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A Certified Train Wreck GDP Report

A Certified Train Wreck GDP Report - GDP cartoon 10.29.2015

Let’s cut to the chase. Today's Q2 US GDP report was a certified train wreck. Here's a closer look.

Retail | American Pie

Takeaway: An accelerating topline at AMZN means the pie piece is shrinking for B&M, while street expectations = accelerating 2H for softline retail.

The 800lb Gorilla in retail land reported numbers last night, and while this isn’t a specific analysis on the AMZN print, there is one key chart that we think is particularly noteworthy headed into Retail Earnings season which kicks off in earnest during the first week of August. In summary, we’ve seen a striking divergence between the relatively strong headline government monthly sales reports and what’s been printed by most (we won’t say all) companies in our coverage universe. That was clear as day in 1Q where the government reported 3.6% growth, but softline retailers (control group of 15 companies) grew only 0.6%. What gives?


As of June, the retail group (ex Auto, Food Service, and Gas) per the government added an incremental $111 billion in sales on a TTM basis. Good for 3.5% growth. There are puts and takes by category, but if we look at the trend in US consumption holistically – it becomes pretty clear what one of the root causes for the discrepancy between what would otherwise be considered healthy sales data and the flow-through to the P&Ls of (especially mall based) retail. And that’s AMZN.


We think the numbers here speak for themselves. Of the $111bn added over the past 12mnths, AMZN alone has accounted for 25% of the incremental growth. Yep, that’s $28bn when you incorporate 3rd party sales. The highest rate we’ve ever seen and a rate over 50% higher than the company recognized a year ago.


Retail | American Pie - 7 28 2016 amzn


Yes, the pie is slightly bigger, but the amount up for grabs is a fraction of what it would otherwise be given the sheer size of the share AMZN is churning through its website in the US. From here, near term expectations look to be in check for softline retail with the street expecting just 0.1% topline growth in 2Q. But given the trend in the chart above, we’re not banking on the acceleration to 1.4% growth in 3Q16 or 2.7% growth in 4Q16.


Retail | American Pie - 7 29 2016 softlines


Assumptions on Amazon US End Retail Estimate:

1) 20% Take Rate on 3rd Party Sales

2) Total Amazon 3rd Party Units % = NA Amazon 3rd Party End Retail Dollar %

3) AMZN North America = US Equivalent

4) 2Q16 3rd Party Units % Assumed 49% of Total

Capital Brief | Trump Vs. Clinton: A Tale Of Convention Contrast

Takeaway: Clinton's Convention Contrast; Depending On Independents; Russian Roulette

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 | Trump Vs. Clinton: A Tale Of Convention Contrast - JT   Potomac under 1 mb


"If your actions inspire others to dream more, learn more, do more and become more, you are a leader."

-John Quincy Adams


Hillary Clinton took center stage last night and made a case to her fellow Democrats and the country why they should coalesce around and support her this November. In a three-day build up to last night, speakers cast Clinton as experienced, stable and committed in stark contrast to Donald Trump - but all lot of this boils down to whether voters can connect to her on a personal level. Chelsea Clinton’s introduction provided the perfect touch portraying her mother as a role model and grandmother to all and amplifying her father’s message earlier in the week.


Clinton’s speech did what Donald Trump’s did not do – she addressed how she’ll provide strong and stable leadership and bring about economic change while at the same time conveying passion and dedication to the causes of millions of Americans. Clinton’s main objective was to neutralize her lingering negatives and appeal to Americans as an experienced hand and unifier by showcasing her career and persistent drive through decades of public service.  


We see a requisite bump in the polls after a solid four days in Philly, but will she continue to excite her constituencies and sustain the momentum?


Uncommitted voters disenchanted with the two-party system continue to hold out on and with both conventions now complete, we wonder if either party has created enough enthusiasm for the ever-growing number of Independents to swing their way. Democrat-turned-Republican-turned-Independent Michael Bloomberg made the case against Trump for pro-business Independents who are wary of Clinton, but only time will tell if his endorsement is strong enough to shift voters her way.


Bernie Sanders’s supporters hold the golden ticket, but with the curtain now closed on the convention, it comes down to the strength and passion of the party’s message and grassroots efforts.


