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Daily Market Data Dump: Friday

Takeaway: A closer look at global macro market developments.

Editor's Note: Below are complimentary charts highlighting global equity market developments, S&P 500 sector performance, volume on U.S. stock exchanges, and rates and bond spreads. It's on the house. For more information on how Hedgeye can help you better understand the markets and economy (and stay ahead of consensus) check out our array of investing products

 

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Daily Market Data Dump: Friday - style performance 7 1

 

Daily Market Data Dump: Friday - sector performance 7 1

 

Daily Market Data Dump: Friday - volume 7 1

 

Daily Market Data Dump: Friday - rates and spreads 7 1


EXPE | New Best Idea (Long)

Takeaway: While there is growing uncertainty surrounding global travel trends, EXPE is largely in control of its own story.

INTRODUCTION: Our sense is that there are three main drivers to the story right now: 1) the OWW integration (2016 EBITDA target), 2) the longer-term AWAY story, and 3) the current travel environment.  We discussed the first two factors in detail in the below notes (links below); the common takeaway is that mgmt is largely in control of both.  We will discuss the third factor below in more detail on our upcoming call.  But in short, if EXPE delivers on its EBITDA target as we expect in the face of these telegraphed global travel headwinds, the stock should work from here; especially if it shows progress on AWAY.  We’re adding EXPE as a Best Idea long with an expected duration of 6-9 months.  We will be hosting a call Friday, July 8th at 11am EDT to run through our detailed analysis

 

KEY POINTS

  1. IT’S LARGELY A COST STORY: Consensus appears to have some doubts around EXPE’s ability to hit its EBITDA target, with current estimates below the midpoint (37% vs. 40%).  However, we estimate that EXPE’s EBITDA target is effectively in the low 20% range after considering its 2015 purchase accounting headwinds.  EXPE could hit that target largely on the cost side alone through its strategy to cut redundant/duplicate costs.  Moreover, mgmt maintains two additional levers it can pull:  1) curbing OWW’s marketing spend (3x its EBITDA) since growing brand awareness for OWW’s is largely counterproductive, and 2) categorizing certain expenses as non-recurring to shift them out of its non-GAAP figures, in turn inflating its reported Adjusted EBITDA.  In short, mgmt is largely in control here.
  2. PAY TO PLAY: The AWAY model transition presents considerable near-term opportunity, which isn’t based on growing into some distant TAM, but capturing a take of the estimates $15B in bookings that its current subs are generating from the service today.  There’s been some pushback from AWAY’s subs, so there is some execution risk on the online bookability opt-in.  But, EXPE basically holds all the cards here since AWAY’s subs earn too much money off the platform to push back, and bear all the financial risk.  Timing issues will limit the total 2016 opportunity, but very small progress with the user fee will go a long way toward proving out EXPE's EBITDA target.  More importantly, mgmt really only needs to show progress to drive sentiment around the story – that AWAY is a material long-term contributor, after all – and given that AWAY’s results are now largely behind the curtain, mgmt can cherry pick any metric it wants to do so.  Once again, mgmt is largely in control here as well.
  3. THE END ISN’T NIGH: We’re all freaked out about decelerating travel trends, especially in the wake of Brexit.  But we suspect most outside of the sell-side are already bracing for it.  First, mgmt had already guided to decelerating room night growth through 2016, and cautioned of softening travel trends on its 6/6/16 investor event, which was corroborated by the STR data that we’re all watching.  The stock had since been giving back much of its 1Q16 post-print gains, Brexit basically eviscerated the remainder.  But it’s important to note that leisure and business trends may be diverging; the latter was the source of cautious commentary from both EXPE and the public hotels.  Either way, occupancy trends are not awful; they’re still positive y/y.  Further, if Brexit does emerge as a travel headwind, EXPE may be the OTA that is most-insulated given its higher proportion of US travelers (strong dollar, more limited Brexit exposure) and hotel bookings that favor the merchant model (limiting cancelation risk).  We will run through the supporting detail/analysis for this section on our upcoming call next Friday at 11am EDT. 

 

EXPE | “It’s Largely a Cost Story”
06/28/16 08:29 AM EDT
[click here]

 

EXPE | Pay to Play (HomeAway)
06/17/16 09:28 AM EDT
[click here]
  

  

Links to our prior two notes are above.  Let us know if you have questions, or would like to discuss in more detail.   

 

Hesham Shaaban, CFA
Managing Director


@HedgeyeInternet 
 

 

Todd Jordan
Managing Director


@HedgeyeSnakeye


CHART OF THE DAY: Happy Canada Day From Your Canadian Buds At Hedgeye!

