Chutzpah

"It ain't what they call you, it's what you answer to."

-W.C. Fields

 

Chutzpah in English connotes courage or confidence. In Yiddish, the language from which the word originates, chutzpah means extreme arrogance.  Which describes you?

 

As stock market operators, capitalists and business builders, we are often called arrogant, when in fact we are actually just confident. We are confident in our work ethic, teammates and vision. 

 

In case you missed it, a couple of days ago the Huffington Post ran an interesting article about Hedgeye. The author, Ben Walsh, came to our office for a day and had some very thoughtful questions about our company and business.  

 

Admittedly, he also struggled with the question of confidence or arrogance.  Nonetheless, he did have some interesting insights about Hedgeye and we thought we’d share the article.

 

Click image to read. 

Chutzpah  - 88

 

The fact is, none of us will ever build anything in life if we aren't confident.

 

Speaking of chutzpah, it's clear that embattled NBC news anchor Brian Williams has some. Although now that he's sitting in the penalty box for six months, feeling shame, perhaps that will change. In the cartoon below, we actually propose an alternative job for Mr. Williams. 

 

Chutzpah  - Williams cartoon 02.11.2015

 

Back to the Global Macro Grind ...

 

Chutzpah or confidence in your analytical abilities is a truly important characteristic of being a good stock market operator. For as you all know, and as Ben Graham famously said:

 

"In the short term stocks are a weighing machine, in the long run they are a voting machine."

 

Speaking of analytical abilities, on the Hedgeye team, our Internet analyst Hesham Shabaan has been on a run of almost epic proportions with his short calls on Pandora, Yelp and Twitter.  (If you aren't currently subscribing to his research, it would be worth emailing to do so.)

 

His newest Best Idea short is the Chinese juggernaut Ali-Bubble. Sorry, Alibaba. The core of his thesis is as follows:

 

1.    GMV GROWTH TO SLOW PRECIPITOUSLY: China's upper class drives the bulk of BABA's GMV.  There is no other plausible explanation after comparing BABA's reported metrics to China consumer demographic data.  That means the next wave of user growth will come from a much weaker consumer, leading to declining GMV/Active Buyer, and slowing GMV growth.

 

2.    MODEL FACING SECULAR PRESSURE: Slowing GMV growth naturally bodes poorly for commissions.  But the bigger issue is Marketing Revenues (~60% of total), which are facing secular pricing pressure as a weaker consumer pressures ad conversions and ROI.  We were already seeing this in BABA’s financials, but the street just took notice of this last print, because...

 

3.    TMALL CAN'T SAVE THE DAY: The one thing that was keeping us on the sidelines was the migration of GMV moving over to BABA's Tmall platform (where BABA collects commissions).  That sputtered out in F3Q15, leading to a sharp slowdown in Commission revenue growth, which exposed the weakness in its Market segment (both reported in its China Retail segment).  Tmall Mix shift can't be trusted a secular growth driver moving forward, so we don't need to worry about getting run over by it longer term.

 

Yes, BABA on some level is the Chinese Internet, but if its growth is decelerating and potentially going to disappoint, does it matter?

 

The other component to the thesis on BABA is the macro economic backdrop in China.  If BABA is indeed the majority of e-commerce that occurs in China, it will be on some level hostage to economic activity in China.

 

In the Chart of the Day below, we show Chinese GDP growth going back 25 years. The clear takeaway from this chart is obviously that last year Chinese growth was at its lowest level in 24 years.  In part, the government is actively trying to slow growth, so this makes sense.  But even in a command economy like China, the ability of central bankers to manage a slow down in a perfectly orderly fashion is limited. 

 

On Sunday we received Chinese trade data, which further emphasized a Chinese economy that is slowing.   While it is always dangerous to take data in isolation, Chinese exports in January fell by -3.3% from year ago levels.  Meanwhile, imports dropped a staggering -19.9%, which was the lowest level since the financial crisis of 2009.

 

More so than the U.S., China is an economy that is largely driven by exports.  In fact, in 2014 Chinese exports totaled $2.34 trillion, which are about 50% larger than the world’s second largest exporter, the U.S.  Combined, Japan and the EU are well more than 25% of Chinese exports.

 

The implication here is pretty clear, which is that the combination of a government that is trying to at least manage growth, if not slow it, with an economy that is dependent on exports to regions in which growth is definitely decelerating, means that the Chinese economy may be set up to disappoint on the downside.

 

Frankly, if the Chinese economy is going to disappoint, we aren’t sure there is a better way to play that then a company that is levered to Chinese wealth creation and trades at almost 14x 2015 sales.  Valuation, of course, isn’t everything, but it is a good measure of expectations.  And as they say about expectations, they are the root of all heartache.

 

Our immediate-term Global Macro Risk Ranges are:

 

UST 10yr Yield 1.62-2.09%

SPX 2026-2090

VIX 15.41-20.80

USD 94.04-95.64
Oil (WTI) 46.43-53.66
Gold 1 

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

Chutzpah  - 02.12.15 chart


Cartoon of the Day: Bulls Leading the People

Investors rejoiced as centrist Emmanuel Macron edged out far-right Marine Le Pen in France's election day voting. European equities were up as much as 4.7% on the news.

read more

McCullough: ‘This Crazy Stat Drives Stock Market Bears Nuts’

If you’re short the stock market today, and your boss asks why is the Nasdaq at an all-time high, here’s the only honest answer: So far, Nasdaq company earnings are up 46% year-over-year.

read more

Who's Right? The Stock Market or the Bond Market?

"As I see it, bonds look like they have further to fall, while stocks look tenuous at these levels," writes Peter Atwater, founder of Financial Insyghts.

read more

Poll of the Day: If You Could Have Lunch with One Fed Chair...

What do you think? Cast your vote. Let us know.

read more

Are Millennials Actually Lazy, Narcissists? An Interview with Neil Howe (Part 2)

An interview with Neil Howe on why Boomers and Xers get it all wrong.

read more

6 Charts: The French Election, Nasdaq All-Time Highs & An Earnings Scorecard

We've been telling investors for some time that global growth is picking up, get long stocks.

read more

Another French Revolution?

"Don't be complacent," writes Hedgeye Managing Director Neil Howe. "Tectonic shifts are underway in France. Is there the prospect of the new Sixth Republic? C'est vraiment possible."

read more

Cartoon of the Day: The Trend is Your Friend

"All of the key trending macro data suggests the U.S. economy is accelerating," Hedgeye CEO Keith McCullough says.

read more

A Sneak Peek At Hedgeye's 2017 GDP Estimates

Here's an inside look at our GDP estimates versus Wall Street consensus.

read more

Cartoon of the Day: Green Thumb

So far, 64 of 498 companies in the S&P 500 have reported aggregate sales and earnings growth of 6.1% and 16.8% respectively.

read more

Europe's Battles Against Apple, Google, Innovation & Jobs

"“I am very concerned the E.U. maintains a battle against the American giants while doing everything possible to sustain so-called national champions," writes economist Daniel Lacalle. "Attacking innovation doesn’t create jobs.”

read more

An Open Letter to Pandora Management...

"Please stop leaking information to the press," writes Hedgeye Internet & Media analyst Hesham Shaaban. "You are getting in your own way, and blowing up your shareholders in the process."

read more