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EVENT: internet BEST IDEAS Quarterly Update

Takeaway: Please join us for our call Tuesday, Oct 20th at 1:00pm EDT. Dialing instructions will be published Tuesday morning.

We will be hosting our quarterly INTERNET BEST IDEAS Update Call next Tuesday.  We will be reviewing the major themes and incremental developments to our Best Idea Short theses (YELP, P), our Best Idea Long thesis on LNKD, as well as our Short thesis on TWTR.  The emphasis of this call will be to outline our view over various durations (particularly 2016) as well as the upcoming catalyst calendar; identifying the major risks and catalysts to each position over the near-to-intermediate term. 

 

Join us for our call Tuesday, Oct 20th at 1:00pm EDT.  Dialing instructions will be published Tuesday morning. 

 

 

KEY TOPICS WILL INCLUDE

  • LNKD: Sheepish guidance ≠ deteriorating fundamentals; why LNKD is poised to breakout from major 1H15 investments (not Lynda).
  • P: Model can’t handle much more than a best case scenario under Web IV; why the worst-case is more likely.
  • YELP: Model is broken, but street now understands that; what we’ll be monitoring to assess the short from here.
  • TWTR: Aggressive monetization tactics creating structural headwinds; why there is at least one more leg down to the short.

 

Hesham Shaaban, CFA

@HedgeyeInternet 


The Macro Show Replay | October 16, 2015

 


October 16, 2015

October 16, 2015 - Slide1

 

BULLISH TRENDS

October 16, 2015 - Slide2

October 16, 2015 - Slide3

October 16, 2015 - Slide4

 

 

BEARISH TRENDS

October 16, 2015 - Slide5

October 16, 2015 - Slide6

October 16, 2015 - Slide7

October 16, 2015 - Slide8

October 16, 2015 - Slide9

October 16, 2015 - Slide10


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CHART OF THE DAY: Overly Bullish Retail Growth Expectations

Editor's Note: Below is a chart and brief excerpt from today's Early Look written by Hedgeye U.S. Macro Analyst Christian Drake. Click here for more information on how to subscribe. 

 

CHART OF THE DAY: Overly Bullish Retail Growth Expectations  - WMT CoD2

 

Retail growth expectations are overly bullish.  The Chart of the Day says it all…it shows the consensus EPS growth rate for a basket of bellwether names in the retail sector. After bottoming in FY15 (WMT FY16) consensus has numbers accelerating to 10% and 12% in FY16 and FY17 respectively. Compare that to WMT guiding to -10% in its FY16 (calendar ‘15), -9% at the midpoint of the guide in FY17 (calendar ’16), and flat in FY 18 (calendar ’17). Bottom line…either WMT sandbagged, or growth for others will come down. Such a significant gap has not sustained itself for any more than a few quarters.


Quinoa Probabilities

"Being unemployed has really helped to lower my carbon footprint."

- Comedic tree-hugging enthusiast 

 

I couldn’t remember the meaning of the word ‘spendthrift’ until I was probably 21 yrs. old.  It’s one of those anti-onomatopoeia words that means the exact opposite of what it sounds like. 

 

How about its venerable cousin of the same ilk, #gainsay … any convicted guesses on that bad boy?

 

And since its Friday, let’s up the investment irrelevancy another notch:  

 

Write this word down, show it to the person next to you and tell them to pronounce it: Quinoa

 

(for reference, it’s: keen-wah)

 

If it’s the 1st time they’ve seen it = 99.9% chance they get it wrong.

 

Co-worker bike to the office this morning wearing a hemp jumpsuit and leaving early for an Earth Day planning committee meeting?   …. No worries, still 50/50 chance they get it wrong.

 

Take some of those TLT gains and see if anyone is willing to take the other side of a virgin Quinoa pronunciation bet. 

  

Drinks on you tonight!

 

Quinoa Probabilities - Euro cartoon 05.18.2015 normal

 

Back to the Global Macro Grind ….

 

If it’s the 1st time your favorite policy maker has seen a global balance sheet recession characterized by global overleverage, oversupply and negative global consumption demographic trends = 99% chance they don’t get the sustainable real growth Rx correct. 

 

Granted, and as our visual macro distillation jedi Bob Rich illustrates above, when the available tool set is limited, sometimes it doesn’t matter what the question is.  If all you have is a hammer, everything looks like a nail and all that ….

