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The Macro Show Replay | February 11, 2016

 


TWTR | Bad Guide, Better Story (4Q15)

Takeaway: Weak print and worse 1Q guide, but much improved mgmt narrative on a bombed-out stock. Our short is likely played out.

KEY POINTS

  1. 4Q15 = LACKLUSTER: We were expecting a decent beat on what appeared to be a sandbagged 4Q guide.  However TWTR only produced inline revenue; largely due to a sharp sequential surge in Data Licensing revenue.  Ad revenues missed consensus estimates, with growth decelerating to 48% y/y from 60% in 3Q15.  Auto-play may also be emerging as more of headwind than tailwind since surging ad engagements are coming at the expense of a sharp deceleration in CPE, and potentially user retention since auto-play's lower CPE also means TWTR needs to introduce a disproportionately higher number of ads into the users' feed to drive a comparable level of revenue growth vs. its legacy ad products.
  2. BAD GUIDE, BETTER STORY: TWTR guided light for 1Q16, but it actually looks much worse if we break it down by segment.  If we assume 1Q16 Data Licensing is flat q/q in 1Q16, then the 1Q guide implies ad revenue decelerating to ~37%, which is below the rate that consensus was assuming for any quarter in 2016, particularly 1Q16 (50%).  However, mgmt didn’t provide annual guidance, and the sell-side didn't press them on it since mgmt improved its narrative by shifting the focus almost entirely toward prioritizing the user.  We believe this would be the smarter move since its long-term prospects are currently limited given its heightened cumulative user churn (see 2nd note below for detail).
  3. SHORT LIKELY PLAYED OUT: We were looking at this print as somewhat of a binary event since mgmt's approach to 2016 guidance was going to determine how much longer we were going to stick with the short.  However, mgmt essentially removed that catalyst.  The stock is holding up after hours despite the light 1Q guide, which we suspect is partly due to mgmt’s improved narrative, but also because of bombed out sentiment, especially following LNKD's print.  We’ll be monitoring where consensus 2016 estimates trend from here, but more likely that not, our short has run its course. 

TWTR | Bad Guide, Better Story (4Q15) - TWTR   Auction 4Q15

TWTR | Bad Guide, Better Story (4Q15) - TWTR   Ad Engagement vs. Pricing 4Q15 

 

See notes below for supporting analysis and recent thoughts.  Let us know if you have any questions, or would like to discuss in more detail.

 

Hesham Shaaban, CFA


@HedgeyeInternet 

 

 

TWTR | Thesis Refresh (2016)

01/26/16 08:11 AM EST

[click here]

 

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]

 


CHART OF THE DAY | Fed Can't Arrest Economic Gravity: New Lows For Inflation Expectations

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. 

 

"... Now with:

  • Inflation expectations making lower lows (5Y Breakevens = 0.94% last, lowest since May 2009) … and the trend similar across the major sovereigns
  • 10Y Yields:  Down another -5pbs this morning to  1.61% (lowest since the 2012 all-time lows)
  • Yield Spread (10’s-2’s):  98bps last and breaching 1.0% to the downside for the 1st time since 2007
  • U.S. High Yield Yields and Spreads making higher highs
  • Investment grade spreads making higher highs
  • High Yield Energy Debt making higher highs (yielding 20.21% as of yesterday’s higher high)
  • Lending Standards tightening and domestic Loan Demand falling  (latest Senior Loan Officer Survey)
  • Eurodollar futures are now pricing the probability of negative rates in the U.S. by 2017 at 17% (up from 2% at the start of the year)"

 

CHART OF THE DAY | Fed Can't Arrest Economic Gravity: New Lows For Inflation Expectations - inflation expectations


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All Koch'd Up!

“Going negative is daring but appropriate monetary policy”

-Narayana Kocherlakota

 

We don’t operate in a silo @Hedegeye and we don’t claim to have a monopoly on good ideas. 

 

As proof, sometime circa 2010, we introduced our proprietary Hedgeye Orb rating scale. 

 

Back then – and before we got all stuffy and corporate - the blue orb was our calling card of sorts and we used the scale to infrequently rate non-Hedgeye generated analysis, central banker prowess, effective use of South Park and 90’s hip hop references, cheesy Canada jokes and so on.

 

If you’re unfamiliar, a 1-orb rating conveys inaccuracy, unoriginality, negative alpha and/or overall  lameness. In contrast, the coveted & rarified 4-orb rating is issued for the conveyance of thoughtfulness, originality, &/or general non-consensus ballsiness.

