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Pop-Tart Strategy

"I would love to be in the room watching someone who needs to consult these directions."

 - Brian Regan

 

There are actual directions for how to eat a Pop-Tart. 

 

Apparently we’ve devolved to the point  that “remove pastry from pouch” needs to be an actual instruction. 

 

And yes, it says microwave on high for 3 seconds  … As in "three" seconds. 

 

Pop-Tart Strategy - 10 27 EL

 

Back to the Global Macro Grind….

 

The Pop-Tart bit isn't mine but it's great (you can watch it HERE, it’s worth your 3 minutes). 

 

In complexity, proper Pop-Tart preparation rivals what has been perhaps the most profitable macro strategy of the last half-decade.

 

Stop me if you’ve heard this one:   

 

Rotate the QE (Euro/Yen => $USD  => Reflation  => Growth/Inflation Expectations  => Bonds 

 

In other words,

 

When Draghi or Kurodo have the QE ball => Euro/Yen Go Down => the Dollar Goes Up => things priced in those dollars go down => Inflation expectations and OUS growth expectations flag => the market prices in those expectations and bonds get bid (again).

 

Yup, that’s it. Pop-Tart macro strategy alpha fully-baked in 3 seconds.   

 

With global inflation expectations priced in dollars and central planning centricity defining markets in the post-crisis period, that QE-Currency connection has only played out “like infinity times” (my 5-year olds new favorite line) over the last 6 years. 

 

Moving on.

 

Keith has provided some high level earnings season updates the last couple weeks.  Let’s take a quick look below the flaky, frosted surface of earnings management to the thin layer of toasted growth at the center:

 

3Q Earnings Scorecard: With ~40% of SPX constituent companies having reported earnings for 3Q, the growth data remains dismal – particularly for a private sector economy purportedly still flirting with a multi-year march higher in policy rates.     

  • Sales/EPS:  In the aggregate, Sales growth is running -3.08% while Earnings growth is tracking at -3.31%.  Granted, the weakness is once again centered on the energy and the industrials complex but those sectors don’t operate in a vacuum and that softness has begun to creep in across the Financials, Staples & Tech sectors as well.
  • Beat/Miss:  Only 43% of companies have beaten topline estimates while 75% (in-line with recent qtr averages) have beaten on EPS.  Indeed, despite 9-months of progressive deflation in consensus estimates, a full 0% (as in “zero”) of Materials and Utilities companies have managed to best sales expectations thus far in 3Q.  Again, the weakness is not just confined to the energy/commodity space – across Consumer Discretionary, Staples and Financials less than 46% of companies have beaten revenue estimates.  A topline recession with broad margin contraction is not a fundamental factor cocktail supportive of resurgent capex and gangbuster hiring. 
  • Missing’s Mattered: The Macro has been driving the fundamentals but accurately forecasting those fundamentals has mattered again as we’ve seen sector variance increase and stock picking has re-emerged as an alpha driver. 75% of companies that have missed earnings expectations have gone on to underperform the market by -6.7% on average while 70% of the companies that have beaten have outperformed the market by +3.7% over the subsequent 3 trading days. 
  • Operating Performance:  Taking a 2nd derivative view of the data, operating momentum has remained decidedly underwhelming with just 43% and 45% of companies registering sequential acceleration in sales and earnings growth, respectively. More than 50% of companies have reported sequential contraction in operating margins as well.  Our operating performance scorecard for 3Q to-date can be seen in the Chart of the Day below. 

  

What about housing?  You guys like the housing trade for 4Q but that New Home Sales print yesterday was a complete brick.

 

Yea it was. We like housing currently and we are more than willing to pivot on our view if the data supports it (recall, we were bearish in 3Q) - but the current data is noisy and incongruent.  Here’s the summary contextualization,  hopefully you’re well caffeinated: 

 

TRID (Tila Respa Integrated Disclosure) – which was a regulatory change in mortgage disclosure requirements and required a large-scare overhaul of lending and mortgage financing systems – went into effect on October 3rd.  Mortgage Purchase Applications which had been running +2.41% MoM and ~+20% YoY in September, shot up to +50% YoY to close out September as demand was pulled forward ahead of the implementation.  

 

In other words, according to the MBA (Mortgage Bankers Association), Mortgage Purchase Demand (which includes mortgages for both New and Existing Homes) was up big in September with the bulk of the increase stemming from the regulatory distortion.

