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Keith's Daily Trading Ranges [Unlocked]

This is a complimentary look at today's Daily Trading Ranges - Hedgeye's proprietary buy and sell levels on major markets, commodities and currencies sent to subscribers every weekday morning by CEO Keith McCullough. Click here to subscribe.

Keith's Daily Trading Ranges [Unlocked] - Slide1

BULLISH TRENDS

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BEARISH TRENDS

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P: Dark Clouds (1Q15)

Takeaway: 2015 is largely irrelevant outside of what it means for 2016 (Web IV). 1Q15 suggests that P may have a harder time weathering that storm.

KEY POINTS

  1. 1Q15=UNINSPIRING: P handily beat revenues on light 1Q15 guidance and corresponding consensus estimates, yet user growth fell short.  The surprise was that much of that upside came from the subscription segment, specifically from the price increase implemented in 2Q14.  Advertising revenue growth decelerated sharply yet again; a potentially concerning trend heading into 2016 (see point 3). 
  2. DOWNHILL FROM HERE: As we mentioned in our last note, the setup gets progressively worse post 1Q15.  2H15 Consensus revenue estimates were already lofty heading into the print, and are likely heading higher on the soft guidance raise.  But more importantly, we’re expecting users to decline in 2H15 (see link below), and Web IV will become a growing overhang as we move through the year. 
  3. DARK CLOUDS: With ad-supported royalty rates facing a potentially precipitous increase, the viability of P’s model will hinge on P’s ability to control listener hours and/or grow revenues enough to absorb those hours.  That said, the continuing deceleration in ad revenue growth is a bad omen heading into 2016, especially since much of that growth is coming from P’s ongoing investment in its salesforce; a strategy it can't sustain if Web IV goes against them.  

 

1Q15=UNINSPIRING

P handily beat revenues on light 1Q15 guidance and corresponding consensus estimates, yet user growth fell short. The surprise was that upside to revenue came from the subscription business, growing 32% y/y on subscriber growth of 11%; suggesting the price increase implemented in 2Q14 was the main driver. 

 

The bigger surprise was that Advertising revenue growth decelerated sharply (from 36% to 27% y/y) from 4Q14; a quarter which had seemingly specific non-recurring headwinds from the holiday advertising season.  National advertising growth decelerated to 18% from 25%, while Local decelerated to 67% from 90%. 

 

P: Dark Clouds (1Q15) - P   Ad rev 1Q15

 

We’re more concerned with national advertising (18% y/y), not just because it’s larger (~3/4 of ad revenue), but because salesforce productivity appears to be on the decline (we estimate national reps increased 23% in 2014).  Further, P could be ceding market share in the mobile ad market (P estimates that it's the #3 mobile player in US).  The majority of P's ad revenue is mobile, and that 18% growth rate is well below any published figure we have found for expected US mobile advertising growth this year.

 

DOWNHILL FROM HERE

As we mentioned in our last note, the setup gets progressively worse post 1Q15.  2H15 consensus revenue estimates were already lofty heading into the print, and are likely heading higher on the soft 2015 guidance raise.  The question is how consensus weights their estimates raises following the print since we we were most concerned with the street assumption for accelerating ad revenue through 4Q15. 

 

P: Dark Clouds (1Q15) - P   2H15 Ad rev scen

 

But more importantly,  we’re expecting users to decline in 2H15 since P's remaining TAM isn't large enough to offset attrition for much longer (see link below for more detail).  Further, Web IV will become a growing overhang as we move through the year.

 

P: New Best Idea (Short)

12/22/14 03:56 PM EST

[click here

 

DARK CLOUDS

With ad-supported royalty rates facing a potentially precipitous increase, the viability of P’s model will hinge on P’s ability to control listener hours and/or grow revenues enough to absorb those hours. We illustrate this dynamic in the below scenario analysis, which could be P's best case scenario from Web IV (see most recent Web IV note below).


P: Dark Clouds (1Q15) - P   Web IV scen P sub rates 3 

 

As we mentioned in our last note, our primary read moving forward will be the trend in listener hours; the more hours P enters the year with, the more drastic steps it will need to take to reign in contents costs.  That situation would be exacerbated by fading advertising revenue growth.

