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Central Planning 101: BoE Crushes The People's Purchasing Power

Takeaway: BoE cut rates by to 0.25%, increased its QE target to £60 billion, which included £10 billion corporate bond purchases. ↓ GBP, ↓ 10yr Gilt

Carney did his best to devalue the purchasing power of The People yesterday (a little “market security” in exchange for what was a great driver for the UK consumer economy in 2015, #StrongPound). He got the GBP/USD down to $1.31 while blasting the 10yr Gilt Yield down to 0.63% where it’s holding this morning, down -14bps month-over-month.

 

Central Planning 101: BoE Crushes The People's Purchasing Power - pound 8 5

UK 10-year Gilt Yield

Central Planning 101: BoE Crushes The People's Purchasing Power - uk gilt 8 5

 

Editor's Note: The snippet above is from a note Hedgeye CEO Keith McCullough wrote for subscribers this morning. Click here to learn more.


The Macro Show #ROADWARRIORS | August 5, 2016

CLICK HERE to access the Daily Trading Ranges.

 

CLICK HERE to access the Early Look. 

 

CLICK HERE for a deeper look at the jobs report and added commentary from Macro & Housing analyst Christian Drake.

In lieu of The Macro Show on Friday here is a special note from Director and Senior Macro analyst Darius Dale.
********************

 Keith and I have spent much of the past four weeks on the road visiting with existing and prospective clients the world over (~35 meetings in total). As always, the buysider-to-[former]-buysider nature of such dialogues allows for a higher order of debate and critical thinking that both parties typically find invaluable.

 

Below is a summary of what I found to be the most important, thoughtful and/or consistent topics of discussion, organized by theme (all quotations paraphrased); hopefully you find it helpful as well. Any associated charts, research notes or presentations are hyperlinked below for ease of review.

 

EMERGING RISKS

A VERY IMPORTANT DISCUSSION:

CLIENT: "I haven't seen anyone talk about the stealth tightening that is the ~15bps back-up in 3M LIBOR over the past month. Everyone talks about where the Fed Funds Rate is headed next, but the reality is that global debt is priced off of LIBOR. I wonder how much the pending rule changes in the money-market fund industry have been and will continue to be a contributing factor to the tightening we've seen across the short and long end of several noteworthy yield curves globally over the past few weeks."

HEDGEYE: That's a very astute observation and one we do not yet have a proven answer for. Here's what we do know: The sharp backup in Japanese interest and inflation swap rates across the curve over the past few weeks (5Y and 10Y JGBs +19bps since 7/27; 20Y JGB +27bps and 30Y JGB +34bps since 7/6; and 5Y5Y Forward Inflation Swap Rate +20bps since 7/16) has caught our attention and is indicative of one of the following two outcomes. 

The Macro Show #ROADWARRIORS | August 5, 2016 - chart1

 

On one hand, the market may be responding positively to the government's recently announced ¥28.1T ($277B) stimulus package and pricing enough of a recovery in Japanese economic growth to perpetuate an increase in risk-taking among Japanese investors.

Conversely, the market could be front-running the beginning of a global, politically-driven shift away from the dominance of monetary easing - which lowers interest rates by creating excess demand for sovereign debt securities - to fiscal stimulus - which may perpetuate higher interest rates via excess supply of sovereign debt (in the absence of helicopter money).

The fact that Japan's benchmark Nikkei 225 Index is down -2.5% since 7/27 is supportive of the latter [more-bearish] theory. Regardless of the underlying driver(s) of the aforementioned backup in Japanese rates, a lasting "JGB Tantrum" is likely to prove quite negative for now-crowded yield trades globally - just as the "Bund Tantrum" was before it. The $1.9B outflow from high-yield bond funds in the week to 8/3 - the first of its kind since June and the largest outflow in seven weeks - is evidence of said unwind risk.

Going back to aforementioned discussion of money-market fund rule changes, it's important that investors understand the drag on economic activity that may result from the associated tightening of capital markets. Specifically, the move to require prime money market funds to hold more short-term debt and allow their NAV's to fluctuate (versus remaining at $1) has perpetuated a $420B outflow from the industry over the past year, leaving the industry with assets below $1T for the first time since 1999.

This would seem to suggest companies reliant upon prime funds for liquidity are likely to have to find other ways to borrow, at the margins - either via costlier bank loans or long-term bond issuance. It's probably not a huge deal given that government money-market funds have more than absorbed the aforementioned outflow (AUM +$509B YoY to $1.5T), but it's just one more headwind to a U.S. economy that is facing cycle-peak comparisons for its lone growth driver (i.e. consumer spending) as far as the eye can see. 

