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Uncertainty? 10% Probability of Fed Rate CUT to 10% Rate HIKE (In Just One Month)

Takeaway: Yeah ... this is normal.

Uncertainty? 10% Probability of Fed Rate CUT to 10% Rate HIKE (In Just One Month) - rate hike cartoon 11.05.2015

 

U.S. equity markets are backing off today ahead of a full week of central planning. (The Fed's policy announcement is tomorrow and the BOJ meeting on Thursday.)

 

Market expectations for 2016 Fed rate hikes are now within spitting distance of pre-Brexit hike probabilities.

 

Uncertainty? 10% Probability of Fed Rate CUT to 10% Rate HIKE (In Just One Month) - rate hike expectations 7 26

 

What a difference a month can make. Contrast this against the implied rate hike probabilities directly following the Brexit vote when rate CUT expectations for the July meeting spiked to 10%.

 

Uncertainty? 10% Probability of Fed Rate CUT to 10% Rate HIKE (In Just One Month) - rate prob 6 24

 

None of this is really shocking. In fact, it highlights the unbelievable amount of uncertainty surrounding Fed policy that's supposedly undergirding the recent rally to all-time highs.

 

Remember... it ain't over until the Fed lady Sings.


Capital Brief: Dems Battle Dumpster Fires In Philly

Takeaway: Bridges Over Troubled Waters; From Russia With Love; Barnberner

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: Dems Battle Dumpster Fires In Philly - JT   Potomac under 1 mb

 

“He who knows best knows how little he knows.”

-Thomas Jefferson

BRIDGES OVER TROUBLED WATERS

Despite the “united together” theme, day one at the Democratic National Convention got off to a very rough start, but ended on high note as Democrats moved swiftly to head off dissention in their ranks before it subsumed their four-day brotherly lovefest. After much gloating and finger wagging at Republican disarray last week, Democrats began their convention with the news of a Trump bump in the polls, a Russian email scandal and the DNC Chair’s subsequent resignation.

 

Though the protests that have ushered in the week are larger and more vocal than those in Cleveland, they were more than offset by powerful speeches by First Lady Michelle Obama, Senator Cory Booker, progressive icon Elizabeth Warren - and Bernie Sanders doubling down on his endorsement of Hillary Clinton. We expect the healing process to continue with speeches by President Bill Clinton tonight and President Obama on Wednesday evening.

FROM RUSSIA WITH LOVE

Emails have been a recurring nightmare for Democrats all year long - this time with DNC Chair Debbie Wasserman Schultz in a starring role resigning under pressure after thousands of internal emails revealing a coordinated effort to stop Bernie Sanders were uncovered and released by suspected Russian hackers, creating an uproar within the party and initiating an FBI probe to boot.

 

She’s been a scapegoat for Democrats on a number of fronts, even though her supporters point to the good she’s accomplished for the party – including raising record sums of money and working tirelessly in FL and across the country on behalf of Obama’s re-elect. Team Clinton has been swift and authoritative in trying to turn the page, but the outrage felt by Sander’s most fervent supporters won’t go away overnight and our friends in the media likely won’t let it.

BARNBERNER

Fissures in the Democratic ranks continued to show as Sanders supporters were welcomed to Philly by a new dumpster fire with the DNC email expose and revelations of manipulation by party officials, the selection of Senator Tim Kaine and residual unease with Clinton. Proving he’s no Ted Cruz, Sanders energized the delegates by delivering a barnburner of a speech on behalf of his ideals and Hillary Clinton.

 

But we think there’s more work to be done and expect Sanders to make more appearances this week and throughout the campaign this fall. Featuring progressive speakers like Sanders, Warren, and Michelle Obama was a prescient kickoff strategy and we think that it will quell most - but not all - of the anger that still burns on the far left.  


The BS Filter: Socialism, Big Bank Bailouts, & Super Abe To The Rescue

Takeaway: Here's our take on some of today's top financial stories.

