For investors bearish on U.S. economic growth, like us, Gold is having an amazing run this year. Year-to-date, Gold (GLD) is up 21.7% versus up just 1.4% for the S&P 500.
In this excerpt from The Macro Show earlier today, Hedgeye Retail analyst Brian McGough explains why certain retailers are overexposed to a rollover in the credit cycle.
Takeaway: The Brexit vote is a coin toss and, despite today's pop, European equities remain in crash mode.
Here's analysis via Hedgeye CEO Keith McCullough in a note sent to subscribers earlier today:
"BREXIT – coin toss? I’d say so. And since I don’t make calls on coin tosses, I’ll just give you both bearish intermediate-term TREND signals in FTSE (6388 resistance) and Pound ($1.47 vs. USD) with an intermediate-term risk range of $1.39-1.47 – in other words, even if they don’t exit, odds are both remain bearish TREND (because the UK economy is slowing regardless vs. last year’s cycle peak)"
"DAX – more definitively bearish TREND than FTSE, but that’s because DAX remains in crash mode (-22% from last year’s cycle high); reminder that we still have the Street low forecasts for both Eurozone and German GDP in 2H of 2016 – #GrowthSlowing is the tail wagging the political dog, and it’s not just the UK who has political risks accelerating in kind."
This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.
Takeaway: AWAY is a big opportunity; time will tell. But EXPE need only show incremental progress in the next 6-9 months to drive bullish sentiment
INTRODUCTION: We’re in the later innings of digging into EXPE. While we have reservations on the longer-term EXPE story (i.e. EXPE vs. PCLN), our sense is that the only two things that really matter to the story right now is the OWW integration (2016 EBITDA target) and the longer-term AWAY story. We discuss the latter below, note to follow on the former. In short, the AWAY business model transition presents a material near-term opportunity, and despite pushback from property owners, EXPE may be holding all the cards here (Pay to Play). More importantly, EXPE really doesn’t need much out of AWAY this year to drive sentiment around the longer-term story.
EXPE is trying to shift AWAY’s model more toward transactional than subscription based. EXPE isn’t abandoning AWAY’s sub model (yet), but trying to capture a take on its estimated $14-$16B in transactions that occur on the AWAY platform annually.
AWAY had been in the process of rolling this out since 2013, but had been fairly passive about it. The only real incentive to adopt online bookability was a $50 discount off the subscription rate. AWAY’s search algorithm would still prioritize by the subscription tier (rate), so online bookability didn’t really have much of a draw unless the sub really believed it drive more transaction volume by doing so. Based on 3Q15 results, only about 25% had opted in for online bookability
However, EXPE is now aggressively expediting the transition. Starting July 11th the search algorithm will be on a “Best Match” Policy, which will be largely driven by whether the listing is online bookable and related factors such as inquiry response time and maintaining up-to-date calendars. EXPE is also providing only one subscription plan at $499 with a $150 discount if the property is online bookable.
EXPE is also introducing a service fee, which ranges from 4%-9% of the total transaction; EXPE expects the average rate to be around 6%. Certainly, the fee raises the price to the end consumer (and/or cuts into the price received by the owner). However, we don’t necessarily see the fee as a major deterrent to booking since the percentage is still lower than the 6%-12% charged by Airbnb. It’s also worth noting that the fee % is inversely correlated to transaction size (see table below) with a cap of $399, which would only be trigged on a rental of over $7300. Further, the fee comes with a booking guarantee, which protects against fraud, double-bookings, etc. In essence, the fee is also serving as insurance, which seems like it would be a big draw within the sharing economy, but granted that’s anecdotal.
The opportunity from the transition isn’t based on growing into a magical TAM, but on capturing a commission on the $15B in estimated annual bookings that AWAY is already generating for its subs today. Granted, that $15B is purely an estimate by AWAY’s own admission, but there’s still a strong opportunity for the transactional model even if the actual booking number is half of its estimate (see first scenario analysis below).
