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McCullough: What One Of The World's 'Most Brilliant' Investors Told Me About Janet Yellen

 

In this excerpt from The Macro Show, Hedgeye CEO Keith McCullough discusses what one of the world's most brilliant investors told him about Fed chair Janet Yellen, interest rates and Friday's Jobs Report. 

 

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Cartoon of the Day: Once Upon A Time...

Cartoon of the Day: Once Upon A Time... - Fed cartoon 09.01.2016

 

"With Q3 GDP tracking at 1.1%, Housing -1.2% (Existing Homes), Productivity down another -0.6% (worst 3 quarter streak since the 1970s) and Auto Sales down mid to high singles (GM and F -5-8% AUG)… And the Fed wants to hike on that data?," Hedgeye CEO Keith McCullough wrote today.


Stock Report: Expedia (EXPE)

Takeaway: We added EXPE to Investing Ideas on the long side on 8/25.

Stock Report: Expedia (EXPE) - HE EXPE table 08 31 16 

THE HEDGEYE EDGE

Key points to the Hedgeye long thesis for Expedia (EXPE) center around executing on its recent M&A initiatives, which we see as the most important part of the story moving forward.

 

Here are the three key takeaways on our long call:

 

  1. “IT’S LARGELY A COST STORY” - EXPE guided to 35%-45% EBITDA growth in 2016, but after considering 2015 purchase accounting headwinds, its effective organic guidance is actually in the low 20% range. Management can get there largely on the cost side alone, with two big levers it can pull in addition to cutting redundant/duplicate costs
  2. PAY TO PLAY (AWAY) - The Homeaway (AWAY) model transition presents considerable near-term opportunity. While there’s some execution risk on the opt-in, we suspect EXPE holds all the cards here. Timing issues will limit the total 2016 opportunity, but management only needs to show progress to propel that story forward
  3. MAJOR RISK ON THE TABLE - We suspect the risk of decelerating travel trends is already on the table given EXPE’s 2Q deceleration in hotel room nights, which reset the bar for street expectations for the remainder of the year and essentially mitigated the last major risk to the story.

 

INTERMEDIATE TERM (TREND)

 

We expect 3Q16 results to refuel optimism in both the OWW & AWAY stories, especially since seasonality will have a greater inorganic impact that should optically amplify their 3Q results.  We also do not see any major blow-up risk in the core business on the 3Q16 print since EXPE’s 2Q mishaps, which were largely self-inflicted and non-recurring, have rebased expectations for the rest of the year.

 

OWW transition on track: Looking to 2H 2016, management expressed that the heavy lifting is largely behind them and that they are incrementally optimistic that a large portion of OWW cost synergies will be realized. (Note: Despite the room nights whiff in 2Q, EXPE beat EBITDA estimates and maintained guidance for the year).  Regarding OWW, 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 cost savings YTD will only amplify the YoY impact into 3Q16.  

      

HomeAWAY ahead of schedule:  Prior to EXPE’s 2Q 2016 print we had highlighted that AWAY’s transition from a pure subscription model to a transactional model was both misunderstood and underappreciated.  The 2Q release confirmed our work as AWAY’s robust revenue acceleration of +37% YoY vs. +17% in 1Q, and the positive color on the conference call served as a meaningful offset to their headline room nights miss.  Additionally, management did a good job of mitigating fears of user base churn - highlighting that they had grown their online bookable listings inventory to 1 million, and reiterated that they are executing ahead of schedule.  Further, the transition to a transactional model introduces a seasonality component that wasn’t there in 2015.  Much of the +200% growth in AWAY online booking transactions in 2Q16 should flow over as revenue growth into 3Q.

 

Core Risk on the table: The Orbitz integration acted as an unintended bookings headwind in 2Q 2016, as internal mishaps may have limited the flow of its inventory to meta-search channels (non-recurring issue).  Further, calendar timing issues appeared to have pulled forward booking volume to 1Q16 out of 2Q16, exacerbating the YoY growth deceleration we saw in 2Q.  All in, both these issues are largely non-recurring, and more importantly have lowered the bar for expectations for the remainder of 2016.  Granted, headlines will affect intra-quarter trading, but despite softening macro trends, EXPE should be a relative outperformer vs. hotels and definitely Hotel REITs given its higher proportion of leisure travel, which is slower to react to softening macro trends.  Finally, EXPE’s merchant model limits cancellation risk should demand soften on any sudden negative events (e.g. Brexit, terrorism, etc.).

