RTA Live: October 23, 2015



[UNLOCKED] Keith's Daily Trading Ranges

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USD, Oil, US 10 YR

Client Talking Points


Draghi rang that #cowbell and macro markets absolutely ripped – gotta love that, even though people will realize it’ll perpetuate as opposed to arrest #deflation (see our research note from last night); here’s a visual on USD during #GrowthSlowing data vs. Euro QE.


Showing no follow through on the QE “buy everything” hopes this morning and that makes sense to me – Nat Gas -1.3% to $2.36 and I think it’s time to sell some (or all) of the net long position we’ve been advocating in Commodities (Gold specifically) as of late.

US 10 YR

Up Dollar, Down Rates à not a growth signal, and we’ll stay with the USA Long Bond position as German 10yr Bund Yield breaks down to 0.50% and Swiss 10yr deflates to -0.33%

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

McDonald’s reports 3Q15 earnings Thursday, October 22nd before the market opens, with a conference call at 11:00am ET. We are expecting strong sequential improvement in performance globally. We look forward to giving you an update on the company’s performance next week, but this week we wanted to focus on the ‘Looming Crash in Beef.'


On Thursday, October 15th, we held a thought-leader call regarding the declining price of beef and how long it will continue. Prices have sky rocketed in recent years and are now standing at more than two standard deviations above the 30 year average. We believe a 50% decline down to historical averages is well within the realm of possibilities. Declining beef prices will be a major tailwind for McDonald’s as they navigate their turnaround.


Restoration Hardware opened its new Full Line Design Gallery at the Cherry Creek Shopping Center in Denver this week.  This is another anchor property -- using 53,000 feet of the 90,000 left vacant by Saks at Cherry Creek.


RH is taking up the size of its stores from an average of 8,000 square feet to about 40,000+ for its new stores – and productivity rates on these new assets are headed higher. In the old stores, RH could only show 10% of its assortment, while in the newer format stores, the company is showcasing better than 75%. Consumers can’t (and don’t) buy what they don’t see.


The #SlowerForLonger theme from Hedgeye Macro has been consistent and straightforward. Our pivot in advance of the most recent jobs report to get long of gold and stay out of the way short-side on commodities turned out to be a good position.


Growth expectations have been correctly revised, but there’s still a good amount of room between Hedgeye estimates and consensus. We are expecting GDP in a range of 0.1%-1.5% for Q3 and another 1-handle in Q4. If that proves accurate, flatter goes the Treasury curve (TLT, EDV), wider goes high yield spreads (bad for JNK), and down goes the USD (GLD).

Three for the Road


Most interesting macro signal today is the Bond Market doesn't give a damn about US stocks "up"



"To be the man, you gotta beat the man!"

-Ric Flair


Even though the Seahawks defeated the 49ers last night 20-3, Russell Wilson only put up 13.40 fantasy points.

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P: Can We Still Be Friends? (3Q15)

Takeaway: We suspect P is expecting a Web IV defeat (Points 2&3), and is trying to smooth things over with the labels/artists before that happens


  1. UGLY PRINT: P wound up missing 3Q revenues after guiding 1% ahead of street expectations on the last print.  P’s 4Q revenue guidance missed consensus estimates by 7%.  For context, P’s 2015 revenue guidance is now near the low end of its initial 2015 revenue guidance, which it had raised twice this year.  P also missed Listener Hours and Active Listener expectations, with the latter decelerating from 4% to 2% y/y growth.  Note that P’s Active Listener metrics are based on the last month of the quarter, which is when it hosted its ad-free listener day that drew a record 30M users for a non-holiday; no telling what that would have been otherwise.  We continue to expect users to decline on a y/y basis by 4Q15.  Either way, the print doesn't matter (see below).
  2. RECKLESS OR DEFEATED? The $90M pre-1972 recordings settlement was confirmed; $60M is payable this quarter.  So after Ticketfly closes, P will only have $157M in cash prior ahead of the Web IV decision, with another $30M due in quarterly installments in 2016.  That is a dangerously low cushion prior to any clarity on Web IV, especially since small missteps in execution could lead to very big differences in cash burn, if not insolvency (see slides below).  That said, the decision behind the Ticketfly is either reckless confidence on Web IV, or P is preparing to blow up its model ahead of an expected defeat, and needs another story to pitch the street when it does.  
  3. CAN WE STILL BE FRIENDS? (WEB IV): The pre-1972 recordings settlement reinforces our view that P is expecting a Web IV defeat since it also covers the 2016 period, and it is pricing in a considerable rate increase.  P is paying $60M for its pre-1972 recording streams prior to 4Q15; it will be paying another $30M for the 5-qtr period ending 2016.  After weighting the $60M settlement for quarterly listener hours from 2010-2015, we estimate that P is paying a quarterly rate of $4.1M in 2015.  That will bump up $6.0M for the next 5 quarters, which translates to a 46% increase.  We’re not sure if there is a listener hour growth assumption in that rate, but after producing 3% in 3Q15, and guiding to the same in 4Q15; we doubt it’s much (if any).


P: Can We Still Be Friends? (3Q15) - P   pre 1972

P: Can We Still Be Friends? (3Q15) - P   Web IV fallout 2

P: Can We Still Be Friends? (3Q15) - P   Web IV fallout 1

P: Can We Still Be Friends? (3Q15) - P   Web IV fallout 3


Let us know if you have any questions, or would like to discuss further.  See notes below regarding Web IV developments and the Ticketfly acquisition.