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye Director of Research Daryl Jones. Click here to learn more. 

 

"... Happy Canada Day from your Canadian buds at Hedgeye!"

 

CHART OF THE DAY: Happy Canada Day From Your Canadian Buds At Hedgeye! - 07.01.16 EL Chart


The Dominion

“A Canadian is someone who knows how to make love in a canoe without tipping.”

-Pierre Burton

 

Unlike its more populous neighbor to the South, which fought a protracted War of Independence from 1775 – 1783, Canada’s ascent to nationhood was peaceful. Canadian representatives travelled to London in 1866 to negotiate with British parliament and the British North America Act was passed in 1867 naming the Dominion of Canada a sovereign nation.

 

So, what exactly is a Dominion?  As the story goes, when the representatives from Canada were in discussions in London, the lead representative Sir John A. McDonald (who would go on to become Canada’s first Prime Minister) suggested the new country’s name be the Kingdom of Canada. The British representatives were concerned this term would offend the Americans and conversely the Canadians were reticent to accept the British suggestion of a colony.

 

Sir Leonard Tilley, a member of the Canada group, who had the habit of reading a chapter of the bible before bed, stumbled upon the seventy-second Psalms which reads:

 

"He shall have dominion from sea to sea, and from the river to the ends of the earth."

 

Tilley suggested the name the next morning and it was quickly accepted. The Dominion of Canada was born.  To this day, Canada’s coats of arms bears the expression, “A Mari Usque Ad Mare”, or “From Sea To Sea”.

 

Happy Canada Day from your Canadian buds at Hedgeye!

 

Back to the Global Macro Grind

 

Needless to say, this note isn’t about a celebration of Canada.  In fact, the ways in which both Canada and the United States gained nationhood are in some ways representative of what’s going on in current geopolitical circles.

 

It is, in effect, the battle of the country versus the greater region. Some of these battles are violent and some are not. In Europe, of course, we’ve seen the impact of the consensus prognosticators voting against a country leaving its region. The result was the pound and a number of other global macro markets selling off.

 

The Dominion - EU cartoon 06.28.2016

 

Despite this dramatic sell off, Treasuries have continued to make higher highs. In fact, both the 10-year and 30-year U.S. Treasuries are at new all-time lows, respectively. The U.S. 10-year is at 1.37% and the U.S. 30-year is at 2.20%.  So the flight to something, maybe safety, continues.

 

The rationale behind this rally in Treasuries can largely be attributed to a general view that being invested in “safe” assets is a good bet given the volatility in global markets due to the shifting geopolitical landscape. In the Great Britain, most pundits did not expect a “leave” victory. At the same time, in the U.S. most pundits are not expecting a Trump victory.

 

At Hedgeye, we are extremely non-partisan but with our acquisition of Potomac Research we are increasingly finding ourselves analyzing politics in the U.S. As much as we, like many, did not feel that Trump would get the nomination, he got it.  At the same time, most pundits do not think Trump will gain the Presidency.

 

Despite the naysayers of a Trump Presidency, the polls are starting to suggest the race is tightening.  According the Real Clear Politics aggregate, Clinton is up on Trump by +4.8, which is outside the margin error. Further, in one of the most recent polls by Rasmussen, Trump is up against Hillary by +4.0%.  According to Rasmussen:

 

“Trump now earns 75% support among his fellow Republicans and picks up 14% of the Democratic vote. Seventy-six percent (76%) of Democrats like Clinton, as do 10% of GOP voters. Both candidates face a sizable number of potential defections because of unhappiness with them in their own parties.”

 

So, the big shift has been that more Democrats are now considering voting for Trump.  Whether this shift towards Trump continues remains to be seen, but the late inning shift does make us reminiscent of Great Britain where the “anti-establishment” vote ruled the day.

 

The combination of market volatility and uncertainty related to Brexit means that funds have dramatically underperformed in the year-to- date.  In fact, according to Bloomberg, hedge funds are off to their worst start since 2011.  According to Hedge Fund Research’s Global Hedge Fund Index, hedge funds have lost 1.8% this year.

