AMZN | Timing

Takeaway: This would’ve been a great qtr a wk ago. We’re bifurcated by duration on AMZN. While we like it 1 yr out, need to get past next 2 Qs first.

It goes without saying that this is one of the more polarizing quarters for Amazon in quite a while. But let’s put aside the stock move for a minute and look at what’s changed fundamentally – after all, with the sell-off the stock is trading about in line with where it was just two days ago.


  1. The irony with all of this is that the quarter itself was very good. Sales grew by 25%, in its core business – what we’ll call US Retail – 60% of sales (it’s actually North America EGM + Media). This is a BIG plus for those out there that think that AMZN can one day capture 10% of total US Retail Sales.  That’s a $500bn number. You may balk at it. We might too. But people believe it, and as long as they do, they’ll hold this stock forever.
  2. AWS also looked relatively solid. Yes, it decelerated to 69% (from 78% last quarter) but is well above a rate we need to make this model work.
  3. International is a clear hole we can poke in the quarter, as we saw growth of only 12%. Keep in mind that AMZN has about 33% share of US Online Spending, but only about 8% in its more developed non-US regions.  While there’s a big opportunity for AMZN to grow outside our borders – potentially fueling one of the next multi-year legs of growth – it’s not acceptable for a company like this to see Int’l sales go from 45% to 33% over the past economic cycle.
  4. That brings us to the only thing we’re really concerned about, which is AMZN’s profitability to the extent we are, in fact, headed into a recession.  Roughly 65% of its total sales are in the US. At the same time, we just saw gross margin improvement decelerate materially, suggesting tougher GM compares 2-3 quarters out. If we have down gross margins, sales erode on the margin due to the economy, then the only thing that could sustain AMZN’s EBIT line is cuts to SG&A growth. If there’s anything we know (and respect) about AMZN, it’s that the company will spend money how, where, when and on what it so chooses. In fairness, this is a $100+bn revenue company that is producing over 50% returns on incremental cash. From where we sit, Bezos has earned a hall pass to do pretty much whatever he wants (that hall pass can be revoked if returns go the other way).


Hedgeye has a very bearish view on the US economy, so we’re concerned about the guide in another 13 weeks.  The SIGMA chart below supports this, as it’s the first time AMZN has been in a negative Sales/Inventory position in seven quarters. Unless estimates come down materially when they hit by the end of the weekend, we’re more on the bearish side from a near-term perspective. Though from a TAIL duration 3-years or less, we still like the story a lot.


AMZN  |  Timing - 1 29 2016 amzn chart1


AMZN  |  Timing - 1 29 2016 amzn chart2


Charts include consensus estimates:

AMZN  |  Timing - 1 29 2016 amzn chart3


Gross Margin expectations remain high.

AMZN  |  Timing - 1 29 2016 amzn chart4

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  • Bullish Trend
  • Bearish Trend
  • Neutral

10-Year U.S. Treasury Yield
2.03 1.92 2.00
S&P 500
1,850 1,913 1,893
Russell 2000
980 1,020 1,003
NASDAQ Composite
4,412 4,592 4,506
Nikkei 225 Index
16,112 17,820 17,041
German DAX Composite
9,304 9,959 9,639
Volatility Index
20.45 28.96 22.42
U.S. Dollar Index
98.19 99.93 98.62
1.07 1.10 1.08
Japanese Yen
118.06 120.61 118.82
Light Crude Oil Spot Price
27.69 33.99 33.72
Natural Gas Spot Price
2.04 2.29 2.23
Gold Spot Price
1,080 1,130 1,115
Copper Spot Price
1.95 2.10 2.05
Apple Inc.
92 97 94
539 616 635
Netflix Inc.
89 99 94
McDonald's Inc.
118 124 122
iShares 20+ Year Treasury
125 128 126
Microsoft Corp.
50.22 53.72 52.06

Japan, Utilities and The ECB

Client Talking Points


News of the morning = Japan goes NIRP – and the Yen goes >120, 10Y JGB’s trade down to 0.09% (as in “nine” basis points) and along with the balance of global yields, U.S. 10Y treasury yields followed suite and are trading down -6bps to 1.91% as the yield curve (10’s-2’s) compresses to another new low. Together with yesterday’s durable goods disaster, this morning’s slowing GDP report and more rumors of stimulus out of China the global #GrowthSlowing data remains conspicuous. Resurgent central bank interventionism is not a function of improving macro fundamentals. 


There’s always a bull market somewhere, even if it’s with growth-slowing bond proxies. The XLU is outperforming the S&P by 10% on a relative basis, and is the only S&P sub-sector in positive territory YTD (+2.9%). We continue to like growth-slowing, low-beta vehicles as the market continues to crush high beta, indebted names. High beta stocks are down -15% for the month (low-beta -2.4%) and high debt is down -9%. The market is not paying for 2018 earnings right now. Companies with high earnings growth estimates are down -10% on the month. 


