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BABA: Stumbling into the Party (Barron's)

Takeaway: We spoke with Barron's at length on our bearish BABA thesis back in April. Thankfully, we weren't mentioned when it twisted our analysis.

Editor's note: This brief research note below was written earlier today by our Internet & Media analyst Hesham Shaaban. If you're an institutional investor interested in learning more about how you can subscribe to his research please email to sales@hedgeye.com.

BABA: Stumbling into the Party (Barron's) - Alibaba cartoon 01.29.2015

KEY POINTS

  1. ARRIVING LATE TO THE PARTY: There isn't much that we all didn't already know.  GMV growth has slowed precipitously, the subsidiary structure is complicated, counterfeit goods are a concern, China macro is headwind, and so on and so forth.  But Barron's bear case is not so much on the above factors, but rather the implication that BABA is making up its reported metrics.  Its basis is largely driven off a quote from another BABA analyst, and a rather weak comparison of BABA's reported metrics to China demographic data.
  2. AFTER ONE TOO MANY: Barron's first takes issue with the fact that BABA's active buyers are roughly the same size as the Chinese e-commerce population reported by CNNIC (Dec 2014).  Remember that BABA has +80% market share, so this shouldn't be a surprise to any of us.  Second, Barron's twisted the demographic analysis we shared with them: that BABA's average consumer spends well in excess of what the average Chinese consumer could afford.  That doesn't mean that BABA is fudging the numbers as the article implies, it just means that China's Elite and/or Group Buying is driving BABA's GMV.  We explained this to the author, he chose to omit it.

 

Note that we have covered our short position in BABA, but we have included a set of notes below that covers the major themes behind our bearish thesis.  Let us know if you have any questions, or would like to discuss in more detail.  

 

Hesham Shaaban, CFA
203-562-6500
hshaaban@hedgeye.com
@HedgeyeInternet 

 

 

BABA: What the Street is Missing
11/26/14 08:03 AM EST
[click here]

 

BABA: Model Facing Secular Pressure
12/04/14 09:17 AM EST
[click here]

 

BABA: The Mobile Debate
03/04/15 10:34 AM EST
[click here]

 

BABA: Solid Pushback → Same Conclusion
03/31/15 08:12 AM EDT
[click here]


BABA: Stumbling into the Party (Barron's)

Takeaway: We spoke with Barron's at length on our bearish BABA thesis back in April. Thankfully, we weren't mentioned when it twisted our analysis.

KEY POINTS

  1. ARRIVING LATE TO THE PARTY: There isn't much that we all didn't already know.  GMV growth has slowed precipitously, the subsidiary structure is complicated, counterfeit goods are a concern, China macro is headwind, and so on and so forth.  But Barron's bear case is not so much on the above factors, but rather the implication that BABA is making up its reported metrics.  Its basis is largely driven off a quote from another BABA analyst, and a rather weak comparison of BABA's reported metrics to China demographic data.
  2. AFTER ONE TOO MANY: Barron's first takes issue with the fact that BABA's active buyers are roughly the same size as the Chinese e-commerce population reported by CNNIC (Dec 2014).  Remember that BABA has +80% market share, so this shouldn't be a surprise to any of us.  Second, Barron's twisted the demographic analysis we shared with them: that BABA's average consumer spends well in excess of what the average Chinese consumer could afford.  That doesn't mean that BABA is fudging the numbers as the article implies, it just means that China's Elite and/or Group Buying is driving BABA's GMV.  We explained this to the author, he chose to omit it.

 

Note that we have covered our short position in BABA, but we have included a set of notes below that covers the major themes behind our bearish thesis.  Let us know if you have any questions, or would like to discuss in more detail.  

 

Hesham Shaaban, CFA


@HedgeyeInternet 

 

 

BABA: What the Street is Missing
11/26/14 08:03 AM EST
[click here]

 

BABA: Model Facing Secular Pressure
12/04/14 09:17 AM EST
[click here]

 

BABA: The Mobile Debate
03/04/15 10:34 AM EST
[click here]

 

BABA: Solid Pushback → Same Conclusion
03/31/15 08:12 AM EDT
[click here]


What’s Moving Oil Prices? Supply And Demand or The Dollar?

 

In response to a subscriber’s question on The Macro Show this morning, Hedgeye CEO Keith McCullough explains his thinking and process on the move in oil prices.

 

Subscribe to The Macro Show today for access to this and all other episodes. 

 

Subscribe to Hedgeye on YouTube for all of our free video content.

 


the macro show

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Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

McCullough: Quick Thought Heading Into Thursday's Fed Meeting

Takeaway: Bets continue to mount on a dovish Fed meeting…

Here’s a quick, general market observation: the U.S. stock market looks increasingly suspect heading into Thursday’s Fed meeting. (I can get you to 32 VIX, no problem).

 

Question: What if people start reading "bad" economic news as bad?