 

That said, the continuing deceleration in ad revenue growth is a bad omen heading into 2016, especially since much of that growth is coming from P’s ongoing investment in its salesforce; a strategy it can't sustain if Web IV goes against them. 

 

 

Let us know if you have any questions, or would like to discuss in more detail.  For Web IV supporting analysis, see links below.  

 

Hesham Shaaban, CFA

@HedgeyeInternet 

 

 

WEBCASTER IV NOTES 

 

P: Losing the Critical Debate?

04/08/15 08:53 AM EDT

[click here]

 

P: Worst-Case Scenario? (Web IV)

03/23/15 09:30 AM EDT

[click here]

 

P: Webcaster IV = Powder Keg

01/13/15 02:49 PM EST

[click here]


LEISURE LETTER (04/24/2015)

Tickers:  SGMS, RCL

 

EVENTS  

  • Today: WYNN Annual general meeting: proxy fight

  • April 28 (4:30pm) - WYNN 1Q CC: ; pw: 20173922

  • April 29 (1:00pm)  -  HOT 1Q CC: ; pw: 17589434

  • April 30 (9:00am) - HST 1Q CC:

  • April 30 (10:00am) - MAR 1Q CC: ; pw:  99597993

  • April 30 (5:00pm) - BYD 1Q CC: ; pw: 3858748

  • May 4 (11:00am) - MGM 1Q CC: ; pw: 1535291

  • May 5 (11:00am) - HYATT 1Q CC ; pw: 17020089

  • May 7 (8:30am) - MPEL 1Q CC ; pw: MPEL

COMPANY NEWS  

SGMS-   Net Sans-Hitay, the consortium that won the tender to operate Turkey’s national lottery Milli Piyango, has pulled out of the deal, with the second-placed bidder ERG-Ahlatçı set to be granted the ten-year contract.

 

Net Sans-Hitay, comprising Turkish tourism business Net Holding, Scientific Games and the co-owner of the Bilyoner.com iGaming platform Hitay Investment Holdings, has been forced to withdraw its candidacy after it was refused more time to renegotiate its funding plans for the project by the Turkish government, having won the tender in July last year.

ARTICLE HERE

Takeaway: Blow to SGMS's lottery ambitions in Europe 

 

SGMS - will provide the Pojoaque Indians with Bally systems at their Buffalo Thunder and Cities of Gold casinos in New Mexico.  The casinos will use the Bally SGS slot management system and its iVIEW Display Manager with Elite Bonusing Suite.  SGMS is also providing Route 66 Casino in Albuquerque with its Play4Fun social casino platform.

 

GALAXY - Galaxy intends to invest over MOP12.8 billion in developing 2.74 square km of land over the border on Hengqin island. Galaxy Entertainment said the development will include a resort with facilities for sport and other leisure pursuits.

ARTICLE HERE 

 

MSC Cruises - is suspending calls in Ukraine and Egypt for autumn 2015 through to spring 2016, replacing them with a number of Mediterranean alternatives. In response to clear market demand, said the company,  MSC Sinfonia, MSC Opera, MSC Fantasia and MSC Musica will, from autumn 2015 to winter 2016, variously incorporate the Greek islands of Rhodes and Crete, as well as Cyprus and Israel into their sailings.

 

MSC Cruises also revealed that, in response to high demand, MSC Opera will increase the frequency of itineraries calling in the Canary Islands, Spain and Madeira, including an overnight stay in Funchal, for her Canary Islands winter 2016 programme.

ARTICLE HERE 

Takeaway: Trouble spots remain in Europe. Are analysts finally waking up to these European risks?

 

RCL - From April 22 through May 1, Royal Caribbean International is offering 2% bonus commission per qualifying booking as part of its annual Travel Agent Appreciation event. The extra pay is also tied to the introduction of Anthem of the Seas.

 

For all new bookings made from April 22 through May 1, on any Caribbean and Bahamas sailings departing on Sept. 1 through Dec. 31, agents can earn the additional 2%. They need to register promotion code 'THANKS' in order to receive the extra pay.

ARTICLE HERE

 

RCL - Royal Caribbean International is starting a nationwide radio brand advertising campaign from today (Friday) as part of the line’s efforts to encourage more first-timers on board. The company will be pushing its overall brand proposition – appealing to adventurous couples and families – with no mention of price, according to UK and Ireland managing director Stuart Leven.