 

With central bankers back-tracking, equities on the brink and credit & Fx markets balking, let’s bring back the truth serum orb for a guest appearance: 

 

  • $7T in negatively yielding debt globally: 1-orb, totally lame
  • Central Banks, globally, announcing (again) more or what hasn’t worked ….. on groundhog day:  1.5 orbs (+0.5 orbs for amusingly ironic timing)
  • Gundlach’s use of the “mission accomplished” banner as a metaphor for the fed rate hike (the allusion being to George W. Bush on the Aircraft carrier and the pre-mature and retrospectively misguided victory lap): Original & Accurate: 3-orbs  

All Koch'd Up! - Abenomics cartoon 02.10.2016

 

Back to the Global Negative Rate Grind …..

 

Kocherlakota – outgoing Minneapolis Fed President/FOMC member and widely suspected owner of the infamous negative blue dot in the Fed’s September Dot Plot – has been chirping Team Janet from the bleachers from the minute he left the field. 

 

Now with …

 

  • Inflation expectations making lower lows (5Y Breakevens = 0.94% last, lowest since May 2009) … and the trend similar across the major sovereigns
  • 10Y Yields:  Down another -5pbs this morning to  1.61% (lowest since the 2012 all-time lows)
  • Yield Spread (10’s-2’s):  98bps last and breaching 1.0% to the downside for the 1st time since 2007
  • U.S. High Yield Yields and Spreads making higher highs
  • Investment grade spreads making higher highs
  • High Yield Energy Debt making higher highs (yielding 20.21% as of yesterday’s higher high)
  • Lending Standards tightening and domestic Loan Demand falling  (latest Senior Loan Officer Survey)
  • Eurodollar futures are now pricing the probability of negative rates in the U.S. by 2017 at 17% (up from 2% at the start of the year)

 

And with futures red and global equity & energy commodity markets continuing in crash mode overnight, the carnage score is currently (% chg off of 52wk high):

 

  • Brazil: -31.1%
  • China: -46.6%
  • France: -25.5%
  • Germany: -28.9%
  • Greece: -54.9%
  • India: -23.6%
  • Italy: -33.9%
  • Japan: -25%
  • Russia: -38.6%
  • Spain: -33.7%
  • USA (Russell 2k): -25.7%

 

…. Collectively, the active policy maker contingent, is now getting Koch’d up: 

 

  • Fischer:  “[Negative Rates] its been better than we thought … working more than I can say I expected”
  • Bernanke:  “it’s a go to” …“I think negative rates are something the Fed will and probably should consider if the situation arises,”
  • Dudley: “if the economy were to unexpectedly weaken dramatically, and we decided that we needed to use a full array of monetary policy tools to provide stimulus, it’s something that we would contemplate as a potential action,"
  • Fed (2016 Bank Stress test):  “include negative yields on short-term rates in your stress test” (1st time including this) and  …. "This scenario does not represent a forecast of the Federal Reserve,"  
  • Yellen (yesterday):  “We will look at it, and should look at it”

 

Conventional thinking has held that 0% on nominal rates represented the lower bound, mostly because nominal returns on cash aren’t <0%.  Theoretically true …. until you add the costs to store institutional sized levels of cash, insure it, protect it ,etc.  

 

You don’t have $7T in negative yielding debt because everything is awesome and you don’t field a chorus of “will you go negative?” questions when the data is conspicuously supporting a hawkish lean. 

 

Janet held the policy normalization line in her testimony yesterday but for a Fed pre-occupied with ‘communication tooling’ and pro-actively leading markets via carefully crafted rhetorical gradualism, that seems like a lot of verbal table setting  

 

Switching gears, Initial Jobless Claims and Retail Sales (Jan data) will round out this week’s domestic macro data flow. 

 

Jobless Claims:  At 285K, rolling initial claims are at their highest point since April of last year and we’re coming up on the anniversary of the trough level in claims recorded last year - meaning that the best they can do going forward is not get any worse.   Think of it as if it was a company at full earnings power/potential and the best it could do is not see earnings decline going forward.  What would that be worth … or what macro multiple would you put on that setup?

 

Retail Sales:  The further decline in gas prices in January will weigh on the headline (recall, Retail Sales represents spending on Goods and are reported in nominal dollars) while the +1.4% MoM rise in auto sales (autos = ~21% of total) will serve as a positive offset.  Further, base effects (i.e. a positive comp setup) stemming from the severe weather in the Dec-Feb period last year will provide a modest support to reported growth.  More broadly, the trend in Retail Sales growth remains one of deceleration.  In fact, growth has been slowing steadily since 2011 as demographics, urbanization, “collaborative” and “conspicuous” consumption and the end of the LT interest rate cycle have all driven spending towards services and experience (a topic for another Early Look).

