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CHART OF THE DAY: The YTD Market Scoreboard (Got $TLT?)

CHART OF THE DAY: The YTD Market Scoreboard (Got $TLT?) - 02.02.15 chart

 

Editor's note: This is a brief excerpt from today's Morning Newsletter written by Hedgeye CEO Keith McCullough.

 

I play for the team that likes the Long Bond more than the Dow in 2015 – here’s the breakdown of the YTD score:

 

1. Dow Jones Industrial Index down -2.9% last week to finish JAN -3.7%

2. SP500 down -2.8% last week to close JAN down -3.1%

3. S&P Financials (XLF) down another -3.2% last wk to finish JAN -7.1% (worst S&P Sector)

4. S&P Utilities (XLU) -1.7% wk-over-wk to close JAN up +2.3% (best S&P Sector)

5. Long-term Treasuries (TLT) +10% YTD (pre interest payment) #timestamped

 


GDP #Patriots

“The truth was incredible enough.”

-Glenn Beck

 

“It was so incredible, in fact, that a strange thing happened after it was reprinted in newspapers from coast to coast… The public didn’t believe it.” (Dreamers and Deceivers, pg 19)

 

In a riveting account of how former US President Grover Cleveland kept both his sickness and surgery a secret, in the aforementioned quote Beck describes America’s reception to investigative journalist, E.J. Edwards, discovering the #truth.

 

What was the #truth about US economic growth in both December and Q4 of 2014? It slowed. As growth slowed and #deflation expectations took hold, the #truth is that investing in the Long Bond (TLT) instead of late-cycle stocks got you paid.

 

GDP #Patriots - TLT cartoon 01.26.2015

 

Back to the Global Macro Grind

 

In stark contrast to this historical metaphor of groupthink in trusting officialdom in the late 19th century, I’m thinking that if you told most Americans that year-over-year growth in US GDP is closer to 2% than it is 5% - they’d believe you.

 

Most upstanding humans believe in those who fight for the #truth every day too. While there used to be a lot more of them in the US financial media, they call them #Patriots – “a person who vigorously supports their country and is prepared to defend it.”

 

My congratulations to the New England Patriots for winning another Super Bowl. Whether you like the man or not, I think you have to respect Tom Brady’s team leadership. The man is all about the team and the system he plays for; not about himself.

 

I play for the team that likes the Long Bond more than the Dow in 2015 – here’s the breakdown of the YTD score:

 

1. Dow Jones Industrial Index down -2.9% last week to finish JAN -3.7%

2. SP500 down -2.8% last week to close JAN down -3.1%

3. S&P Financials (XLF) down another -3.2% last wk to finish JAN -7.1% (worst S&P Sector)

4. S&P Utilities (XLU) -1.7% wk-over-wk to close JAN up +2.3% (best S&P Sector)

5. Long-term Treasuries (TLT) +10% YTD (pre interest payment) #timestamped

 

Academics like to talk about what was “causal” in driving performance numbers. I like to write about what is. There is very little to no evidence to refute that a slowing in the rate of change in both growth and inflation isn’t bad for certain macro investing styles and exposures – and very good for others.

 

Since Long-term Bond Yields had been front-running this Q4 GDP #slowing news since December, last week was more of an exclamation point than it was a new sentence about what actually happened in the US economy:

 

1. US 2yr Yield was down -3 basis points on the week, but are already down -21bps (-31%) YTD

2. US 10yr Yield was down -15 basis points wk-over-wk, but are already down -52bps (-24%) YTD

3. Yield Spread (10yr minus 2yr) compressed another -12bps last wk to -31bps (-21%) YTD

 

This is why it should surprise no one who is bearish on bond yields that:

 

A) US Regional Bank Stocks (KRE) are even worse than XLF at -9.5% YTD

B) US REIT Stocks (VNQ) are crushing it at +6.8% YTD (pre dividends)

 

Yep. It’s all the same macro trade. If you got the direction of both growth and inflation right, you got bond yields right (and everything that correlates positively/negatively in either equity style factors and/or asset allocations right).

 

What’s next?

 

First, have a #process that allows you to embrace the uncertainty of each and every centrally planned market day. Second, be prepared for a short-term correction in what’s been nothing short of a parabolic move in the USD vs. other devalued currencies.

