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Lazard (LAZ) | Value Trap - Best Ideas Call REPLAY

Takeaway: We hosted a Best Ideas conference call yesterday on our ongoing Short recommendation on Lazard (LAZ). Our replay is enclosed.

Best Ideas Video Replay Below

 

Best Ideas Call Replay HERE

Best Ideas Call Materials HERE

 

1.) Our main contention is that the Street is ignoring warnings signs of a high water mark in M&A including rising private equity participation levels and also all-time highs in consideration value. Both metrics last peaked in 2007. In addition, the constant rise of corporate credit costs from mid-2015 to current day has widely referenced Moody's indices higher by over 100 basis points. Our research shows that a move of this magnitude has historically impacted M&A by -20% on an annual basis.

 

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2.) The firm's asset management business is the crown jewel of emerging market (EM) and non-U.S. international investing and the company is riding the wave of successful new product introductions in strategic equity and infrastructure. That being said the firm's EM exposure is under-stated and we estimate that 55% of assets-under-management, and not the stated 30%, is a more accurate picture of the company's absolute EM exposure (when going fund by fund and including products in Global and Multi-regional). Lazard Asset Management has never sidestepped an EM melt-down, experiencing both negative growth and also market depreciation. In the '02-'05 EM cycle, the division experienced over -4% decay rates and market depreciation in various years of up to -10%. 

 

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3.) Street estimates are unbelievably complacent in our view with numbers that completely ignore the hyper-cyclicality of the advisory and asset management businesses. If you "give" the firm the best of all worlds, the 2015 M&A revenue environment; the record restructuring revenue environment of 2009; and the high water mark in asset management in 2014, those revenues tally $2.68 billion creating EPS of $3.79. The Street currently is at $2.78 billion in top-line for 2017 on EPS of $4.01 with '18 at $2.82 billion and $4.40. For 2016, we think the company will earn under $3 in earnings, some -20% below the Street. Our base case estimate is the stock is worth $30 per share on 10x our $3 EPS estimate for '16. Our bear case if M&A activity rolls over by -20%, is a $22 stock at $2.20 in earnings at a 10x multiple.

 

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Please let us know of any questions,

 

Jonathan Casteleyn, CFA, CMT 

 

 

 

Joshua Steiner, CFA


FLASHBACK: Why We Advised Short Twitter | $TWTR

Takeaway: Just because we like using Twitter, doesn't mean we like the stock.

There's a good chance if you're reading this right now you came here via Twitter. For the record, we are power users of Twitter here at Hedgeye and remain big fans of its platform. That said, we've arguably been the biggest bear on the stock since it went public in 2013.

FLASHBACK: Why We Advised Short Twitter | $TWTR - twitter cartoon 04.29.2015

Fast forward to today... Twitter (TWTR) is hitting all-time lows. It's down over -50% since our Internet & Media analyst Hesham Shaaban made his original short call before the IPO.  

 

Here's a flashback to 2013 where Shaaban lays out his original bearish thesis. (It was a while ago, when Wall Street was still bullish, and we still had the old school HedgeyeTV set design). You can also click here to read an excerpt from his most recent institutional research note on TWTR.

 

Enjoy!

 


[UNLOCKED] Fund Flow Survey | Year-End Active Shakedown

Takeaway: All active categories except muni bonds saw outflows in the 5 days ending Dec 30th while investors favored passive products and money funds.

Editor's Note: This is a complimentary research note which was originally published January 7, 2016 by our Financials team. If you would like more info on how you can access our institutional research please email sales@hedgeye.com.

 

 

Investment Company Institute Mutual Fund Data and ETF Money Flow:

Most active products finished 2015 with a dull thud in the 5 days ending December 30th. All categories but tax-free bonds saw outflows during the last week of the year. Domestic equity funds again bled out another $2.9 billion in the final week of the year, ending 2015 with their worst annual outflows on record, losing -$172.2 billion. This compares to the +$144 billion subscription for equity ETFs as the shift from active to passive continued last year. In fixed income, taxable bond funds lost -$6.8 billion in the last week as investors digested the new more active Fed policy. Taxable bonds in aggregate had a rare annual redemption in '15 losing $40 billion last year. Since 2007, only 2013 resulted in an annual redemption in the taxable bond category.

 

Finally, with markets shuddering, investors seeking safety shored up +$16 billion in money market funds, bringing the 4th quarter money market inflow to +$90.1 billion following the +$54.4 billion in subscriptions during the 3rd quarter. 2015 finished with the first annual money fund inflow since 2008 with an annual tally of +$26 billion in cash being moved to the sidelines. The first annual cash increase this cycle is reminiscent to the cash builds of 1999 and 2006 with investors having overallocated to risk assets and then reversing to safety. Overall there is a $1 trillion opportunity for leading cash managers to collect lost funds that have been allocated to stocks and bonds over the past 7 years.


