This note was originally published at 8am on February 12, 2015 for Hedgeye subscribers.
"It ain't what they call you, it's what you answer to."
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.
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.
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 email@example.com 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%
Oil (WTI) 46.43-53.66
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research