 

Yep, that’s the other thing that happened as the US Dollar stopped going up at an accelerating rate last week. Some of the extreme correlation trades (CRB Index and Oil vs USD) went the other way:

 

1. CRB Commodities Index +1% last wk to -4.8% YTD

2. WTI Oil +4.5% last wk to -11.3% YTD

 

So just take the time to observe Mr. Macro Market’s message (i.e. don’t try to force a pass at the goal line when you have time to run the ball). As #Patient GDP Patriots, I’m confident we can intercept hurriedness, and capitalize on the other team’s mistakes.

 

Our intermediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.65-1.79%

SPX 1

Dow 17,032-17,410

USD 94.51-95.98

Oil (WTI) 43.61-48.34

Gold 1

 

Best of luck out there this week,

KM

 

Keith R. McCullough

Chief Executive Officer

 

GDP #Patriots - 02.02.15 chart

 


TWTR: Thoughts into the Print (4Q14)

Takeaway: We remain Short on expectations for sharply decelerating 2015 revenue growth, but somewhat cautious into the print.

 KEY POINTS

  1. 2015 WILL BE A CHALLENGE: We’re expecting 2015 revenue growth of 51% vs. consensus of 66%.  Outside of the obvious World Cup comp headwind in 2Q15/3Q15, we suspect TWTR’s largest source of revenue growth since 3Q13 (Ad monetization) will be under pressure with the 2Q13 Supply Shock largely in the rearview mirror.  Further, efforts to reignite that growth driver could push its users away.
  2. BUT WE'RE SOMEWHAT CAUTIOUS INTO THE PRINT: First, we're not sure how TWTR will approach guidance (lower the bar vs. hope for the best).  Second, it wouldn't take much user growth to produce an accelerating y/y growth rate for US MAUs given an easy y/y comp and the embedded aesthetic tailwind from third-party/automated accounts.  That alone could refuel optimism on a beaten-up stock.  However, we suspect any near-term upside would be short-lived.

 

2015 WILL BE A CHALLENGE

We’re expecting 2015 revenue growth of 51% vs. consensus of 66%.  In addition to the obvious World Cup comp headwind in 2Q15/3Q15, we suspect TWTR’s largest source of revenue growth since 3Q13 (Ad monetization) will be under pressure as well.  

 

We had previously laid out our analysis which suggested that TWTR’s monetization strategy has been driven by surging ad load more than anything else.  In short, we believe that the reported change in TWTR’s ad engagements is a proxy for increasing ad supply, since ad engagements and ad pricing are almost perfectly inversely correlated. 

 

For more detail, see the link below

 

TWTR: What the Street is Missing

05/19/14 09:09 AM EDT

[click here]

 

Back in 2Q13, TWTR experienced its sharpest q/q increase in ad engagements alongside is sharpest q/q decline in ad pricing; collectively what we refer to as the “2Q13 Supply Shock” , which had propelled TWTR’s y/y revenue growth through 1H14.   

 

TWTR: Thoughts into the Print (4Q14) - TWTR   2Q13 Supply Shock

 

However, the rate of ad engagements has essentially slowed to pace of overall user activity on the site (global timeline views).  We initially thought that TWTR had slowed the pace of ad load increases, but it could be that users have started to fade TWTR’s ads at an increasing pace. 

 

If the latter is the case, TWTR would need to increase ad load at a disproportionately higher rate to receive the same level of engagement.  However, that creates the risk of pushing its users away; the perverse inverse relationship between TWTR's ad engagements and US MAUs suggests as much. 

 

TWTR: Thoughts into the Print (4Q14) - TWTR   Ad vs. user engagement 3Q14 2 

TWTR: Thoughts into the Print (4Q14) - TWTR   Ad Load vs. US MAUs 3Q14

 

but we're somewhat cautious into the print

First, we're not sure how management will approach guidance.  TWTR could guide high and hope for the best, especially since it recently raised $1.8B ($3.6B total cash) that can use to acquire inorganic growth down the stretch.  However, the street expectation is for ongoing beats and raises, so lowering the bar now would be the prudent approach, especially with Costolo's jobs seemingly on the line.  We're expecting light guidance, but no telling how management will approach it.

 

Second, It will not take much net user growth to produce an accelerating y/y growth rate for US MAUs.  Anything over 1.5M net new US MAUs will produce y/y growth in excess of the 19% reported in 3Q14 (TWTR has averaged ~3M net ads since 1Q14).  It's important to note that TWTR has an embedded aesthetic tailwind on its MAU growth from third-party accounts, the majority of which from automated accounts with no discernible user activity.   Any upside on MAUs could rekindle optimism in the name.

 

TWTR: Thoughts into the Print (4Q14) - TWTR   Bot Accounts 3Q14 2

 

That said, there is more risk to being short the print than we would like, but we suspect any near-term upside would be short-lived.  

