April 29, 2014

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VIDEO | Real Conversations: McCullough Talks with Top Private Investor

Takeaway: Here are the first two parts of a four part interview between private investor Buddy Carter and Hedgeye CEO Keith McCullough.

In the first of four parts of a wide-ranging interview with Buddy Carter, a private investor and former proprietary trader at Goldman Sachs, Carter discusses how to find the best resources in a radically changing global information landscape with Hedgeye CEO Keith McCullough.



In the second of four parts in a wide-ranging interview with CEO Keith McCullough, private investor Buddy Carter, a former proprietary trader at Goldman Sachs, talks how about technology has changed the pace and the way we consume financial information.



Takeaway: We think the BoK is gearing up to ease monetary policy and/or intervene in the FX market to arrest KRW appreciation.



  1. Our GIP model sees the South Korean economy in Quad #3 (i.e. Growth Slowing as Inflation Accelerates) over the next few quarters, a catalyst that should weigh on inflows into the nation’s capital markets.
  2. Moreover, we see both growth and inflation undershooting official and consensus targets over the intermediate term. Slowing growth in the US, Japan and “Old China” should cap exports gains (i.e. the primary driver of Korea’s 1Q14 GDP growth acceleration) going forward and annualized FX strength – particularly in 2Q and 3Q – should limit the impact of global cost-push inflation from the commodities markets.  
  3. To the extent our models are proven correct, we would anticipate a dovish/interventionist policy response out of the BoK in the currency market at some point over the intermediate term. That would be an easy “sell”, given the KRW’s material outperformance on a 1D, 1W, 1M, 3M, 6M, 1Y, 18M and 3Y basis.
  4. Our FX valuation models see downside in the KRW vis-à-vis the USD on the order of 5-6% on a REER basis and 7-9% on a carry basis. Historical correlations suggest deltas of this magnitude in the currency market are likely to weigh on the Korean equity market as well as the country’s USD debt.
  5. That being said, however, we’re not raging bears on either asset class. South Korea has proven unsurprisingly resilient to changes in foreign portfolio flows into EM economies in recent years, which is very much in line with our proprietary EM crisis risk modeling work. Additionally, what the KOSPI lacks in dividend yield support, it makes up for in sheer [perceived] cheapness that may continue to perpetuate a fairly consensus intuitional bid into the nation’s stock market.

















Source: Bloomberg


 Source: Bloomberg



Source: IMF








Feel free to ping us with any follow-up questions. Have a great evening,




Darius Dale

Associate: Macro Team

the macro show

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Poll of the Day Recap: 64% Wouldn’t Friend Facebook Stock

Takeaway: 64% NO; 36% YES

Poll of the Day Recap: 64% Wouldn’t Friend Facebook Stock - dislike


Right now, 43 analysts have a “Buy” rating on Facebook and nine have “Holds” – there are zero “Sells.” Shares are currently trading at 14X revenues (with advertising revenues set to slow meaningfully through 2014 according to Facebook management). Hedgeye CEO Keith McCullough believes that “as revenue growth slows, this wacky 14x revenue multiple should compress.”

That said, we wanted to get your opinion by asking in today’s poll: Would you buy Facebook right now?

At the time of this post, 64% of voters said NO; 36% YES.

Several NO voters agreed that the timing isn’t right either because of #bubblesbursting, or the market being too risky, as this voter explained, “Technically the chart needs more time to base and consolidate before stepping in to buy. Second, the Nasdaq is in a downtrend presently, which is leading the market, and therefore, initiating a buy here would be trying to catch a falling knife or going against the path of least resistance. There are much better plays out there right now, but $FB will be on my watch list.”

Another person who voted NO said, “The multiple to ARPU at Facebook is still ~80x. Mature subscription businesses (i.e. Satellite TV) trade at multiples of ~3-4x. Facebook will have to grow ARPU 20 fold just to grow into its current valuation. That's a tall order for a small business, let alone a company of FB's size.”

