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Cartoon of the Day: #ConsumerSlowing

Cartoon of the Day: #ConsumerSlowing - Deflation cartoon

 

U.S. consumer spending fell 0.2% in September, according to a government report this morning. It’s yet another sign of the weak US consumer.

 

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WTW: Debating Whether to Cover

Takeaway: Stronger 2014 results + Stagnant 2015 consensus estimates = Lower 2015 hurdle. May be less upside to the Short in an already crowded trade.

KEY POINTS

  1. 3Q14 SHOWS SIGNS OF IMPROVEMENT: Y/Y declines in both revenues and membership moderated once again in 3Q14, with seasonal attrition improving over last year's levels.  That means WTW is likely heading into 2015 with a potentially higher starting member base, reducing the burden of the winter selling season.  We don't believe it will be enough.
  2. BUT 2015 DETAILS WERE VAGUE: We were expecting management to be more explicit regarding 2015 expectations.  WTW implied the headwind from a lower starting member base will be somewhat lower (from $0.60 to $0.55 prior).  That doesn't mean a whole lot since it's only looking at one side of the equations (starting members).  Management also suggested incremental cost investments of $25M next year, but reiterated its expectation that marketing expenses will remain flat, which we do not believe is a prudent move (see point 4).      
  3. CONSENSUS NOW ASKING FOR LESS: 2014 estimates have crept up to reflect the 3Q14 beat and raise, but 2015 estimates have remained largely unchanged).  In turn, 2015 consensus growth expectation have declined, which means the downside surprise factor on the guidance release has also.  We're still expecting considerable downside: 2015 revenue of $1.31B and EPS of $0.96 vs. Consensus of $1.40B and $1.86, respectively. However, when you couple that with sentiment that is already extremely bearish (Short interest > 40% of the float), there may not be too much more upside left in the Short from here. 
  4. THE BIGGER QUESTION: Is WTW's recent weakness secular? Because if it is, then they're shooting themselves in the foot with its cost-containment initiatives, specifically its plans for flat marketing spend in 2015.  WTW's member acquisitions costs have more than tripled in the last 3 years, which alone would suggest secular pressure (but we admit that is backward looking).  If WTW's issues are secular, then its member acquisition costs will keep climbing, which would mean flat marketing spend = worse winter selling season.  Consensus estimates imply improving member acquisition costs in 2015; we doubt that is likely.  We'll be monitoring our Google Trackers, stay tuned.  

WTW: Debating Whether to Cover - WTW   Member Acquisition Costs 1Q15E

WTW: Debating Whether to Cover - WTW   Selling Seasons 1Q15E

 

Hesham Shaaban, CFA

@HedgeyeInternet

 

Thomas Tobin

@HedgeyeHC


Japan: CTRL+PRINT

Client Talking Points

JAPAN

This is what the economic reports said before they hit the panic button (household spending -6% year-over-year, housing starts -14% year-over-year, and Construction spending -40% year-over-year)… so they must do moarrr of what didn’t work? Yep. Massive devaluation of Yen to 111.62 last, and Nikkei ramps to highest since U.S. market collapse began (NOV 2007).

USD

Unintended consequences? Nah – how about Yen Down, Dollar Up = #deflation accelerating? Oil, Gold, Russia, Texas, etc. all going to feel serious pain on this epic central planning day of 2014.

OIL

Oil is down on the “news” with WTI re-testing of the lows in play now = down -25% since June and don’t forget that (depending whose index you use),  20-27% of the high yield/junk debt market is “Energy” related. Month end ramp in equities, but we highly doubt that’s on inflation oriented ones.

Asset Allocation

CASH 68% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 0%
FIXED INCOME 28% INTL CURRENCIES 4%

Top Long Ideas

Company Ticker Sector Duration
EDV

The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). U.S. real GDP growth is unlikely to come in anywhere in the area code of consensus projections of 3-plus percent. And it is becoming clear to us that market participants are interpreting the Fed’s dovish shift as signaling cause for concern with respect to the growth outlook. We remain on other side of Consensus Macro positions (bearish on Oil, bullish on Treasuries, bearish on SPX) and still have high conviction in our biggest macro call of 2014 - that U.S. growth would slow and bond yields fall in kind.

