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Got $VIX? Risk Happens Slowly, Then All At Once

For much of the past 3.5 years, the VIX has been range-bound between 10-20, with occasional blips to 25 on front-month contracts.

 

Got $VIX? Risk Happens Slowly, Then All At Once  - z volatility

 

And then it happens...

 

Crash!

Boom!

Bang!

 

Yesterday’s close of 36.02 confirms a bullish phase transition for U.S. equity volatility that is unlikely to go away anytime soon. It's rocketed +213% higher in just one month. The move was eerily reminiscent of the 8/8/11 rip in the VIX that preceded several months of 30+ VIX closes.

 

With the Fed gearing up to make a policy mistake in the coming months, could we be looking at a similar setup?


LNKD: Notes from 10-Q & IR

Takeaway: Post-print color from the 10-Q & IR below. Fundamental long thesis in tact, but a sheepish mgmt team remains the risk.

KEY POINTS

  1. DISPLAY EVAPORATES? IR confirmed that the $34M organic guidance cut was essentially all due to display advertising, citing lack of visibility.  Note that display advertising generated $48M in 1H15 revenues, so by cutting 2015 guidance by $34M, mgmt is essentially assuming that display revenues evaporates overnight in 2H15, which obviously doesn't make sense since display was flat q/q in 2Q15, and 4Q is a seasonally strong quarter.  In short, mgmt just wanted display ad revenues out its guidance.  
  2. LYNDA GROWING FASTER THAN EXPECTED: Mgmt suggested during the Lynda acquisition announcement that Lynda generated $150M in 2014 revenue, "growing at about mid-20% range".  According to data from the 10-Q, Lynda on a stand-alone basis generated $87M in 1H15 revenue (38% y/y growth).  However, we're not sure how that relates to Lynda guidance because of the unknown acquisition accounting impact on deferred revenues.
  3. SALESFORCE RAMP CONTINUES:  According to the 10-Q, Sales & Marketing headcount grew 61% y/y in 2Q15, an acceleration from 51% growth in 1Q15.  IR suggested that ~30% of its ~500 acquired Lynda employees were S&M personnel; after backing that out, we estimate that S&M headcount grew 52%-54% y/y.  We see the ongoing salesforce ramp as an investment given the improving selling environment (see note below for detail and tracker).
  4. ARPU IMPACT MOSTLY FX: IR attributed the 2Q15 slow down in ARPU primarily to Fx, which hampered revenues by 3%. That is the same percentage mgmt stated for 1Q15, so that can't fully explain the slowdown.  We suspect that the surge in net LCS account growth also contributed to the slowdown.  We did learn that 2Q15 net LCS account growth tilted toward SMBs, which could be a slight headwind to ARPU.  However, Fx comps ease in 2H15.
  5. NET-NET, COMES DOWN TO MGMT: No incremental changes to our thesis post 10-Q and IR.  We continue to see upside to 2015 estimates from the ongoing investment in its salesforce into an improving selling environment, which we see as a coiled spring.  However, a sheepish mgmt team remains the concern.  There can't be any ambiguity to guidance on its next print after crying wolf two quarters in a row.  We have relayed that message to company; hopefully it gets that this time around.

 

See the note below for supporting detail/analysis on our long thesis.  Let us know if you have any questions or would like to discuss further.

 

Hesham Shaaban, CFA


@HedgeyeInternet 

  

LNKD: New Best Idea (Long)
07/14/15 08:00 AM EDT
[click here]


[Unlocked] Keith's Daily Trading Ranges

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

[Unlocked] Keith's Daily Trading Ranges - Slide1

BULLISH TRENDS

[Unlocked] Keith's Daily Trading Ranges - Slide2

BEARISH TRENDS

[Unlocked] Keith's Daily Trading Ranges - Slide3

[Unlocked] Keith's Daily Trading Ranges - Slide4

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[Unlocked] Keith's Daily Trading Ranges - Slide7

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[Unlocked] Keith's Daily Trading Ranges - Slide9

[Unlocked] Keith's Daily Trading Ranges - Slide10


investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

FINANCIALS SENTIMENT SCOREBOARD - First American (FAF)

Takeaway: We are flagging First American (FAF - Score: 17) as a long on sentiment and short interest.

This morning we are publishing our updated Hedgeye Financials Sentiment Scoreboard in conjunction with the release of the latest short interest data last night. Our Scoreboard now evaluates over 300 companies across the Financials complex.

 

The Scoreboard combines buyside and sell-side sentiment measures. It standardizes those measures to an index of 0-100, where 100 is the best possible sentiment ranking and 0 is the worst. Our analysis shows that a contrarian strategy can be employed successfully by taking the other side of stocks with extreme readings in sentiment, either bullish or bearish. Once sentiment reaches these extreme levels, it becomes a very asymmetric setup wherein expectations become too high or too low.  

 

We’ve quantified the tipping points for high and low sentiment. Specifically, we've found that scores of 20 or lower have a positive, average expected return while scores of 90 or greater are more likely to underperform.