Trump rattled off some of the more myopic statements on Russia since former AK Governor Sarah Palin reminded us that Russia can be seen from her house...Criticism from all corners is building for his outrageous remarks encouraging Russia to continue their hacking efforts to find Clinton’s missing emails. Whether it was sarcasm or not, it crystallized where Trump’s head is. Rather than focusing on party themes and policy differences, like the ones he will see in debates, he sticks to the personal attacks that helped him thrive in the primaries.


We heard promises that the Republican convention would be a turning point for Trump, after which he would buckle down and get serious, but instead he continues to fall back on ridicule, innuendo and attention-getting headlines. While most of the country finally realizes that this is a change election - his rhetoric will only get him so far until he digs deeper on substance and focuses on solutions mattering most to the American people.

Hedgeye Statistics

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

  • LONG SIGNALS 80.48%
  • SHORT SIGNALS 78.35%

Reality Check: The Nonsense Of Helicopter Money Speculation

Takeaway: Its been a rocky few weeks for Japan as helicopter money speculation stoked volatility. Central planners can't arrest economic reality.

Reality Check: The Nonsense Of Helicopter Money Speculation - helicopter money cartoon 07.19.2016


"There is considerable uncertainty over the outlook for prices," Kuroda told a press conference on Friday, following the Bank of Japan's July meeting. "In order to prevent these uncertainties from leading to a deterioration in confidence in households and businesses, we have decided to implement new measures."


The BOJ decided to double its annual purchases of ETFs to ¥6 trillion and will conduct an assessment of the effects of negative interest rates and its asset-buying program, which Reuters says suggests "that a major overhaul of its stimulus program may be forthcoming."


It's been a wild week leading up to the BOJ decision. "Helicopter money" speculation created a massive amount of volatility. Take a look at the last four days of trading in the USDJPY, with short-term intraday moves bouncing between -1.79% to +2.32%. Meanwhile, the peak-to-trough decline over the past four days is -3.55%:


Reality Check: The Nonsense Of Helicopter Money Speculation - usdjpy 7 29


In the past, BOJ Governor Haruhiko Kuroda has thrown cold water on helicopter money speculation. Here are a collection of recent statements from Kuroda addressing helicopter money:


  • "WSJ: There’s been a lot of discussion recently, especially among academics, about employing helicopter money, fiscal expansion financed with monetary quantitative easing. Is that something that should be considered in Japan?

    Mr. Kuroda: No.

    WSJ: Why not?

    Mr. Kuroda: No, we have no intention to employ helicopter money, anything like that, because, as you know, in any—almost all developed countries, fiscal policy is formulated by the government and approved by the parliament. Fiscal policy is the responsibility of the government and the parliament and prerogative of the government and the parliament." 4/18/16 (Wall Street Journal)
  • "Helicopter money is a policy where monetary and fiscal measures become one. But developed countries have learned through history to keep monetary policy and fiscal policy separate, with the central bank taking charge of the former and the government the latter... I don't think [helicopter money] can be adopted under the current legal system." 4/28/16 (Nikkei Asian Review)
  • "No need and no possibility for helicopter money." mid-June, (BBC Radio 4)
  • "There is an institutionally established system in which the government and the Diet are responsible for carrying out fiscal policy, while monetary policy is conducted by an independent central bank. Under the current legal system, I don’t think we can carry out (helicopter money)." 6/17/16 (Japan News)


Why does this matter?


Reality Check: The Nonsense Of Helicopter Money Speculation - bank of japan reuters


You'll note that the Reuters headline above is exactly one week before the BOJ announced it would pursue negative interest rates. You may be wondering... Will Kuroda shock markets again?


However, the more relevant question investors should be asking themselves is: Will the BOJ's "major [policy] overhaul," helicopter money or not, ultimately matter?


Since announcing the BOJ's negative interest rate policy in January:


  • Nikkei: -5.4%
  • USDJPY: -15.3%
  • 10yr JGB: -29bps


Clearly, markets continue to price in Japanese #GrowthSlowing regardless of what BOJ bureaucrats say. We continue to believe that central planners cannot rain money down from the heavens and expect their flagging economies to grow.


