guidance raise was equally impressive.  
  2. What No One Really Knows: How much of its 2Q14 strength was driven by the World Cup, and how much of its guidance raise was tied to its recent string of acquisitions in its Data Licensing segment.  
  3. What the Data Suggests: Users are starting to fade twitter ads at an increasing rate, which would suggest that TWTR's growth strategy of rampant increases in ad load isn't sustainable.  
  4. What We're Expecting: A marked acceleration in data licensing revenue growth in 3Q14, alongside a marked deceleration in 3Q14 advertising revenue; a setup that may take the street by surprise.  

 

WHAT WE ALL KNOW

2Q14 was a monster quarter.  TWTR beat revenue estimates by 37M (14% upside) with accelerating revenue growth across both segments, alongside accelerating US user growth (bots included).  The company raised guidance by $100M, even after backing out the 2Q14 upside, it's still a considerable raise relative to prior implied 2H14 guidance of $700M at the midpoint.  

 

WHAT NO ONE REALLY KNOWS

How much of its 2Q14 strength was driven by the World Cup, which is a month-long event without a comparable event in the prior-year period.  Management made multiple comments citing World Cup as a tailwind, but without any detail to quantify the impact.  What we do know is that Global Timeline views saw its sharpest q/q increase since 2Q13, and that doesn't include TWTR's tailored content around the event, where ads were naturally served.  

 

The other thing to consider is how much its recent acquisitions factored into its guidance raise.  TWTR spent $132M on 7 acquisitions in 2Q14, all within its Data Licensing segment, which saw its sharpest sequential increase in revenue growth since TWTR closed the MoPub acquisition.  The company has since announced 3 more acquisitions in 3Q14.  The question is how much of an impact will these acquisitions have on TWTR's revenues in 3Q14 after contributing a full quarter of revenue.  

 

TWTR: Has the Story Changed? - TWTR   Data 2Q14

 

WHAT THE DATA IS TELLING US

For the first time in TWTR's reported history, its sequential growth in ad engagements lagged that of user activity (global timeline views); meaning that users are starting to fade twitter ads at an increasing rate.  Remember that TWTR's reported timeline views do not include the tailored content around the World Cup, so the 2Q14 inflection is worse than the chart below suggests.  

 

TWTR: Has the Story Changed? - TWTR  Timeline vs. Ad Engagements

 

It's important to note that TWTR generally only gets paid when users engage with its ads, so it's a concern if users are fading them at a higher rate; especially since our analysis suggests that TWTR's growth over the LTM has been driven primarily by surging ad load more than anything else (see note below for detail).  

 

If TWTR can't get its users to engage with its ads at historical rates, then it means it needs to introduce a disproportionately larger number of ads to deliver the results the street is expecting.  That runs the risk of pushing the less loyal users away, especially since TWTR is largely dependent on mobile (smaller screen) to drive its ad revenues.

 

We recommend reading the note below for context.

 

TWTR: What the Street is Missing

05/19/14 09:09 AM EDT

http://app.hedgeye.com/feed_items/35420  

 

WHAT WE'RE EXPECTING

We continue to expect a marked 2H14 deceleration in advertising revenue growth; the impetus being the inability to comp past the 2Q13 ad supply shock that we discuss in the note above.  However, we could still see upside to 2H14 revenue estimates, albeit inorganically, from its recent string of acquisitions in its Data Licensing segment.

 

However, we don't believe that is what the street is expecting, or is willing to pay for.  The growing sentiment from many of the bulls that we're speaking with is that TWTR is becoming the next FB as the #2 option for growing social media ad budgets.  If TWTR's 3Q14 results reflect our expectations above, it would case serious doubt on the story, and we would expect the street to sour on the name.  

  

Let us know if you have any questions, or would like to discuss in more detail.

 

Hesham Shaaban, CFA

@HedgeyeInternet

 


Bounce in U.S. Equities

Client Talking Points

ASIA

With the Russell 2000 down -1.2% year-to-date, it’s been a lot easier for small/mid cap growth investors to stay with long China, India, and Indonesia – all up again overnight to +12.5%, +27.6%, and +23.5% year-to-date, respectively – that’s where the real perfect is and also why you’ll see a higher “International Equities” allocation in our asset allocation model than USA.

