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U.S. Economy Enters Most Difficult Part of Cycle

 

In this brief excerpt from The Macro Show, Hedgeye Senior Macro analyst Darius Dale discusses how the U.S. economy has entered the toughest part of the cycle and why our growth estimate remains so bearish.


Reading Between The Lines: China's Cryptic Commentary

Reading Between The Lines: China's Cryptic Commentary - China growth cartoon 11.19.2015

 

Truth out of China? 

 

If only the truth were black and white.

 

Here's analysis in a note sent to subscribers this morning in which our Macro team pieces together recent comments from the PBoC and the country's state-owned news agency Xinhua to arrive at some interesting conclusions:

 

"The Shanghai Composite Index dropped -2.3% overnight despite the PBoC injecting 250B of liquidity into the banking system, which represents the largest such injection since February 26th. Weighing on sentiment was a Xinhua report that monetary policy will likely be more prudent in 2016 than it was last year, according to sources close to the PBoC, as well as PBoC Chief Economist Ma Jun commentary about future monetary policy needing to guard against financial risks.

 

With Chinese corporate leverage high and getting higher (166% of GDP) and property prices running up 30% YoY in first tier cities, we expect the PBoC to rein in the liquidity provision meaningfully from here now that economic stabilization is in the rear view mirror."

 

More from China's state-owned news agency Xinhua:

 

"China will continue to implement a prudent monetary policy this year, and, in the context of the economic slowdown, top officials have described the prudent policy as one 'with a slight easing bias.'

 

As the economy is yet to fully restore its strength, China will not shy away from using the ample tools at its disposal to bolster the economy. But it will be more careful to prevent the easing from going too far."

 

HEADS UP!


TWTR | Covering Short

Takeaway: No catalysts + bombed-out sentiment. But it’s premature to try to call a bottom on TWTR; this story will be tough to turn around.

KEY POINTS

  1. OUT OF HARD CATALYSTS: Mgmt reset the bar on revenue growth expectations by guiding 1Q16 revenue growth 13 percentage-points below consensus.  We estimate that guidance calls for a deceleration in Ad revenue growth in excess of 11 percentage points depending on the rate of sequential growth assumed for its Data Licensing segment, which hasn't declined q/q since 3Q13.  We suspect mgmt bought itself enough breathing room on what appears to be a particularly light guide, but TWTR's push into Auto-play ads remains a wild card given the trade-off between engagements and CPE.  Further, if Auto-play winds up siphoning off engagements from its legacy CPC ad products (i.e. ad fatigue), then that breathing room could evaporate quickly.  It's a murky picture that we would rather just avoid, and given bombed out sentiment, we would rather just watch from the sidelines for now.
  2. BUT NOT OUT OF THE WOODS: Remember TWTR needs to beat on both monetization and user growth expectations to appease the street.  Those two factors have historically worked against each other with the common denominator being ad load (see 3rd note below).  It's also worth noting that TWTR's push into auto-play could exacerbate this dynamic since TWTR needs a disproportionately higher level auto-play ad load to drive revenue growth given the CPE discount.  But more importantly, user growth will be much tougher to achieve since we estimate that TWTR has churned through nearly 40% of its US user base (2nd note below).  That is shifting the dynamics of its user growth from organic growth toward reengagement, which we suspect will be tougher to achieve without giving those users a clear incentive to come back.  That said, we suspect it’s premature to call to try to call the bottom on TWTR; this story will be tough to turn around.

 

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
Managing Director


@HedgeyeInternet 

 

 

TWTR | Bad Guide, Better Story (4Q15)
02/11/16 08:18 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]


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Earnings, Euro and China

Client Talking Points

#EARNINGS

With the busiest week of Q1 Earnings for S&P 500 companies, we’ll have some concrete evidence of pending earnings deterioration. Thus far, 66 companies have reported from 7 sectors. 4 of 7 have comped down bottom line. S&P earnings have comped down -10.8% in aggregate, with materials and financials leading decliners. The trend of late cycle reporting strength in healthcare and consumer discretionary carries on, for now. Again we would ask the question, can the market continue to trade-up with the possibility of two more quarters of poor earnings? We’ll see.  

EUR/USD

The ECB holds its monetary meeting in Frankfurt tomorrow. We expect no great “waves” from President Mario Draghi as he already delivered the “Drugs” in the form of both interest rate cuts and the expansion of QE (by €20 billion to €80 billion/month) in last month’s meeting. We continue to suggest trading our immediate term TRADE risk range of $1.12 - $1.14. We have a neutral outlook on the currency cross over the intermediate term TREND.