 

Specifically, our backtest of 10,400 observations over a 10-year period found that stocks with scores of 0-10 went on to produce an average absolute return of +23.9% over the following 12-month period. Scores of 10-20 produced an average absolute return of +11.9%. At the other end of the spectrum, stocks with sentiment scores of 90-100 produced average negative absolute returns of -10.3% over the following 12-months.

 

The first table below breaks the 300 companies into a few major categories and ranks all the components on a relative basis. The second table breaks the group into smaller subsectors and again gives them relative rankings within those subsectors. 

 

This week we're flagging First American (FAF - Score: 17) as a long as our 3Q15 call to "hide out" in Housing favors the title insurers. We are also highlighting Federated Investors (FII - Score: 13) as screening well from both a sentiment/short interest and a fundamental research standpoint (see our latest FII research HERE). FII stock is one of the few asset management stocks that is up year-to-date in 2015.

 

FINANCIALS SENTIMENT SCOREBOARD - First American (FAF) - Sentiment1

 

FINANCIALS SENTIMENT SCOREBOARD - First American (FAF) - Sentiment2

 

FINANCIALS SENTIMENT SCOREBOARD - First American (FAF) - Sentiment3

 

The following is an excerpt from our 90 page black book entitled “Betting Against the Herd: Generating Alpha From Sentiment Extremes Across Financials.”

 

Let us know if you would like to receive a copy of our black book, which explains this system and its applications.

 

BUYS / LONGS: Financials with extremely low sentiment readings of 20 and below on our index (0-100) show strong average outperformance in absolute and relative terms across 3, 6 and 12 month subsequent durations.  Stocks with sentiment ratings of 20 or lower rise an average of +15.1% over the next 12 months in absolute terms.   

 

SELLS / SHORTS: Financials with extremely high sentiment readings of 90 and above on our proprietary sentiment index (0-100) demonstrate a marked tendency to underperform in absolute and relative terms across 3, 6 and 12 month subsequent durations.  Stocks with sentiment ratings of 90 or greater fall in value an average of -10.3% over the next 12 months in absolute terms. 

 

 

FINANCIALS SENTIMENT SCOREBOARD - First American (FAF) - Absolute 12 mo

 

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT


Euro, DAX and Volatility

Client Talking Points

EUR

The EUR/USD is trading down 90 basis points this morning as the prospect of the ECB’s Mario Draghi talking down the currency at the Jackson Hole meeting increases. “We’ll do whatever it takes” Part 2?  We continue to call for growth slowing in the Eurozone (Q3 macro theme = #EuropeSlowing). We expect the Fed to raise rates ahead of the ECB and political and fiscal issues throughout the Eurozone to put downside support on the cross. This morning the ECB’s Vice President Vitor Constancio said the ECB will take further measures if it sees a significant risk to the outlook for inflation.

DAX

Down -5.8% week-over-week, the DAX index has been crushed along with its European peers, standing at a mere +2.5% year-to-date. If Germany with its exporting powerhouse (46% of GDP) alongside a weakened EUR/USD can't offset itself from the pack, who can?  Our #EuropeSlowing call includes the ECB’s inability to move inflation far from the zero bound.  

VOLATILITY

For much of the past 3.5 years, the VIX has been range-bound between 10-20, with occasional blips to 25 on front-month contracts. Yesterday’s close of 36.02 confirms a bullish phase transition for U.S. equity volatility that is unlikely to go away anytime soon. The move was eerily reminiscent of the 8/8/11 rip in the VIX that preceded several months of 30+ VIX closes. With the Fed gearing up to make a policy mistake in the coming months, could we be looking at a similar setup?

 

**Tune into The Macro Show with Hedgeye CEO Keith McCullough at 9:00AM ET - CLICK HERE

Asset Allocation

CASH 75% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 0%
FIXED INCOME 25% INTL CURRENCIES 0%

Top Long Ideas

Company Ticker Sector Duration
MCD

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).

PENN

"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. 

TLT

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

5 Reasons Why the Fed Won’t Raise Interest Rates in 2015 https://app.hedgeye.com/insights/46004-5-reasons-why-the-fed-won-t-raise-interest-rates-in-2015 … via @HedgeyeDJ

@KeithMcCullough

QUOTE OF THE DAY

Keep your eyes on the stars and your feet on the ground.

Franklin D. Roosevelt

STAT OF THE DAY

New Home Sales in July were New Home Sales were +5.4% month-over-month and +26% year-over-year.


CHART OF THE DAY: Homebuilders: Sector Quant | $ITB

Editor's Note: The chart and excerpt below are from today's Early Look. This morning's note was written by our U.S. Macro Analyst Christian Drake. For more info on subscribing click here.  

 

Is great not good?   If you can’t be long the best fundamental data in the USA (& best rate-of-change #’s in all of global macro), what can you be long?  

 

Gundlach now says “Watch Out Below”, Dalio now says the next big policy initiative may be easing, not tightening.  Hedgeye has been reiterating the bond bull and global growth-slowing call for ~9-months.  The asset allocation and prospective policy implications are largely implicit. 

 

CHART OF THE DAY: Homebuilders: Sector Quant | $ITB - HB CoD2


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