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TWTR: More of the Same?

Takeaway: Dorsey is permanent & Bain may be running the show. This is a non-event till mgmt shows us how it will address the street moving forward

KEY POINTS

  1. PERMANENTLY DISTRACTED? Jack Dorsey, co-founder and interim CEO, has been named as TWTR's permanent CEO.  Dorsey will also remain CEO of Square, which is expected to go public soon.  We're not sure this is the smartest move for a company that doesn't know how to talk to the street.  The first time that TWTR disappoints, Dorsey's split role will likely be the first thing the street points to; especially if Square goes public anytime soon.
  2. BAIN RUNNING THE SHOW? We suspect Dorsey will be more of a figurehead given his split role, suggesting TWTR's new COO and current monetization head, Adam Bain, will be taking the reigns.  While TWTR has experienced considerable revenue growth under his watch, it has been primarily driven by rampant increases in ad load, which has led to a level of user attrition that may be turning into a structural issue (see note below).  That said, more of the same isn't the answer, but that really depends on what the new mgmt team's priorities are into 2016.
  3. MORE OF THE SAME? Collectively, the C-suite shakeup is a non event until we know how management will address street expectations moving forward.  If TWTR guides 2016 revenue inline with the street, it's basically 2015 again. TWTR would be chasing near-term upside at the expense of further longer-term damage to its model (user churn), and will likely disappoint on lofty consensus expectations for 2016 advertising revenue regardless.  If TWTR chooses to rebase expectations early, it would buy mgmt enough breathing room to ease up on the ad load and prioritize MAU growth, which will ultimately define its long-term prospects.

 

See the note below for our most recent thoughts on TWTR.  Let us know if you have any questions, or would like to discuss in more detail.

 

Hesham Shaaban, CFA


@HedgeyeInternet  

 

 

TWTR: The Crossroads  (User Survey: n=7,500)
08/25/15 07:48 AM EDT
[click here


TIF: Adding Tiffany to Investing Ideas (Short Side)

Takeaway: We are adding Tiffany to the short side.

Please be advised that we are adding Tiffany (TIF) to the short side today.

 

According to Hedgeye CEO Keith McCullough, "Tiffany's catalyst is the cycle. It's slowing. And I'll be shocked if the ISM Services report (in 5 mins) doesn't confirm that." (Editor's note: It just did.)

 

Our Retail team will send out a full stock report later this week outlining our bearish thesis on the luxury jewelry and specialty retailer.

 

TIF: Adding Tiffany to Investing Ideas (Short Side) - zz tif


RTA Live: October 5, 2015

 


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Retail Callouts (10/5): Hedgeye Retail Idea List, WMT Headcount Reduction

Takeaway: Wayfair moving up on short list. ULTA added to Long Bench. Wal-Mart scratching and clawing for every basis point of margin.

Retail Idea List

Retail Callouts (10/5): Hedgeye Retail Idea List, WMT Headcount Reduction - 10 5 chart1

**Moved Wayfair higher on our list of Core Shorts as conviction grows.

**Added ULTA to Long Bench. We were involved on the short side over a year ago as more of a tactical trade. But we're diving deep into the underlying long-term drivers now. Stay tuned.

 

WMT - Wal-Mart confirmed Friday it is eliminating 450 positions within its Arkansas HQ. This represents a 2.5% headcount reduction at the home office.

(http://www.chainstoreage.com/article/walmart-cuts-0-jobs-headquarters)

 

2015 has been less than a banner year for WMT. For starters the stock is down 24% YTD as the company took one on the chin as it invested in both its people and e-comm capabilities. The new minimum wage standard at $9.00 alone will cost the company $0.24 (up from the original guidance of $0.20) add on top of that investments in e-comm and Fx pressure and we get to an earnings growth rate for the year of -10% at the mid-point of the guide.

 

We've seen Walmart try to offset these costs over the past year by renegotiating terms with its vendors (not once but twice), cutting some 24hr locations, and reducing employee hours. Now its going after its headcount at HQ. The 2.5% reduction is just a drop in the bucket compared to the 13% cut TGT announced earlier this year. But, its pretty obvious that WMT is scratching and clawing for every bps of margin. That's bad news for the rest of retail.