 

Fed policy doctrine says that the outside lag on policy is something on the order of 6-18 months.  In other words, because a variable lag exists between the time policy is implemented and the time its impact flows through the real economy, the Fed’s forecast for growth and inflation 2-6 quarters out should dictate policy action today.

 

Here there are two (major) problems:

 

1.    Data Dependence:  For a self-described Data Dependent Fed, this represents a fundamental conflict.  Policy action can’t be simultaneously dependent on reported data (which, itself, is 1-3 months old) and also on a variant forward projection of how the data will have evolved 0.5-1.5 years from now.

2.   Serial Over-optimism:  Forecast risk has been real and serially biased towards overestimation alongside a persistent expectation for a return to “trend-line” growth.  On average, Fed forecasts have overestimated growth by ~100bps every year over the last half-decade. With GDP averaging just 2% over the same period, that magnitude of over-optimism is not insignificant.      

 

Now, with the Fed again grazing blissfully in the panglossian forecasting fields in 2015, the domestic data train continues to onboard negative second derivative trends.

 

As review, from a rate-of-change perspective, we are past peak across the following:

 

·         Payroll Growth:  Peaked in Feb at +2.34% YoY.  While past peak employment growth doesn’t herald an imminent recession, it does consistently typify an expansion in its twilight.

 

·        Consumption Growth: Household Spending growth peaked in 1Q15.  Consumption Comps get more difficult from here and, while reported growth will again be “good” on an absolute basis in 3Q, the slope of the line will be negative.  With credit growth still muted, consumption growth is all about income trends and the accelerating growth in aggregate personal and salary and wage income over the last two years has supported an improving capacity for household spending.  With lower growth in aggregate hours and flat earnings growth (remember: aggregate income is simply a function of # of people working * hours worked per week * earnings per hour) in August and September, income growth is flirting with a negative inflection as well. 

 

·         Confidence:  Consumer Confidence (University of Michigan) peaked in 1H15.  Unsurprisingly, confidence and real per capita income move concurrently.  If income trends flag, a recovery to new highs in confidence becomes increasingly improbable. 


·         Profitability:  Corporate profitability across both the S&P500 and the national aggregate has crested and moved past peak. 

 

Indeed, as the market cap collapse in WMT signaled earlier this week, the profitability cratering observed across the energy and industrial complex is conspicuously creeping its way into the retail space.  

 

Our Retail Sector Head, Brian McGough, aptly contextualized the Walmart release and the broader readthrough to retail in an institutional note on Wednesday.  Since I remain perma-bearish on wheel re-creation, here’s an unedited reprint of the highlights:

 

1) WMT set the bar so low with its guidance today that we have to wonder how the rest of retail is not quaking in its boots. The mid-point of the guide implies that earnings will be off 10% this year and another 6-12% in FY 17 AND we won’t see 2015 earnings levels again until at least FY19. If anyone is questioning what end of the economic cycle we’re in, it’s not the end you give a kiss at bedtime. While a struggling WMT is a terrible barometer for all of retail, it’s even more troubling when you consider what WMT is investing in. Wages and Price. That will be a significant headwind on the gross margin and cost side. Any peers (ranging from TGT to CVS to COST to KSS to Albertson’s [winner of “most poorly timed IPO of the decade”]) who think they can sidestep this reality are delusional. 

 

2) Wages – by the end of FY17 WMT will have invested $2.7bn or $5,400 per each of its 500,000 eligible US employees. It will account for -4.5% to -9% of EPS change in FY17 or 75% of the aggregate earnings decrease. That type of deleverage for a company like WMT who in the US employs 1.4mm workers and accounts for 16.5% of workers in the Food & Beverage, Health/Personal Care, Clothing, and General Merch categories that’s a game changer. Anyone who has not proactively managed their expense line will have a tough time. It’s a good thing for KSS that it does not have to pay higher wages because it’s employees love to come to work (that statement will come back to haunt CEO Mansell). 

