Christman: What Comes Next After The Failed Coup In Turkey

Editor's NoteBelow is a complimentary research note written over the weekend by Hedgeye Potomac National Security analyst LTG Dan Christman USA Ret. 


Christman: What Comes Next After The Failed Coup In Turkey - erdogan


The coup attempt to oust President Erdogan has clearly failed; clashes evidently are still occurring at some naval bases, but plotters and insurgents have either been arrested, died in the attempt, or are fleeing to nearby countries (Greece) and are seeking asylum.


The White House, Secretary Kerry, Chancellor Merkel, and the EU's leadership all aligned reasonably early in the crisis to signal support for Erdogan; and the Turkish president also quickly won the support of "Turks in the street." As much as some U.S. analysts last evening were breathlessly hoping for the coup to succeed, it seemed poorly planned and lacked substantial support even within the military; it also failed to reckon with the fact that, despite the increasingly authoritarian behavior of Erdogan, his muzzling of the press and key opponents, and his creeping Islamization, he was (in the words of Fareed Zakharia) the most popular Turkish politician since Ataturk.


What next?


First and most obviously, US support for the government in terms of foreign military sales (FMS) and broader security and economic assistance will continue; Turkish bases are simply too important for the US in its fight against ISIS to be put at risk.


Second, however, the coup will play into Erdogan's increasing paranoia will do nothing to arrest the Putin-like moves of the Turkish president to assert even greater executive authority, at the fringes of constitutionality. Initial statements from the president and his AK party highlight this; they blame the entire episode last night on the "Pocono imam," Fethullah Gulen, a former ally of Erdogan who is now a vocal critic and living in Pennsylvania. 


Finally, and related, expect a harsh crackdown, not just on the military, but on domestic critics as well, as order is restored. 


All of this complicates the anti-ISIS coalition and the war against Islamic extremism; it may however, give the US and the EU an opportunity to encourage Erdogan to bridge his differences with the Kurds. Their separatist party, the PKK, was, ironically, amongst the first of the opposition parties to voice their support for the embattled president last night. Hard to figure.

McCullough: Buy The All-Time High?

In this excerpt from The Macro Show this morning, Hedgeye CEO Keith McCullough cautions subscribers and advises what investors should consider as U.S. equities hit an all-time high.

INSTANT INSIGHT: An Update On Our #CreditCycle Call

Takeaway: At the current default rate, 2016 is on track to surpass the 2009 all-time corporate bankruptcy high.

INSTANT INSIGHT: An Update On Our #CreditCycle Call - The Cycle cartoon 05.12.2016


As U.S. equity markets hit all-time highs, subtly simmering beneath the surface, the bond market is telling an entirely different story about the state of the U.S. economy.


According to the Financial Times:


"Global defaults hit the milestone century mark last week, a 50% jump from the number of delinquencies at the same point last year and the highest level since the US emerged from recession in 2009.


The number rose by four to 100 in the first full week of July, as defaults in the US oil and gas sector ratcheted higher, according to Diane Vazza of S&P Global Ratings.


That brings the amount that has been defaulted on to $154 billion."


(**S&P Global Ratings now predicts the default rate by junk-rated companies in the U.S. will climb to 5.3% by March 2017, up from 3.8% a year earlier.)


More disconcerting still, at the current default rate, 2016 is on track to surpass the 2009 all-time corporate bankruptcy high. 


INSTANT INSIGHT: An Update On Our #CreditCycle Call - global corp defaults



"The asymmetry between Rising Stars (potential for upgrade) & Fallen Angels (downgraded to Junk) in U.S. Credit continues," Hedgeye Financials analyst Jonathan Casteleyn wrote earlier today.


INSTANT INSIGHT: An Update On Our #CreditCycle Call - rising star fallen angel

More to be revealed.


**To read more of our #CreditCycle work check out:


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NFLX | New Trade Idea (Long)

Takeaway: This is just a short-term trade on what we believe to be a bullish setup into the 2Q16 print. Bearish thesis remains the same.


We published a note last night discussing our thoughts into NFLX’s 2Q16 earnings release (same bullets below in case you missed it).  In short, we expect that strength in int’l net sub adds on the 2Q print/3Q guide to alleviate growing concerns around the longer-term NFLX story; most of which were introduced by the 2Q16 guidance release.  Granted, we expect the 3Q guide for US net subs to disappoint, but we don’t see that as a major headwind given the heightened level negative sentiment around the US story today.  We suspect the street would look past a miss on the 3Q US net subs guide as long as it isn’t worse than the 2Q guide; especially if NFLX produces upside to its 2Q US net adds metric as we expect, and more importantly shows progress with the int’l story.  In short, the Int'l story is now the new battleground in the name since it's the barometer to NFLX's longer-term viability given perceived pressures in the US.  That said, given the growing wave of negative sentiment around the story, we suspect the stock works as long as int'l works. 




