Greece, Earnings and Germany

Client Talking Points


The news for Greece remains primarily negative, no reform list has been submitted by Greece which is a big issue for the Eurogroup. A Eurogroup Chair member came out and said there are still wide differences that remain. The Greek Foreign Minister is being criticized by EU colleagues. The one bright spot is that Germany has said that they see some progress being made.


72% of U.S. companies have beat earnings estimates, which is a positive and in-line with the 5-year average. However, the blended rate of earnings and revenue growth is down -3.4% in Q1 year-over-year. The big driver of this draw down is likely the energy sector.


Germany remains one of our top long ideas in Macro. The recently released IFO data was mixed. IFO’s current conditions index rose to 113.9 in April from 112.1 in March, while a measure of expectations fell to 103.5 from 103.9. The IFO's business climate index rose for a sixth month to 108.6 from 107.9 in March. 

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

MTW revised down its 2015 guidance for the Foodservice Equipment segment and preannounced a weaker than expected 1Q 2015. Sales in the quarter are a noteworthy miss, but we do not believe that the release has relevance for our sum-of-the-parts valuation thesis, and see many reasons to anticipate stronger operating results in 2H 2015.  Basically, we think investors stand to be paid for suffering through this volatility, with potential share price upside on separation ranging from the high 20s to low 40s. Near-term profit weakness is partly why the shares are ‘cheap’, and we think holders may be compensated well for the volatility. The shares are currently trading lower on a weaker than expected 1Q15, but 2Q15 should show improved Crane segment results and 2H should show better Foodservice Equipment results.


iShares U.S. Home Construction ETF (ITB) is a great way to play our long housing call. The housing data was mixed in the latest week with the April homebuilder confidence survey (NAHB HMI) putting in a strong sequential improvement, while March Housing Starts were a bit soft. The National Association of Home Builders (NAHB) released its April Housing Market Index survey (HMI) – essentially a survey of builder confidence. The print was strong as it showed a nice bounce across all three survey categories: traffic of prospective buyers, current conditions, and expectations 6 months out.  Housing Starts were up sequentially in March, but by less than the market expected. Total Starts rose by 2% to 926,000 (seasonally-adjusted annualized rate) from 908,000 in February.


On the domestic fixed income front we’re looking at lower yields for longer. Lower yields benefit those slow-growth fixed income cash flows tied to the treasury curve (yields down, bonds up). TLT sets-up nicely in a slow-growth, deflationary setting because inflation missing=expectation for even easier policy=more central-planning cowbell=lower yields for longer.

Three for the Road


3.26 million new retail brokerage accounts opened in China . . . . This week ! #TradingTheDragon @HedgeyeDJ


We are really competing against ourselves, he have no control over how other people perform.

Pete Cashmore



Roughly 83 million Americans age six and over (about 28% of the population), reported that they did not once participate in any of 104 specific physical activities in the last calendar year which qualifies them as "totally sedentary" (survey results by the Physical Activity Council).

Keith's Macro Notebook 4/24: Greece | Earnings | Germany

Hedgeye Director of Research Daryl Jones shares the top three things in CEO Keith McCullough's macro notebook this morning.

Retail Callouts (4/24): AMZN, KSS, HBI, WMT, TGT, KORS

Takeaway: AMZN - $15 in EPS by 2018? Adding to Long Bench. KSS launches Yoga line where it operates 0 stores. HBI: Good #s, customer action troubling.



AMZN - $15 in Earnings???

It's tough to say that this was a 'great' quarter for AMZN, as the company still lost money despite adding $3bn in revenue and improving gross margins by 340bp. But relative to expectations, it was killer. Specifically, EBIT came in at $255mm, which compares to guidance of -$450mm to +$50mm. That's particularly impressive given that the international business posted a 1600bp hit in reported sales growth due to FX -- the biggest hit ever for AMZN.  


When all is said and done, we think that the AMZN debate is finally getting interesting. It's been a stock that trades at a stratospheric multiple of earnings (about 370x today), but invests and competes away its profit/earnings to gain share. By our math, today AMZN accounts for about 15% of all online spending. At some point sales growth will slow, share will find its final resting place, and AMZN will blow-out its margins. That's when we see the real earnings power of the company. Looked at a different way, Wal-Mart accounts for about 7% of Brick & Mortar US Retail Sales. Based on that metaphor, one could make the argument that AMZN is twice as dominant in its core market as WMT is.


The bull case as we see it is that AMZN tops out at 20-22% of Online Retail Sales over 3-4 years, and takes margins up to 6% -- something that's well within reason. This year the company will earn something South of a buck. But a 6% margin in 2018 would result in EPS of about $15. That's about 25x earnings based on today's price. Not bad for one of the most dominant companies to ever do business on this planet.


This name is officially back on our Idea Bench as a Long.

Retail Callouts (4/24): AMZN, KSS, HBI, WMT, TGT, KORS - 4 24 chart1


KSS - Kohl's and Gaiam Launch Yoga Line in NYC


Takeaway: KSS pulled out all the stops yesterday to launch it's new Yoga line with Gaiam and Two Fit Moms in NYC. The ironic part of the marketing equation is that KSS doesn't have a store in Manhattan proper. Yes, this will probably get picked up by national media and there was a social media campaign behind the event, but we'd think that KSS would leverage an event like this into building awareness and goodwill with people who actually shop at the store. As far as the Yoga play is concerned - nearly every retailer out there has some answer to the 'athleisure' trend. TGT has champion, DKS added Calia with Carrie Underwood this year, Victoria Secret and Gap have done it in house. At this point, it's not a differentiator unless the brand is a leader in the space. Gaiam has been a player in the equipment space mostly in the mid-tier mass space, but has very little exposure to the apparel side of the Yoga/Athletic market. It may keep some KSS shoppers in house, but we don’t see how it’s a major traffic driver for the company.

Retail Callouts (4/24): AMZN, KSS, HBI, WMT, TGT, KORS - 4 24 chart2


HBI - Numbers Fine. Outlook Cloudy. We'd Avoid it.


We wouldn't own HBI here, and our sense is that the management team wouldn't disagree given the wave of insider selling we've seen in recent weeks,  To buy the stock at 15.5x EBITDA, you need to believe that the company is sandbagging on accretion from its deals and that real numbers are considerably higher. We're not making that bet until Rich Noll does, especially with the SIGMA reading going the wrong way.


The organic growth rate was -3.3% excluding the $184mm from DB Apparel. There were a few puts and takes on the top line in the quarter, but the most notable was that one of the company’s big accounts drew down its inventory position.  It's likely Wal-Mart or Target -- with our bet on WMT. The reality is that WMT took up wages 25% above minimum wage and it has to pay for this somehow. TGT took up wages to a lesser degree, and will certainly look for vendors to shoulder the cost given that consumers won't.


Management selling an expensive stock while at least one major customer 'adjusts inventory levels' = a pretty big deflator to the best bull thesis.

Retail Callouts (4/24): AMZN, KSS, HBI, WMT, TGT, KORS - 4 24 chart3





KORS - Luxury brand Michael Kors strikes back at Quebec counterfeiters



WMT - Bonuses for Wal-Mart top execs now tied to sales growth



U.S. House passes cyber-threat information bill



Swire, Simon, Whitman in Miami Venture



LB - Victoria's Secret creates a new holiday for women



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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.


  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.  



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.



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



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






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



  • 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


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 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.


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.



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.


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.



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.



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”.



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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