 

3) Retail growth expectations are overly bullish.  The Chart of the Day below says it all…it shows the consensus EPS growth rate for a basket of bellwether names in the retail sector. After bottoming in FY15 (WMT FY16) consensus has numbers accelerating to 10% and 12% in FY16 and FY17 respectively. Compare that to WMT guiding to -10% in its FY16 (calendar ‘15), -9% at the midpoint of the guide in FY17 (calendar ’16), and flat in FY 18 (calendar ’17). Bottom line…either WMT sandbagged, or growth for others will come down. Such a significant gap has not sustained itself for any more than a few quarters.

 

Dost thou gainsay the acceleration in retail spendthriftery?

 

Reality, Rates & Rhetorical Questions: How many times has the Fed raised rates into a slowdown and with headline inflation at +0.0%?  … what’s that quinoa pronunciation success rate, again?

 

Could inflation percolate as we lap the energy collapse comps and a weaker dollar drive price inflation in things priced in dollars?

 

Sure, but the internals driving that reflation are delusory (remember why the dollar is weaker).  It’s akin to a drop in the labor force driving the unemployment rate lower.  The positive headline is simply an antithetical symptom of the underlying reality.  

 

Keith has been harping on this point but it bears harping as it’s about as unambiguous a Macro market signal as it gets:  Down Dollar + Down Rates ≠ Growth Accelerating. 

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.96-2.06%

SPX 1
RUT 1108--1177
DAX 96

VIX 15.51-22.44

 

Prepare. Perform. Prevail.

 

Christian B. Drake

U.S. Macro Analyst

 

Quinoa Probabilities - WMT CoD2


REPLAY | THOUGHT LEADER CALL | LOOMING CRASH IN BEEF

Yesterday we spoke with James Robb a Director at the Livestock Marketing Information Center (LMIC) regarding the looming crash in beef prices. Below please find the materials and associated audio from our conversation:

 

AUDIO: CLICK HERE

MATERIALS: CLICK HERE

 

A 50% decline in beef prices back to historical averages is well within the realm of possibilities. Below is a 30 year look at Feeder Cattle CME $/lb., current levels are greater than two standard deviations above the average. The information that James Robb provided supports the potential decline down to historical levels.

REPLAY | THOUGHT LEADER CALL | LOOMING CRASH IN BEEF - CHART 6

 

CORN

Corn, a core component of feed has been volatile, and is projected to stay that way when looking short-term. When looking longer term prices have leveled off and are projected by LMIC to remain stagnant to slightly down.

REPLAY | THOUGHT LEADER CALL | LOOMING CRASH IN BEEF - CHART 1

 

CATTLE

Heifers can either go to feed lots to be slaughtered or to breeding herds for beef cow replacement. In the chart below you see that heifers being held for beef cow replacement ticked up +6.5% in 2015. In simple terms that means for the time being the herd is growing and less cows are being slaughtered.

REPLAY | THOUGHT LEADER CALL | LOOMING CRASH IN BEEF - CHART 2

REPLAY | THOUGHT LEADER CALL | LOOMING CRASH IN BEEF - CHART 3

 

The decrease in slaughtered cattle is because you simple don’t need as many cows, because they weigh more than ever.

REPLAY | THOUGHT LEADER CALL | LOOMING CRASH IN BEEF - CHART 4

 

Cattle cycles typically run anywhere from seven to ten years. We are at about the two year mark and LMIC predicts that we are still 2-3 years away from the peak. This means declining prices for longer, providing a tailwind for restaurant companies until 2018. Cattle inventory is projected to rise sharply as shown by the brown line in the chart below.

REPLAY | THOUGHT LEADER CALL | LOOMING CRASH IN BEEF - CHART 5  

 

What event(s) could lead to significantly lower prices?

  • Macroeconomic factors, if the U.S. economy goes into a recession in 2017, prices will fall.
  • Mother nature, if we get another drought in the southern plains, we will have a herd liquidation that will have a short term impact on supply.

 

Will the lower for longer corn market lead to lower beef prices?

  • Yes, cost of production eventually works through the system after a certain period of lag. If corn stays stable or trends lower that will be supportive of continued herd growth and lower prices.

 

Lower beef price will benefit many companies across the consumer staples space. We highlighted TSN, HRL and CAG as major beneficiaries, but many more companies will benefit on a smaller scale.

 

Please call or e-mail with any questions.

 

Howard Penney

Managing Director

 

Shayne Laidlaw

Analyst

 


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.65%
  • SHORT SIGNALS 78.64%
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