  1. THESIS RECAP: We doubt NFLX will be able to sustain its model and/or the breadth of its content offering, and that's it 2016 ROW launch will put that into context over 2016/2017.  We see NFLX’s contractual obligations as a considerably understated proxy for the ongoing cost of running its business rather than a distinct set of milestones; especially since its content outlays profile more as recurring quarterly expenses rather than asset purchases.  That said, the viability of its model is dependent on its ability to realize its user TAM.  However, our analysis of the US market suggests it may only have limited near-term runway, making the int’l expansion story crucial.  NFLX has essentially accelerated the test case for whether that story will work into 2016/2017 with its ROW launch, so we suspect the story may be coming to a head this year.  If Int'l starts sputtering out, we suspect the hype around the longer-term story fizzles out, and the multiple gets sucked out of the stock.
  2. US DOES APPEAR TO BE UNDER PRESSURE: Consensus is expecting net subscriber adds to decline -41% y/y to 532K in 2Q (vs. guidance of 500K), followed by a -12% decline in 3Q.  Our trackers are suggesting that the US did decline at a decelerating rate in 2Q, but not quite at the pace implied by guidance/consensus.  The 3Q guide may be a different story though since consensus is expecting a considerable moderation in the y/y decline in US net adds, and our tracker suggests only marginal improvement in the y/y trend in 3Q vs. 2Q.  Granted it’s still early in 3Q, but given that NFLX reports so early in the quarter, we suspect mgmt would need to take a big leap of faith in order to guide consensus domestic 3Q net adds.  We’re expecting 2Q net adds to come in at roughly 650K, with the 3Q guide slightly below that (vs. consensus of 774K).
  3. BUT INT’L LOOKS MUCH BETTER: Consensus is expecting net adds to decline -11% y/y to 2.1M in 2Q (vs. guidance of 2.0M), followed by a 4% increase in 3Q.  Remember that NFLX hasn’t annualized past all of its 2015 country launches yet, so a y/y decline in 2Q seems overdone, especially considering its 2016 ROW launch.  While our trackers are pointing to decelerating 2Q growth, we’re not seeing declines outside of a few notable countries (UK, CA, AU), but that is being largely offset by elevated growth throughout Latin America.  Our trackers also suggest that those two themes are largely extending early into 3Q as well, however the decline in those countries mentioned above is moderating, while Latin American growth remains elevated, if not accelerating in certain countries on a y/y basis QTD.  Collectively, we’re expecting int’l net adds to approach 3M in 2Q, with the 3Q guide coming in around 3.5M (vs. consensus of 2.85M)
  4. 2Q16 = BULLISH SETUP? We suspect that sentiment around the US story is fairly muted at this point, so attention has shifted toward the int’l markets as the proxy for whether the longer-term NFLX story has any legs.  In turn, we suspect if int’l works then than the stock could work as well.  We know we’re not alone in expecting upside to 2Q int’l net sub adds, but the 3Q guide hasn’t gotten as much attention.  If NFLX guides to a 3-handle for 3Q int’l net sub adds, we suspect the int’l story will find rekindled optimism following the shell shock from the 2Q guide, which would likely appear as a hiccup and/or sandbag in retrospect.  Regarding the US story, it’s tougher to gauge how sentiment tracks from here since we’re expecting a miss on the 3Q net sub adds guide, which could propel the bear case around potential churn from NFLX’s planned price increases.  But we suspect the street could look past a miss on US net sub adds as long as the 3Q guide isn’t worse than the 2Q guide, especially if NFLX produces upside to its 2Q net adds metric as we expect, and more importantly shows promise around the int’l story.   


See the notes below for supporting detail around our thesis.  Let us know if you have any questions, or would like to discuss further.


Hesham Shaaban, CFA
Managing Director




NFLX | Good vs. Bad (US User Survey)
06/09/16 10:41 AM EDT
[click here


NFLX | Breaking Down Content Costs
05/26/16 08:14 AM EDT
[click here

Daily Market Data Dump: Monday

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, rates and bond spreads, and key currency crosses. 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




Daily Market Data Dump: Monday - equity markets 7 18


Daily Market Data Dump: Monday - sector performance 7 18


Daily Market Data Dump: Monday - volume 7 18


Daily Market Data Dump: Monday - rates and spreads 7 18


Daily Market Data Dump: Monday - currencies 7 18

WisdomTree (WETF) | Helicopter Helping...Brexit Hurting

Takeaway: Japanese trends are being "lifted" by rumors of Helicopter QE but Brexit is still pushing AUM out the door.