 

Stock Report: Expedia (EXPE) - EXPE   CHART 1

 

Stock Report: Expedia (EXPE) - EXPE   CHART 2

 

LONG TERM (TAIL)

 

EXPE’s potential stock price appreciation (over the longer term) will be contingent upon the company’s ability to show continued progress out of both the Orbitz and HomeAway integration.  So far, we believe management is effectively controlling each of these stories, especially in 2016.  But we will be reassessing the setup for 2017 moving forward.

ONE-YEAR TRAILING CHART

Stock Report: Expedia (EXPE) - HE EXPE chart 08 31 16


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 80.43%
  • SHORT SIGNALS 78.34%

Europe in the Hamper

As we charge out of summer into fall, and into the ECB’s next interest rate meeting (on Thursday, September 8th), below we revisit our Eurozone regional economic and political outlooks within the context of our Q3 2016 Macro Theme of #EuropeImploding.

 

The quant continues to signal that the EUR/USD is broken across its intermediate term TREND duration and immediate term TRADE duration with a current trading risk range of $1.11 – $1.13.

 

Europe in the Hamper - Eur USD 9 1

 

Growth Outlook:  Slowing Persists

 

The Eurozone as a whole (alongside most individual countries that make up the 18 member bloc) is stuck in Quad 3 of our proprietary GIP (growth, inflation, policy) model - growth slowing as inflation accelerates - for the remainder of 2H 2016 and into early 2017. 

 

Reported Q2 European GDP from Eurostat (released back on August 12th) confirmed what we had long been beating the boards about:  #EuropeSlowing (a Q3 2015 Macro Theme!).

 

Eurozone Q2 GDP fell to 0.3% Q/Q vs 0.6% in the prior quarter and fell to 1.6% Y/Y vs 1.7% in the prior quarter.

 

While the market was shocked by the lower Q2 print, we weren’t, and as you can see from the table below, Hedgeye’s 2016 FY estimate for Eurozone GDP (+1.2%) is notably lower than Bloomberg Consensus (+1.5%) and Central Bank (+1.6%) estimates. So there’s more room for downward surprises from here!

 

In addition, numerous international forecasting agencies have lowered country level growth and output estimates across Eurozone countries over recent weeks:

  • The Bundesbank in its biannual economic outlook cut Germany’s growth forecast for 2016 to 1.7% (from 1.8%) and for 2017 to 1.4% (from 1.7%).
  • The German Institute for Economic Research (DIW) showed German GDP forecast to fall by 0.4% in the first eight months post-Brexit, and said Eurozone GDP could fall by 0.2%.
  • Germany's BGA Trade Association cut its 2016 forecast for German export growth to between 1.8% and 2.0% this year (vs its previous forecast of 4.5% in April) due to risks from Brexit and increasing global uncertainty. 
  • Bank of France reiterated its 1.4% growth target for 2016 (Hedgeye is at 1.0%) and cut the 2017 estimate by 10bps to 1.5%. 
  • Fitch Ratings agency downwardly revised Italy’s growth estimate to 0.8% vs 1.0% in 2016 and to 1.0% in 2017 and 2018 (down from 1.3% and 1.1%, respectively).

Europe in the Hamper - EUROZONE

 

 

Olympic-Style Data Dive:

 

We’ll let the data speak for itself in the charts below. In any case, it’s been crystal clear to market participants that Eurozone data is broadly slowing, not improving, on the margin. Again, the QE central-banker wand is not working!

 

This week, the release of Inflation (CPI) for August printed +0.2% Y/Y, unchanged from the prior month and below the 0.30% forecast.  Is CPI anywhere near the ECB’s medium term 2.0% target?  Nope!

Europe in the Hamper - CPI 9 1

 

Eurozone Confidence figures for the month of August fell across four categories (Economic, Business, Industrial, and Services), while Consumer confidence remained unchanged on the month.

Europe in the Hamper - Eurozone Confidence Table

Europe in the Hamper - eurozone Business Confidence

 

Manufacturing PMI data for August was also anemic, with a M/M decline for the Eurozone in aggregate, with most countries showing monthly declines or levels around/below the 50 line indicating contraction.

Europe in the Hamper - PMIs August

 

Finally, Germany’s IFO Business Sentiment Survey did a swan dive in the August print, with Expectations (6 months out) falling for a second straight month.

Europe in the Hamper - IFO AUG

 

 

ECB Policy:  Super Mario to the Rescue?

 

Assessment: Draghi has run out of bullets in an attempt to manage growth and inflation expectations

 

If we had a dollar for every time we mentioned that neither Mario Draghi, nor any other central banker for the matter, can will growth and inflation higher through quantitative easing, well, frankly, we’d be rich! 

