Takeaway: Our tracker is flagging a deteriorating selling environment. Light 2016 guidance now more likely, and macro could become a growing concern.
- TRACKER DETERIORATING: Our LNKD JOLTS tracker declined sequentially into the second month of 4Q15, which is expected given seasonality in LNKD's selling environment. But as we mentioned in our last note, we're keying in on magnitude, which has gotten worse than seasonality alone would suggest. As a reminder, our LNKD Talent Solutions TAM analysis suggests that the bulk of that TAM is in the upsell opportunity (ARPA) vs. new account volume (see note below for detail).
- GUIDANCE TO DISSAPOINT? We already had reservations about staying long into LNKD's 2016 guidance release since this mgmt team is notoriously conservative with guidance. We suspect it's even less likely now that mgmt guides to street expectations if our tracker is correctly flagging a deteriorating selling environment. Further, Fx pressure is continuing early in 2016, which we expect to be top of mind for this mgmt team since Fx was LNKD's largest source of pressure last year, and the primary source of its guidance cut.
- CLOSING LONG POSITION: Our original thesis on LNKD was that it can't be played as a sleepy long. First, we have to be mindful of ever-rising consenus estimates and a mgmt team that doesn't want to box itself into them. Second, we're late cycle, and we don't want to be there for the eventual turn. Our macro team is now calling for a potential recession as early as 2Q16, which LNKD will not be immune to since its Talent Solution TAM is tethered to macro (see note below). We still view LNKD as one of the better run companies in our space, but when we put good company up against bad macro, macro wins.
See the note below for supporting detail/analysis on our LNKD. Let us know if you would like to disucss.
LNKD: New Best Idea (Long)
07/14/15 08:00 AM EDT
Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye CEO Keith McCullough. Click here to learn more.
"... As you can see in the Chart of The Day, the volatility of levered investments is starting to move up and into the right of this 3-factor SPREAD RISK chart:
- High Yield Spread (over 10yr Treasury) = y-axis
- Bond Market Volatility (MOVE Index) = x-axis
- Total Corporate Credit Outstanding = Bubble Size
History shows that once High Yield Spreads have widened meaningfully off the cycle-lows (as they have for the last 7 months), they do not tighten again in the same economic cycle."
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“A leader must be a true believer in the mission.”
I didn’t win Powerball last night, so I’m back at it, peddling non-fiction to Obama’s “folks” at the Fed this morning.
In all seriousness, like many of you, Laura and I had a Powerball discussion with our kids at the dinner table last night. Laura told them that “if we won”, we’d keep it anonymous and donate a large part of it to charity. The kids liked that.
Yes, I know. A certain type on the Old Wall is all about the money. And a mother’s moral lessons to her children can sound idealistic. But the reality is that a lucky ticket wouldn’t have changed the mission we’re on this morning. As parents, we’re already winning.
Back to the Global Macro Grind…
As a parent, coach, or professional (or anyone in any position of leadership) our goal should always be to be on a mission – one that we can feel in our bones – one that we truly believe in. As Navy SEAL Jocko Willink went on to write in Extreme Ownership:
“Leaders must always operate with the understanding that they are part of something greater than themselves and their own personal interests. They must impart this understanding to their teams.” (pg 76)
I realize I am as flawed and fragile as any other human being. Without the blessing of good health, everything I’ve ever “wanted” can be disrupted. That’s why, every day, I re-commit to being part of something that’s a lot bigger than I’ll ever be.
Back to the belief system of a Powerballer…
A lot of people played who have never played. Why? If you’re not in it, you can’t win it. But it was also a cultural craze that transcends the bubble in “wealth.” From “internet stocks” to housing, we’ve had plenty of bubbles pop in the last two decades. This one will too.
Some people play Powerball because they want a short-cut. They’ll gamble their kids meal money away for the hope of a better life. I don’t judge that. People have wants and needs. But we also have a culture that is fixated on cheap leverage.
“Cheap” leverage has a ton of downside if the principal investment goes to zero. When I think about all the mistakes I could have made in the last 6 months, the biggest one would have been getting sucked into “missing the move” in a lottery stock.
Fortunately, saying no to gambling, drugs, and leverage is a choice. Together, many of us made that choice.
To review the biggest catalyst for a US stock market crash:
- The perception that “0% rates” = 0% risk is a centrally planned fraud
- Real risk is measured in terms of both volatility and credit spreads
- As #Deflation becomes pervasive instead of “transitory”, both volatility and credit spreads breakout
As you can see in the Chart of The Day, the volatility of levered investments is starting to move up and into the right of this 3-factor SPREAD RISK chart:
- High Yield Spread (over 10yr Treasury) = y-axis
- Bond Market Volatility (MOVE Index) = x-axis
- Total Corporate Credit Outstanding = Bubble Size
History shows that once High Yield Spreads have widened meaningfully off the cycle-lows (as they have for the last 7 months), they do not tighten again in the same economic cycle.
Moreover, we’ve never seen a Credit Cycle with this much debt outstanding. This is the biggest corporate credit bubble in human history and leverage, as we all very well know, can amplify returns in both directions.