USD

One of the biggest overbought exhaustion signals in 15 years remains, but you saw what a downtick in USD can do yesterday; huge 1-day move in both Oil and Energy (XLE) stocks – we still think the Fed gets easier throughout Q3/Q4 as the rate of change in U.S. economic growth data slows – consensus is hawkish.

UTILITIES

The Down Dollar, Down Rates move yesterday paid the slow-growth #YieldChasers – that was the 1st SPX Sector we signaled buy on alongside the SPX oversold signal at 1977; XLU +1.2% on the day yesterday to +13.1% year-to-date  – we’ve stayed with that all year and we’re not changing our minds on it into the Fed statement either.

Asset Allocation

CASH 36% US EQUITIES 6%
INTL EQUITIES 19% COMMODITIES 4%
FIXED INCOME 31% INTL CURRENCIES 4%

Top Long Ideas

Company Ticker Sector Duration
EDV

The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). Now that we have our first set of late-cycle economic indicators slowing in rate of change terms (ADP numbers and the NFP number), it's time to really think through the upcoming moves of this bond market. We are doubling down on our biggest macro call of 2014 - that U.S. growth would slow and bond yields fall in kind.

TLT

Fixed income continues to be our favorite asset class, so it should come as no surprise to see us rotate into the Shares 20+ Year Treasury Bond Fund (TLT) on the long side. In conjunction with our #Q3Slowing macro theme, we think the slope of domestic economic growth is poised to roll over here in the third quarter. In the context of what may be flat-to-decelerating reported inflation, we think the performance divergence between Treasuries, stocks and commodities may actually be set to widen over the next two to three months. This view remains counter to consensus expectations, which is additive to our already-high conviction level in this position.  Fade consensus on bonds – especially as growth slows. As it’s done for multiple generations, the 10Y Treasury Yield continues to track the slope of domestic economic growth like a glove.

RH

Restoration Hardware remains our Retail Team’s highest-conviction long idea. We think that most parts of the thesis are at least acknowledged by the market (category growth, real estate expansion), but people are absolutely missing how all the pieces are coming together to drive such outsized earnings growth over an extremely long duration. The punchline of our real estate analysis is that a) RH stores could get far bigger than even the RH bulls seem to think, b) Aside from reconfiguring 66 existing markets, there’s another 19 markets we identified where the spending rate on home furnishings by people making over $100k in income suggests that RH should expand to these markets with Design Galleries, and c) the availability and economics on large properties for all these markets are far better than people think. The consensus is looking for long-term earnings growth of 28% -- we’re looking for 45%.  

Three for the Road

TWEET OF THE DAY

Only bad thing about $LULU print is that it buys current mgmt team time.

We added LULU as a top long after the Street capitulated in June

@HedgeyeRetail

QUOTE OF THE DAY

It's fine to celebrate success but it is more important to heed the lessons of failure.

-Bill Gates

STAT OF THE DAY

TREASURIES: UST 10YR down -4 basis points for the week and -46 basis points year-to-date ahead of the Fed today.


investing ideas

Risk Managed Long Term Investing for Pros

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.

CHART OF THE DAY: Did You Nail This?

CHART OF THE DAY: Did You Nail This? - COD 09.17

 

On August 15th, the 10-year yield hit a 2.30% low.  Within a month, by September 15th, the 10-year yield had tacked on 30 basis points and reached basically a three month high.  This morning the 10-year yield is trading off the recent highs from a couple of days ago, albeit only marginally.  Even if you didn’t nail the move, or did so in hindsight, the fact remains having a view on rates, and thus the U.S. dollar, is critical in global macro positioning.


What Is Your Vision?

“Leadership is the capacity to translate vision into reality.”

 -Warren Bennis

 

We held our inaugural Hedgeye Cares Charity Golf Challenge at Great River Golf Club in Milford, CT yesterday.  The group of my colleagues that banded together to form the Hedgeye Cares committee did an outstanding job translating a vision into a reality.

 

Like most charity events, it wouldn’t have been a success without the support of myriad sponsors.  On the corporate side, we were pleased to get support from The Lincoln Motor Company, Salesforce.com, Bloomberg, D.B. Root, MBIA, Better ITS, the Arizona Coyotes, and Firefly Space Systems just to name a few. In addition, many individuals like you were kind enough to lend a helping hand by either buying a foursome or providing items for the silent auction.