The BS Filter: Socialism, Big Bank Bailouts, & Super Abe To The Rescue - Italian bank cartoon

Socialism, Pension Funds & Italian Bank BAILOUTs

According to Reuters, Italian pension funds have agreed to invest in the country's bad bank loans at the insistence of the government. The combined bailout program will be called Atlante 2, a follow up to a previous bailout fund that has already "used more than half of its initial 4.25 billion euro endowment to take over two failing regional banks." Sources familiar with the matter say the government asked for €500 million, as investors have become increasingly concerned about troubled loans totalling €360 billion.

 

OUR TAKE: "Socializing market risk continues," Hedgeye CEO Keith McCullough wrote earlier today. Italy's stock market crash accelerated this morning, at one point the FTSE MIB was down as much as -1.8% today before ending the day at essentially flat. Still the MIB is down -32% from 2015 top, as the ongoing big bank "rescue" freaks people out.

In other pension fund news...

"Long-term returns for U.S. public pensions are expected to drop to the lowest levels ever recorded, portending deeper pain for states and cities as a $1 trillion funding gap widens," the Wall Street Journal writes. Pension funds are expected to put up twenty-year annualized returns of 7.47%, raising concerns about whether states and cities can continue to afford pension obligations.

 

OUR TAKE: We've long been concerned about future pension fund returns and the possibility of a coming retirement crisis. Required reading on the subject include Hedgeye Financials analyst Josh Steiner's Early Look, "The Retirement Reality Check," and "Are 10 Million Americans About To Be Screwed Out Of Their Pensions?" by Hedgeye Restaurants analyst Howard Penney.

Freak out & Fire Up The Printing Presses!

"Bank of England policy maker Martin Weale said he’s begun to favor immediate stimulus for the U.K. economy... chang[ing] his mind on the timing of stimulus after purchasing managers’ indexes released July 22 were a lot worse than he had thought," Bloomberg writes.

 

OUR TAKE: Central Planning Orthodoxy = Print, Print, Print.

Super Abe To the rescue?

"Japan looks to inject 6 trillion yen ($56.7 billion) in direct fiscal outlays into the economy over the next few years, double the amount initially planned," the Nikkei newspaper reports. Meanwhile, the Wall Street Journal writes that Japan's Prime Minister Shinzo Abe is increasingly pressuring BOJ head Haruhiko Kuroda to "coordinate efforts by expanding the central bank’s monetary easing."

 

OUR TAKE: Even Abe's doubling of fiscal outlays can't stop the economic bleeding in Japan. Investors don't think so either. The Yen strengthened 1.2% today and Nikkei tumbled -1.4%.

 

Other stories worth mentioning:

  • FT - "Anheuser-Busch InBev has unilaterally raised its offer for rival SABMiller to £79bn to quash an investor rebellion that threatened to disrupt the third-biggest deal in corporate history."
  • Nasdaq - "BP posted its third straight quarterly loss as the British oil giant reels from a two-year crude-price slump and remains haunted by the 2010 Gulf of Mexico spill."
  • MarketWatch - "Royal Bank of Scotland and Natwest could become the first U.K. banks to charge customers to hold their cash if the Bank of England yanks benchmark interest rates below zero in wake of the Brexit vote."

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The Long-Term Twitter Story Isn’t Good

In this excerpt from The Macro Show, Hedgeye analyst Hesham Shaaban goes granular on the major headwinds facing Twitter. “Over the last two plus years, management has inflicted so much damage on its model that we really can’t see a way to fix it,” says Shaaban. “If Twitter can figure this out, there’s a ton of upside, given how badly the stock has been dinged throughout its public history. We just can’t see it—not yet at least.”

 

Subscribe to The Macro Show today for access to this and all other episodes. 

 

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What Jobless Claims Say About Recession (And Risk Of Significant Stock Market Selloff)

Takeaway: We're knocking on recession's door according to historical jobless claims data.

In the two charts below, Hedgeye Financials analyst Josh Steiner highlights how jobless claims data sub-330,000 is a harbinger of recession and hence significant stock market selloffs.

 

The first chart shows the last three cycles and the length of time jobless claims dropped below 330k before recession hit. The numbers are as follows: 24, 45, and 31 months (average: 33 months). With the current cycle in its 29th month below that level, we are

 

  • 5 months past the minimum
  • 4 months shy of the 33-month average
  • 16 months from the max

Chart #1

What Jobless Claims Say About Recession (And Risk Of Significant Stock Market Selloff) - zgogo

 

 

In the last cycle, the bottoming in jobless claims preceded a massive equity selloff.

