Hedgeye CEO Keith McCullough shares the top three things in his macro notebook this morning.
Hedgeye CEO Keith McCullough shares the top three things in his macro notebook this morning.
Takeaway: We are removing Goldman Sachs from Investing Ideas today.
Please be advised that we are removing Goldman Sachs from Investing Ideas today. Shares of Goldman have risen 3.6% since being added on 3/25 versus a 0.78% return for the S&P 500.
Below is a brief note from Hedgeye CEO Keith McCullough on the decision.
* * * * * * *
GS was a catalyst driven way (we thought they’d have a great quarter, and they did) to build up our Investing Ideas list when the US stock market was oversold. Now that a bad headline GDP report and an easier Fed are priced in, I want to reduce the size of the list – and this is one way to express that.
Our fundamental research view on Goldman Sachs (GS) has not changed. This is a portfolio/market timing call. Its generated the alpha we wanted.
The USD is hitting 2 month lows on the combination of what are now consensus expectations for an easier Fed and a big bounce in Greece (stocks v-bottomed off bombed out lows in Athens on the “no exit” headlines); if the Fed isn’t dovish enough today, the USD can easily bounce off this oversold signal.
It is hard to discern whether bonds are front-running a “not dovish enough” Fed, but the levels really matter here as we’ve seen plenty of bounces to lower-highs in rates for the last 16 months. Our immediate-term risk range for the UST 10YR is 1.85-2.02 and that’s as wide as the range has been in 2 months.
Asia experienced one of the weaker sessions in a while with Indonesia down another -2.5% (down -7.1% in 3 days), Australia -1.8%, and India continuing to break down (BSE Sensex is now bearish TREND signal) – Thailand unexpectedly cut rates and stocks dropped -0.8% there too.
|FIXED INCOME||30%||INTL CURRENCIES||4%|
The Dodge Construction Starts Index accelerated at its highest rate since 1982. The index was driven largely by non-building projects, which was 74% higher for the first three months compared to last year. The Architecture Billings Index (ABI), a survey of architects, increased ~3% month-over-month and ~5% year-over-year for March. The ABI Index typically leads nonresidential and residential construction spending by 9-12 months. More importantly, the ABI Index leads Manitowoc Crane Orders by 2 quarters. This suggests MTW’s crane sales should see a pickup in the first half of the year. MTW reports April 29th after the close. Earnings Call will be held at 10:00am eastern time the following day.
iShares U.S. Home Construction ETF (ITB) is a great way to play our long housing call. Housing went 4 for 4 in a data heavy calendar for the sector this week with demand improving across both the new and existing markets and the fledgling acceleration in price growth finding some positive confirmation. The builder stocks had a choppy week of performance as investors held mixed opinions of earnings reports and management commentary out of DHI and PHM but, from a fundamental data perspective, the Trend remains one of discrete improvement.
Ten-year rates dipped 12bps on the week (forward-looking growth expectations) and the USD got crushed for a 1.5% loss. Growth and inflation expectations get priced in AHEAD of the more dovish policy tone resulting from any sign of deterioration in the labor market. Wednesday’s Fed meeting will be the next catalyst that will steer the market’s expectation on forward-looking growth and inflation. We expect the dots (forward-looking federal fund rate expectations) to be pushed out….again.
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...During yesterday’s meeting, circa 3:15PM, one of our analysts slammed his laptop and left the room in a frenzy. This had nothing to do with Penney telling Hesham Shaaban to “embrace meditation” – one of his Best Short Ideas, Twitter (TWTR) was blowing up!
...While you can criticize Shaaban for literally never having presented a Best Long Idea (yet), he’s nailed the following names to the proverbial NHL playoff boards in the last 18 months (i.e. since we let him start publishing on his own names):
“Our greatest power is that we know that we don’t know.”
Do you really know what the Federal Reserve is going to say today? I don’t. If you do, with 100% certainty, please don’t call and/or email me with that information. I don’t want to go to jail.
Having witnessed some characters in this business take on orange-jump-suit-risk to get what some of them call “edge” (i.e. inside information), I’ve spent my entire career trying to build a #process that doesn’t need short-cuts (i.e. cheating).
That puts me in a position of really not knowing what I’m not supposed to know. Instead of selling you certainty, it forces me to embrace uncertainty… and probability weight each and every decision I make based on the most recent data and market pricing.
Back to the Global Macro Grind…
We had our company meeting yesterday. We do one every quarter. It’s usually lunch and 3-4 hours of thought leaders at Hedgeye thinking out loud about #process: what’s working; what’s not – what can we do next. #BestPractices
The best part about these meetings is the element of surprise. When you have 57 thoughtful people in a room who have decided to open their minds to learning, a lot can happen in an afternoon. Who can really make you challenge yourself and think?
Our veterans (Daryl Jones, Howard Penney, and Tom Tobin) stepped up and delivered the wood on that front yesterday. In fact, I don’t think I’ve ever seen objective and critical self-reflection like that – back to back to back.
