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Earnings Season Update: The Soft Bigotry of Low Expectations

Takeaway: So far, 43 of 500 companies have reported an aggregate year-over-year EPS decline of -7.1%.

Earnings Season Update: The Soft Bigotry of Low Expectations - earnings q2

 

Everyone beats Wall Street's beaten down earnings expectations. But what really matters is the year-over-year change.

 

"So far, 43 of 500 companies have officially printed their GAAP and non-GAAP stories for an aggregate year-over-year EPS decline of -7.1%," Hedgeye CEO Keith McCullough wrote earlier today. "Financials EPS are currently -8.3% y/y and allegedly they all “beat”; I’d still sell them on bounces from here."


Daily Market Data Dump: Tuesday

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, key currency crosses, and commodities. 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: Tuesday - equity markets 7 19

 

Daily Market Data Dump: Tuesday - sector performance 7 19

 

Daily Market Data Dump: Tuesday - volume 7 19

 

Daily Market Data Dump: Tuesday - rates and spreads 7 19

 

Daily Market Data Dump: Tuesday - currencies 7 19

 

Daily Market Data Dump: Tuesday - commodities 7 19


NFLX | Closing Long (2Q16)

Takeaway: We got too cute trading around our thesis. 2Q16 was so bad that we suspect our thesis may play out much sooner than we originally expected.

KEY POINTS

  1. 2Q16 = JUST AWFUL: Both the print and our long call into it.  We bought NFLX as trade on expected upside to int’l net sub adds for both the 2Q print/3Q guide.  NFLX reported int’l net adds of 1.54M (-36% y/y decline) vs. consensus of 2.1M and issued 3Q guidance of 2M vs. our expectation of 3.5M.  US was much worse, with net adds at historical lows of 160K and 300K in the 2Q print/3Q guide, respectively.  Mgmt suggested its gross adds were inline with its expectations, but heighted churn preempting the price increases from the ungrandfathering of its plans led to the shortfall vs. its expectations.  Regardless of the reason, its int’l net subs adds are a big concern given that NFLX hadn’t annualized past many of its 2015 country launches, and it just launched to ROW in 1Q16.  The fact that net adds are down on a y/y basis despite these tailwinds casts new doubt on the longer-term int’l story.
  2. DEMAND = ELASTIC? We clearly underestimated the magnitude of churn in our two trackers this quarter; largely because we didn’t think a $1-$2 increase in the monthly rate would be a big deal for most of its subs.  The sub adds miss vs. guidance was the worst in NFLX’s reported history (both US and int’l on a % basis); suggesting mgmt was really caught off guard as well.  It’s too early to tell if churn will become a prolonged issue since over half of NFLX domestic subs are in grandfathered plans, and NFLX will be staggering the price increases.  But the 2Q16 churn issue casts new doubt over one of NFLX’s assumed levers to cover its longer-term content costs; demand may be more elastic than many of us had assumed.  Granted, we could be overreacting to the print, but given the backlash to such a relatively small monthly rate increase, we have to question NFLX’s pricing power. 
  3. THESIS REFRESH: The first two bullets suggest that NFLX may have a shorter runway on both int’l growth and its ability to take price down the road.  In the context of our thesis, it appears even less likely that NFLX’s model will survive in its current form, and more importantly, that the street will actually figure that out over the 2016-2017 period following its ROW launch.  NFLX's mounting contractual obligations aren't a secret; if int'l user growth sputters out further despite its ROW launch, the specifics of its content costs will likely receive more attention (first note below) as the street realizes that int'l can't compensate for waning US demand (second note).  We're actually shocked that the stock isn’t down more pre-market and that we haven't seen any downgrades on one of NFLX’s worst prints in recent memory.  That basically suggests that the street still has hope and/or is in denial about NFLX’s longer-term prospects, which also means that we may get another shot on the short side this year.

 

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


@HedgeyeInternet

 

 

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

 

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

 

 


investing ideas

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Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

Another new all-time closing high for the SP500 as European Equities resume their crash...

Client Talking Points

Japan

The Heli-Ben $$ Copter rumoring has done a week of wonder for the Nikkei, ramping it +10.6% in the last 6 trading days; sadly it’s still -20% from the chart many chased at the 2015 peak … and economic growth continues to slow.