 

SPLS - Staples announces it will not be open on Thanksgiving Day stating it want to allow customers, and employees to spend time with their families.  Staples stores had been open the prior two Thanksgivings.

(http://investor.staples.com/phoenix.zhtml?c=96244&p=irol-newsArticle&ID=2092307)

 

US Justice department is launching a new strategy to deal with counterfeit goods and cyber attacks.  Plan to include working with third party marketplaces and providing funding to local law enforcement in key jurisdictions.

(http://footwearnews.com/2015/business/retail/us-government-cyber-crimes-counterfeit-hacking-158559/)

 

W - Wayfair entering into agreement to have Alliance Data provide its private label credit card services.

(http://finance.yahoo.com/news/alliance-data-partners-wayfair-launch-113000042.html)

 

HBC - Simon Property & Hudson's Bay JV closed on acquisition of GALERIA Kaufhof properties.

(http://investor.hbc.com/releasedetail.cfm?ReleaseID=935020)

 

APP - American Apparel files Chapter 11 bankruptcy.  It reached an agreement with 95% of its secured lenders to implement a pre-arranged financial restructuring.

(http://investors.americanapparel.net/releasedetail.cfm?ReleaseID=935021)

 

H&M - H&M's first store in India sees impressive turnout for the opening.  Store is 25,000 SqFt in New Delhi's Citywalk mall.

(http://wwd.com/retail-news/mass-off-price/hm-makes-impact-on-india-retail-10251243/)


MONDAY MORNING RISK MONITOR | SLOWDOWN ON THE HOMEFRONT?

Takeaway: Risk came home last week as what had been fears primarily around Chinese contagion became fears of a domestic slowdown.

MONDAY MORNING RISK MONITOR | SLOWDOWN ON THE HOMEFRONT? - HC

 

Key Takeaway:

Last week, what had been predominantly an international risk focus became a global one with the slowdown in China converging with an especially soft U.S. jobs report for September. We've been flagging in our weekly initial jobless claims note that the US economy is late cycle. The September NFP report obviously raises the stakes.

 

Beyond the weak U.S. jobs report, the latest Chinese PMI reading showed the fastest deterioration since March 2009 and Japanese industrial production fell short of expectations last week. In response, CDS spreads widened globally and high yield credit deteriorated further with the YTM rising by 51 bps to 8.16% - the highest level since 2012 - while the 10-year Treasury yield came in sharply. #Risk-Off

 

Risk indicators in our heatmap below are decidedly negative on the short and intermediate term. Long-term indicators remain mixed.

Current Ideas:


MONDAY MORNING RISK MONITOR | SLOWDOWN ON THE HOMEFRONT? - RM19

 

Financial Risk Monitor Summary

• Short-term(WoW): Negative / 1 of 12 improved / 4 out of 12 worsened / 7 of 12 unchanged
• Intermediate-term(WoW): Negative / 1 of 12 improved / 8 out of 12 worsened / 3 of 12 unchanged
• Long-term(WoW): Negative / 2 of 12 improved / 2 out of 12 worsened / 8 of 12 unchanged

MONDAY MORNING RISK MONITOR | SLOWDOWN ON THE HOMEFRONT? - RM15

 

1. U.S. Financial CDS – Swaps widened for 20 out of 27 domestic financial institutions as the jobs report came in at a disappointing 142k jobs added in September. Meanwhile, the challenges continue to mount for Sallie Mae (SLM) as the CDS blew out by a further +105 bps to 732 bps, coinciding with the CFPB announcing it will explore new regulations for student loan servicers.