You can call us a cult. But we call ourselves a team.
During yesterday’s meeting, circa 3:15PM, one of our analysts slammed his laptop and left the room in a frenzy. This had nothing to do with Penney telling Hesham Shaaban to “embrace meditation” – one of his Best Short Ideas, Twitter (TWTR) was blowing up!
Fat finger on the pre-market close release. Stock down 18% in a New York minute. Halted. #Boom!
And the Hedgeyes smiled.
There’s something about building an independent think tank that prides itself in SELL ideas that gets me up in the morning. As most of you know, building a repeatable #process on the short side is not an easy thing to do. That’s why we’re doing it.
At one point in the QA session of the meeting, I was asked what our “pipeline of prospective analyst hires” was looking like. And, for the first time, instead of rattling off names of people we’re interviewing, I said I just wanted to see more of our rookies play.
Not only do the “young” guys/gals at this firm get how to not be certain about anything, they know how to build a battle-tested #process that allows them to probability weight both the accuracy and timing of their research ideas.
While you can criticize Shaaban for literally never having presented a Best Long Idea (yet), he’s nailed the following names to the proverbial NHL playoff boards in the last 18 months (i.e. since we let him start publishing on his own names):
In other words, what he really needs next is to get run-over in one of these things. Because no analyst I have ever worked with stays this good (on the short side) for this long, in an up market!
I obviously don’t want the man to get crushed. But reality is that everyone gets tagged in this business, eventually – and that’s how we all learn. But if you listen to Shaaban talk through his ideas, he’s constantly talking about not only what he doesn’t know… but what the management teams he follows don’t know either.
And that, my friends, is how you get really good at this game.
That’s how you beat the guys who take the short-cuts, cheat, and have no other process than asking “management” what the numbers are. When management doesn’t know what they don’t know – the fundamentally driven research analyst who thinks for himself wins.
As for what macro “management” (The Fed) really knows… Cyclically, do they get that the US is #LateCycle? Secularly, do they get global demand is slowing due to #DemographicYields? We’ll see.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 1.85-2.02% (bearish)
SPX 2095-2126 (bullish)
RUT 1 (bullish)
DAX 118 (bullish)
VIX 11.89-14.82 (neutral)
USD 95.63-97.83 (bullish)
EUR/USD 1.06-1.10 (bearish)
YEN 118.55-120.81 (bearish)
Oil (WTI) 52.61-58.30 (bearish)
Natural Gas 2.44-2.62 (bearish)
Gold 1181-1215 (neutral)
Copper 2.65-2.83 (bearish)
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
Takeaway: Comping the 2Q13 Supply Shock will remain its Achilles heel until it finds better way to monetize its model. That won't be easy
While we were expecting a light 2Q15 guidance, which missed consensus by $61M (11%) at the midpoint, TWTR also missed 1Q revenues by $21M (4%), and cut full-year revenue guidance by $100M. Management highlighted pressure on its direct response ad products in 1Q15, citing more stringent ad engagement requirements and somewhat faltering demand from rising ad prices.
But the real culprit was decelerating ad engagements across its entire business (see point 2), and consensus estimates that weren't adequately considering from non-recurring 1H14 tailwinds (Olympics/World Cup). Collectively, we believe this was the source of the shortfall in 2Q15 guidance.
TWTR’s monetization strength had been driven by a rampant increase in ad load starting in 2013 (what we call the 2Q13 Supply Shock), which we believe was a sudden and sustained surge in ad load that drove much of TWTR's revenue growth through 2014 (more detail in our note, and S-1 excerpt below).
TWTR: What the Street is Missing
05/19/14 09:09 AM EDT
TWTR S-1/A MD&A (11/4/2013): “The decreases in cost per ad engagement over these periods [3Q12-3Q13] were primarily due to an increase in supply of advertising inventory available in our auctions, which was partially offset by increased demand for our Promoted Products. Supply of advertising inventory increased as we expanded the distribution of our Promoted Products to our mobile applications and additional markets outside of the United States in 2012. The increase in advertising inventory provided us with additional opportunities to place ads on our platform.”
Now TWTR is seeing a precipitous slowdown in average ad engagements, which means it must find a way to drastically improve its ad targeting ability, or increase ad load at a disproportionately higher rate to achieve comparable ad engagements. That leads to a bigger problem..
We were highly encouraged by the surge in Ad Pricing (CPE) in 1Q15, which not only a budding growth driver, but a testament to advertiser demand and improving products mix. However, we don’t believe that can turn the tide on its own.
TWTR will need to beat both revenue and MAU expectations in perpetuity to appease the street going forward; yet its reported metrics suggest those two factors are working against each other. So while TWTR could gamble on a muted surge in ad load, with less potential risk of a material drawdown in CPE from the tailwinds mentioned above, there is a chance it would sacrifice MAU growth at the same.
In short, TWTR appears to have limited options, with even less breathing room from consensus.
Let us know if you have any questions, or would like to discuss in more detail.
Hesham Shaaban, CFA