 

In short, this week’s fundamental data will not be the #GrowthSlowing foil the Fed is stalking. 

 

Yesterday, my 5-yr old son won a jiu-jitsu tournament as the youngest kid in his class - then, an hour later, his 3-yr old sister made him tear-up and tap out:  4-orbs

 

Economic gravity has markets and policy makers in an arm-bar.  With volatility in bullish formation, risk ranges open on the downside and confidence in central planning breaking down, the capitulatory tap-out probably hasn’t been realized yet. 

 

As the saying goes, “Everyone has a plan until they get punched in the face...” 

 

Our (7-month old) plan = Don’t get punched in the face ... Long Bonds and bond proxies remains the rope-a-dope strategy

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.57-1.85%

SPX 1
RUT 940-995

Nikkei 159

VIX 23.02-28.98

EUR/USD 1.07-1.14
Oil (WTI) 25.83-30.27

 

Good luck out there today.

 

Christian B. Drake

U.S. Macro Analyst

 

All Koch'd Up! - inflation expectations


WAB | Anxious, Are We?

Takeaway:  Wabtec’s repurchase seems to reflect anxiety about its sagging share price.  Perhaps the Faiveley family is getting antsy about their discount to public holders. For long-term holders who liked the old Wabtec strategy, we do not see how a change in capital allocation is a positive signal. 

 

 

Choking on Good Burgundy

 

There are a few odd and noteworthy aspects of the buyback announced today.  First, it is utterly uncharacteristic for WAB.  Wabtec has had an acquisition driven growth strategy, and the 4Q15 buyback is much larger than the cumulative net buybacks over the last decade.  It is a major change in capital allocation, and one may limit post-Faiveley acquisition flexibility.  

 

Second, with the Faiveley deal closing expected at some point in 2016, cash is precious.  As we see it, WAB will need to come up with about $1 billion to close, with about $200 million of that currently in escrow.  The $365 million spent on the repurchase might have been put to better use, limiting the amount of debt that would be needed to fund the transaction. 

 

Finally, Faiveley’s public holders can elect Euro 100 per share, while the family is stuck taking 75% of their compensation in a fixed 1.125 ratio of WAB equity that has devalued since the deal was announced.  The family would be selling shares at – depending where one marks a WAB three-year mandatory convertible preferred of dubious liquidity – a 25% to 30% discount to public holders.  Is the Faiveley family finding that a bit hard to swallow, and perhaps pushing for revised terms?

 

 

Some Other Questions

  • Why change the capital allocation strategy?  The share price was at 4Q15 average levels through most of 2014 without a large buyback, so it is unlikely that management was attracted to the exceptional value.
  • Is the buyback a signal that business is great, and management wants to demonstrate confidence?  That seems a pretty clear, ‘no’.  We know that US Freight Rail equipment is going into storage, orders for new equipment are down, and that the international freight market is not robust. Backlogged orders may support activity in early 2016, but we do not believe that Wabtec management is highly optimistic about their market outlook.
  • Does WAB just want to add additional leverage, not recognizing that this is likely the peak of the rail capital spending cycle?  We hope so.  In fairness, Wabtec has probably been underleveraged; that will change with the buyback & Faiveley merger.
  • Did the company want a lower share count to improve headline EPS guidance? Perhaps, but the market has not responded well to simplistic financial engineering of late.
  • Did the Faiveley family press the company to do something about its sagging share price?  That doesn’t seem out of the question.  If you were the Faiveley family, would you want to receive less than the public holders?

 

We may be asking the wrong question, but Wabtec management seemed to want a higher share price in the fourth quarter.  For long-term holders who liked the old Wabtec strategy, we do not see how a change in capital allocation strategy is a good signal.


REPLAY: Healthcare Updates You Can’t Afford To Miss & Live Q&A

Our Healthcare team, Tom Tobin and Andrew Freedman, was back in the studio today at 12:15pm ET for another Healthcare Q&A with an opportunity for you to ask your questions live.

 

They had key updates on a wide range of companies they cover, including HCA Holdings (HCA), AMN Healthcare Services (AHS), Athenahealth (ATHN), Mednax (MD), Medidata Solutions (MDSO), Zimmer Biomet (ZBH), and Hologic (HOLX).

 

 


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