 

 

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

 

Hesham Shaaban, CFA

@HedgeyeInternet

 

 


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.28%
  • SHORT SIGNALS 78.51%

THE HEDGEYE MACRO PLAYBOOK

Takeaway: In today's edition of the Macro Playbook, we discuss the potential turn from #Quad4 to #Quad1 back to #Quad4 in the U.S. for 1H15.

THEMATIC INVESTMENT CONCLUSIONS

Long Ideas/Overweight Recommendations

  1. Consumer Staples Select Sector SPDR Fund (XLP)
  2. iShares U.S. Home Construction ETF (ITB)
  3. SPDR Gold Shares (GLD)
  4. PowerShares DB U.S. Dollar Index Bullish Fund (UUP)
  5. iShares 20+ Year Treasury Bond ETF (TLT)
  1. LONG BENCH: Vanguard REIT ETF (VNQ), Utilities Select Sector SPDR Fund (XLU), Vanguard Extended Duration Treasury ETF (EDV), Healthcare Select Sector SPDR Fund (XLV)

Short Ideas/Underweight Recommendations

  1. CurrencyShares Japanese Yen Trust (FXY)
  2. SPDR Barclays High Yield Bond ETF (JNK)
  3. Industrial Select Sector SPDR Fund (XLI)
  4. iShares MSCI Emerging Markets ETF (EEM)
  5. SPDR S&P Regional Banking ETF (KRE)
  1. SHORT BENCH: SPDR Oil & Gas Exploration & Production ETF (XOP), CurrencyShares Euro Trust (FXE), WisdomTree Emerging Currency Fund (CEW)

 

QUANT SIGNALS & RESEARCH CONTEXT

#Quad414 Progressing According to the Plan: Last week’s deluge of economic data confirmed a #Quad4 setup for the fourth quarter of 2014. On both an absolute and relative (i.e. directional) basis, data continued to run counter to the consensus narrative of the U.S. being a +3-5% GDP growth economy and financial markets responded appropriately:

 

  • S&P 500 Index: -2.8% WoW
  • Dow Jones Industrial Average: -2.9% WoW
  • Russell 2000 Index: -2% WoW
  • NASDAQ Composite Index: -2.6% WoW
  • U.S. 10yr Treasury Note Yield: -16bps WoW to close the week at 1.64% – the lowest level since late-April of 2013, prior to Bernanke’s May 22nd speech of that year which ignited the infamous “Taper Tantrum”
  • Bloomberg U.S. 10+ Year Treasury Bond Index: +2.3% WoW

 

Net-net, the data was bad, on the margin, and markets reflected that. Now what?

 

Perhaps lost said data deluge were the first three releases of high-frequency economic growth indicators for the month of January:

 

  • Markit Manufacturing PMI: a preliminary figure of 53.7 in JAN vs. 53.9 in DEC
  • Markit Services PMI: a preliminary figure of 54 in JAN vs. 53.3 in DEC
  • Markit Composite PMI: a preliminary figure of 54.2 in JAN vs. 53.5 in DEC

 

THE HEDGEYE MACRO PLAYBOOK - MANUFACTURING PMI

 

THE HEDGEYE MACRO PLAYBOOK - SERVICES PMI

 

THE HEDGEYE MACRO PLAYBOOK - COMPOSITE PMI

 

The three key takeaways from those releases are as follows:

 

  1. The slowdown in the late-cycle segments of the economy (e.g. manufacturing, CapEx, earnings, inflation, employment, etc.) continues unabated
  2. The U.S. economy at large continues to be driven by consumption, as highlighted by the uptick in services sector growth dragging the composite index higher despite the ongoing deterioration in manufacturing
  3. The composite index bucked a sustained trend of deceleration by positing its first positive sequential uptick since June

 

We’ll see if takeaway #3 is sustainable as we parse through January high-frequency economic data over the next 3-4 weeks. The Bayesian inference process we apply to modeling the economy would suggest that it is. In layman’s terms, Q1 has an extremely subdued base effect, which greatly enhances the probability that YoY real GDP growth accelerates in the quarter.

 

Don’t get too excited (read: position sizing) about chasing any growth-oriented sector, style factor or security, however.

 

Specifically, that same Bayesian inference process suggests that we’re headed right back in the ever-defensive #Quad4 for Q2. The base effects from Q2 through Q4 of this year are as difficult as the base effect in Q1 is easy.