The ECB’s Jens Weidmann (also President of the Bundesbank) warned fellow policy makers that the ECB should not go too far with the QE program, but will President Mario Draghi listen?  We doubt it!  Weidmann rightly points out that the ECB needs to lower its inflation forecast for 2016. A 2% target is after all a pipedream!


*Tune into The Macro Show with Gaming, Lodging & Leisure analyst Todd Jordan live in the studio at 9:00AM ET - CLICK HERE

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Utilities (XLU) continue to be the bright spot in the equity markets for 2016. XLU is up 1% this year, having edged out all other S&P 500 subsectors by a wide margin. Last week, XLU was down marginally but was still second best among the subsectors, beating all but Healthcare (XLV). Essentially, it's paying off to own low-beta XLU in a crashing market.


General Mills (GIS) has turned on its advertising for no artificial colors and flavors in its cereal, as well as an increased effort for its gluten free campaign. Click here to view the 30 second spot TV commercial.


These steps taken on cereal, coupled with improved merchandise planning across their portfolio in the second half should bode well for the company’s future performance. Additionally, General Mills fits neatly into the style factors that we like from a macro point of view, large cap, low beta and liquidity.


Rating agency S&P disclosed on Thursday three concerning stats as it relates to the wellness of credit oustanding:

  • More companies were at risk of having their credit ratings cut at the end of December than at the close of any other year since 2009
  • The number of potential downgrades was at 655, compared with 824 reported by the finish of 2009
  • The year-end total for 2015 was "exceptionally" higher than a yearly average of 613


Then on Friday, S&P followed with additional action:

  • Disclosure that oil-exporting countries face fresh downgrades as crude prices fall further and that it could repeat last year's move when it made a big group of cuts all at once
  • S&P currently has Azerbaijan, Bahrain, Kazakhstan, Oman, Russia, and Saudi Arabia on negative outlook in its Europe, Middle East and Africa region, as well as Brazil and Venezuela in Latin America

Moody’s echoed the shaky state of credit markets by announcing it was putting the ratings of 120 oil and gas companies on watch Friday.


Strap on your seatbelts as we expect that credit spreads will continue to widen. If the Fed pivots on its “4 rate hikes” in 2016 as the data continues to slow, Treasury bond yields get pushed lower and high-yield spreads widen into a late cycle deleveraging. This should continue to generate alpha in a Short JNK, Long TLT trade.

Three for the Road


Kaiser: ‘I Think The Old MLP Model Is Dead’… via @hedgeye



Mistakes are the portals of discovery.

James Joyce


The 20 most profitable hedge funds pulled in $15 billion last year, while all the hedge funds combined lost $99 billion.


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CHART OF THE DAY: Bullish? This Economic Indicator Prints Worst Growth Since November 2009


CHART OF THE DAY: Bullish? This Economic Indicator Prints Worst Growth Since November 2009 - CoD Cap Goods Orders


Editor's Note: Below is a brief excerpt and chart from today's Early Look written by U.S. Macro analyst Christian Drake. Click here to learn more.


"... Core Capital Goods Orders (i.e. business capex), meanwhile, declined -4.3% MoM and accelerated to -7.5% YoY – marking an 11th consecutive month of negative year-over-year growth and the worst growth print since November 2009.


But bad is good because 11 straight months of negative growth now = easy comps …. Right?"

Albert's Folly?

“Insanity: doing the same thing over and over again and expecting different results.”

-Albert Einstein


Was Einstein complexity deficient and wrong?


His well-worn colloquial definition of insanity may carry the caveat of scale dependence. 


In describing complex systems, Jim Rickards uses the example of snowflakes accumulating on the mountainside:  ….for long periods of time the same thing can happen with no discernible change in result - the snow just keeps accumulating and growing higher. 


This happens until some critical threshold is breached and the incremental snowflake catalyzes the avalanche or what is termed a “phase transition” in the local environment. 


There was nothing particularly special about that last, individual snowflake.   It’s the inherent complexity of “the system” that drives the dynamism and end result.


In biochemistry, many times you need “X” amount of substrate to hit an enzymatic trigger point.  You can keep adding “chemical ingredients” but you won’t catalyze the desired reaction until enough of the necessary compounds are present.   


In many experimental situations doing the same thing over and over and expecting (at some point) a different outcome may, in fact, be the most rational course of action. 


An inherent and principal problem is that repeated trial & error approaches are generally employed in situations of uncertainty and with outcomes that can be binary … you don’t know if you’re “insane” or not until you hit the level of system criticality and see a positive or negative phase transition. 


If that phase transition is negative, too late.  Kind of like a bank run…gradually, then suddenly…and completely nonlinear. 


When does the incremental QE snowflake catalyze a financial market phase transition and is unconventional monetary policy action heading towards a binary phase transition outcome catalyzed by a change in market confidence, unintended consequences, accumulation of latest risks, etc.?


Are global central banks insane in their repeated easing initiatives and failures to print real sustainable growth or have they simply not yet done enough?