The Macro Show #ROADWARRIORS | August 5, 2016 - chart2

 

CLIENT: "Central planners are destroying the financial services industry. It's as if they do not want us to exist - and the reality is they probably don't. Yellen is critical of income inequality, no?"

 

HEDGEYE: Right...

 

Hopefully you've found these discussions helpful. Best of luck out there incorporating the aforementioned factors into your existing and respective research and risk management frameworks.

 

 

Happy Summer Friday,

 

DD

 

Darius Dale

Director


PCLN | Earnings Call Notes (2Q16)

INTRODUCTION: We chose not to opine ahead of the 2Q16 print largely because our tracker appeared to have exaggerate bookings guidance on the last print, and was once again calling for an acceleration in bookings growth into 3Q16, which we had a hard time trusting.  2Q bookings growth (ex Fx) decelerated by 5% points, but naturally was suppressed by a flurry of negative events late in 2Q; suggesting the 2Q guide was sandbagged even more than the beat suggested.  PCLN’s 3Q guide accelerated off the range it provided for 2Q, suggesting mgmt may be expecting an acceleration off of actual 2Q results; agreeing with our tracker.  Moving forward, we’ll be providing tracker updates for our original tracker (ARPU) as well a new tracker (volume) we recently built.  Below are our earnings call notes; we’ll provide another update after we see where consensus shakes out

 

MANAGEMENT COMMENTS 

  • Happy with results despite competition and macro volatility
  • Currently have 1 million alternative accommodation rental properties on their booking.com platform, grew by +30% YoY
    • Listings are up have doubled in the last year
    • Currently have 493K instant book Vacation Rentals (VR),  +39% YoY
  • 23.7 million total listings
    • 16.3 million via their hotel partners
    • 7.3 million in homes and other unique places to stay
  • Broke their companywide record of daily bookings as 1 million reservations  were booked in 1 day this Q
  • Agoda continues to grow – running a world class merchant model.  Pleased to see group members leveraging the large supply platform
  • Kayak exceeded expectations
    • Search queries revenue growth and profit were up YoY
    • FB messenger service getting traction
  • Car days growth seen mostly through rentalcars.com platform, which showed pronounced strength across all major markets
  • Mobile channel continues to grow and building share continues to be a top priority
  • Feel good about their outlook for 3Q despite the volatility and frequency associated with terrorist attacks and other geopolitical events
  • Performance look back
    • Growth in room nights didn’t decelerate like they expected, leading to stronger than forecasted room night growth and total gross bookings. This momentum has also carried into 3Q
    • Exposure to UK destination and source business is about 10% or less of PCLN
    • Hotel ADR’s were consistent with their forecast
    • FX impacts were slightly unfavorable compared to the prior year and guidance
    • Difference in constant currency bookings growth and room night growth is largely driven via the decline in airline ticket bookings, lower accommodation ADRs and slower rental car bookings
    • Timing of Easter hurt 2Q profitability & margins
    • Int’l gross profit up 19% y/y, US up 8%
    • Operating margins pressured on a y/y basis by Easter shift, and ad budget shifting from 1Q to 2Q
    • Performance Advertising ROIs under pressure y/y, extending into 3Q
    • Net income benefited from a lower tax rate -due to the impact on deferred tax balances of a change in state tax law, but hit by $12.9M write-down of Hotel Urbano
    • Operating cash flow +38% YoY
    • Repo’d $299 million worth of common stock in 2Q and have repo’d $69 million in 3QTD
  • Guidance Update 3Q 2016
    • 3Q guidance implies deceleration later in the Q following a strong start in July, mainly due to size of their business and longer term trends
    • FX basket weakened by 2% since their last call
    • Expect 260bps of deleveraging non-GAAP op margins
    • Pressure to advertising ROI due to strengthening comparisons
    • Forecast does not assume any changes in the macro and travel market 