 

THE HEDGEYE MACRO PLAYBOOK - GDP COMPS

 

THE HEDGEYE MACRO PLAYBOOK - UNITED STATES

 

***CLICK HERE to download the full TACRM presentation.***

 

TRACKING OUR ACTIVE MACRO THEMES

Global #Deflation: Amidst a backdrop of secular stagnation across developed economies, we continue to think cyclical forces (namely #StrongDollar driven commodity price deflation) will drag down reported inflation readings globally over the intermediate term. That is likely to weigh heavily upon long-term interest rates in the developed world, underpinning our bullish outlook for U.S. Treasury bonds.

 

The Hedgeye Macro Playbook (1/29)

 

#Quad414: After DEC and Q4 (2014) data slows, in Q1 of 2015 we think growth in the US is likely to accelerate from 4Q, aided by base effects and a broad-based pickup in real discretionary income. We do not, however, think such a pickup is sustainable, as we foresee another #Quad4 setup for the 2nd quarter. Risk managing these turns at the sector and style factor level will be the key to generating alpha in the U.S. equity market in 1H15.

 

#Quad414 Confirmation (1/30)

 

Long #Housing?: The collective impact of rising rates, severe weather, waning investor interest, decelerating HPI, and tighter credit capsized housing in 2014.  2015 is setting up as the obverse with demand improving, the credit box opening and 2nd derivative price and volume trends beginning to inflect positively against progressively easier comps. We'll review the current dynamics and discuss whether the stage is set for a transition from under to outperformance for the complex.

 

EARLY LOOK: USA Inc. (1/30)

 

Best of luck out there,

 

DD

 

Darius Dale

Associate: Macro Team

 

About the Hedgeye Macro Playbook

The Hedgeye Macro Playbook aspires to present investors with the robust quantitative signals, well-researched investment themes and actionable ETF recommendations required to dynamically allocate assets and front-run regime changes across global financial markets. The securities highlighted above represent our top ten investment recommendations based on our active macro themes, which themselves stem from our proprietary four-quadrant Growth/Inflation/Policy (GIP) framework. The securities are ranked according to our calculus of the immediate-term risk/reward of going long or short at the prior closing price, which itself is based on our proprietary analysis of price, volume and volatility trends. Effectively, it is a dynamic ranking of the order in which we’d buy or sell the securities today – keeping in mind that we have equal conviction in each security from an intermediate-term absolute return perspective. 


February 2, 2015

February 2, 2015 - HE DTR 2 2 15


Investing Ideas Newsletter

Takeaway: Current Investing Ideas: GLD, EDV, HOLX, MDSO, MUB, RH, TLT and XLP.

Below are Hedgeye analysts’ latest updates on our eight current high-conviction long investing ideas and CEO Keith McCullough’s updated levels for each.

 

Please note that we added Gold (GLD) this week and removed Yum! Brands (YUM).

 

We also feature two additional pieces of content at the bottom.

Investing Ideas Newsletter      - 34 

Trade :: Trend :: Tail Process - These are three durations over which we analyze investment ideas and themes. Hedgeye has created a process as a way of characterizing our investment ideas and their risk profiles, to fit the investing strategies and preferences of our subscribers.

  • "Trade" is a duration of 3 weeks or less
  • "Trend" is a duration of 3 months or more
  • "Tail" is a duration of 3 years or less

CARTOON OF THE WEEK

Investing Ideas Newsletter      - GDP cartoon 01.30.2015

2014 full year GDP growth was +2.4%, not 5%. Our call was y/y growth peaked in Q4 of 2013, and it did.

IDEAS UPDATES

GLD

Gold completed its BEARISH to BULLISH TREND REVERSAL and we’re adding it back on the long side for 2015. We sent out our first buy signal in GLD on Tuesday. Keith added to that position in Real-Time Alerts on Thursday ahead of Friday’s GDP print (which missed expectations).

 

TREND DURATION = 3-Months or More

 

*Our real-time alerts product notifies subscribers of the exact time and price we are managing our exposure to our top investing ideas. 

------

Dollar Down, Rates Down = #StrongGold

 

Bad economic data warrants an easier Fed, and Friday’s GDP print did in fact miss q/q annualized:

  • Sequential (q/q) GDP annualized printed +2.6% for Q4 vs. consensus expectations of +3.0%
  • Synching Friday’s print with our internal GROWTH, INFLATION, POLICY model, full-year 2014 GDP printed +2.5% vs. Hedgeye, Central Bank, and consensus forecasts of +2.4%.

March 18th is the next Fed catalyst, and we expect that they’ll announce a reversion from the plan to raise rates in June. The depreciation of the EURO and YEN against the dollar have already moved on their respective catalysts. The Fed has the next move, and we are front-running the foreseeable shift in policy.