ARTICLE HERE

INDUSTRY NEWS

NV McCarran Airport data- for March 2015, passenger traffic was up 1.8% YoY. 

Takeaway: 19th consecutive month of traffic growth at McCarran. International visitation stronger than domestic driven by Canada and Mexico


Local workers-  Macau’s Secretary for Economy and Finance, Lionel Leong Vai Tac, requested the city’s six casino operators to boost their corporate policies in order to promote more local workers.  Leong said the Macau government “placed great importance [on] the workers’ career[s]…, such as the opportunities for upward and horizontal mobility,” according to a government statement. He added this would be “one of the factors to consider in the mid-term review [of] the industry”.

ARTICLE HERE 

MACRO

Hedgeye Macro Team remains negative Europe, their bottom-up, qualitative analysis (Growth/Inflation/Policy framework) indicates that the Eurozone is setting up to enter the ugly Quad4 in Q4 (equating to growth decelerates and inflation decelerates) = Europe Slowing.

Takeaway:  European pricing has been a tailwind for CCL and RCL but a negative pivot here looks increasingly likely in 2015.


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HOUSING CHART OF THE DAY: 19.4% YoY = Disappointing?

HOUSING CHART OF THE DAY: 19.4% YoY = Disappointing?  - NHS CoD

 

Editor's Note: This brief excerpt and chart are from today's Morning Newsletter which was written by Hedgeye U.S. Macro Analyst Christian Drake. Click here to subscribe.

*  *  *  *  *  *  *

 

...Further, as we show in the Chart of the Day, given the favorable comp dynamics, New Home Sales in March – despite the sequential softness – were still up a remarkable +19.4% YoY.   Moreover, with comparison’s remaining favorable through July, year-over-year sales growth is likely to come in in the upper-teens to mid-twenties over the next four months - one would be hard pressed to find a better, rate-of-change chart in all of Global Macro.


Before & After

"It’s like Speed 2 but with a bus instead of a boat.”

-Milhouse Van Houten, The Simpsons (season 12)

 

Progress is generally not a cosmological crapshoot; some mystical coming together of elements, which, through some random spontaneity, have come to form a specific, organized end. 

 

Black swans and accidental billionaires are real but success, by and large, is not an accident. 

 

Progress and change can, at times, be illusory however. 

 

You know those “Before” and “After” photos that grace the pages of pretty much every fitness and nutritional supplement ad you’ve ever seen?  I took part in one of those photo shoots one year following a natural bodybuilding show I did. 

 

The best part...

 

I did both the “BEFORE” and “AFTER” photo in the same day.  No twelve-week transformation, no sophisticated supplement cocktail, no sycophantic testimonial ...mostly make-up, lighting artistry and photo editing acrobatics.  Yep, the venerable before & after shot – that paragon of fitness marketing – can be (not always) the simple product of illusion and marketing malfeasance.

 

Back to the Global Macro Grind…

 

It’s been a tough last couple days for housing bulls with price volatility rising and performance whipsawing alongside company earnings and data seasonality.  However, similar to my illusional instantaneous physique transformation, the ‘Before’ and ‘After’ of Housing’s underlying fundamental reality is largely unchanged. 

Before & After - Housing cartoon 04.01.2015

 

Let’s review and contextualize the crush of recent data, starting with the (perceived) negatives.   

 

DHI:  D.R. Horton beat top and bottom line estimates for fiscal 2Q on Wednesday, reporting 30% growth in orders,  strong selling season demand and a rising backlog while raising full year sales and construction estimates.  The stock, however, closed down -5.4% on the day as management pared back its gross margin forecast by -50bps on account of the rising contribution from and increased focus on the lower-margin, entry level market (i.e. 1st time homebuyers). 

 

So, investors remain acutely focused on builder margins - a preoccupation and movie we’ve seen before with KBH reporting a similar quarter, with a similar investor response, at the start of the year.  To tie in today’s amusing but otherwise irrelevant headline quote - it’s like January but with DHI instead of KBH.   