So, if you’re looking for reasons why the German stock market (DAX) and Russell 2000 (IWM) are in crash mode (down -21-22% from their cycle peaks in April-July of 2015), the combination of:
A) LEVERAGE (most equity hedge funds run 150-250% gross invested to lever up low nominal returns)
B) LIQUIDITY (lots of hedgies own the same small-mid cap stocks; when they go down fast, they can’t get out)
I’ve never been a fan of levered-long strategies – especially at economic cycle peaks. Personally, I don’t believe in levering myself up with assets I can’t afford either. But that’s just me – the guy who spent $5 on Powerball, just for fun.
It’ll be fun putting those tickets in the garbage this morning. My mission is not to have you chase charts, buy high, and hope that stocks never go down. Like bonds, they go up and they go down. I’m a big believer in a risk management process that goes both ways.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.04-2.18%
Oil (WTI) 28.61-33.52
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
Client Talking Points
Right back into crash mode goes the over-owned “this time is different” in Europe theme. The DAX is down -2% this morning and down -21.1% since the April 2015 top. ECB President Mario Draghi is going to have to defend this with Down Euro = Up Dollar = #Deflation.
Isn’t it ironic, but not surprising, that the “U.S. is the best house in a bad hood” thesis has crashed too? The Russell 2000 is now down -22% (crash mode) from its July 2015 #Bubble high as U.S. domestic growth expectations move toward a #Recession.
At 116 basis points the yield spread (10yr – 2yr) is both at a year-to-date low and cycle low. This always happens as the cycle is slowing toward recession and don’t forget you’ll get Industrial Production and PPI recession prints in the U.S. tomorrow morning.
*Tune into The Macro Show with Hedgeye CEO Keith McCullough live in the studio at 9:00AM ET - CLICK HERE.
|FIXED INCOME||21%||INTL CURRENCIES||12%|
Top Long Ideas
McDonald's boasts style factors that are best in class for turbulent times in the market, big cap and low beta and it has handily been outperforming the market and its competitors as of late. One of the biggest aspects of competing in their space is value offering.
McDonald’s has ceded share in the value category primarily to Burger King over the last two years. Now that they are launching a national value platform with a full slate of media support, MCD will recover the value customer.
General Mills' business seems to be starting to pick up steam, as the company is working to improve merchandising and advertising on core business.
In addition they have executed a few small, but meaningful M&A deals showcasing the change in managements thinking. The divestiture of Green Giant to B&G Foods, for instance, although a profitable business, was a good move for them given their lack of focus/investment in the brand (they have more opportunities like this throughout their portfolio, in addition to SKU rationalization).
GIS continues to look for more sizeable acquisitions in emerging markets, but the string of pearls approach may remain most effective domestically.
After the worst start to a year literally EVER for U.S. equity markets, TLT caught a bid in the first week of trading as the centrally-planned Chinese stock markets traded limit down earlier in the week. It was the largest central bank liquidity injection from Beijing since Chinese markets crashed in September.
TLT remains one of our strongest long idea calls heading into 2016 as junk bond markets begin to crack.
Three for the Road
TWEET OF THE DAY
Wait for it... Fed officials have recently cautioned that headwinds from China may upend the FOMC's planned interest rate hike path.
QUOTE OF THE DAY
Success is more a function of consistent common sense than it is of genius.
STAT OF THE DAY
On Tuesday, crude oil briefly dropped below $30 per barrel for the first time in 12 years.
Takeaway: Last week, investors sought safety in bonds, contributing a net $12.9 billion more to fixed income than equities
Investment Company Institute Mutual Fund Data and ETF Money Flow:
In the first week of 2016, investors reacted to the market turmoil by favoring bonds over stocks as measured by the -$12.9 billion spread between total equity flows and total bond flows (incorporating both mutual funds and ETFs). Positive numbers imply greater money flow to stocks with negative numbers imply greater money flow to bonds. With volatility on the rise in early 2016, we expect the aversion to stocks to continue.
Importantly, active domestic equity funds continued their losing streak, which we define as a string of outflows unbroken by four consecutive weeks of inflows. The following chart shows that domestic equity has been in outflow for 45 consecutive weeks with the current streak running at the fastest pace on record with a redemption average of -$4.0 billion per week. With the domestic equity exodus showing no sign of stopping, we continue to recommend a short position in shares of T. Rowe Price (see our TROW reports).
In the most recent 5-day period ending January 6th, total equity mutual funds put up net outflows of -$2.4 billion, trailing the 2015 average outflow of -$1.5 billion. The outflow was composed of international stock fund contributions of +$1.6 billion and domestic stock fund withdrawals of -$4.0 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 inflows of +$67 million, outpacing the 2015 average outflow of -$462 million. The inflow was composed of tax-free or municipal bond funds contributions of +$1.4 billion and taxable bond funds withdrawals of -$1.3 billion.
Equity ETFs had net redemptions of -$9.1 billion, trailing the 2015 average inflow of +$2.8 billion. Fixed income ETFs had net inflows of +$1.3 billion, surpassing the 2015 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 2015 and the weekly year-to-date average for 2016:
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.
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 2015, and the weekly year-to-date average for 2016. In the third table are the results of the weekly flows into and out of the major market and sector SPDRs:
Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR callouts, investors shunned technology stocks, redeeming -$506 million or -4% from the technology XLK ETF.
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.
The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a negative -$12.9 billion spread for the week (-$11.5 billion of total equity outflow net of the +$1.4 billion inflow to fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52-week moving average is +$691 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.)
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:
Jonathan Casteleyn, CFA, CMT
Joshua Steiner, CFA
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