 

We like an allocation to gold against our other macro positions and will look to buy on short-term pullbacks within the BULLISH TREND set-up. 

Investing Ideas Newsletter      - 444

HOLX

Hologic finished the week up +3.8% versus down -2.4% for the S&P 500.

 

It's up approximately 14% since we added it to Investing Ideas at the beginning of the year, while the S&P 500 is down -3% year-to-date.

 

HOLX pre-announced a positive F1Q15 during the JPM Healthcare conference earlier this month, but did not update their guidance at the time. This week, the company officially reported earnings and raised guidance above consensus expectations. With this recent guidance raise and positive management commentary, HOLX is very likely heading above $40 sometime in the next 6 to 9 months, with $50 just around the corner. Accelerating revenue and earnings growth, a higher multiple, and earnings power above $2.00 gets us there.

 

We think this will be the first of several beat and raise quarters.

Investing Ideas Newsletter      - c5

Earnings Call Highlights

 

Diagnostics:  The most significant change from the quarter was stability in ThinPrep. Thanks to incremental disclosures the company is providing (positive trends tend to make companies more open) it's now possible to actually see the company's Cytology results, which while down in the US, managed to grow modestly year over year. Our OB/GYN survey has been flagging stability in US Pap trends and we will have the January update next week.  Our model previously anticipated -10% declines over the next 2 years which will now improve to 0%, a massive acceleration and very accretive for the model.

Investing Ideas Newsletter      - c6

M&A: When Hologic bought Cytec and Gen-Probe, they were plugging major holes in their businesses.  In the first case, slowing/declining 2D mammography, in the second, declines in ThinPrep.   While they still have to execute, looking out past peak 3D growth rates likely to occur in 2016/2017 and acting proactively, should be a significant tailwind to the multiple.  In prior work we have found topline growth drives their EV/EBITDA and P/E multiples while debt metrics are largely irrelevent.

 

3D Mammography:  Our estimate for Breast Health was too high coming into the quarter.  We'll be running our update for US facility counts for January this weekend and reviewing the 10K.  We'll refine our estimate and publish the results and update next week.  We still believe consensus Breast Health numbers are too low.  It was clear from the call that HOLX is taking share from GE, which will increase our out year estimates, and placement rates are accelerating, which we should capture in our survey.  How that translates into revenue will be increasingly accurate in our model.  Anecdotes regarding aggressive pricing from GE suggest they are acting out of a position of weakness.  

 

Key to our thesis is 3D adoption, which continues to progress into the fast part of the adoption curve.

Investing Ideas Newsletter      - c7

Transparency:  It's always easier to deliver good news than disappointment, and we welcomed the increased details in HOLX's earnings presentation which provided greater detail.  In this case a clear narrative supported by data will will go a long way to improving investor confidence and the multiple.

Investing Ideas Newsletter      - c8

Debt Leverage:  We hear the complaint, but think its misguided, that HOLX is over-levered.  For such a stable business, with accelerating fundamentals, we think the concern is misguided.  Regardless leverage is heading lower, which should allay those concerns.

Investing Ideas Newsletter      - c9

MDSO

The Hedgeye Healthcare team has no material update this week ahead of Medidata Solutions earnings on Thursday (2/5 pre-market). We reiterate our expectations for the company to beat expectations on both the top and bottom line.

Investing Ideas Newsletter      - mdso

TLT | EDV | XLP | MUB

Editor's note: Our longstanding, non-consensus call on bonds remains the gift that keeps on giving. This January, TLT was up +10% versus the S&P 500 which was down -3%.

 

Per Hedgeye senior macro analyst Darius Dale:

 

Our #Quad414 theme is picking up steam with the deluge of this week's U.S. economic data and remains core to alpha generation in 1H15.

 

Click here to read the full report. 

RH 

Hedgeye's retail sector analysts have no material update on Restoration Hardware this week.

 

 

* * * * * * * * * * 

ADDITIONAL RESEARCH CONTENT BELOW

Mcdonald's: a new beginning

The first email we received from a client following the news of Thompson’s departure yesterday posed a simple question: “Should I chase MCD tomorrow?”

Investing Ideas Newsletter      - 70

Riding Strong Through the Actual and arithmetic blizzard of crummy macro data

Whether housing can remain an insular island of intermediate term strength against the burgeoning blizzard of global disinflationary pressure and decelerating domestic Macro data for December is the relevant question.

Investing Ideas Newsletter      - bz


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