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BABA: What the Street is Missing

Takeaway: China’s Elite drives BABA’s GMV. BABA's user growth moving forward will come from a much weaker consumer; a double-edged sword for its GMV.

INTRODUCTION

We hosted a call last week laying out our BEAR case on BABA, and the key metric we're tracking to time the short opportunity (contact us for the deck and replay).  We're going to publish a series of short notes detailing the salient points from the call.  This is the first, and maybe the most important.

  

KEY POINTS

  1. CHINA’S ELITE DRIVES BABA’S GMV: Both GMV/Active Buyer (average spend) and its cohort commentary suggest China’s upper class drives its GMV.  After comparing these metrics to China consumer demographic data, there is no other plausible explanation.
  2. GROWTH WILL COME AT A PRICENew BABA consumers will have considerably less funds to spend.  In turn, user growth will pressure BABA’s average GMV; turning what was a growth driver into a headwind, and leading to a sharp deceleration in GMV growth through F2017.  Note that ~85% of BABA’s revenues are linked to its GMV.

 

CHINA’S ELITE DRIVES BABA’S GMV

The average consumer on BABA’s China Retail sites spends roughly ¥6.5K annually (~USD $1.1K).  In the chart below, you can see the distribution of China’s internet users by income (red columns) and what BABA's average GMV would represent as percentage of their incomes (orange columns).  In short, BABA’s GMV would be a prohibitively large amount for most consumers in China; especially since BABA can’t sell’s everything.   

 

BABA: What the Street is Missing - BABA   China s Elite

BABA: What the Street is Missing - BABA   Can t Sell Everything

 

The other thing to consider is BABA’s cohort commentary on its F2Q15 earnings call, which we have pasted below. 

 

BABA F2Q15 Earnings Call (Maggie Wu): “Let me share with you some color on this average spending per buyer. As I said that the longer customers stay with us, the more they're going to spend annually on our platform. I'll give you an example”

    • “The customer who stayed with us for a year's time, their average annual spending level is somewhere around RMB 1,000
    • “And for the ones who stayed with us for five years' time, their spending level is somewhere around RMB 15,000
    • “And then for the ones who stayed around 10 years, their levels is going to above RMB 30,000

 

The amounts spent by those on the platform for more than 5 years are just jaw-dropping when you consider the income distribution of China’s internet users.  If we compare these metrics to the first chart above, only 5% to 14% of China's internet population at most could afford to spend ¥15K-¥30K annually; let alone BABA's ¥6.5K average GMV. 

 

GROWTH WILL COME AT A PRICE

The obvious takeaway is that BABA’s GMV is currently hostage to the whims of its upper class consumers.  What’s more concerning is that GMV growth moving forward will be driven primarily by new consumers with considerably less to spend.  In turn, new user growth will come with disproportionately lower GMV growth since average GMV is facing decline; turning what was a growth driver into a headwind.

 

We illustrate this dynamic in our China GMV Market Model, which is driven by user growth and e-commerce spending projections (both by income cohort); the former being the more important driver.  As new lower-income consumers join the BABA platform, they will grow in proportion to BABA’s total users; driving down both average income and average spending of its user base. 

 

BABA: What the Street is Missing - BABA   GMV Model Penetration

BABA: What the Street is Missing - BABA   GMV Model growth

 

Note that roughly 85% of BABA’s revenues are linked to its GMV, which our model suggests is heading for sharply decelerating growth through F2017. 

 

We will be publishing a follow-up note with more detail on the impact of our GMV projections on BABA's business model.  In the interim, see link below for broader summary of our bearish thesis, or let us know if you would like to see our BABA deck.

 

 

BABA: Leaning Short, But...

10/21/14 07:02 AM EDT

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

 

 

Hesham Shaaban, CFA

@HedgeyeInternet

 


Growth and Inflation Expectations Falling

Client Talking Points

OIL

There’s still a > +276,000 net LONG position in crude futures/options, so don’t forget that the bounce China gave oil last week was A) short lived and B) faded by deflation expectations, big time as WTI tests making lower lows – very bearish for Energy stocks and bonds, imposing interconnected risk to the high-yield market.

UST 10YR

There’s still a -128,000 net SHORT position in the 10YR Treasury, so bond bears are getting creamed with the 10YR crashing (-26% year-to-date) to 2.25% this morning. 2.22% is an immediate-term level of short-term support, but we still think yields go lower as the Fed freaks about #deflation in Q1 of 2015.

SENTIMENT

As front month VIX tests the low-end of my 12.16-15.62 risk range, the II Bull/Bear Spread just tested an all-time high of +4270 basis points wide to the bull side (+108% since OCT 13th) as the Bear side of the survey hit an all-time low of 13.8%. Stay with the Long Bond over RUT and SPX from here – less volatility, and way less crowded.

Asset Allocation

CASH 64% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 0%
FIXED INCOME 31% INTL CURRENCIES 5%

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).