TLT

We continue to think long-term interest rates are headed in the direction of both reported growth and growth expectations – i.e. lower. In light of that, we encourage you to remain long of the long bond. The performance divergence between Treasuries, stocks and commodities should continue to widen over the next two to three months. As it’s done for multiple generations, the 10Y Treasury Yield continues to track the slope of domestic economic growth like a glove. We certainly hope you had the Long Bond (TLT) on versus the Russell 2000 (short side) as the performance divergence in being long #GrowthSlowing hit its widest for 2014 YTD (ex-reinvesting interest).

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

YEN has one of the biggest 1-day drops in money printing history = $111.62 vs USD

@KeithMcCullough

QUOTE OF THE DAY

Nothing in all the world is more dangerous than sincere ignorance and conscientious stupidity.

-Martin Luther King

STAT OF THE DAY

According to a study published in Environmental Science and Technology, 29% of San Francisco's air pollution comes from China.


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.


Panic Plan, CTRL-Print

“When I suck, I’ll retire.”

-Tom Brady

 

I suck this morning.

 

While many may very well have nailed this, I did not. The Japanese economy is so bad that they just went all 1920s Germany on the rest of the world, printing 80 TRILLION Yens.

 

Panic Plan, CTRL-Print - EL chart 2

 

Back to the Global Macro Grind

 

Just how bad does the Japanese economy suck? Well, right before they came out of left-central-planning-field with this decision, here’s what they reported, in economic growth terms:

 

  1. Japanese Household Spending -6% year-over-year
  2. Japanese Housing Starts -14% year-over-year
  3. Japanese Construction Spending -40% year-over-year

 

No, the down -14-40% prints aren’t typos. Abenomics is killing it, literally.

 

Q: “So”, what do central planners do when all else fails?

A: moarrr of the same! (*definition of insanity)

 

Japan’s equivalent of Janet (his name is Kuroda) said that Hedgeye nailed it on the #GrowthSlowing call and that the Bank of Japan is at a “critical point to overcome deflation.”

 

There’s that word again, #deflation.

 

Forget what 80 TRILLION is in the context of what the Germans did in the 1920s for a second (99% of people in this world don’t get the econ #history lesson anyway) and think about what this Panic Policy in Japan is going to do to the rest of the world’s economics in 2015:

 

  1. Burning The Yen = Dollar Up = Oil Down
  2. Oil Down = Russia Down
  3. Job growth in Texas, North Dakota, etc. Down

 

In other words, what these macro morons in Japan don’t get is that what they just did is only going to perpetuate worldwide #deflation.

 

Did I just call them morons? Yes. And I said I suck this morning too. Get over it and get on with the next move in the game that is Global Deflation Risk. Did you know that 27% of the high yield/junk debt market in the US is levered to some version of Energy inflation?

 

Again, follow the bouncing puck on that thought. Yen burnt to a crisp à #StrongDollar à Quad4 deflationary pressures à Down Oil à Down Energy stocks à Down Energy related debt #Bubble.

 

And, while you’re going to see the mother of all month-end markups (many mutual funds have their year-end in October too, so isn’t Japan falling into the ocean perfect timing!), what does that mean for #deflation risk to the US stock market as it re-tests all-time highs?

 

Technically speaking (my 4 year old daughter just pointed this out after she looked at the chart), an all-time high in the SP500 is a long time. “So”, there has never been more risk that US equities deflate, starting in November.

 

REMINDER: the last US stock market #bubble peaked in OCT 2007 and Japan’s Nikkei hasn’t been this high since NOV 2007 either.

 

If you’re looking to buy either Japanese or US stocks on this “news”, how do you explain it to your investors? ‘Well, you see, our thesis all along was that these money printings would result in economic collapse, so we wanted to be long the #PanicPlan associated with that.’

 

My asset allocation of 0% (net) to US equities will be dead wrong this morning. Zero percent allocation to Commodity Deflation and its related energy stocks and bonds is right though, so I don’t have to retire just yet.

 

Our immediate-term Global Macro Risk Ranges are now:

 

SPX 1

RUT 1071-1175

VIX 12.89-21.78

Yen 108.11-111.98

WTI Oil 79.03-81.65

Gold 1162-1231

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Panic Plan, CTRL-Print - Chart of the Day


Bumbles Bounce!

This note was originally published at 8am on October 17, 2014 for Hedgeye subscribers.

“Didn’t I ever tell you? Bumbles Bounce!”

-Yukon Cornelius

 

Bounce that bumble! Oh yeah. I am going to go all Cornelius Yukon on you this morning! “The greatest stock picker (prospector) in the world!” VIDEO: https://www.youtube.com/watch?v=nsY2EeUuLj8#t=17

 

GenX kids like me loved this guy (so did our baby booming parents – just stick us in front of the TV and they were all set). For those of you who didn’t see Rudolph The Red Nosed Reindeer (initially released in 1964), Cornelius is a beauty.