The clearest opportunity is in the user fee, which could provide an incremental $900M vs. $487M in AWAY’s TTM revenues (3Q15) if AWAY can capture 100% of the estimated $15B transactions online. If EXPE could sway its subs toward the Pay-Per-Book subscription (no sub fee, 8% take-rate), the total opportunity grows to $2.1B. However, we don’t believe the latter will happen unless AWAY forces it subs into it the pay-per-book (PPB) option, jacks up the price on paid subscriptions, or introducing a bookings fee for paid subs.
Either way, that’s not likely to happen until AWAY captures actual transaction volume online in order to better size up its actual bookings and the effective take-rate off of that. If AWAY discovers that its effective take-rate is as low as it believes, we believe it will sunset the paid sub model, at least in its existing form.
The new cost structure is causing a bit of backlash amongst the property owners (here, here, here, and finally addressed by AWAY CEO, Brian Sharples: here), which makes sense since AWAY’s prior platform was very profitable. We can’t definitviely calculate average bookings/listing since AWAY can’t either. But there are a few different ways to slice up the data to back into it, all of which point average annual bookings north of $10K for paid subs (see analysis below), which would effectively translate to commission of under 5% on its bookings. Note that likely skews much lower for US subs since they are monetizing at 2x the rate of EU, which in turn is dragging down the average booking calculation. For context, Int’l had represented roughly 33% of AWAY’s revenue prior to the acquisition. At a bare minimum, it’s probably safe to say that AWAY’s paid subs are doing in excess of $5K in average bookings; otherwise they probably would have opted into the pay-per-book option.
Naturally, there is some execution risk on the opt-in for online bookability since these owners are doing well enough without the option, and it’s easier to avoid taxes without an electronic trail. The user fee also effectively makes the transaction more expensive, so the user is theoretically less likely to book. But we suspect the real reason why AWAY’s paid subs are resisting the change is that they simply don’t want to put AWAY in a position to take price on them; moving those transactions online would do exactly that. AWAY would have a better idea of how much business it's actually generating for its subscribers, and in turn, its effective take-rate off of that. If AWAY adjust its pricing model accordingly.
But ultimately we believe AWAY holds all the cards here, and the property owners need to play ball. Naturally, the change in the search algorithm puts those without bookability at a disadvantage. But we believe the more important factor is that there is just too much rental income at risk to try and steer the transaction offline, especially since that income is largely volume dependent.
AWAY’s average bookings per transaction ranges between $1k and $2K depending on which metric you’re using (Escapia average or EXPE’s expected average user fee). Compare that to average annual rental income that is well in excess of $10K, and there is a lot of risk to losing any transaction volume, especially considering that over 60% of vacation properties are mortgaged, with roughly half over 70% financed. Competition may also be heating up within the Vacation Rental space. Vacation property purchases were particularly strong for over the past two year (2014 was a record); according to the NAR, 40% of 2015 vacation home buyers plan to rent these properties out for income. In short, the secular tailwind in VR demand is being met with increasing supply.
In short, EXPE is changing the rules of the game, and we don’t believe AWAY’s property owners can do much about it since they bear the brunt of the financial risk, and are in increasing competition with each another.
EXPE doesn’t need that much in online bookings conversion out of AWAY to fuel optimism in the story this year given the opportunity from the user fee alone. In the last scenario analysis below, we illustrate the opportunity by flexing annual bookings against online capture rate. We’re only factoring in the user fee while assuming full cannibalization of AWAY’s paid subs into the online booking subscription ($118M headwind based on 3Q15 Paid Sub ARPU).
The negative is the risk of declining revenue from paid sub cannibalization, but that would essentially require less than a 20% capture rate despite all listings having online bookability in our analysis. The positive is that AWAY could still drive growth even if its actual bookings are half of its 2015 estimate. Under most logical assumptions, AWAY is producing accelerating Listings revenue growth this year vs. the 11% growth it produced in the TTM period ending 3Q15.