 

In contrast, the Census Bureau data for the same period showed New Home Sales declining -11.5% MoM and decelerating to +2% YoY - marking the lowest level of sales in 10 months and well off the +20% year-over-year pace of growth averaged YTD.  

 

Two data sets, two completely different conclusions on the sequential direction of housing demand.  They can’t both be correct.  

 

The lone avenue for reconciling the difference is if all of that excess purchase demand reported by the MBA was concentrated in the existing market.  That seems unlikely.

 

But we won’t have to wait long for additional clarity as Pending Home Sales (which represents signed contract activity in the existing market) for September will be released on Thursday.  We’re content to wait on that before taking a more convicted view on the state of underlying demand or the distortive effects of TRID implementation. 

 

The evolution of social media and the democratization of information flow has been great.  A byproduct of that evolution, however, has been an exponential increase in noise – the informational/analytical equivalent of empty calories. 

 

Filter you’re source menu by accountability, transparency and analytical density.

 

Better yet, be your own source.

 

Our immediate-term Global Macro Risk Ranges are now:

 

SPX 1
RUT 1135--1175

UST 10yr Yield 1.98-2.09%

VIX 13.56-19.77 

Oil (WTI) 43.28-46.13 

Gold 1151-1175 

 

You don’t get the brain you want by not using the one you have,

 

Christian B. Drake

U.S. Macro Analyst

 

Pop-Tart Strategy - EL 10 27


U.S. Dollar Driven #Deflation Risk

Client Talking Points

OIL

WTIC is down another -0.8% (post last week's -6.3% decline) and they're really going after the levered names again (our Energy analyst Kevin Kaiser had another good SELL note on KMI recently). Russian Stocks lead losers this morning down -1.9% and Natural Gas is crashing down another -3% to $2.00.

SPAIN

Spain had their centrally-planned V-bottom, but failed @Hedgeye TAIL risk resistance of 10692 on the IBEX. The IBEX is down -0.6% this morning as Spain still needs to report their economic slowing data, unfortunately - QE hope won't change that.

RUSSELL 2000

The Russell 2000 failed at both TRADE (1175) and TREND (1199) resistance and remains in draw-down mode -10.5% from its year-to-date (and bubble) peak - one of the best pure play ways to play a #LateCycle slowdown in the USA is via Russell's domestic revenues. 

 

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

 

Asset Allocation

CASH 68% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 0%
FIXED INCOME 32% INTL CURRENCIES 0%

Top Long Ideas

Company Ticker Sector Duration
MCD

What week it was for MCD shareholders! Shares finished the week up 7.3%. We have been saying all along that the third quarter of 2015 would be the inflection point for the McDonald’s (MCD) turnaround. After this print, it appears that the heartache is finally over at McDonald’s, as this quarter marks the first good quarter the company has had in two years.

 

From here, the upside in the stock price lies with the growth of All Day Breakfast, additional G&A cuts, national value offering implementation, reimaging of restaurants, commodity deflation, especially in beef and increased operational efficiencies, among others. In addition, the REIT is a potential driver of incremental value but not crucial to the long-term success of this call. With Steve Easterbrook at the helm we are confident this company will be better managed than it has been in a long time.

RH

RH unveiled a full floor of Modern product in their New York Flatiron store this week. The new concept sits on the first floor of the 21k sq. ft. store and marks the 3rd property in RH’s fleet (along with Denver and Atlanta) to carry the new product line.

 

Fundamentally and financially, we’re about to see growth at RH go on a multi-year tear. We think this stock is headed to $300 over the next 2-3 years. We’ve been patient for the catalyst calendar to begin, and the waiting is finally over.

TLT

As devaluation and global currency war jockeying from central bankers around the world continues, the acknowledgement of growth slowing continues to push yields lower. The long-bond was up on Thursday, after the ECB meeting, despite an easing-fueled rip in equities. The bond market doesn’t believe in the growth storytelling and we expect it to continue.

 

Remember that 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. That has implications for gold (risk to being long), but we want to get through the Fed meeting and GDP data next week before we pivot on a gold view. Stay tuned.

Three for the Road

TWEET OF THE DAY

UPDATE: Hedgeye Energy Analyst Kevin Kaiser Reiterates His Short Case on Kinder Morgan | $KMI https://app.hedgeye.com/insights/47127-update-hedgeye-energy-analyst-kevin-kaiser-reiterates-his-short-case… via @hedgeye

@KeithMcCullough

QUOTE OF THE DAY

Failures to heroic minds are the stepping stones to success.