XLP

The U.S. is in Quad #4 on our GIP (Growth/Inflation/Policy) model, which suggests that both economic growth and reported inflation are slowing domestically. As far as the eye can see in a falling interest rate environment, we think you should increase your exposure to slow-growth, yield-chasing trade and remain long of defensive assets like long-term treasuries and Consumer Staples (XLP) – which work decidedly better than Utilities in Quad #4. Consumer Staples is as good as any place to hide as the world clamors for low-beta-big-cap-liquidity.

Three for the Road

TWEET OF THE DAY

GREECE (which we're still short) down another -1.4% to -18% YTD

@KeithMcCullough

QUOTE OF THE DAY

Children have never been very good at listening to their elders, but they have never failed to imitate them.

-James A. Baldwin

STAT OF THE DAY

Copper deflates another -0.5% to -10% for 2014 year-to-date as global growth (demand) slows.


November 26, 2014

November 26, 2014 - Slide1

 

BULLISH TRENDS

November 26, 2014 - Slide2

November 26, 2014 - Slide3

November 26, 2014 - Slide4

November 26, 2014 - Slide5

 

 

BEARISH TRENDS

November 26, 2014 - Slide6

November 26, 2014 - Slide7

November 26, 2014 - Slide8

November 26, 2014 - Slide9

November 26, 2014 - Slide10

November 26, 2014 - Slide11
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November 26, 2014 - Slide13


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THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – November 26, 2014


As we look at today's setup for the S&P 500, the range is 54 points or 2.28% downside to 2020 and 0.34% upside to 2074.                                                          

                                                                     

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: 1.73 from 1.74
  • VIX closed at 12.25 1 day percent change of -2.93%

 

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Applications, Nov. 21 (prior 4.9%)
  • 8:30am: Durable Goods, Oct., est. -0.6% (pr -1.3%, rev -1.1%)
  • 8:30am: Init Jobless Claims, Nov. 22, est. 288k (prior 291k)
  • Continuing Claims, Nov. 15, est. 2.348m (prior 2.330m)
  • 8:30am: Personal Income, Oct., est. 0.4% (prior 0.2%)
  • 9:45am: Chicago MNI, Nov., est. 63 (prior 66.2)
  • 9:45am: Bloomberg Consumer Comfort, Nov. 23 (prior 38.5)
  • 9:55am: UofMich Confidence, Nov. final, est. 90 (prior 89.4)
  • 10am: Pending Home Sales m/m, Oct., est. 0.5% (prior 0.3%)
  • 10am: New Home Sales, Oct., est. 471k (prior 467k)
  • 10am: Freddie Mac mortgage rates
  • 10:30am: DOE Energy Inventories
  • 11:30am: U.S. to sell $29b 7Y notes
  • 12pm: EIA natural-gas storage change
  • 1pm: Baker Hughes rig count

 

GOVERNMENT:

  • House, Senate out of session
  • 6am: Quinnipiac University Polling Institute releases poll of U.S. voters with their assessments of 2016 presidential race

 

WHAT TO WATCH:

  • Saudi Arabia Says No One Should Cut Output, Oil Will Stabilize
  • HP’s Fourth-Quarter Sales Miss Shows Challenges Ahead of Split
  • EU Privacy Rules Said to Be Extended to Google U.S. Site
  • Uber Said Poised to Raise Funds Showing $40b Value
  • Holiday Sales: Earlier Thanksgiving Hours, Deeper Deals
  • Black Friday Specials to Lure 140 Million U.S. Shoppers
  • East Coast Storm Brings Headaches for Travelers and Forecasters
  • Households Drive U.K. Economy as Exports, Investment Decline
  • Constancio Says ECB Sovereign-Debt Buying Would Use Capital Key
  • Caesars Creditor Group Sues for Receiver to Run Operating Unit
  • HSBC, Goldman Rigged Platinum Prices for Years, Jeweler Says
  • CBS Program Accord With Dish Extended as Contract Talks Continue
  • Samsung to Buy Back Shares After $1.7 Billion Sale of Chemicals
  • China Widens ‘Tax-Evasion’ Net as Microsoft to Pay $150m
  • HSBC Said to Be Probed by U.S. on Hedge-Fund Leak, WSJ Says

 

EARNINGS:

    • Deere (DE) 7am, $1.57 - Preview
    • Golar LNG (GLNG) Bef-mkt, ($0.02)
    • Golar LNG Partners (GLMP) Bef-mkt, $0.67

 