 

McCullough: Quick Thought Heading Into Thursday's Fed Meeting - Fed tightening cartoon 09.09.2015

 

If the Fed goes dovish (they should), our omnipotent policymakers will have to tell the truth about a slowing economy.

 

That should scare people.

 

On a related note, the US Dollar Index closed on its low for the week (down -1.1% ). What’s most interesting about that is that on 30-day correlation, the S&P 500 has a POSITIVE correlation to USD of +0.8.

 

In other words, a dovish Fed could be bad news for stocks.

 

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Monday Mashup

Monday Mashup - CHART 1

 

RECENT NOTES

9/11/15 REPLAY | GOING LONG UNFI BLACK BOOK

9/04/15 GIS | Sends the Jolly Green Giant Packing

9/02/15 HSY | THE CURRENT SET UP IS LEANING LONG

8/31/15 HAIN | LOW QUALITY & INCREASED BUSINESS RISK

 

RECENT NEWS FLOW

Friday, September 11

MNST | Board of Directors have authorized a new share repurchase program of up to $500mm (click here for article)

PEP / SODA | PepsiCo is expanding its distribution partnership with SodaStream (click here for article)

 

Thursday, September 10

MDLZ | Provided an update on cost savings initiative and reaffirmed 2015 guidance (click here for article)

 

Wednesday, September 9

FLO | Announced the acquisition of Alpine Valley Bread Company, for $120mm in cash. FLO anticipates FY16 sales for the Alpine business to be $85mm - $95mm, the business has been growing at a CAGR of 51% over the last three years (click here for article)

 

Tuesday, September 8

MKC | Plans to expand organic and non-GMO offerings in 2016 (click here for article)

Angie’s | Adding popcorn production capacity in Reno, NV as the competition in RTE-popcorn heats up (click here for article)

 

SECTOR PERFORMANCE

Food and organic stocks that we follow outperformed the XLP last week. The XLP was down -0.4% last week, the top performers on a relative basis from our list were B&G Foods (BGS) and United Natural Foods (UNFI) posting increases of +6.3% and +4.7%, respectively. The worst performing company on a relative basis on our list was Lifeway (LWAY), which was down -2.8%.

Monday Mashup - CHART 2

 

QUANTITATIVE SETUP

From a quantitative perspective, the XLP is bearish on a TRADE and TREND duration.

Monday Mashup - CHART 3

 

Food and Organic Companies

Monday Mashup - CHART 4

Monday Mashup - CHART 5

Monday Mashup - CHART 6

 

Keith’s Three Morning Bullets

Bets continue to mount on a Dovish Fed meeting…

 

  1. USD – US Dollar Index closed on its low for the wk (-1.1% on the wk) and is seeing follow through selling this morning vs. both Euros and Yens – what’s most interesting about this to me is that on 30-day correlation, SPX has a POSITIVE correlation to USD of +0.8 (meaning a Dovish Fed could be bad for stocks)
  2. JAPAN – Down Dollar is definitely bad for Japanese Stocks – that INVERSE correlation has not changed; Yen +0.3% took another -1.6% out of the Nikkei overnight – it’s -12.5% in the last month with the US Dollar -2.7% (and Yen +3.8%)
  3. UST 2yr – yield tested a “breakout” above 0.75% for the 6th time in 6 months last wk… and failed; back down to 0.71% on Dovish Fed spec this morning and, with Fed Fund Futures this low, I still think the Fed could train wreck macro markets if they tighten

 

SPX immediate-term risk range = 1; UST 10yr Yield 2.13-2.24%

 

Please call or e-mail with any questions.

 

Howard Penney

Managing Director

 

Shayne Laidlaw

Analyst

 


MONDAY MORNING RISK MONITOR | LESS BAD IN THE SHORT TERM, BUT THE LT REMAINS NEGATIVE

Takeaway: Last week some positives, but mostly negatives with the intermediate term framework remaining decidedly negative.

Key Takeaway:

Risk parameters remain decidedly negative over the intermediate term, but appear to have struck a balance between positive and negative in the shorter term and longer term.

 

Notable events last week included the US Jobs report, which saw only 173k jobs added in August, less than the 220k expected and China's downward revision to GDP for 2014 to 7.3% from 7.4%. On the flip side, expectations for Chinese stimulus created some optimism and junk bonds saw a small bounce . Additionally, the FOMC meeting announcement coming this week added further uncertainty to the mix.

 

We continue to highlight China as our biggest concern with Chinese steel prices continuing to fall.


Current Ideas:


MONDAY MORNING RISK MONITOR | LESS BAD IN THE SHORT TERM, BUT THE LT REMAINS NEGATIVE - RM19

 

Financial Risk Monitor Summary

• Short-term(WoW): Positive / 3 of 12 improved / 1 out of 12 worsened / 8 of 12 unchanged
• Intermediate-term(WoW): Negative / 2 of 12 improved / 5 out of 12 worsened / 5 of 12 unchanged
• Long-term(WoW): Negative / 2 of 12 improved / 2 out of 12 worsened / 8 of 12 unchanged

MONDAY MORNING RISK MONITOR | LESS BAD IN THE SHORT TERM, BUT THE LT REMAINS NEGATIVE - RM15

 

1. U.S. Financial CDS – Swaps tightened for 16 out of 27 domestic financial institutions with an average move of -1 bps tighter.