Hesham Shaaban, CFA




P: Dumb or Defeated? (Ticketfly)
10/07/15 11:02 AM EDT

[click here]


P: It's All About the Benchmarks (Web IV)
10/02/15 12:22 PM EDT
[click here]


P: Fool's Gold (Web IV)
09/21/15 02:05 PM EDT
[click here]



CHART OF THE DAY: Draghi Puts His Finger On The Trigger (Again)


CHART OF THE DAY: Draghi Puts His Finger On The Trigger (Again) - 10.23.15 EL chart


Ultimately (and perversely) Down Euro Devaluation is a global TIGHTENING event because the world’s biggest asset price #deflation risk is that the world’s inflation expectations (commodities, debt, etc.) are DENOMINATED IN DOLLARS.


Yep. I’m going all CAPS on you at the top of this freshly squeezed and stimulated risk management morning! Let’s get after it.

Fresh Stimulus!

“Defeat should never be a source of discouragement but rather a fresh stimulus.”

-Robert South


Preach, brother! If wrong on both growth and inflation all year long, never, ever, give up. There’s always a sticker for everyone to win at the end of the QE rainbow. Cowbells and puppy dogs. Ring it, preacher!


Robert South was an English churchman in the 17th century who would probably do as well as the speaker of the centrally-planned market house today as he did under King Charles II and then William & Mary.


Discouraged short seller? Hopefully not. The Long Bond continued higher yesterday too. If you’re only a US stock picker type, there’s a plethora of longs and shorts for you to pick from post yesterday’s “fresh stimulus” too.


Back to the Global Macro Grind


Yep. That’s what your un-elected-central-planning-overlord Draghi called it yesterday. Nah, he didn’t have to actually do anything. He just had to call it a “fresh stimulus.” If only the people who have been bullish all year long were bullish for that reason.

Fresh Stimulus! - Draghi cartoon 10.22.2015

Bullish on either top-down GDP growth or “reflation”, that is…


If you were bullish on some of the most expensive big cap stocks in human history (like, say Amazon – AMZN) with the fundamental call that growth there would accelerate throughout a #LateCycle US (and Global) slowdown, that was dead right.


Whereas if you were bearish on some of the most expensive mid cap stocks in human history (i.e. the ones that don’t make money like, say Pandora – P) alongside Hedgeye’s Internet & Media Analyst, Hesham Shaaban, you nailed that too.


That’s why I’m refreshed and fired up this morning. How could you not be? AMZN is +10% pre-open and Pandora (P) is crashing another -23%.


Stock Pickers and Macro Minds, Unite!


As opposed to focusing on the macro data this morning (Germany’s PMI slowed again to 51.6 in OCT vs 52.3 last month), I’d be remiss (and un-objective) to not give a big Earnings Season shout-out to the likes of AMZN, GOOGL, and MSFT last night.


This is what those 3 stocks did to the Q3 Sales/EPS Scorecard vs. what I highlighted 2-days ago:


  1. SP500 Sales “growth” of -3.6% got back to down -2.4%
  2. SP500 Earnings “growth” of -7.9%  clawed back to down -5.4%


In other words, after consensus called for +8-10% Earnings Growth in 2015, the new bull case is that after AMZN, GOOGL, MSFT, we’re back to earnings season being better than horrendous.


Just to break the Sector Styles of Earnings Season down for you again, here are the numbers post 161/500 companies reporting:


  1. Energy – Sales -31%, EPS -55%
  2. Materials – Sales -18%, EPS -36%
  3. Industrials – Sales -6%, EPS -2%
  4. Financials – Sales -3%, EPS -8%
  5. Information Technology – Sales -3%, EPS -13%
  6. Consumer Staples – Sales -4%, EPS -2%
  7. Consumer Discretionary – Sales +4%, EPS +19%
  8. Healthcare – Sales +10%, EPS +4%


Yeah. Healthcare Sales and Earnings have been relatively awesome (as they tend to be alongside consumer spending at the end of an economic cycle), so Healthcare stocks (XLV) were down -0.6% on the day yesterday.


Remember, when QE Cowbell is your catalyst, bad news is good and good news is bad, baby! Unless the news (like American Express, AXP, Earnings) is really bad or really good (McDonald’s, MCD), that is.


That’s why I love where this market and all of its risks/opportunities are right now. For far too long the variance of macro, sector, and stock picking returns was generationally low. Everything either went up, or down. Now some things go up, and others straight down.


Back to Draghi’s “fresh stimulus” comment and what we think about that (see Darius Dale’s video presentation from last night):


  1. Down Euro --> Up Dollar, Down Rates is not a GDP growth accelerating signal – it’s a slowing one
  2. What’s bearish for the Euro (until the Fed gets more dovish data next week) is bearish for Commodity inflation expectations
  3. What’s bearish for growth and inflation expectations is bullish for The Long Bond (TLT) and Municipal Bonds (MUB)


Ultimately (and perversely) Down Euro Devaluation is a global TIGHTENING event because the world’s biggest asset price #deflation risk is that the world’s inflation expectations (commodities, debt, etc.) are DENOMINATED IN DOLLARS.


Yep. I’m going all CAPS on you at the top of this freshly squeezed and stimulated risk management morning! Let’s get after it.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.98-2.09%

USD 94.89-96.75
EUR/USD 1.10-1.12
Oil (WTI) 44.80-47.63


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Fresh Stimulus! - 10.23.15 EL chart

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