 

This time around is therefore no different – the ECB’s newest “tool”, to buy selective corporate debt alongside its sovereign Eurozone debt buying, will remain a failed policy as a “transmission mechanisms” to the real economy.

 

As we’ve noted in other works, the Fed’s Janet Yellen has now made 5 policy pivots (from Dovish to Hawkish) in the last seven months. Her credibility, along with Draghi’s and Kuroda’s, is one and the same: lost!

Europe in the Hamper - Kuroda cartoon

 

Most recently at Jackson Hole the ECB's Benoit Coeure said that “if other actors do not take the necessary action then it [the ECB] may need to dive deeper into its operational framework and strategy.”  #HelicopterMoney?  

 

We expect that September’s meeting next Thursday will yield no new “programs” or “tools”, yet we expect any language attached to an economic and inflationary outlook to be marginally more bearish to reflect updated economic data releases. 

 

 

Political Risk Rising!

Spain - the poster child for political risk, as acting PM Mario Rajoy is into his 9th month without a government. The latest update is Rajoy lost a confidence vote yesterday 180 votes to 170.

 

Is there a path for a government going forward?  We expect that Rajoy is unlikely to form a majority government (176 votes needed of 350-seat parliament), given his inability to attain enough votes through a coalition with the liberal Ciudadanos party, as a strong block opposition in the Socialists (PSOE) and anti-establishment group Podemos seek to block his candidacy.  We suspect we’ll be looking at a third election before year’s end.

Europe in the Hamper - Spain cartoon 06.30.2016

 

 

Italy - Calling a Referendum David Cameron Style?  How about this scenario… by the end of the year Italy’s PM Matteo Renzi is replaced?  

 

It could happen.  In early August Italy’s high court approved a constitutional referendum set out by PM Renzi to do away with a parliamentary system in which the upper and lower houses have equal powers, effectively abolishing the Senate as an elected chamber and sharply reducing its ability to veto legislation.

 

While this referendum’s original intention had nothing to do with Italy leaving the Eurozone or not, media messaging was twisted, and whether a mistake or not, Renzi personalize the result of the referendum, saying that he would resign if the vote was not a ‘yes’. An ode to David Cameron!

 

Over recent weeks Renzi retracted his statement, saying: “This is not my referendum…I’ve made a mistake in personalizing it too much. But now we simply need to tell the truth about the substance of the reform…The question is not, ‘Do you think Renzi is a nice guy?’ It is, ‘Do you want to cut down the number of parliamentarians and scrap perfect bicameralism?’ If [the reform] passes, it will cut the cost of politics by €500m a year.”

 

Recent polls show "Yes" and "No" camps almost neck-and-neck, and many voters are still undecided ahead of the referendum, which in theory could take place on any Sunday between October 2 – December 11. Recent whispers suggest a November 27th date.   

 

However, the referendum does share parallels with the UK Brexit referendum because like Cameron, Renzi has linked the referendum vote with his candidacy.  Having open up this box, he’s squarely allowed Italians to vote him out of office, regardless of their opinion on the referendum. Not only has Renzi’s popularity been fading in recent months to anti-Eurozone/European parties, including the euroskeptic Five-Star Movement and Northern League, the referendum gives this opposition new marketing fodder to vote him off the island. 


Poll of the Day: Which Event Below Is Among The WORST In U.S. Market History?

Takeaway: What do you think? Cast your vote. Let us know.


Is The Yellen Fed Truly "Data Dependent"?

Takeaway: To hike or not to hike, that is the question all Fed officials are pondering at the moment. Let's look at the data.

Is The Yellen Fed Truly "Data Dependent"? - Yellen data dependent cartoon 11.18.2015

 

"What's really changed, economically, since stocks crashed last time?" Hedgeye CEO Keith McCullough wrote earlier today. "Dovish (not hawkish) Fed." In short, the only thing keeping stocks up at this point is bad economic data and the perennial hope that Yellen will get dovish once again.

 

On that front and For those of you keeping score...

  • Q2 GDP: 1.1%
  • July Existing Home Sales (90% of Housing): -1.6%
  • GM and Ford Sales -5-8%

 

This is all clean cut rate hike "data," right?

 

It gets worse. Add another terrible economic data point to that list today with an ISM print of 49.4 in August. Quick quetsion: Is the Fed out to lunch with its hawkish outlook?

 

You bet.

 

Is The Yellen Fed Truly "Data Dependent"? - ism manufacturing

 

To hike or not to hike, that is the question all Fed officials are pondering at the moment.

 

You know where we stand on that.

 

However, With all this ugly data, one thing is certain...

 


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