 

The bullish rejoinder to the margin concerns is two-fold:

  1. It’s our view that the recent margin weakness is largely a product of the marked deceleration in  HPI (Home Prices) that occurred over the course of 2014.  In other words, it’s a product of rearview dynamics.  With home price growth stabilized and now beginning to accelerate over 2015 the forward outlook for margins is improving.   
  2. DHI is making a calculated bet that 1st time homebuyer demand is poised to accelerate meaningfully and the market disagree’s with the conclusion and/or the operating decision. DHI’s own results are testament to the improving trends in entry level demand.  With employment growth for the 20-34 year old group now positive for 2-years and accelerating over the last couple quarters the labor market dynamics are supportive of that expectation as well.  Further, the FHA loan cost reductions and low downpayment loan programs rolled out by Fannie/Freddie in January are all aimed at bolstering entry-level demand.   

We understand the margin consternation but, from a top-down perspective, it’s difficult to characterize accelerating demand as a negative fundamental development, particularly with a view that HPI should support margin improvement going forward.  This is why we've been recommending buying the dips on builders - such as KBH when it traded down to $11 (24% lower from yesterday’s closing price) back in January - that sell off on margin concerns. 

 

New Home Sales:  New Home Sales for March, reported yesterday, declined -11.4% MoM to +481K.  The sequential retreat was notable and captured most of the headlines but was, in fact, not overly surprising and deserves proper contextualization. New Home Sales in February were the highest since February 2008 and some 22% above the TTM average so a modest hangover on the heels of that comp should not be unexpected   

 

Further, as we show in the Chart of the Day below, given the favorable comp dynamics, New Home Sales in March – despite the sequential softness – were still up a remarkable +19.4% YoY.   Moreover, with comparison’s remaining favorable through July, year-over-year sales growth is likely to come in in the upper-teens to mid-twenties over the next four months - one would be hard pressed to find a better, rate-of-change chart in all of Global Macro. 

 

So, DHI’s earnings were disappointing and New Homes Sales in March were soft…but not really.  Moving onto this week’s discretely positive housing data….

 

Purchase Applications:  Purchase demand, as measured by the MBA’s weekly survey, rose +5.0% week-over-week to 205.4 on the Index – the highest level since June of 2013.  On a year-over-year basis, purchase demand accelerated to +15.4% - the fastest rate of growth YTD and the 15th consecutive week of positive growth.   Purchase activity in 2Q15 is currently tracking +13% QoQ and +12% YoY. 

 

Existing Home Sales:  Existing Home Sales rose +6.1% MoM in March to 5.19M Units SAAR – marking the highest level in 18-months.  On a year-over-year basis, EHS accelerated to +10.4% YoY as the confluence of easy comps, improving organic demand and weather related catch-up all supported the rebound in reported demand.  That same constellation of factors should continue to support strong 2nd derivative improvement in demand over the next couple/few months. 

 

FHFA HPI:  the FHFA Home Price series for February released this morning showed home price growth accelerating to +5.5% YoY (vs. +5.1% prior), further corroborating the acceleration reported by the CoreLogic series earlier this month.  Tight supply should continue to support home price growth and given the strong relationship between housing related equities and 2nd derivative HPI, the existent demand/supply/price dynamics should support performance across the complex.   

 

We turned positive on Housing back in November but having been on both the long and short side of housing multiple times since 2008 as our model is both data sensitive and dynamic. 

 

Looking forward, there are a trinity of known risks to housing activity whose likely magnitude of impact remains largely unknown.  Specifically, the convergence of negative seasonal performance, new regulation (TRID) and the impacts of the California/West Coast drought pose a collective risk to housing activity into late 2Q/early 3Q. 

 

However, while we remain mindful of those quasi-latent risks, we continue to think improving fundamentals and accelerating rates of change in both demand and price should dominate investor mindshare and related equity performance in the more immediate-term.  

 

Enjoy your weekend.

 

Christian B. Drake

U.S. Macro Analyst

 

Before & After - NHS CoD


I Love Debate

This note was originally published at 8am on April 10, 2015 for Hedgeye subscribers.

“I love argument, I love debate.”

-Margaret Thatcher

 

And I love Margaret Thatcher. She was a beauty.  She took down the old crusty central planners of British officialdom, and stood up for the purchasing power of the people and their currency.

 

I have debate on the mind as I am actually meeting with some big time central planners today in NYC. I am neither bringing a taster to the lunch debate, nor a rollover in all that I have been writing and ranting about for the last 7 years. I am bringing The #Process.

