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Double Double Top

This note was originally published at 8am on October 29, 2014 for Hedgeye subscribers.

“Making the simple complicated is commonplace; making the complicated simple, awesomely simple, that’s creativity.”

-Charles Mingus

 

Canadians are somewhat simple people.  As a Canadian, I think I can get away with saying that, even if most of you can’t.  But let’s be honest, after hockey, beavers, and Tim Horton’s coffee, what else is there?

 

Certainly, there is also the vast beauty of the majestic country.  Keith and I took a few of our colleagues to an offsite to Lake Nipigon, which is the largest freshwater lake solely in the province of Ontario, early this year. There is a picture from our trip in the middle graphic below and we experienced this beauty first hand.

Double Double Top - z. lake

 

There is also the kind soul of the nation.  A soul that was very much on display after the recent tragic terrorist attack in Ottawa.   Sir Winston Churchill may have said it best when he stated:

 

“There are no limits to the majestic future which lies before the mighty expanse of Canada with its virile, aspiring, cultured and generous-hearted people.”

 

That is likely as true today as it was back then, even if falling oil prices throw a curve ball to the Canadian economy in the short term.

 

But, back to coffee and simplicity for a second, when Canadians order coffee they keep it simple.  The typical Canadian strolls into Tim Horton’s, usually at some ungodly hour, and simply orders a Double Double, which is Canadian speak for coffee with two sugars and two creams.

 

Last night before our men’s league hockey (we are Canadians remember!), Keith and I were chatting about the market and it dawned on us that, “Double Double Top”, may actually be the most apropos description of the current stock market action.

 

Back to the Global Macro Grind

 

The most recent top can appropriately be called the Alibaba ($BABA) top as the top of the U.S. stock market, not unsurprisingly, coincided very closely with the IPO of the Chinese internet juggernaut.   In fact, Alibaba (or whatever you want to call the Cayman Islands entity that U.S. investors own an interest in) started trading on Friday, September 19th and the SP500’s recent top was, you guessed it, also on Friday September 19th.  

 

On some level, it should be no surprise that the biggest IPO in history signaled the market top.   It is obviously an event that signals “things” can’t get much better from “here”.    The question of course is what will signal the end of the most recent rally?  Perhaps the social media bubble popping?

 

Our Internet and Media Analyst Hesham Shaaban has been admittedly vocal on the headwinds facing some of the social media business models.  In fact, for a long time he was the lone bear on both Twitter ($TWTR) and Yelp ($YELP) and was recently validated by recent results from both companies.   He has been less vocal on Facebook ($FB) and somewhat rightfully so as the company has performed admirably, well until last night’s earnings report . . .

 

Certainly, Facebook’s numbers weren’t terrible.  The company has 864 million daily users and is growing revenue at 40%+ y-o-y.  But even the stalwart of the social media group has to at some point show a path to real profitability and with total GAAP costs expected to increase between 50 – 70% in 2015, outpacing revenue growth by a wide margin, meaningful profitability is unlikely to happen anytime soon.

 

So is this then the Facebook top?  Due to a dearth in crystal balls in the Hedgeye office this morning, I’m not sure I can definitively say it, but to the extent that social media stocks were leading some of the recent market froth, that ship has now sailed.

 

As well, there is no doubt that many consensus investors have gone from selling the recent bottom to leaning very long again.   According to the most recent U.S Investor’s Intelligence poll, bullish sentiment shifted to 47.0% from 35.2%, bearish sentiment decreased to 16.3% from 18.2%, and those expecting a market correct decreased to 36.7% from 46.5%.   So, if you are getting long at the Facebook top, just be forewarned that isn’t a contrarian call!

 

Also, some bulls may still be holding out for the Pollyanna-ish view of U.S. GDP growth of 3% in perpetuity, but as my colleague Darius Dale noted yesterday:

 

“Unfortunately, the data is becoming increasingly unsupportive of that narrative. Specifically, the two drivers of any U.S. economic expansion (i.e. household consumption and CapEx) appear to have lost considerable amount of steam of late. 

 

Let’s ignore the horrible SEP Retail Sales print (falling gas prices, anyone?) and focus specifically on today’s SEP Durable Goods and OCT Conference Board Consumer Confidence numbers.

 

Brutal Durable Goods and CapEx Demand
Core Capital Goods dropped the most in 8M (-1.7% MoM) and Durables ex-Defense & Aircraft – i.e. the stuff the average household purchases – was down for a second consecutive month at -0.3% MoM; this was the 1st such instance of back-to-back contraction since the weather-induced weakness we saw in the first quarter.

 

MAJOR Consumer Confidence Head-Fake
At face value, the OCT Consumer Confidence print was a huge win for anyone who doesn’t really do macro. Specifically, the headline figure inflated to 94.5, which was the highest reading since a 95.2 reading back in OCT ’07.”

 

Take it from a simpleton Canadian, buying U.S. equities at the peak in Consumer Confidence is a recipe for underperformance. 

 

Now of course with that all said, perhaps the FOMC will provide a boost to the markets with the rate announcement today at 2pm. In our Chart of the Day below, which is appropriately a cartoon created in house, I provide a summary of our thoughts on that . . .

