"The mainstream financial media and sell-side wants to talk about anything besides earnings right now," Hedgeye CEO Keith McCullough wrote this morning. "It's the worst start to an EPS season in six years."
Takeaway: Dollar Down, Rates Down = #StrongGold
Gold tested and confirmed its BEARISH to BULLISH TREND reversal, and we sent out the buy signal today in GLD (10:28 a.m. at $124.00) to our real-time alerts subscribers for a trade into the FOMC announcement tomorrow afternoon. We will continue to manage this exposure with a BULLISH intermediate-term TREND bias. Stay tuned for updates on this trade.
GLD Risk Management Levels:
- BUY TRADE = $119.51
- SELL TRADE = $127.34
- BUY TREND (BULLISH) = $118.69
With the continued deterioration in U.S. economic data, we believe there is a probability Yellen’s language will be interpreted by the market as more dovish than her previous path as she attempts fight the pain of global deflation within the fed framework.
One of the last Q4 data points, A durable goods orders print this morning, showed a large sequential deceleration of -3.4% in December. The number was slightly positive on a year-over-year basis, the general TREND since we moved into QUAD#4 reeks #deflation, which we fully expect to be a big talking point tomorrow.
Yellen will anchor on 1) deflationary headwinds and 2) the recent deterioration in the labor market in tomorrow’s speech.
A more dovish policy path could be perpetuated with a GDP miss on Friday (which we model as more likely than not with a very difficult Q4 comp on a year-over-year basis). Under this scenario pressure on the dollar should bode well against a long gold position for a TRADE. Please reach out with any questions.
Takeaway: Apparel and Footwear global e-commerce snapshot. ICSC - current weather not helping against the easiest comp of the year.
EVENTS TO WATCH
Takeaway: Nothing big to call out from this weeks data point. The 2.6% comp was a slight acceleration on the 2yr trend line - up 20bps. What struck us as we looked at the chart this morning was the upcoming week 5 comp, which was the first flat reading in the ICSC since Feb. 2010. As we sit here in CT in the midst of a state wide travel ban retailers must deal with mother nature once again. Not a great set-up for a blowout week.
E-Commerce Market Comparison
Takeaway: We ran our own consumer survey in late December to gauge what the landscape looked like across 19 different subsectors of retail. We've presented just a fraction of the findings - focused primarily on the Athletic Space in our Athletic Black Book and Foot Locker Calls. We'll dig into the entire space in much more detail when we release our E-Commerce Black Book.
We thought this was an interesting look at the global apparel and footwear market.
- The first graphic shows the top 10 countries ranked by 2013 revenue totals. The growth numbers across the board are pretty remarkable. The US and Japan were the slowest growers, but were also the most mature markets in 2008.
- China has been on an absolute tear with a 5yr CAGR of 180%. The total sales number is now on par with the US from a base of zero and penetration is now higher than the US. That's an amazing combination of consumer adoption and systems integration.
- The 5 most penetrated markets are now: UK, China, US, France, and Germany. Graphic 2 shows the Global heat map.
Apparel & Footwear E-Commerce Sales
Global Heat Map - Apparel and Footwear E-commerce penetration
SHLD - Sears Canada Names Boire as CEO
FAST Retail - Uniqlo Enters Canadian Market
MAT - Mattel Names Christopher Sinclair as Chairman and Interim Chief Executive Officer
Sports Authority names former Pep Boys exec as chief marketing officer
GME - GameStop launches tax refund program
NKE - Nike signs major sports deal with Xavier
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As stocks get hit hard today, Hedgeye CEO Keith McCullough explains to Fox Business “Opening Bell” host Maria Bartiromo what’s behind the market volatility and selloff.
Hedgeye CEO Keith McCullough shares the top three things in his macro notebook this morning.
Takeaway: We're monitoring one key metric to time the short. At 16x 2015 revenues, we have no problem waiting for the turn.
- F3Q15 A MIXED BAG: Singles Day for BABA was considerable success in terms of GMV growth, but we don’t believe that strength held throughout the quarter, especially given lackluster China retail metrics.
- CONSENSUS NOT ASKING FOR MUCH, BUT WILL IT BE ENOUGH: Consensus estimates are calling for a notable deceleration in revenue growth to 47% from 54% in F2Q15. We’re expecting a small top-line beat, but the question is by how much, and whether it will be enough to appease the street.
- WHAT WE’RE KEYING IN ON: Tmall GMV mix, which has been a secular growth driver, propelling commission revenue growth ahead of GMV growth, and masking secular pressures within its core marketing segment. But once that sputters out, we’ll have our entry point on the short side. At 16x 2015 revenues, we can wait for the turn, and still capture plenty of downside when it does.
F3Q15 A MIXED BAG
The majority of BABA’s business model can be tied back to its GMV, which is the simplest way to gauge the strength of its business. Below is a quick graphic on how we conceptualize BABA’s model and key secular drivers.
Regarding F3Q15, we all know Singles Day (November 11th) was a considerable success for BABA, with GMV up ~58% y/y; if that rate were to hold throughout the quarter, it would mark a considerable acceleration over the 49% it achieved in the prior quarter. However, the big risk is the elevated percentage of Mobile GMV% (42.7%), which is concerning since mobile is a headwind to BABA’s core marketing segment (see link below). If that elevated Mobile GMV % were to hold through F3Q15, it would market the largest y/y acceleration in BABA’s reported history.
If we were to bet on one of either the GMV growth rate or the Mobile GMV % holding for the quarter, we would take the latter. In the first chart below, we compare y/y growth rates of BABA’s GMV vs. selected China Retail metrics that we believe best aligns with BABA’s core e-commerce categories. It’s a mixed bag at best, suggesting the strength from Singles Day was not likely representative of BABA’s GMV this quarter.
CONSENSUS NOT ASKING FOR MUCH, BUT
Despite what is looking like a mixed bag of a quarter in terms of GMV, and the potential headwind from growing Mobile GMV mix, consensus estimates aren’t out of reason. Expectations are fairly muted, calling for a notable deceleration in revenue growth to 47% from 54% in F2Q15.
That said, we’re expecting a small top-line beat of RMB 27.8B vs. RMB 27.6B (or ~2% upside). However, BABA has so many smaller moving parts, particularly within its non-core segments, that could potentially drive growth higher than we're expecting. The bigger question is how big of a beat is the street expecting, especially following its F2Q15 (CY 3Q14) release when it beat top-line estimates by 5%.
WHAT WE’RE KEYING IN ON
Tmall GMV mix, which continues grow in proportion to total GMV, has been driving Commission revenue growth ahead of GMV growth (BABA collects commissions on Tmall transactions). As long as this mix shift continues, it could continue to mask the secular weakness we're expecting for its core Marketing segment since both Marketing and Commissions are reported in a single line item (China Retail).
However, Tmall GMV mix shift appears to be losing steam; BABA hasn't delivered sequential improvement in its Tmall GMV % over the last two quarters. While we expect a seasonal uptick in F3Q15, we're keying in on the magnitude of that increase. Because once Tmall GMV mix sputters out, commission growth will converge with GMV growth, and will no longer be able to compensate for the weakness we're seeing in its core marketing segment.
As a reminder, our bearish thesis centers around the influx of a much weaker consumer pressuring BABA's model, particularly its core marketing segment (~60% of revenue), where we expect lower advertising ROI to pressure ad rates, which has already started (see link below for more detail).
BABA: Model Facing Secular Pressure
12/04/14 09:17 AM EST
Let us know if you have any questions, or would like to discuss in more detail.
Hesham Shaaban, CFA
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