Client Talking Points
A massive move in cross-asset class volatility (one of the biggest in macro history) now has the USD in the position of bearish TRADE, bullish TREND – with EUR/USD risk range now = $1.12-1.16, will ECB President Mario Draghi be the news @JacksonHole and devalue again? BOJ guys don’t have it in their central planning playbook to let Yen run away from them from here either.
Gold is correcting this morning (alongside Treasuries) on the Global Equity bounce and maybe that’s sniffing out a Draghi move too – we’ll see, but we’re in wait and watch mode here on buying Gold as we would rather buy it at the low-end of my 1,131-1,168 range on a European or Japanese FX War move.
One of the most epic moves in U.S. Equity volatility, ever – and ever, given the 2008 and 2011 moves we risk managed through, is a long time - this is an absolute Phase Transition that will ultimately have to answer to growth expectations – risk range on VIX is now 29.03-47.13!
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Top Long Ideas
One of the ways that McDonald's is going to take market share back is through one of the most popular items on its menu—the Egg McMuffin. "I honestly believe that if there is a silver bullet, it’s all day breakfast for McDonald’s," says Restaurants Sector Head Howard Penney. "And I do believe they’re going down that road and they will do it."
Penney adds that we’ll probably know more about that at the November analyst meeting and what the breakfast potential will be. There’s obviously a lot of things that go around MCD doing breakfast (e.g. shrinking other parts of the menu, etc).
"We continue to like Penn National Gaming here due to stable regional gaming trends, better than expected quarterly and annual earnings, and the Plainridge and Jamul contribution to PENN’s two-year growth story," writes Hedgeye Gaming, Lodging & Leisure Sector Head Todd Jordan.
It was a very good week for those sitting behind the long-bond coming out of the FOMC minutes release on Wednesday. During a tumultuous 5-day stretch in which the S&P 500 fell over -5%, subscribers who followed our recommendation on TLT were sheltered from the market storm and gained almost +2%. Moreover, during the past month, TLT has gained +5.7% versus a -6.8% loss for the S&P 500 (a 1,200 basis point difference). In other words, it has paid handsomely to buck the consensus tide.
Three for the Road
TWEET OF THE DAY
FLASHBACK: 2.75% or 1.75%? https://app.hedgeye.com/insights/45978-flashback-2-75-or-1-75 … via @hedgeye
QUOTE OF THE DAY
Keep your eyes on the stars and your feet on the ground.
Franklin D. Roosevelt
STAT OF THE DAY
The average age of German citizens is 46, the average age is second only to Japan’s. One in 20 Germans is over 80 and by 2050 it will be one in six, according to UN data.
Takeaway: TWTR is risking long-term damage to its business model by trying to appease the street. Mgmt needs to shift gears before it’s too late.
- THE PROBLEM: Monetization is coming at the expense of user growth and retention. TWTR runs a CPC ad model, meaning the user must engage with TWTR’s ads in order to generate revenue. In order for TWTR to drive the level of revenue growth the street is expecting, it must continually introduce more and more ad load, which has historically pushed its more casual users away. In short, TWTR has been chasing good prints at the cost of potential life-time users. Longer-term, TWTR’s business model will be hampered by its cumulative churn, leading to a smaller user base to distribute ad load on to, hence lower potential revenues down the road.
- THE DATA: We have seen this dynamic playing out throughout TWTR’s reported history, with US MAUs and Ad Engagements (proxy for ad load) moving in opposite directions (see note below). We also ran a survey attempting to segment TWTR’s users by engagement levels (n=7,500). What we’ve found is almost 40% of respondents with a twitter account are no longer using the platform. Of those that do remain, roughly half do not use the platform daily, suggesting they are more casual users, hence more likely to churn off. The good news is that there is still room for user growth (estimated 38% US penetration), but not enough to support a model with elevated churn.
- THE CROSSROADS: TWTR needs to decide what matters more: appeasing near-term street expectations, or building a sustainable business model. The latter means that TWTR needs to prioritize the user; both attracting new users and reclaiming the ones that it has lost. We’re not sure exactly the best way go about doing that, but what we can say is TWTR can’t win the user while simultaneously chasing lofty consensus revenue expectations with rampant increases in ad load. Mgmt's approach to 2016 guidance will essentially tell us where its priorities lie; i.e. whether TWTR is a secular short or something we can potentially get behind. For now, we remain short.
TWTR: Are Acquisitions Enough?
03/17/15 08:50 AM EDT
Let us know If you have any questions or would like to discuss in more detail.
Hesham Shaaban, CFA
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