Thomas Chandler Haliburton

STAT OF THE DAY

A biscuit which had been aboard a lifeboat on the Titanic has sold at auction for £15,000. The auction was at Henry Aldridge & Son in Devizes, Wiltshire, UK.


The Macro Show Replay | October 27, 2015

 


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October 27, 2015

October 27, 2015 - Slide1

 

BULLISH TRENDS

October 27, 2015 - Slide2

October 27, 2015 - Slide3

October 27, 2015 - Slide4 

BEARISH TRENDS

October 27, 2015 - Slide5

October 27, 2015 - Slide6

October 27, 2015 - Slide7

October 27, 2015 - Slide8

October 27, 2015 - Slide9

October 27, 2015 - Slide10

October 27, 2015 - Slide11

 


TWTR: Thoughts into the Print (3Q15)

Takeaway: Tricky setup with a lot of moving parts. We remain short since TWTR will eventually need to rebase 2016 expectations, question is when.

KEY POINTS

  1. UPSIDE ALREADY EXPECTED? TWTR preannounced 3Q15 revenues to come in at or above the high end of guidance, so now a 4Q guidance beat may also be the expectation.  That will be a challenge since consensus is assuming no decay in y/y ad revenue growth from 3Q to 4Q, which means TWTR can't afford any slippage on either engagements or CPE (despite slowing user growth and its first positive CPE comp from 4Q14, respectively).  While acquisition revenue could help fill the void, consensus already appears to be baking that in with 4Q data licensing revenues ramping to $63M by 4Q (vs. $50M reported in 2Q).  However, TWTR could produce upside on MAUs following tepid user growth comments on its last call.  
  2. BUT TRICKY SETUP: We’re not sure what matters more on this print: the release or how the new C-suite addresses the street regarding the longer-term story.  That’s really tough to gauge since we’re not sure what Dorsey could offer to breathe life back into this story; but he may not need much on muted sentiment.  But we also suspect that Dorsey knows that 2016 expectations need to be rebased, and doubt he is willing to risk another blow up similar to the 1Q15 release.  That said, we suspect the new c-suite may try to manage expectations before it releases 2016 guidance on the next print (also less incentive to guide high for 4Q15).
  3. WHAT WE’RE KEYING IN ON: Ad engagements and CPE; the wider the divergence between the two, the more TWTR is increasing ad load.  We suspect TWTR's surging ad load is what is causing its softening user growth metrics, and mgmt's ongoing attempts to appease street revenue expectations has led to a heighted level of cumulativer churn that will ultimately cap its long term upside (see 1st note below).  Put another way, TWTR has been chasing short-term upside at the expense of long-term damage to its model; we're ultimately trying to figure out whether that may change under the new regime.  

 

TWTR: Thoughts into the Print (3Q15) - TWTR   Ad MAU vs. CPE 3Q15

TWTR: Thoughts into the Print (3Q15) - TWTR   4Q15 Ad Rev Scen

TWTR: Thoughts into the Print (3Q15) - TWTR   FC Ad Rev 2Q15

 

See notes below for supporting analysis on TWTR's user retention issues and monetization strategy.  Let us know if you have any questions, or would like to discuss further.  

 

 

Hesham Shaaban, CFA


@HedgeyeInternet 

 

 

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

 

TWTR: What the Street is Missing
05/19/14 09:09 AM EDT
[click here]


Cartoon of the Day: Ackman's Valeant Effort

Cartoon of the Day: Ackman's Valeant Effort - Ackman cartoon 10.26.2015

 

Earlier this spring, controversial hedge fund manager Bill Ackman called Valeant Pharmaceuticals (VRX) “a very early-stage Berkshire [Hathaway].” Hmm. Fast forward to last week when an investment research firm compared the drugmaker to Enron. Shares have plunged 35% since and are down 57% from its August high. Last check, Ackman's Pershing Square Capital owns a 5.7% stake in VRX, constituting a whopping 19% of Pershing Square’s portfolio.

 

Ouch.

 

Our Healthcare analysts got the call right. On July 22, 2014, analyst Tom Tobin issued our Valeant Black Book laying out the short case and calling out what we considered to be an unsustainable business model.

 

CLICK HERE to access Tobin's prescient institutional research report on Valeant. If you’d like to learn more about our institutional research offerings please ping sales@hedgeye.com.


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