CHART #2

What Jobless Claims Say About Recession (And Risk Of Significant Stock Market Selloff) - jobless stocks

 

*To access our institutional research email sales@hedgeye.com.


TWTR | Thoughts into the Print (2Q16)

Takeaway: Sorry for the delay, struggled with the setup. We're bearish into 4Q and beyond, but see 2Q upside, and the 3Q guide could go either way.

KEY POINTS

  1. THESIS REFRESH: We covered our TWTR short ahead of the 1Q16 print due to expected 1Q/2Q upside since we underestimated the auto-play mix headwind.  For now, we're keeping TWTR on our Short Bench, but our thesis hasn't changed; we still can’t see a way to fix the model given the damage TWTR has inflicted on it over the past 2+ years.  We believe problem with the TWTR story had been that the pre-Dorsey regime was scared of the street.  Instead of rebasing expectations early on, TWTR chased estimates with rampant increases in ad load, in turn pushing its users away.  We had previously estimated that TWTR had churned through nearly 40% of its US user base (Aug 2015 survey, n=7.5K); in turn shifting the US user story from organic growth to recapture, which may be tougher to achieve.  That said, monetization is now even more challenged since TWTR is struggling to capture the user/engagement growth necessary to drive its longer-term revenue growth.  We also now suspect that the model is in worse shape than we initially believed after segmenting its Ad business.
  2. CORE PRESSURE: The main drivers of the Ad model right now are Auto-play and its Non-Owned & Operated business (non-O&O).  We estimate that auto-play was roughly 60% of its total 1Q16 ad mix, and that it drove roughly 40% of its total 1Q16 Ad revenue growth.  TWTR’s non-O&O business was its second largest source of Ad revenue growth in 1Q16, but it also exhibited a notable seasonally decline in 1Q16; suggesting it’s no longer an unbridled tailwind.  More importantly, we estimate that Ad revenue growth in its Legacy O&O business (ex Auto-Play) was only in the high-single digit range in 1Q16.  So when we look out to 4Q when TWTR has comps of both a full quarter’s worth of auto-play ads and more mature Non-O&O Ad revenues, the core Legacy O&O business would likely need to reaccelerate off of 1Q levels to get to the 20% Ad revenue growth that consensus is assuming; a challenge given what will likely be flattish user growth.  Granted, we’ll see some benefit from its content deals and a potential lift from the election cycle, but we doubt it will enough to fill the void vs. our 4Q estimate of low- to mid-teens growth.
  3. BUT TOUGH SETUP: The 3Q guide will likely be the key barometer for the print given our diverging expectations for 2Q vs. 4Q.  For context, if TWTR handily beats 2Q estimates with the 3Q guide roughly inline, we suspect the stock moves higher.  On the other hand, if TWTR guides to a material deceleration in 3Q revenue growth into the mid- to high-teens, then we suspect 2Q results will not matter.  We suspect mgmt may sandbag the 3Q guide in order to bring down 4Q expectations; largely because it appears mgmt tried to do so with the 2Q guide, which implies either a y/y decline in its core Legacy O&O business or no sequential growth in either its Non-O&O business or Auto-Play product.  But that's just speculation; we're really not sure how mgmt will approach the 3Q guide.  We're going to sit this one out given the growing wave of negative sell-side sentiment and short interest that remains somewhat elevated.  We think we'll get another shot at the short later this year; if not, we can still look forward to 2017 consensus estimates, which are calling for a reacceleration in Ad revenue growth to the mid-20% range, holding steady throughout 2017.

 

Let us know if you have any questions, or would like to discuss further.

 

Hesham Shaaban, CFA
Managing Director


@HedgeyeInternet

 

TWTR | Thoughts into the Print (2Q16) - TWTR   Non O O 1Q16

TWTR | Thoughts into the Print (2Q16) - TWTR   Incremental Ad Revenue by Source 1Q16


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