What Is Your Vision? - 44

Aside from being a very enjoyable day, we also raised close to $100,000 for Bridgeport Caribe Youth Leaders, which is an all-volunteer program based in Bridgeport, CT that provides “children with diverse educational, sports and community awareness programs that foster physical, intellectual and social development, while instilling pride and helping them build character and self-esteem, so that they can reach their full potential and value their role in society.” 

 

Certainly a group more than worthy of our support. Again, we thank you.

 

Back to the Global Macro Grind...

 

Even as many of my Hedgeye colleagues were away from their screens yesterday, the global macro news flow continued.  The most relevant global market over the next 24 hours is of course likely to be the Treasury market with the Federal Reserve policy meeting occurring later today.   Regardless of what the Fed says today, it is likely that very few investors have “nailed” the last month of interest rate moves, except in hindsight.

 

As shown in the Chart of the Day below, on August 15th, the 10-year yield hit a 2.30% low.  Within a month, by September 15th, the 10-year yield had tacked on 30 basis points and reached basically a three month high.  This morning the 10-year yield is trading off the recent highs from a couple of days ago, albeit only marginally.  Even if you didn’t nail the move, or did so in hindsight, the fact remains having a view on rates, and thus the U.S. dollar, is critical in global macro positioning.

 

So, what is the Fed going to say and how are we positioned? 

 

Despite the lack of a crystal ball, we are sticking with our house view that Fed will be more dovish than expected.  With reported inflation relatively benign, the housing sector seeing some cracks (arguably a lot!), and the most recent employment data points softer than expected, there seems to be little incentive for the Fed to ramp up the hawkish rhetoric.

 

According to his Wall Street Journal podcast from yesterday, the mighty Fed visionary Jon Hilsenrath appears to agree with us. As he noted:

 

“Given the economic backdrop, they don’t want to send a signal right now that rate increases are imminent.”

 

Indeed Mr. Hilsenreth, indeed.

 

So, interestingly, as we head into the main Fed event, the 10-year yield didn’t even make it into the top three things that Keith sends out to subscribers in his “Direct from KM” email every morning at 6:00am, which were as follows (if you aren’t on "Direct" from KM please email to get details on being added) :

  1. ASIA – w/ the Russell 2000 -1.2% YTD, it’s been a lot easier for small/mid cap growth investors to stay with long China, India, and Indonesia – all up again overnight to +12.5%, +27.6%, and +23.5% YTD, respectively – that’s where the real perf is and also why you’ll see a higher “International Equities” allocation in our asset allocation model than USA
  2. USD – one of the biggest overbought exhaustion signals in 15 years remains, but you saw what a downtick in USD can do yesterday; huge 1-day move in both Oil and Energy (XLE) stocks – I still think the Fed gets easier throughout Q3/Q4 as the rate of change in US economic growth data slows – consensus is hawkish
  3. UTILITIES – the Down Dollar, Down Rates move yesterday paid the slow-growth #YieldChasers – that was the 1st SPX Sector we signaled buy on alongside the SPX oversold signal at 1977; XLU +1.2% on the day yesterday to +13.1% YTD – we’ve stayed with that all year and I’m not changing my mind on it into the Fed statement either

 

Speaking of vision, it seems the Scottish vision of independence will be tested today.  According to the most recent three polls, the "No" for Independence voters are maintaining a narrow lead of some four points. 

 

As we have often written, polls in the aggregate matter and in the aggregate the polls continue to imply that the No votes will prevail.  Interestingly, as well, online betting site Betfair has already started paying out No votes as they consider the No majority win a foregone conclusion.  That all said, until the mighty Jon Hilsenreth opines nothing is truly a foregone conclusion! 

