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A Sad Year For The Hedge Fund Industry

Short Low, Cover High, Capitulate, And Cry = 2&20

 

What a sad year it's been for our industry. According to Bloomberg (during one of Hedgeye's best years yet), hedge funds are on track for their worst first half since 2011. I can't for the life of me understand how hedge funds missed what has been so obvious to us all year. Instead of whining about the "macro environment," hedge funds should be up huge, long Utilities, short Financials.

 

A Sad Year For The Hedge Fund Industry - sector performance 7 1

 

Sure, 100 handle 3-day swings in SPY have been great for traders who can go both ways. It's also terrible for equity fund flows…

 

A Sad Year For The Hedge Fund Industry - 06.30.16 EL Chart

 

Most Pundits have completely missed the link between #GrowthSlowing and long the Long Bond (TLT) and Gold (GLD) vs. short U.S. Equities. Gold ripped another +1% higher to $1335/oz, clocking Global Equity Bull at +25.9% YTD. And TLT continues to rock the Bond Bear world, hitting new all-time highs.

 

It generally takes time for "stocks" people to figure out what the bond market is telling them. Patience, of course, is what the real #GrowthSlowing Bulls (Long: TLT, ZROZ, EDV, XLU, GLD) have understood, for a year.

 

 

But, but, Keith, what about the FTSE? 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…

 

Whoever is telling you Brexit doesn't matter is a macro moron - all-time lows in yields (and bank spreads) matter. Question: What’s next for banks after giving up of a lot of free market liberty for short-term centrally planned market gains?

Meanwhile...

  • GERMANY: +0.6% DAX this morning, but to put this bear market bounce in context (DAX -21.4% from the 2015 cycle peak)
  • ITALY: no bounce today as the stock market remains in crash mode, -33% from the Global Equity #Bubble High (July 2015)
  • JAPAN: 5 straight up days on nothing fundamental; Nikkei still -24.9% from its Global Equity #Bubble high of 2015

 

#NoWorries

 

All of this is going to end swimmingly because economic fundamentals are so strong...

 

A Sad Year For The Hedge Fund Industry - Draghi Peter Pan cartoon 04.13.2016

 

For the record ... unlike most unaccountable Old Wall pundits, we actually have a real research team with a real process for making our calls. Old Wall and its media are in for a rude awakening. It's going to get a lot uglier before the entire edifice comes crashing down.


Capital Brief: The Calculus Behind Trump's Trade Tirade

Takeaway: Trump's Trade Tirade; Hampering Hillary; Trump Veepstakes

Editor's Note: Below is a brief excerpt from Hedgeye Potomac Chief Political Strategist JT Taylor's Capital Brief sent to institutional clients each morning. For more information on how you can access our institutional research please email sales@hedgeye.com.

 

Capital Brief: The Calculus Behind Trump's Trade Tirade - JT   Potomac under 1 mb

 

“On matters of style, swim with the current, on matters of principle, stand like a rock.”

― Thomas Jefferson

TRUMP’S TRADE TIRADE

Donald Trump’s protectionist and populist trade talk is becoming a big fly in the ointment for Republicans. He pledges to abolish policies that send American jobs overseas, threatens to impose tariffs on Chinese imports, promises to punish companies that move manufacturing to countries with cheaper labor, and bashes the U.S. Chamber of Commerce for their “insider deals” - even though economists of all stripes argue that Trump’s trade stance would be devastating to the economy and global trade.

 

Trump is making a calculated move on two fronts: go after both Clintons and their backing of trade deals over the decades, and woo working class voters and Democrats at the expense of main street Republicans and support from the business community. Someone had better buy up Trump’s foreign made clothing line before he gets elected...

HAMPERING HILLARY

In contrast to Trump, June was a good month for Hillary Clinton – she’s climbed in the polls, garnered important endorsements, and dodged a number of potential setbacks. She even broke ground on confronting the trust and likeability issues that have dogged her for years and then, BAM!, the State Department email issue resurfaces in earnest - courtesy of her top aide’s sit down with the Justice Department and her husband’s indiscreet conversation with U.S. Attorney General Loretta Lynch - who this morning announced she would not overrule the final decision by prosecutors and the FBI in the case.

 

It’s been nearly a year since the inspector general raised concerns over Clinton’s server, and despite comments that they plan to continue the case further, there’s increasing speculation that the Justice Department has set the date of the convention later this month as an unofficial deadline to finish the probe.

TRUMP VEEPSTAKES

While Trump has mostly been moving in the right direction, there’s still an abundance of doubt within his party – he has yet to receive big-name endorsements or even put the convention on solid footing. Trump can quickly allay that doubt once he names his veep. The right veep, that is. Choosing his running mate will anchor support from many in his party as well as provide a foundation for his yet-to-be-unveiled policy agenda. Trump plans for a convention reveal, but we think he’ll do it before – he needs momentum going into the convention. 


Got #GrowthSlowing? 10-Year Treasury Yield Hits All-Time Lows!

Got #GrowthSlowing? 10-Year Treasury Yield Hits All-Time Lows! - Yield cartoon 06.14.2016

 

Around the world, government bond yields are making fresh lows as global growth slows. U.K. gilts and the 10yr Treasury yield hit all-time lows this morning.

 

Below is analysis from Hedgeye CEO Keith McCullough in a note sent to subscribers earlier this morning:

 

"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!" 

 

 

That's why, since late 2014, we've been making the call to get long the Long Bond (TLT). It's been the right call. With yields making record lows, TLT is at an all-time high today and has crushed the S&P 500 year-to-date:

 

  • TLT: +16.5%

  • S&P 500: +3.0%

 

 


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

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

 

CLICK TO ENLARGE

 

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


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