Earnings

43 of 500 companies have officially printed their GAAP and non-GAAP stories for an aggregate year-over-year EPS decline of -7.1%. Financials EPS are currently -8.3% y/y and allegedly they all “beat”; we'd still sell them on bounces from here.

Volume

Continues to crash into the all-time closing SPY highs – yesterday’s Total US Equity Volume (including dark pool) was down -20% and -24%, respectively vs. its 1 month and 1year averages; this cannot be bullish for active vs. passive flows (in June, active saw its biggest monthly outflow since Oct 2008).

Asset Allocation

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
7/18/16 50% 0% 0% 13% 30% 7%
7/19/16 50% 0% 0% 13% 30% 7%

Asset Allocation as a % of Max Preferred Exposure

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
7/18/16 50% 0% 0% 39% 91% 21%
7/19/16 50% 0% 0% 39% 91% 21%
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

Long Bonds (TLT) = #GrowthSlowing, yield curve compression.

GLD

Gold (GLD) = Protection from global currency devaluation and inflation/down USD – You can travel anywhere on earth and get a quote in local currency .

TIP

Treasury Inflation-Protected Securities (TIP) = Combination of the above exposures.

Three for the Road

TWEET OF THE DAY

Buy the all-time high? No thank you. app.hedgeye.com/insights/52414… via @KeithMcCullough $SPY #stocks #markets pic.twitter.com/7WKBaFXhfh

@Hedgeye

QUOTE OF THE DAY

“The only way to be number one is to be number one.”

-Anonymous

STAT OF THE DAY

Derek Jeter's career batting average is .310


The Troubling Truth Behind The Rally To All-Time Highs

Takeaway: Volume continues to crash into the all-time closing SPY highs – yesterday’s Total US Equity Volume was down -20% versus its 1-month average.

The Troubling Truth Behind The Rally To All-Time Highs - volume cartoon

 

The no-volume rally to all-time highs in the S&P 500 is disconcerting to say the least. Why?

 

No Volume = No Conviction

 

Here's analysis via Hedgeye CEO Keith McCullough in a note sent to subscribers earlier today:

 

"Volume continues to crash into the all-time closing SPY highs – yesterday’s Total US Equity Volume (including dark pool) was down -20% and -24%, respectively versus its 1-month and 1-year averages; this cannot be bullish for active vs. passive flows (in June, active saw its biggest monthly outflow since Oct 2008)"

 


July 19, 2016

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  • Bullish Trend
  • Bearish Trend
  • Neutral

INDEX BUY TRADE SELL TRADE PREV. CLOSE
UST10Y
10-Year U.S. Treasury Yield
1.63 1.31 1.59
SPX
S&P 500
2,110 2,190 2,166
RUT
Russell 2000
1,142 1,233 1,207
COMPQ
NASDAQ Composite
4,851 5,114 5,055
NIKK
Nikkei 225 Index
14,960 16,779 16,497
DAX
German DAX Composite
9,305 10,237 10,063
VIX
Volatility Index
12.01 17.14 12.44
USD
U.S. Dollar Index
96.00 97.11 96.59
EURUSD
Euro
1.09 1.12 1.10
USDJPY
Japanese Yen
100.39 107.36 106.14
WTIC
Light Crude Oil Spot Price
43.78 47.09 45.94
NATGAS
Natural Gas Spot Price
2.61 2.92 2.72
GOLD
Gold Spot Price
1,319 1,374 1,329
COPPER
Copper Spot Price
2.10 2.30 2.23
AAPL
Apple Inc.
94.60 100.22 99.83
AMZN
Amazon.com Inc.
721 755 736
NFLX
Netflix Inc.
86.53 99.01 98.81
GOOGL
Alphabet Inc.
699 756 753
JPM
J.P. Morgan Chase & Co.
59.70 65.33 63.96
IBM
International Business Machines
154 164 159.86



Hedgeye's Daily Trading Ranges are twenty immediate-term (TRADE) buy and sell levels, along with our intermediate-term (TREND) view.  Click HERE for a video from Hedgeye CEO Keith McCullough on how to use these risk ranges.


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The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.38%
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