If the former and if the rationale for prevailing policy is flawed, the likelihood that the phase transition is negative goes up. 


Here, increasing the scale (more debt/devaluation/etc.) on a (monetary policy) system built on a misguided ideology is doomed to fail – while the incremental easing initiative may be the negative trigger, the actual, absolute level of the debt/QE/etc. would largely be a random variable -  it’s the construct and scale of the system itself that ensures the implosion.


If the latter – with the BOJ announcing negative interest rates overnight (response: YEN >120, 10Y JGB’s dropping as low as 0.09% ... as in “nine” basis points) and China floating more stimulus rumors - we remain on the path to finding out.   


In the secular fight against overleverage, oversupply and negative demographics, Abe’s quiver is getting light and the remaining tools in the global central bank policy chest are few and duller. 


The probability that the developed market NIRP train continues to onboard central bankers is rising, not falling. 


Albert's Folly? - einstein


Back to the Global Macro Grind ….


Yesterday’s Durables Goods data (-5.1% MoM, -0.6% YoY) was a train wreck as the headline and all the sub-aggregates declined both sequentially and year-over-year. 


The mini implosion in December capped off a year which saw orders decline -3.5% and post the largest annual decline outside of a recession in 24 years.   


Notably, Durables Goods Ex-Defense and Aircraft – which is the aggregate most closely associated with what actual households buy – declined -1.2% MoM and accelerated to -2.8% YoY, marking an 8th consecutive month of negative YoY growth.


Core Capital Goods Orders (i.e. business capex), meanwhile, declined -4.3% MoM and accelerated to -7.5% YoY – marking an 11th consecutive month of negative year-over-year growth and the worst growth print since November 2009.


But bad is good because 11 straight months of negative growth now = easy comps …. Right?


Here’s the current score on recessionary domestic data:   


  1. Industrial Production: -1.8% YoY in Dec following a -1.3% YoY reading in Nov = 1st negative readings since 2009.  This series also carries the distinction of throwing off almost zero false positive vis-à-vis recession signaling over the last half-century
  2. ISM/PMI:  Contractionary prints (<50) in each of the last two months.  With inventories still elevated and both backlogs and new orders in contraction, the headline Index reading should stay sub-50 in the near-term.
  3. Exports:  Export growth has been negative in 6 of the last 7 months. The -4.0% growth recorded in the latest month = worst since 2009.
  4. Durable Goods: Negative growth in 9 of the last 11 months and down -3.5% YoY for 2015.
  5. Capex:  11th consecutive months of negative year-over-year growth and worst since 2009.
  6. Capex Plans:  Forward Capex plans as measured by the Fed Regional Surveys made another new low in January, suggesting the negative trend in investment spending is unlikely to ebb in the coming quarter(s).
  7. Producer Prices:  Headline PPI inflation negative for 11-straight months with Core PPI at just 0.30% and falling. Another step function move lower in energy prices in Jan and one of the worst import price growth #’s (-3.7% YoY, ex-petroleum) since 2009 in the latest month say the trend will continue.   
  8. Corporate Profits: Earnings growth and corporate profits across S&P500 companies have been negative QoQ for two consecutive quarters as of 3Q15 and are tracking at -3% with ~37% of constituents having reported for 4Q15. 
  9. Stocks: Russell 2000 is down -22.6% off the July 2015 highs.  In other words, the majority of publically listed equites have already crashed.   


And just to make it a Macro (Not) Top 10 list:


  1. Slowing:  Employment Growth, Income Growth, Consumption Growth and Credit growth are all slowing currently.  Yes – many of those measure remain good on an absolute basis but … & I feel like I say this 100X a week … it’s about better/worse, not good/bad and less good is bad when adopting a slope-of-the-line perspective of the data. 


This morning we’ll probably get a 0-handle on GDP for 4Q15 (QoQ, SAAR).  


On a year-over-year basis – which is how we model it, how companies are modeled, and the lens through which almost all other data is interpreted -  4Q15 will mark a 3rd consecutive quarter of slowing (& comps get tougher in 1Q16).


Whether we fall into technical economic recession from here may be largely beside the point (although that risk is rising, not falling)


  1. Earnings and Profit recessions are followed by significant, subsequent drawdowns in equities regardless of whether we actually go into economic recession.
  2. Common sense:  Is slowing growth, falling inflation, rising volatility, expanding credit spreads and rising uncertainty and reactionary central bank interventionism a fundamental factor set you want to be over-exposed to?   


Nature manages physiological complexity via redundant systems and controls. 


Slowing growth puts us in Quad #3 (slowing growth & Inflation) or Quad #4 (stagflation) in our GIP model. $USD’s, Bonds and Utilities win under either scenario. #Redundancy


We’ll side with Mother Nature … she’s traversed a global cycle or two.  


Christian B. Drake

U.S. Macro Analyst


Albert's Folly? - CoD Cap Goods Orders

Early Look

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