  • Trends have marginally improved in Japan with rumors of a new bout of QE and a potential last ditch effort to "Helicopter" credit to consumers and spur the moribund Japanese economy. With that speculation running through the market early last week, the firm's hedged Japanese product took in over +$400 MM in new AUM in the past 5 days, as the Yen sold off -5%. The respite to the consistent uptrend in the currency and the slough off in AUM is allowing the DXJ to put in its best running month in 9 months and has boosted the stock out of a consistent downtrend for now.
  • Europe is still a slippery slope with Brexit adding a layer of complexity to the already weak economic landscape with fears of an Italian banking crisis now being intermixed with the unknown of how the U.K. will divorce itself from existing agreements with the E.U. The firm's hedged European product lost over -$250 million alone on Friday, with the tally from Brexit over the past 15 trading days now at -$1.2 billion in AUM (outflows and depreciation).
  • The wiggle higher in DXJ AUM has helped the stock on a short term basis but we remain bearish on the concentration risk to the firm on these 2 products which total 45% of AUM (especially with the ongoing weakness and concern in Europe which is impacting HEDJ). Other fundamental issues include the consistent underperformance of the firm's smart beta products compared to local benchmarks and also that over a broader cycle that long currency exposure tends to stabilize returns for foreign investors and the currency hedges at DXJ and HEDJ have done nothing but nullify Euro and Yen gains all year. The stock still trades well over 30x earnings and will report quarterly results next Friday with a likely $0.06 per share earnings print. With an $0.08 quarterly dividend currently, management will need to either cost cuts, restrike the dividend policy, or grow out of the current weak trends in its main products. We see fair value at $5-$7 per share or ~20x a $0.28 estimate for 2017 (under a scenario where DXJ and HEDJ stabilize but the firm doesn't grow). Our bear case scenario is that the firm breaks even at $20 billion in AUM and the stock is worth $2 per share.


The rumors of a "Helicopter" bout of QE in Japan finally took the rally out of the Yen last week with the Japanese currency depreciating -5%. This helped DXJ AUM by over +$400 MM with the product working on its best month in 9. The downtrend in DXJ AUM is still substantially lower however:

WisdomTree (WETF) | Helicopter Helping...Brexit Hurting - Chart 1


The European hedged product is now discounting another unknown with Brexit fears running through the product the past 3 weeks. The HEDJ lost over $250 MM on Friday (July 15th) alone with the total tally on the fund's AUM at -$1.2 billion since the U.K. referendum to leave the E.U.

WisdomTree (WETF) | Helicopter Helping...Brexit Hurting - Chart 2


Both funds are highly responsive to the direction of their respective foreign currencies and the Yen's rally this year has been dramatic with a stubbornly high Euro also problematic for the firm's currency hedges:

WisdomTree (WETF) | Helicopter Helping...Brexit Hurting - Chart 3


WisdomTree (WETF) | Helicopter Helping...Brexit Hurting - Chart 4


One of our main contentions with the story is that outside of near term currency weakness (the past 3 years), that there are significant periods of time where long currency exposure significantly benefits foreign investors:

WisdomTree (WETF) | Helicopter Helping...Brexit Hurting - Chart 5


WisdomTree (WETF) | Helicopter Helping...Brexit Hurting - Chart 6


In addition, the firm's "smart beta" methodology or fundamentally indexing via dividend payouts has yet to prove that it can "outperform" established market cap weighted benchmarks:

WisdomTree (WETF) | Helicopter Helping...Brexit Hurting - Chart 7


WisdomTree (WETF) | Helicopter Helping...Brexit Hurting - Chart 8


Shares remain wildly expensive and still have very high embedded growth despite AUM in decline. The firm also has a capital management issue at hand, currently paying an $0.08 per share common dividend while currently at a $0.06-0.07 per share earnings run rate. WETF stock sits as a Best Idea Short with fair value at $5-7 (and a $2 valuation in a breakeven scenario).


WisdomTree (WETF) | Helicopter Helping...Brexit Hurting - Chart 9


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Please let us know of any questions,


Jonathan Casteleyn, CFA, CMT 




 Joshua Steiner, CFA




Patrick Staudt, CFA

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