However, note that the new search algorithm and subscription plans don’t kick in until 3Q16 (July 11th), so we may not see a sudden surge bookable listings, especially since the opt-in will likely not occur overnight. However, the user fee has already kicked in (Feb), and we already know booking volume more than doubled y/y in 1Q (170% y/y), so we’ll start to see some of that flow through to 2Q/3Q revenue, which is based on the stay not the booking. Further, the transactional model is more seasonal, which should inflate AWAY’s 2Q/3Q growth rates vs. the year ago period.
But more importantly, all EXPE mgmt really needs to do is show progress with the transition, and mgmt will have a handful of metrics that it can cherry pick to paint any picture it wants. So even if revenues do initially decline from sub cannibalization, mgmt could chalk it up to higher-than-expected opt-in to online model, which will only breed optimism for the longer term story. If transaction volume growth decelerates vs. that 1Q metric, mgmt could blame it on the timing of algo/model change. It’s hard to envision a scenario that management couldn’t talk around since it’s still very early in the transition.
That said, we suspect mgmt has a pass over the 2-3 quarters if there are any hiccups since it is still very early in the transition. On the other hand, if mgmt shows any signs progress with the transition, the story only gains momentum.
Let us know if you have questions, or would like to discuss in more detail.
Hedgeye Potomac is hosting a call with one of Washington’s top political strategists, Scott Reed, to share his insights on the presidential election, the upcoming Democratic and Republican conventions, and outlook on the Senate and House races this fall.
The call will take place on Tuesday, June 21st at 11am ET with prepared remarks from Reed followed by Q&A.
ABOUT SCOTT REED
Scott Reed is the senior political strategist at the U.S. Chamber of Commerce. He is responsible for overseeing the Chamber’s federal voter education program. Reed created and implemented the blueprint for that strategy to help recruit business-friendly candidates, overseeing traditional and digital advertising campaigns, and identifying credible messengers to showcase the importance of the free enterprise system.
Reed was campaign manager for Bob Dole’s 1996 presidential campaign. He oversaw the national campaign, which included political strategy, policy development, communications, and advertising during the GOP primary and the general election. In addition, he directed preparations for the 1996 Republican National Convention in San Diego and the vice presidential selection process of Jack Kemp. In 1993, Reed was appointed executive director of the Republican National Committee. He served as chief operating officer of the GOP during the historic elections in 1993 and 1994 when the Republicans gained control of both the House and the Senate for the first time in more than 40 years. During the Bush administration, Reed served as chief of staff to Secretary Jack Kemp at the Department of Housing and Urban Development. He directed personnel, political, and policy matters, employing a long-term empowerment and privatization program.
Confirmation Number: 13638941
St. Louis Fed head James Bullard has finally acknowledged that the U.S. economy is slowing. The eye-opening part of Bullard's Friday morning admission is this: He now says the U.S. economy's growth is so underwhelming that we may need no more than a single additional rate hike for the next 2.5 years.
As we've pointed out before, Bullard joins San Francisco Fed head John Williams in dialing back prior rate hike expectations. (Williams was perhaps the most ardent hawk, yearning for as many as five rate hikes in 2016.)
Oh how the mighty have fallen...
In a shocking mea culpa though, Bullard released a statement today about Fed forecasting and the U.S. economy saying:
"We are backing off the idea that we have dogmatic certainty about where the U.S. economy is headed in the medium and longer run. We are trying to replace that certainty with a manageable expression of the uncertainty surrounding medium- and longer-run outcomes."
Bullard now predicts that, “Output grows at a trend pace of 2%, but the unemployment rate remains quite low and inflation remains at 2%” over the next two-and-a-half years.
He even brought up the dreaded "R-word":
"We are currently in a no recession state, but it is possible that we could switch to a recession state. If such a switch occurred, all variables would be affected but most notably, the unemployment rate would rise substantially. Again, the possibility of such a switch does not enter directly into the forecast because we have no reason to forecast a recession given the data available today. The possibility of recession is instead a risk to the forecast."
And here's another interesting admission about the Fed's concern about "asset price bubble risk":
"The approach presented here also says little about asset price bubble risk, a factor that often enters the actual policy discussion."
Bullard's statement is an interesting read. Hopefully, we're moving toward a Fed that puts humility before dogma.