 

In preparation for today, Darius Dale, Josh Balch, Pavitra Duggal, and I spent all of yesterday meeting with Institutional Investors. The debate in most meetings was as vibrant as it has been in a long time. I’ll recap some of the highlights in the grind.

I Love Debate - Central banker cartoon 03.03.2015

 

Back to the Global Macro Grind

 

When I am on the road, some of the best discussions I have with my teammates are in between meetings. I can’t count how many times Darius and I can’t wait to get out of the elevator and debate amongst ourselves the best debate points of the prior meeting.

 

In that regard, banging out 6-8 meetings in a day is an exercise in gaining cumulative knowledge of not only what investors are thinking, but who has the most differentiated views and/or analogues that best support or refute our in-house research view.

 

Sometimes what people aren’t asking about is an idea in and of itself. China, for example, hasn’t been a trending topic in our meetings this year, and boom! The Hang Seng puts on a +15% ramp to the upside in the last month, so now we’ll get asked about it.

 

Since Global Macro can take the discussion anywhere, there’s a lot to talk about, but I’d say the Top 3 Debates I’ve had in the last week (I was in the Midwest to start the week) have been centered on these questions:

 

  1. Is the Dollar done going up?
  2. Is Oil done going down?
  3. Is the US economy that slow in Q1?

 

If I recapped what the healthiest debate was 1 month ago today, it was all about whether rates were going up or down. The Fed’s March 18th meeting put a lot of the questions about “liftoff” at bay (Fed Funds Futures pushed the 1st hike out to DEC too).

 

Markets moving in one direction with data supporting it will do that to a debate. The debates get much more interesting when market prices are whipping around in a range, like the US Dollar and Oil have been.

 

On the US Dollar:

 

  1. There tends to be a lot of anchoring on Fed policy, and less respect for what Draghi and Kuroda are committed to doing
  2. We agree with investors who tell us that our being right on lower-rates-for-longer is less bullish for the USD in isolation
  3. We don’t agree that consensus gets what a EUR/USD level of 80 cents looks like from an asset allocation perspective

 

On Oil:

 

  1. Since we believe that the US Dollar’s epic 6 month ramp is the beginning of a longer-term TREND, Oil bulls don’t like that
  2. Oil Bulls tend to data mine for decoupling – meaning they’ll agree with our USD view, but say supply or demand is bullish
  3. Oil Bears tend to believe that demand is as good as it’s going to get (it’s pro cyclical) and supply is a long-term problem

 

On the US Economy:

 

  1. Almost everyone asks about the Atlanta Fed forecast chart that’s been getting passed around (going straight down)
  2. Almost no one models GDP year-over-year like we do, so we surprise them when explaining Q1 GDP is going to be good
  3. The timing of what the Fed thinks GDP is in Q1 (and what they’ll probably have to say April 29th) is a great debate

 

On that last point about April 29th, it’s interesting because:

 

  1. That’s the date of the next FOMC decision on rates/policy
  2. It’s also the date of Q1 2015 GDP being released
  3. And, most importantly, that date is pre the next US jobs report

 

So when debating the timing, I’ve been trying to make the point that A) since the most recent jobs report was the worst in almost a year and B) the way the Fed looks at GDP (Q/Q SAAR) is going to look really “slow” sequentially, they’ll punt on rate hikes.

 

And since Fed Fund futures are pricing in my view, it’s tough for someone to argue with me on that, unless they have inside information… that said, anything can happen obviously. We’ll see if I’m right.

 

If I am, from today’s time and price to that critical Macro Catalyst date (April 29th), I think you could see:

 

  1. USD sell off from this week’s immediate-term overbought zone of 99.46-99.87 on the USD Index
  2. Oil bounce again within its bearish TREND (top end of the risk range, for now is $53.54 WTI)
  3. US Interest Rates making yet another lower-high here and re-testing 1.81% on the 10yr Yield

 

In other words, some of my very short-term views are at odds with my longer-term ones – and others (rates) are aligned. After I’ve debated everyone else, I love to argue with myself about all of that. Macro markets, across durations, are non-linear.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.86-1.97%
SPX 2076-2096

RUT 1244-1267  
VIX 13.03-15.96
USD 98.03-99.76
EUR/USD 1.06-1.08
WTI (Oil) 46.43-53.03

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

I Love Debate - 04.10.15 Chart


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