 

After a rough week of dancing with the bear, here are some “high-conviction” Cornelius “picks”, I mean quotes:

 

“Terrible weather we’re havin’!”

“Open up! It isn’t a fit night out for man or beast”

“This is my land. And you know it’s rich with gold. Gooooollldddd!”

 

Bumbles Bounce! - EL chart 2

 

Back to the Global Macro Grind

 

Ok. Maybe Captain Stock Picker didn’t think that was funny. Getting caught long in “the land” of levered bullish market beta wasn’t funny either. “So”, on this Bumble Bounce, do me a favor and recognize that the oncoming red light isn’t Rudolph – it’s a train.

 

Yep, open it up! Let this bounce rip to the high heavens of hope and sell-the-bumble-bounce #STBB. Because hope (that “everyone is bearish now”) is not a risk management process.

 

Neither is calling tops and bottoms. Remember, both are processes, not points. We’ll review the #process that got us bearish on both growth and inflation in the first place (before October’s “terrible weather”), on a Flash Call today at 1PM EST (email sales@hedgeye.com if you’d like access).

 

I’ll keep the call to 15 mins, then take the most important part of the call (your questions). Here are some levels to consider selling into as you “observe the bumbles one weakness (the bumble sinks! Ha ha!)”:

 

  1. UST 10yr Yield – immediate-term TRADE resistance zone of 2.22-2.31%
  2. Russell 2000 – immediate-term TRADE resistance = 1105
  3. SP500 – immediate-term TRADE resistance = 1889

 

*Note: I am not using the 200-day moving monkey as “resistance” – our #process is built to front-run that.

 

Don’t worry, I get it. You get it too. We are both allowed to change our minds in real-time. This is a dynamic and non-linear system of risk we are dealing with. Being wed to a chart, ice pick, and a moving monkey isn’t the answer.

 

While yesterday’s gap down open in both the Russell and SP500 recovered faster than I would have thought it could. Who cares what I thought? Mr. Market certainly doesn’t.

 

What we need to care about is where marked-to-market risk is right here and now. Then make the best risk management decisions we can make on the bounce. Chase or sell?

 

That’s why I show every move I’d be making if I was back in your seat (Real-Time Alerts). If you can think of a better way for me to show what I really think in the moment, let me know. But I’m thinking the #timestamp is the best I can do.

 

No, that doesn’t mean my #timestamps are always right. They’re not always wrong either. But I have been arguably dumber than Cornelius in showing you, literally, every move I’d have made (over 2,800 of them, long and short) since 2008.

 

Back to risk managing the bounce – some of the more interesting ones will come within risk ranges that are #crashing:

 

  1. Including this morning’s bounce to 2.18%, the 10yr UST Yield is still crashing, -28% YTD
  2. Including this morning’s whopping +0.5% bounce to $82.89, WTI Crude Oil is still crashing, -25% since June
  3. Including Europe’s bounce, both Greek and Portguese stocks are still crashing, -21-22% YTD

 

And why are these ex-ebola items #crashing?

 

  1. Bond Yields crash when growth expectations do
  2. Oil crashes in #Quad4, when both global growth and inflation expectations do
  3. Illiquid European stocks crash, well, every time they remind you the central plan didn’t work

 

Oh, then there’s the crash within the Russell itself. Over 62% of stocks in the Russell 2000 have crashed (-20% peak to trough drawdowns). By my math, that is a lot of pain that was not proactively prepared for.

 

But everyone is going to strike it rich with their small cap peppermint stock “picks”, on the bounce, right? “Peppermint! What I’ve been searching for all my life! I’ve struck it rich! I’ve got peppermint! Wahooooo!” (Cornelius again, sorry – couldn’t resist).

 

Right. Right. After very few prepared for the avalanche of small cap beta risk, everyone is going to triple-down on the bounce, and the bumbles will never sink again.

 

Roger that. And it really is different this time. It’s Rudolph, remember (not a train on globally interconnected #GrowthSlowing and deflation risk).

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.09-2.22%

SPX 1831-1889

RUT 1041-1105

DAX 8454-8895

VIX 20.74-28.92

Gold 1205-1251

 

Best of luck out there today,

KM

 

Bumbles Bounce! - Chart of the Day


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