#TIGHTCHINA

The Shanghai Composite Index dropped -2.3% overnight despite the PBoC injecting 250B of liquidity into the banking system, which represents the largest such injection since February 26th. Weighing on sentiment was a Xinhua report that monetary policy will likely be more prudent in 2016 than it was last year, according to sources close to the PBoC, as well as PBoC Chief Economist Ma Jun commentary about future monetary policy needing to guard against financial risks. With Chinese corporate leverage high and getting higher (166% of GDP) and property prices running up 30% YoY in first tier cities, we expect the PBoC to rein in the liquidity provision meaningfully from here now that economic stabilization is in the rear view mirror. 

 

*Tune into The Macro Show with Darius Dale live in the studio at 9:00AM ET - CLICK HERE

Asset Allocation

CASH 65% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 5%
FIXED INCOME 25% INTL CURRENCIES 5%

Top Long Ideas

Company Ticker Sector Duration
MCD

McDonald's (MCD) is reporting 1Q16 results on Friday, and we will have a more thorough update following the release. Current consensus estimates are projecting system-wide same-store sales (SSS) growth to be +4.6%, and +4.6% in the United States. Given another full quarter of All Day Breakfast, and ever evolving value proposition that MCD is providing, we feel confident in their ability to perform at or above expectations.

 

MCD continues to be a great LONG stock to hold during turbulent times in the market given their attributes of being large-cap, low beta, and aligns with our macro teams view of going LONG lower to middle income food providers.

CME

With the largest Capital Markets operation reporting results last week, JP Morgan's numbers continue to relay the business-to-business (B2B) shift in both bond and equity markets. With capital hamstrung by Financial Crisis era regulation, and fixed income desks running tight as a drum, brokerage activity continues to shift over into the exchange traded derivative markets. JPM's FICC, or fixed income trading, results hit $3.5 billion in revenue in 1Q16, down 13% year-over-year.

 

Conversely, the daily reporting of CME Group's (CME) bond volumes finished at 8.2 million contracts per day in 1Q, up +9% from last year. On a revenue basis, CME's results are actually a little stronger, with fixed income rate per contract up +2% year-over-year. The shift in equities is more balanced, with JPM's equity trading revenues up +6% y-o-y according to their latest report.

 

CME's stock volumes, however, still outflank the big brokerage desk with futures and options volume up +9% y-o-y for the forthcoming quarterly report on April 28th. This activity shift is secular in our view and CME Group has a strong upward bias in earnings power which makes its stock one of the few to own in Financial Services.

TLT

We remain the bears on the U.S. economy and the corporate profit and credit cycles - we’re long growth slowing via Long Bonds (TLT) and Pimco 25+ Year Zero Coupon U.S. Treasury ETF (ZROZ) and short risky corporate credit via Junk Bonds (JNK) as the profit cycle rolls over.

 

High yield bonds have experienced meaningful relief in price terms with the move in reflationary assets. Again, we reiterate that once credit spreads move off their cycle lows, they don’t typically revert in the same cycle, which is why we are sticking with our sell recommendation on junk bonds (JNK).

 

Any time corporate profits decline for two consecutive quarters, the S&P drawdown has had a peak to trough decline of at least 20%. Dissecting the likely direction of earnings in Q1 and Q2 of this year, we could be facing 4 consecutive quarters of declining corporate profits, and we question the market's ability to slap higher earnings multiples on the S&P 500.

Three for the Road

TWEET OF THE DAY

4 Videos On Why We Remain https://app.hedgeye.com/insights/50370-4-videos-on-why-we-re-bearish… @KeithMcCullough @HedgeyeDDale @HoweGeneration $SPY #Fed

@Hedgeye

QUOTE OF THE DAY

It's about discovery.  

Scott Jurek

STAT OF THE DAY

Apple reported iPhone owners unlock their device, on average, 80 times a day.


The Macro Show with Darius Dale Replay | April 20, 2016

CLICK HERE to access the associated slides.

 

After you've watched today's show, we invite you to read a special complimentary edition of Hedgeye's Early Look. 

 

 An audio-only replay of today's show is available here.


CHART OF THE DAY: What More Can Fed Jawboning Accomplish?

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye Senior Macro analyst Darius Dale. Click here to learn more.

 

"... With respect to Equities: Simply put, we do not think Janet Yellen can authorize QE4 without another leg down in domestic credit and equity markets – which, if prescient, calls into question the sustainability of this rally. As such, we believe the late-cycle sectors (i.e. Financials, Healthcare and Consumer Retail) are in the earlier innings of pricing in the depths of the cycle, while reflation sectors have clearly priced in some version of approaching the ninth inning; it’s not at all clear that the latter sectors will make lower-lows on the next leg down. Given our bearish outlook for the domestic equity market from here, we still want to be short the opposite of our preferred style factors on the long side – i.e. low beta, high quality, capital return stories like GIS and MCD."

 

CHART OF THE DAY: What More Can Fed Jawboning Accomplish? - Chart of the Day 4 20


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