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.40-2.62%

SPX 1

Shanghai Comp 2 

VIX 11.34-14.09 

Pound 1.61-1.64

WTI Oil 91.37-95.12 

Gold 1

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

What Is Your Vision? - COD 09.17

 


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – September 17, 2014


As we look at today's setup for the S&P 500, the range is 30 points or 1.10% downside to 1977 and 0.40% upside to 2007.                                           

                                                                                    

SECTOR PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

EQUITY SENTIMENT:

 

THE HEDGEYE DAILY OUTLOOK - 10

 

CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 2.04 from 2.06
  • VIX closed at 12.73 1 day percent change of -9.84%

 

MACRO DATA POINTS (Bloomberg Estimates)

  • 7am: MBA Mortgage Applications, Sept. 12 (prior -7.2%)
  • 8:30am: CPI m/m, Aug., est. 0.0% (prior 0.1%)
  • 8:30am: Current Account Bal., 2Q, est. -$113.4b (pr -$111.2b)
  • 10am: NAHB Housing Market Index, Sept., est. 56 (prior 55)
  • 10:30am: DOE Energy Inventories
  • 2pm: Fed seen maintaining overnight bank lending rate target between 0% and 0.25%, reducing QE purchases by $10b
  • 2:30pm: Fed’s Yellen holds news conference on FOMC

 

GOVERNMENT:

    • President Obama in Tampa to attend briefings at Centcom
    • 10am: Benghazi Select Cmte hearing
    • 10:15am: Senate Finance Cmte hearing on energy tax incentives, revising the U.S. energy tax code
    • 10:30am: Senate Judiciary Cmte holds hearing on open Internet, net neutrality debate
    • 10:30am: Sen. Armed Services Cmte leaders to hold news briefing to release newly declassified report on yr-long investigation of cyber hacking into computer networks of some defense contractors
    • 1pm: Wells Fargo CEO John Stumpf talks about role of financial services in economy at National Press Club
    • 2pm: CFTC holds meeting to consider rule on margin requirements and final rule on utility special entities
    • 2pm: House Oversight panel holds hearing on IRS, missing e-mails
    • 2:30pm: Senate Foreign Relations Cmte hears from Sec. of State John Kerry on U.S. strategy to defeat Islamic State

 

WHAT TO WATCH:

  • Fed Decision Day Guide: considerable debate on forward guidance
  • China joins ECB in adding stimulus as Fed scales back
  • Microsoft’s Nadella raises dividend, changes 2 board members
  • Citigroup embraces derivatives risk as deals surge
  • Endo offers $2.2b for men’s health drugmaker Auxilium
  • Sony widens full-year net loss forecast to 230b yen vs 50b yen
  • Credit Suisse loans said to draw regulatory scrutiny: WSJ
  • Scots independence campaigns make final appeals ahead of vote
  • U.K. “bad bank” said to prefer JPMorgan as bidder: Telegraph
  • Barclays hid trader role after questions, Schneiderman says

 

EARNINGS:

    • Clarcor (CLC) 5:08pm, $0.79
    • Cracker Barrel (CBRL) 7am, $1.56
    • FedEx (FDX) 7:30am, $1.96 - Preview
    • General Mills (GIS) 6:55am, $0.69 - Preview
    • Herman Miller (MLHR) 4pm, $0.47
    • Lennar (LEN) 6am, $0.67 - Preview
    • Pier 1 Imports (PIR) Aft-Mkt, $0.13
    • United Natural Foods (UNFI) 4:05pm, $0.65

               

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Iron Ore Seen Stabilizing by Australia as High-Cost Mines Close
  • Cattle Viewed as Last Bull After Herds Dwindled: Riskless Return
  • Brent Crude Rebounds as Libya’s Sharara Field Shut; WTI Steady
  • Copper Trades Near One-Week High as Top User China Adds Stimulus
  • France’s Panic Over Wheat Supplies Seen Easing as Harvest Ends
  • Record Corn Fills Silos While Eroding Farmer Prices: Commodities
  • Gold Is Little Changed Near Eight-Month Low as Fed Ends Meeting
  • Rubber Gains for 3rd Day on Bets China Stimulus May Boost Demand
  • Nigeria Seeks to Avert Oil Terminal Halt Amid Strike Action
  • U.S. LNG No Panacea as Asia and Europe to Boost Imports, BG Says
  • NOREXECO Gets License for Forestry to Paper Derivatives Exchange
  • Russian Grain Demand Seen by Grain Union Rising on Refugees
  • Fracking Study Spurs Call for Rules to Leakproof U.S. Gas Wells
  • Steel Rebar in Shanghai Halts Decline as China Boosts Stimulus

THE HEDGEYE DAILY OUTLOOK - 5

 

CURRENCIES


THE HEDGEYE DAILY OUTLOOK - 6

 

GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 4

 

EUROPEAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 7

 

ASIAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 8

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - 9

 

 

The Hedgeye Macro Team

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


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