Q&A

  • China outbound
    • Continues to be a market they view as great opportunity, favorable demographics
    • China economy slowing down, but still very attractive for them in the immediate term
    • China exposure through Ctrip partnership (PLCN int’l inventory shown to Ctrip travlers), and booking.com & Agoda directly (China outbound)
  • Alternative accommodation
    • Inventory of dynamically bookable listings should fuel future growth
    • Distribution network also key to driving future growth
    • Network and ability to market these properties is highly competitive    
  • Cancellation trends – all factored into their guidance
    • Cancellations were up slightly in the quarter and there was more volatility but within expectation and have factored it into their guidance
  • Brand spend –
    • Expected seasonally higher brand spend in 2Q but it came in slightly below their forecast, should continue to see similar level of spend in the US for 3Q.
  • Geo Segment Trends:
    • Europe continuing to grow solidly, but at slower rates given the size of its market and law of large numbers.
    • US growing faster than their consolidated growth rate   
  • Bookings for alternative accommodation? Will not provide that number
  • Markets stricter on alternative acoomm giving the hotels any lift? No not that they can see
  • Would look to work with FB more, have had success with them early on.  Would look to add more performance oriented placements
  • Corporate bookings roughly 1/5 bookings, trends?
    • Opportunity to grow in the future but difficult to suggest how the share of overall bookings will shake out
    • Business transient is only 30% of room nights to begin with (in the US)
    • Unlikely that the share of bookings shifts to 50/50
  • Kayak FB messenger service – fairly new product but the opportunity is big
  • Environment with Hotels pushing direct bookings
    • Don’t expect hotels to go too far given that they need to charge higher ADRs, if they did push lower rates, PCLN is more than appropriately positioned for that kind of environment
  • Lodging cycle impact on when hotels need to lean in on OTAs?
    • They feel they should always be leaning on the OTAs but naturally towards the end of the cycle the hotels would be more reliant
    • If occupancy drops then hotels would be more inclined to use the OTA product
      • GLL note: Occupancy is currently flat to negative on YoY basis in the US)
  • What does the TAM look like for new hotel room additions?
    • “There still is opportunity in the hotel space as well. So in some, substantial opportunity to continue to increase the size of the platform, although diminishing return in terms of the number of rooms available per property.”
    • Typical average size of the new properties they are bringing on is smaller since they are mostly dealing with alternative accommodation and smaller hotels   
  • Vacation Rental (VR)
    •  feel they have the superior product, one day people will shop for VR like they do for hotels
    • They like their scale and offerings – feel they are positioned for this inevitable transition in the VR business
  • Travel Trends
    • Spain and Portugal performing very well.  Ireland and Germany also doing well.
    • Turkey, France, Belgium doing poorly – naturally as a result of recent events
    • Nothing they can see from their side that would suggest corporations are pulling back on overall travel 
  • CEO search continues – right in the middle of it 

 

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

 

 

Hesham Shaaban, CFA
Managing Director


@HedgeyeInternet   

 

Todd Jordan
Managing Director


@HedgeyeSnakeye


Daily Trading Ranges

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[From The Vault] Cartoon of the Day: Choppy Waters

[From The Vault] Cartoon of the Day: Choppy Waters - fed 6 9 14

 

Our inimitable, in-house cartoonist Bob Rich is on a much-deserved summer vacation. While he kicks back and relaxes, we're going into the Hedgeye Vault and highlighting some of his best work. Since Yellen & Co. have totally got this (for sure), we bring you another audience favorite.

 

Click here to receive our daily cartoon for free.


A Job Cut Spike In The Oil Patch

Takeaway: While claims were fairly unexciting this past week, the Challenger Job Cuts Report showed a fresh round of layoffs in energy.

Editor's Note: Below is a brief excerpt from an institutional research note written by Financials analyst Josh Steiner and Jonathan Casteleyn earlier today. To access our institutional research email sales@hedgeye.com

A Job Cut Spike In The Oil Patch - jobs cartoon 06.03.2016

The Challenger Job Cut Report showed a 17,700 spike in cuts from the energy industry today. That's up from 2,000 in the prior reading. As the Challenger report points out, this was somewhat of a surprise, given recent projections for rising oil prices and labor shortages. 

 

Here's a closer look.

A Job Cut Spike In The Oil Patch - job cut 8 4 16


Caterpillar: 6 Questions & 1 Chart From Our Short CAT Conference Call

Takeaway: Hedgeye Industrials analyst Jay Van Sciver recently added Caterpillar to their Best Ideas Short List

Editor's Note: Our Industrials analyst Jay Van Sciver hosted an in-depth presentation on his Caterpillar short call today. He recently added CAT back to his Best Ideas list. Below are key discussion points he covered during the call. 

Caterpillar: 6 Questions & 1 Chart From Our Short CAT Conference Call - z cat cartoon

KEY DISCUSSION POINTS:

  • Orders vs. Sales: Do order rates support current 2H16 & 2017 consensus estimates?
  • Mutually Exclusive Goals:  Can CAT maintain its dividend and its credit rating?
  • Materials Cost:  What do higher steel prices mean for future manufacturing decrementals?
  • CAT Financial: Is the decline in allowances appropriate and sustainable?
  • Aftermarket Cycle Stability: Do improvements in mining equipment aftermarket move the needle for CAT?
  • Valuation:  Are CAT shares pricing in a cyclical rebound in Mining and Oil & Gas capital spending? 

 

Caterpillar: 6 Questions & 1 Chart From Our Short CAT Conference Call - caterpillar


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