Tightened the most WoW: ALL, CB, ACE
Widened the most WoW: MS, C, LNC
Tightened the most WoW: CB, ALL, ACE
Widened the most MoM: SLM, LNC, MMC

MONDAY MORNING RISK MONITOR | SLOWDOWN ON THE HOMEFRONT? - RM1

 

2. European Financial CDS – Swaps mostly widened in Europe last week with the average move at 5 bps.

MONDAY MORNING RISK MONITOR | SLOWDOWN ON THE HOMEFRONT? - RM2

 

3. Asian Financial CDS – Asian CDS widened across the board last week. Fanning the flames was a Chinese PMI reading showing the fastest deterioration since March 2009 and Japanese industrial production falling short of expectations.

MONDAY MORNING RISK MONITOR | SLOWDOWN ON THE HOMEFRONT? - RM17

 

4. Sovereign CDS – Sovereign swaps were mixed over last week. Portuguese sovereign swaps tightened the most, by -5 bps to 174, while Japanese swaps widened the most, by +5 bps to 46.

MONDAY MORNING RISK MONITOR | SLOWDOWN ON THE HOMEFRONT? - RM18

 

MONDAY MORNING RISK MONITOR | SLOWDOWN ON THE HOMEFRONT? - RM3

 

MONDAY MORNING RISK MONITOR | SLOWDOWN ON THE HOMEFRONT? - RM4


5. Emerging Market Sovereign CDS – Brazilian swaps tightened an impressive -41 bps W/W to 447 bps, but outside of Brazil most of the EM space saw swaps widen. 

MONDAY MORNING RISK MONITOR | SLOWDOWN ON THE HOMEFRONT? - RM16

MONDAY MORNING RISK MONITOR | SLOWDOWN ON THE HOMEFRONT? - RM20

6. High Yield (YTM) Monitor – High Yield rates rose 51 bps last week, ending the week at 8.16% versus 7.65% the prior week.

MONDAY MORNING RISK MONITOR | SLOWDOWN ON THE HOMEFRONT? - RM5

7. Leveraged Loan Index Monitor  – The Leveraged Loan Index fell 18.0 points last week, ending at 1839.

MONDAY MORNING RISK MONITOR | SLOWDOWN ON THE HOMEFRONT? - RM6

8. TED Spread Monitor  – The TED spread fell 2 basis points last week, ending the week at 33 bps this week versus last week’s print of 34 bps.

MONDAY MORNING RISK MONITOR | SLOWDOWN ON THE HOMEFRONT? - RM7

9. CRB Commodity Price Index – The CRB index rose 0.9%, ending the week at 194 versus 192 the prior week. As compared with the prior month, commodity prices have decreased -1.3%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

MONDAY MORNING RISK MONITOR | SLOWDOWN ON THE HOMEFRONT? - 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 | SLOWDOWN ON THE HOMEFRONT? - RM9

 

11. Chinese Interbank Rate (Shifon Index) –  The Shifon Index rose 8 basis points last week, ending the week at 1.99% versus last week’s print of 1.91%. 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 | SLOWDOWN ON THE HOMEFRONT? - RM10

 

12. Chinese Steel – Steel prices in China fell 0.5% last week, or 10 yuan/ton, to 2187 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 | SLOWDOWN ON THE HOMEFRONT? - RM12

 

13. 2-10 Spread – Last week the 2-10 spread tightened to 141 bps, -6 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR | SLOWDOWN ON THE HOMEFRONT? - RM13

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.4% upside to TRADE resistance and 2.9% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR | SLOWDOWN ON THE HOMEFRONT? - RM14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 

 


CHART OF THE DAY: A U.S. Economic Cycle Reality Check

Editor's Note: This is a chart and brief excerpt from today's Early Look written by Hedgeye CEO Keith McCullough. Click here for more information on how you can become a subscriber for $1 a day.

 

CHART OF THE DAY: A U.S. Economic Cycle Reality Check - z dd Chart of the Day

 

"...While I’m sure the Old Wall storytelling will be epic this morning on “why the jobs number wasn’t that bad” … and “stocks closed up on the day… the bottom is in…”, blah blah blah… allow me to re-interrupt with economic cycle-reality ... The jobs number sucked… and labor data will continue to suck into year-end."

 


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