Tightened the most WoW: AXP, MS, MTG
Widened the most WoW: SLM, MET, ACE
Tightened the most WoW: CB, ACE, ALL
Widened the most MoM: SLM, WFC, MET

MONDAY MORNING RISK MONITOR | LESS BAD IN THE SHORT TERM, BUT THE LT REMAINS NEGATIVE - RM1

 

2. European Financial CDS – Swaps tightened for the most part in Europe last week. The median move was a -3 bps, while Greek bank CDS were outliers, tightening between -341 bps and -3087 bps.

MONDAY MORNING RISK MONITOR | LESS BAD IN THE SHORT TERM, BUT THE LT REMAINS NEGATIVE - RM2

 

3. Asian Financial CDS – Swaps for Chinese banks widened between +1 bps and +4 bps last week as the country revised its 2014 growth rate down from 7.4% to 7.3%. 

MONDAY MORNING RISK MONITOR | LESS BAD IN THE SHORT TERM, BUT THE LT REMAINS NEGATIVE - RM17

 

4. Sovereign CDS – Sovereign Swaps were flat to tighter last week. Italian sovereign swaps tightened the most, by -4 bps to 112.

MONDAY MORNING RISK MONITOR | LESS BAD IN THE SHORT TERM, BUT THE LT REMAINS NEGATIVE - RM18

 

MONDAY MORNING RISK MONITOR | LESS BAD IN THE SHORT TERM, BUT THE LT REMAINS NEGATIVE - RM3

 

MONDAY MORNING RISK MONITOR | LESS BAD IN THE SHORT TERM, BUT THE LT REMAINS NEGATIVE - RM4


5. Emerging Market Sovereign CDS – Emerging market swaps were mixed last week. Brazilian sovereign swaps widened by 16 bps to 395. Meanwhile, Russian swaps tightened by -15 bps to 370.

MONDAY MORNING RISK MONITOR | LESS BAD IN THE SHORT TERM, BUT THE LT REMAINS NEGATIVE - RM16

MONDAY MORNING RISK MONITOR | LESS BAD IN THE SHORT TERM, BUT THE LT REMAINS NEGATIVE - RM20

6. High Yield (YTM) Monitor – High Yield rates fell 7 bps last week, ending the week at 7.09% versus 7.15% the prior week.

MONDAY MORNING RISK MONITOR | LESS BAD IN THE SHORT TERM, BUT THE LT REMAINS NEGATIVE - RM5

7. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 5.0 points last week, ending at 1870.

 

MONDAY MORNING RISK MONITOR | LESS BAD IN THE SHORT TERM, BUT THE LT REMAINS NEGATIVE - RM6

 

8. TED Spread Monitor – The TED spread was unchanged last week at 31 bps.

 

MONDAY MORNING RISK MONITOR | LESS BAD IN THE SHORT TERM, BUT THE LT REMAINS NEGATIVE - RM7

 

9. CRB Commodity Price Index – The CRB index was unchanged last week at 197. As compared with the prior month, commodity prices have decreased -0.6%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.


MONDAY MORNING RISK MONITOR | LESS BAD IN THE SHORT TERM, BUT THE LT REMAINS NEGATIVE - RM8


10. Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread was unchanged at 10 bps.


MONDAY MORNING RISK MONITOR | LESS BAD IN THE SHORT TERM, BUT THE LT REMAINS NEGATIVE - RM9


11. Chinese Interbank Rate (Shifon Index) –  The Shifon Index fell 13 basis points last week, ending the week at 1.90% versus last week’s print of 2.03%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.


MONDAY MORNING RISK MONITOR | LESS BAD IN THE SHORT TERM, BUT THE LT REMAINS NEGATIVE - RM10


12. Chinese Steel – Steel prices in China fell 1.5% last week, or 35 yuan/ton, to 2225 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity and, by extension, the health of the Chinese economy.


MONDAY MORNING RISK MONITOR | LESS BAD IN THE SHORT TERM, BUT THE LT REMAINS NEGATIVE - RM12


13. 2-10 Spread – Last week the 2-10 spread widened to 148 bps, 7 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.


MONDAY MORNING RISK MONITOR | LESS BAD IN THE SHORT TERM, BUT THE LT REMAINS NEGATIVE - RM13


14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 2.7% upside to TRADE resistance and 4.5% downside to TRADE support.


MONDAY MORNING RISK MONITOR | LESS BAD IN THE SHORT TERM, BUT THE LT REMAINS NEGATIVE - RM14


Joshua Steiner, CFA


Jonathan Casteleyn, CFA, CMT

 


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