The central planning #BeliefSystem is breaking down.


Reality Check: The Nonsense Of Helicopter Money Speculation - central bankers cartoon 06.29.2016

This Overlooked Housing Investigation Has Huge Investing Implications

In this excerpt from The Macro Show, Hedgeye Housing analyst Josh Steiner explains the findings of a recent Treasury Department investigation that has significant implications for housing investors.



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


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Takeaway: We’re giving back 5% for a big reset in room-night estimates; means we can sleep on our long through 2016 given what we saw out of OWW/AWAY


  1. 2Q16 = SELF-INFLICTED NOISE: As we mentioned in our last note, most outside of the sell-side were already bracing for decelerating trends, but no one expected this.  Room nights growth decelerated to 20% from 37% in 1Q16.  Mgmt suggested that they were already expecting ~600bps of deceleration largely due to 1Q/2Q calendar shifts, but the incremental deceleration was due to a combination of the recent terrorist attacks and internal mishaps related to the OWW integration, which may have limited to flow of its inventory to meta-search channels due to technichal issues.  The company expects a mild reacceleration in organic room nights in 2H.  EXPE also raised its dividend by to $0.26 from $0.24 (thanks), announced that it is may try to IPO Trivago before year-end, announced that it may save up to 50% on the build-out of its +$1B corporate headquarters over the next few years.  All in, mgmt introduced a ton of noise into the story without adequately addressing the progress it's making with the core story; particularly with AWAY.
  2. BUT STILL IN CONTROL: Despite the sudden shock in room nights growth, EXPE still beat consensus EBITDA estimates by 12%; suggesting that its 2016 EBITDA target really is a just cost story.  EXPE’s inorganic expense trajectory declined in absolute dollars across each line item outside of G&A, which saw a notable decrease in the prior quarter.  However on a consolidated basis, total operating costs as a % of revenue did accelerate on a y/y basis due to a continued surge in Tech & Content costs.  But AWAY was the much bigger story, which went under the wire this quarter (see Point 1).  First, 1M bookable listing may be the biggest highlight/sigh-of-relief since the biggest risk to the AWAY model transition was the opt-in; we estimate that 1M bookable listing effectively translates to online bookability penetration of 70%-85% depending on its total listings.  AWAY is also making early progress on monetizing its new model, with 2Q revenue growth up 37% y/y vs. 17% in 1Q; note that AWAY was high-single/low-teens top-line grower as a stadalone company.  Collectively, the progress mentioned above is all about execution, and has nothing to do with the current travel environment.
  3. FAIR TRADE: We expect 3Q to fuel optimism in both the OWW & AWAY stories since the inorganic seasonality impact should optically amplify their results.  First, roughly 40% of OWW’s annual EBITDA is historically concentrated into 3Q.  The 3Q15 OWW purchase accounting headwind effectively means EXPE doesn’t really have an OWW comp from last year, and the early leverage we’ve seen on the cost side YTD will only amplify the y/y impact into 3Q16.  For AWAY, the transition into a transactional model introduces a seasonality component that didn’t really exist last year (subscription model).  Given the early progress we’ve seen in online-bookability opt-in, coupled with another quarter of +200% y/y growth in online bookings transactions in 2Q, AWAY revenue growth will likely accelerate again since most of those 2Q booking will be recognized as revenue on the 3Q stay, and AWAY will have a full quarter's worth of the user fee in effect.  Meanwhile, the risk of softening trends in room nights is already on the table after 2Q mishap, and we only had to give back 5% on the stock that had ripped through July to essentially hedge that risk away.  We should see a big reset in 2016 consensus room night estimates, which basically means we can sleep on the long through 2016 since EXPE is now just an execution story at this point.


EXPE | FAIR TRADE (2Q 2016) - EXPE   Inorganic Cost Trajectory 2Q16

EXPE | FAIR TRADE (2Q 2016) - EXPE   AWAY online bookability 2Q16


Let us know if you have any questions or would like to discuss in more detail.


Todd Jordan
Managing Director



Hesham Shaaban, CFA
Managing Director


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