[UNLOCKED] Fund Flow Survey | Year-End Active Shakedown - ICI1 large 1 13

 

In the most recent 5-day period ending December 30th, total equity mutual funds put up net outflows of -$6.0 billion, trailing the year-to-date weekly average outflow of -$1.5 billion and the 2014 average inflow of +$620 million. The outflow was composed of international stock fund withdrawals of -$3.1 billion and domestic stock fund withdrawals of -$2.9 billion. International equity funds have had positive flows in 41 of the last 52 weeks while domestic equity funds have had only 8 weeks of positive flows over the same time period.

 

Fixed income mutual funds put up net outflows of -$4.6 billion, trailing the year-to-date weekly average outflow of -$462 million and the 2014 average inflow of +$926 million. The outflow was composed of tax-free or municipal bond funds contributions of +$2.2 billion and taxable bond funds withdrawals of -$6.8 billion.

 

Equity ETFs had net subscriptions of +$5.5 billion, outpacing the year-to-date weekly average inflow of +$2.8 billion and the 2014 average inflow of +$3.2 billion. Fixed income ETFs had net inflows of +$1.9 billion, outpacing the year-to-date weekly average inflow of +$1.0 billion and the 2014 average inflow of +$1.0 billion.

 

Mutual fund flow data is collected weekly from the Investment Company Institute (ICI) and represents a survey of 95% of the investment management industry's mutual fund assets. Mutual fund data largely reflects the actions of retail investors. Exchange traded fund (ETF) information is extracted from Bloomberg and is matched to the same weekly reporting schedule as the ICI mutual fund data. According to industry leader Blackrock (BLK), U.S. ETF participation is 60% institutional investors and 40% retail investors.



Most Recent 12 Week Flow in Millions by Mutual Fund Product: Chart data is the most recent 12 weeks from the ICI mutual fund survey and includes the weekly average for 2014 and the weekly year-to-date average for 2015:

 

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Cumulative Annual Flow in Millions by Mutual Fund Product: Chart data is the cumulative fund flow from the ICI mutual fund survey for each year starting with 2008.

 

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Most Recent 12 Week Flow within Equity and Fixed Income Exchange Traded Funds: Chart data is the most recent 12 weeks from Bloomberg's ETF database (matched to the Wednesday to Wednesday reporting format of the ICI), the weekly average for 2014, and the weekly year-to-date average for 2015. In the third table are the results of the weekly flows into and out of the major market and sector SPDRs:

 

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Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR callouts, investors seeking safety contributed +3% or +$171 million to the long treasury TLT ETF.

 

[UNLOCKED] Fund Flow Survey | Year-End Active Shakedown - ICI9



Cumulative Annual Flow in Millions within Equity and Fixed Income Exchange Traded Funds: Chart data is the cumulative fund flow from Bloomberg's ETF database for each year starting with 2013.

 

[UNLOCKED] Fund Flow Survey | Year-End Active Shakedown - ICI17

 

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Net Results:

The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a positive +$2.2 billion spread for the week (-$520 million of total equity outflow net of the -$2.7 billion outflow from fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52-week moving average is +$741 million (more positive money flow to equities) with a 52-week high of +$20.5 billion (more positive money flow to equities) and a 52-week low of -$19.0 billion (negative numbers imply more positive money flow to bonds for the week.)

  

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Exposures:
The weekly data herein is important for the public asset managers with trends in mutual funds and ETFs impacting the companies with the following estimated revenue impact:

 

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MUST-SEE | 5 Key Charts Capturing Our Bearish Market View

Takeaway: From "sell everything" to "buy the dip" ... Wall Street storytelling is all over the map.

MUST-SEE | 5 Key Charts Capturing Our Bearish Market View - bounce cartoon 01.12.2016

 

We've been bearish on stocks since July and consistently bullish on the Long bond (TLT). In related news, we've been right. 

 

Below are five key charts this morning with analysis from Hedgeye CEO Keith McCullough.

 

"With the CRB Index closing at 162 yesterday (Oil sub $30, Copper $1.94, Nickel -5.7% on the day!, etc) macro markets are bouncing on those crashes bouncing, not Chinese trade data (Shanghai was -2.4%)," Hedgeye CEO Keith McCullough wrote in a note to subscribers earlier this morning. "#Deflation/Recession reports pending on Friday with USA’s PPI and Industrial Production reports."

 

Does this look "transitory" to you?

 

Take a look at copper...

 

meanwhile, Over in Bond Land...

 

"Not much of a bounce in 10yr Yield terms this morning = 2.14% with immediate-term downside to 2.06% this week if we continue to be right on that #Deflation data – looking for the JPM report tomorrow to be bearish on the margin too."

 

 

Pivoting to equity markets

 

Ford (F) is a good example of Old Wall storytelling that investors should buy on "gas prices are low" and "auto sales are good." Nope. That didn't work out so well.

  

Across the world...

 

No matter what you read from mainstream this morning, Chinese export/import data remains decisively bearish TREND. Take a look.

 

What about the rest of Asia? Funny you should ask...

 

We're sticking with our process that's helped our subscribers through these turbulent economic times.

As Keith Is Fond of saying, "Do macro or macro will do you."



RTA Live: January 13, 2016

 

 


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 80.64%
  • SHORT SIGNALS 78.61%
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