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Pre-OPEC Meeting Fails to Deliver Output Cut: OPEC Reality Check
  • HSBC, Goldman Rigged Metals’ Prices for Years, Suit Claims
  • Shorting Chickens Becomes Hot Trade in Stock Market: Commodities
  • WTI Crude Trades Near 4-Year Low as OPEC Sends Mixed Signals
  • Gold Slips as Dollar Strengthens Before U.S. Economic Data
  • Copper Falls to Three-Week Low Before U.S. Durable-Goods Report
  • Gold Bulls Should Buy With Euros, Not Dollars: Chart of the Day
  • Iron Ore Extends Rout Below $70 as Global Supply Seen Expanding
  • Oil Bust of 1986 Reminds U.S. Drillers of Price War Risk: Energy
  • German 2015 Power Gains to 8-Month High Ahead of Capacity Sale
  • Rebar Closes Near Record Low as Investors Weigh Output, Demand
  • Vitol Sees New LNG Supply Adding to Glut as Demand Declines
  • Oil Volatility Here to Stay Regardless of OPEC Decision: Options
  • U.K. Gas Advances in Longest Streak Since 2011 Amid Norway Cuts

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


CHART OF THE DAY: Rate of Change in US Growth Versus the 10yr Bond Yield

CHART OF THE DAY: Rate of Change in US Growth Versus the 10yr Bond Yield - 11.26.14 EL Chart

 

Today's Chart of The Day shows the Rate of Change in US growth versus the 10yr bond yield. Unless you are paid to navel gaze at the “Dow”, this macro relationship is obvious to all but the willfully blind. To most of our “rate of change” fans,  the year-over-year rate of change in growth and inflation are pretty basic concepts. To Consensus Macro (and the financial media that dotes on it), not so much…


Uber Bullish!

“If we can get you a car in 5 minutes, we can get you anything in 5 minutes.”

-Travis Kalanick

 

Travis, how about a massage? Or some turkey day beers and, bonds?

 

Everyone who has created an anti-consensus company likes how the CEO of Uber, Travis Kalanick, rolls. If this morning’s headlines about T Rowe’s investment are right, it looks like Uber is going to price its final private round at a $35-40B valuation too!

 

That’s almost as bullish as I am in 2014… on the Long Bond (TLT). In less than 3 minutes, I can get you anything you need to explain the bull case. As growth and inflation expectations slow, globally, bond yields go lower. Ok, maybe that was less than 1 minute.

Uber Bullish! - Fightin  Words 08.29.2014

 

Back to the Global Macro Grind

 

In less than 1 minute, I can get you a chart (see Chart of The Day) showing the Rate of Change in US growth versus the 10yr bond yield. Unless you are paid to navel gaze at the “Dow”, this macro relationship is obvious to all but the willfully blind.

 

To most of our “rate of change” fans,  the year-over-year rate of change in growth and inflation are pretty basic concepts. To Consensus Macro (and the financial media that dotes on it), not so much…

 

Yesterday’s Consensus Media headlines on US GDP were classic. Sadly, Bloomberg (who we pay a lot of money to for rate of change data), continued down the all-time-CNBC-ratings-lows-perma-SPY-bull-spin-path by writing:

 

BREAKING: “SP500 Little Changed Near Record On GDP, Consumer Confidence”

 

In other real-world news yesterday, “Consumer Confidence” actually tanked (falling to 88.7 in NOV from 94.5 in OCT), and the rate of change in year-over-year US GDP growth slowed (again) to 2.4% in Q3 versus 2.6% in Q2.

 

#PermaBull says pardon?

 

Yes. Evolve your process, just a little, and stop staring at a next to useless GDP quarter-over-quarter SAAR (sequentially/seasonally adjusted) report and look at it how you look at the companies you invest in (i.e. on a year-over-year basis).

 

This isn’t rocket science. I can get you these numbers (and a whole lot more of them) in less than 3 minutes!

 

Again, to review why US bond yields continue to crash (10yr yield -26% YTD to 2.25% this morning):

 

  1. After topping at +3.1% year-over-year growth in Q4 of 2013, Q314 US GDP growth slowed to +2.4% and…
  2. While the +1.9% year-over-year growth report for Q1 was much uglier than the +3-4% “expected”…
  3. You can look forward to a Q4 GDP growth print in 2014 that is closer to +1.9% than Q3’s 2.4% was

 

Put another way, we still have US GDP growth (year-over-year dammit!) tracking to +2.2% for 2014 – and, magically, that’s exactly where the 10yr US Treasury Yield is trading this morning.

 

#Tah-dah! Get growth’s rate of change right – and you get bond yields right.

 

My inbox is fun. I often get forwarded other people’s macro work and, most of the time, I can’t particularly understand what it means. Mostly, I think that’s because I only care about rates of change. And most of that work doesn’t.

 

It’s not personal. It’s simply my perspective. And it’s this anti-consensus process and perspective that had us as bearish on the Long Bond in 2013 (when the rate of change in US growth was #accelerating) as we are Uber Bullish now.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.22%-2.33%

SPX 2020-2074

RUT 1154-1190

VIX 12.16-15.62

Yen 117.20-119.16

WTI Oil 73.03-77.04

Copper 2.94-3.01

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Uber Bullish! - 11.26.14 EL Chart


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