 

A key reason hedge funds have underperformed is that many funds are crowded into similar trades. In that vein, a recent investment / trade idea we’ve had is related to Australian housing. We think there is still alpha left in this one and according to our Financials Team the short thesis is as follows:

  • One Trick Pony - We had assumed Australia's lifeblood was digging holes in the ground, but we found instead that the country's real lifeblood is pouring the foundation into those holes and then selling it. 
  • Over-construction - Construction is running amuck. There are almost 15x as many residential construction cranes in Australia per capita as there are in the major cities of North America.
  • King of the Bubbles - Australia's real home prices rose +120% between Q1 1990 and Q4 2014. Even Canada - another favorite property bubble of ours - which rose +67% over the same time period - looks modest by comparison.
  • Living on a Prayer - Australians are literally banking on the assumption that home prices keep going up forever. Home equity extraction in Australia dwarfs what was seen in the U.S. in the 2004-2006 bubble top.

Those are just the bullet points, but if you’d like more info on the short Australian housing then please email .

 

Our immediate-term Global Macro Risk Ranges are now: 

 

UST 10yr Yield 1.36-1.57%

SPX 1 

VIX 14.41-25.99
USD 94.90-97.15

Gold 1

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

The Dominion - 07.01.16 EL Chart


100 handle 3-day swings in SPY

Client Talking Points

UK

“but UK stocks are up”… yeah, lol – for a trade… and they had to eviscerate both the Pound (back down to $1.32 this am) and UK Bond Yields to all-time lows (UK 10yr -57bps in the last month alone to 0.84%) to get there… what’s next for banks with the giving up of a lot of free market liberty for short-term centrally planned market gains?

UST 10YR

We’re seeing fresh all-time lows in the USA’s 10yr this morning (briefly touching 1.40%) – obviously the higher return (especially on a volatility adjusted basis) position, for a year now, has remained long the Long Bond (TLT) instead of US Equity Beta (SPY) and Micron (MU) is just a preview of Earnings Season; risk range on VIX = 14-27! 

Gold

We've never seen so many celebrate being back to “up” on the year (are you?), when the real proxies #GrowthSlowing are absolutely crushing it, for epic absolute and relative gains – Gold up another +1% this AM to $1335/oz = +26% YTD after Utilities (XLY) ramped another +2.2% yesterday to an eye-popping 21.2% YTD (vs. Financials XLF -4.1% YTD).

Asset Allocation

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
6/30/16 58% 0% 0% 12% 26% 4%
7/1/16 58% 0% 0% 12% 26% 4%

Asset Allocation as a % of Max Preferred Exposure

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
6/30/16 58% 0% 0% 36% 79% 12%
7/1/16 58% 0% 0% 36% 79% 12%
The maximum preferred exposure for cash is 100%. The maximum preferred exposure for each of the other assets classes is 33%.

Top Long Ideas

Company Ticker Sector Duration
TLT

In Great Britain, the people voted for freedom and not for the broken promises that central planners can bend and smooth economic gravity. The #BeliefSystem is breaking down and despite the fact that every central banker around the world was out Friday talking about “stepping in.”

As we’ve mentioned, the bond market has gotten the #GrowthSlowing call right all along.

GLD

Looking at other markets (yes there are other markets), maybe being long the Long Bond (TLT) for almost two years and sitting long of Gold (GLD) was too boring for some people, you have to ask yourself what you’re buying in broader equity indices with an ongoing earnings and cyclical slowdown. The second quarter of 2016 is setting up as the 5th consecutive quarter of Y/Y earnings declines for the S&P 500, the longest streak since the quarter ending in Q3 2009.

TIP

We want to be long of continued growth decelerating and inflation picking up from a GIP modeling perspective into the back half of 2016. TIPS are a great way to play both of these views along with our GLD (reflation) and TLT (growth slowing) positions.

 The policy response globally will continue to be, currency devaluation and monetary easing with the intent to create inflation, and we take their commitment to this very seriously .

Three for the Road

TWEET OF THE DAY

Who #Trump May Tap for Veep (and Why a #Clinton/#Warren Ticket Is Unlikely) app.hedgeye.com/insights/52097… @HedgeyePotomac pic.twitter.com/5lrZuhNsct

@Hedgeye

QUOTE OF THE DAY

“In matters of style, swim with the current; in matters of principle stand like a rock. 

–Thomas Jefferson 

STAT OF THE DAY

Lenny Dykstra had a career batting average of .285, his best year was in 1990 when he hit .325.


Who Trump May Tap for Veep (and Why a Clinton/Warren Ticket Is Unlikely)

 

Hedgeye Potomac Chief Political Strategist JT Taylor discusses who Donald Trump may be eyeing for Vice-President and why a Hillary Clinton / Elizabeth Warren ticket is an unlikely proposition. 


investing ideas

Risk Managed Long Term Investing for Pros

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