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.14-2.33%

SPX 1856-2007

RUT 1067-1151

VIX 12.61-25.56

USD 84.89-86.12

WTI Oil 79.91-83.67

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

Double Double Top - z. cartoon


SINGAPORE Q3 2014: NO REAL GROWTH HERE

Takeaway: Q3 was another bad quarter for Singapore. Analysts expecting growth from this market may need to temper their enthusiasm

An analysis of the Q3 performance by the Singapore Integrated Resorts

 

 

Please see our note:  http://docs.hedgeye.com/HE_SING_3Q.pdf



EXCERPT | Are Global Central Banks Running Out Of Bullets? A Call with John B. Taylor

 

This is an excerpt from the Q&A portion of the Hedgeye Macro Team's conference call with Stanford University Professor John B. Taylor.

Contact sales@hedgeye.com for access to the full call. 


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**BABA: Singles-Day Takeaways (Fixed Link)

Takeaway: Singles Day was a big success, but we can't glean too much for F3Q15. Mobile continues to surge, which will be a growing headwind for BABA

KEY POINTS

  • TOTAL GMV: As of midnight in China, BABA reported total transactions with a GMV (Gross Merchandise Value) of RMB 57.1B for the 24-hr Singles Day event, which translates to y/y growth of 57%.  If that growth holds through the quarter, it would mark a considerable acceleration in y/y GMV growth from the 51% growth reported last quarter (F2Q15).  However, we don’t know how much of F3Q15 GMV will be concentrated into Singles Day.  Jack Ma suggested on CNBC that there was a slowdown in GMV in anticipation of Singles Day, so we can’t glean too much for F3Q15 from the Single Day GMV report.
  • MOBILE GMV %: We want to reiterate that Mobile is a headwind to its marketing business since vendors aren't wiling to pay comparable ad rates for mobile ad clicks and BABA isn't delivering a comparable ad load on mobile devices.  BABA reported that 42.6% of GMV occurred on mobile devices, which would mark a 7 percentage-point acceleration from its prior quarter.  If that percentage holds for the quarter, it would be produce a y/y acceleration of 23 percentage points, which would be the largest y/y increase in Mobile GMV % in its reported history.  
  • THE BIGGER QUESTION: How much of BABA's GMV came from Tmall, which is where it collects commissions.  The ongoing shift in GMV towards Tmall remains its largest driver of Commission revenue growth.  The key question: What is the ultimate ceiling for Tmall GMV mix? This will be the key metric that we'll be monitoring moving forward,  because once the Tmall GMV % sputters, the runway for Commission revenue growth will sputter with it.  That would expose the growing weakness that we’re expecting for BABA’s core marketing segment (~60 of revenue).

 

For more detail on our bearish long-term thesis, see link below.  Let us know if you have any questions, or would like to discuss in more detail.

 

BABA: Leaning Short, But...

10/21/14 07:02 AM EDT

http://app.hedgeye.com/feed_items/38742

 

 

Hesham Shaaban, CFA

@HedgeyeInternet

 


BABA: Singles-Day Takeaways

Takeaway: Singles Day was a big success, but we can't glean too much for F3Q15. Mobile continues to surge, which will be a growing headwind for BABA

KEY POINTS

  • TOTAL GMV: As of midnight in China, BABA reported total transactions with a GMV (Gross Merchandise Value) of RMB 57.1B for the 24-hr Singles Day event, which translates to y/y growth of 57%.  If that growth holds through the quarter, it would mark a considerable acceleration in y/y GMV growth from the 51% growth reported last quarter (F2Q15).  However, we don’t know how much of F3Q15 GMV will be concentrated into Singles Day.  Jack Ma suggested on CNBC that there was a slowdown in GMV in anticipation of Singles Day, so we can’t glean too much for F3Q15 from the Single Day GMV report.
  • MOBILE GMV %: We want to reiterate that Mobile is a headwind to its marketing business since vendors aren't wiling to pay comparable ad rates for mobile ad clicks and BABA isn't delivering a comparable ad load on mobile devices.  BABA reported that 42.6% of GMV occurred on mobile devices, which would mark a 7 percentage-point acceleration from its prior quarter.  If that percentage holds for the quarter, it would be produce a y/y acceleration of 23 percentage points, which would be the largest y/y increase in Mobile GMV % in its reported history.  
  • THE BIGGER QUESTION: How much of BABA's GMV came from Tmall, which is where it collects commissions.  The ongoing shift in GMV towards Tmall remains its largest driver of Commission revenue growth.  The key question: What is the ultimate ceiling for Tmall GMV mix? This will be the key metric that we'll be monitoring moving forward,  because once the Tmall GMV % sputters, the runway for Commission revenue growth will sputter with it.  That would expose the growing weakness that we’re expecting for BABA’s core marketing segment (~60 of revenue).

 

For more detail on our bearish long-term thesis, see link below.  Let us know if you have any questions, or would like to discuss in more detail.

 

BABA: Leaning Short, But...

10/21/14 07:02 AM EDT

http://app.hedgeye.com/feed_items/38742

 

 

Hesham Shaaban, CFA

@HedgeyeInternet

 


Cartoon of the Day: Thank You

"Since today is one of the most important days of the year to show our gratitude and respect (Veterans Day in the US, Remembrance Day in Canada, Armistice Day across Europe)," CEO Keith McCullough began in today's Morning Newsletter, "I’d like to take a minute to do that this morning."

 

"While the battlefield of economic and market risks continue to mount, we should never forget the sacred one where our bravest countrymen have fought for our liberty and freedom."

 

Cartoon of the Day: Thank You - veterans day cartoon 11.11.2014


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