Additionally, a different NO voter pointed out that “the business model might be powerful, but everything has a price. There have been 411 insider transactions since the IPO for net proceeds of $15.2 billion. Only one of those was an insider Buy – and that was at $21.03 for a million bucks. That's only 0.01% of the total cumulative Insider Transaction value – and was at a price that's 63% below current levels. If Insiders won't buy, then why should I?”

Those who took the opposite stance and voted YES said:

  • “Facebook is going beyond the traditional social network they've built thus far, and will do what Google is doing by buying companies that extend beyond the scope of their core business.  Google took the first steps with Nest, while Facebook did it with Oculus; there'll be a lot more of this.  Soon they'll both look like modern versions of General Electric.”
  • “As a small business owner, it is a very inexpensive way to advertise/promote to a targeted customer group.  This will help add revenue to FB, as well as, their other strategic plans. Long term buy.”
  • “I voted yes because analysts have price targets around $84.00 and I believe FB is investing in the next generation of relevant technologies. It's not about the teenagers anymore.” 
  • “I voted yes because Zuckerberg is in agreement with Hedgeye that his stock is overvalued. Using FB shares as a currency to enter new markets is a good thing.  He is not content with just being a social network and over time the bears will be proven wrong.  Oculus VR is a fantastic technology that is being underestimated by the main stream media. Facebook continues to eat Google and Yahoo's lunch in display ad revenue.  They have turned a much maligned Instagram acquisition into an engine for growth.  Sometimes companies that have the most long term potential appear overvalued, I understand the bear thesis, but do bears really understand the bull case?”
  • “I believe the stock with reach 80 - 85 in the next year.  Zuckerberg is too vain to do anything but succeed.”


VIDEO | Penney: Why Panera Bread Is One of My Best Ideas on the Short Side | $PNRA

Hedgeye Managing Director and Restaurants analyst Howard Penney walks investors through the reasons why he added Panera Bread as a "Best Idea" on the short side over a year ago, ahead of its earnings report tomorrow night.

YELP: The Sad Truth

Takeaway: Our short focuses on the TREND/TAIL duration, so we don't care much about 1Q14. But, the stronger the quarter, the more bearish we become


  1. Pressure to Build Through 2014: One of the major risks facing YELP in terms of both attrition and new client growth is the sharp rise in commodity costs, which has seen its sharpest sequential increase since 2011.  SMBs will be hit hardest, making adverting expenditures tougher to swallow.
  2. Today's Strength = Tomorrow's Weakness: YELP is losing virtually all its clients annually, meaning it must continually to sign more new clients in excess of what it starts the year with in order to drive growth.  That said, it's current client base will always be its future hurdle; the larger that is, the larger the hurdle, the lower it's future growth. Given a shrinking TAM, that's a scary prospect.  

Pressure to Build Through 2014

We're not seeing as much risk to 1Q14 Revenues; largely because what we've seen in terms of macro pressure didn't begin until mid February, which was after the company issued 2014 guidance (2/5/14).  That said, the backdrop has materially deteriorated since then, and will only get worse through 2014.


We previously pointed out the sensitivity of YELP's customer penetration levels to commodity prices in our YELP Short Best Ideas presentation.  Dating back to 1Q11, the y/y change in customer penetration levels is almost perfectly inversely correlated (-.93) with the change in commodity prices on a y/y basis.  


The point is that SMBs see a disproportionate impact from rising input costs given lower economies of scale.  In turn, advertising expenditures become increasingly discretionary when the SMB P/L is under pressure.


The CRB index has seen its sharpest sequential increase since 2011; most of that acceleration occurring after the company issued guidance.  More importantly, commodity comps ease throughout the year, so unless commodity costs decline materially, the y/y pressure will intensify.  


Put another way, as we move through the year, each SMB that is debating whether to renew its contact with YELP will be in a progressively worse situation than it was when it initially decided to advertise with YELP.


YELP: The Sad Truth - YELP   CRB vs. Ad Penetration 2

Today's Strength = Tomorrow's Weakness

YELP loses virtually all its clients annually, meaning it must continually sign more new clients in excess of what it starts the year with in order to drive growth.  That said, it's current client base will always be its future hurdle; the larger that is, the larger the hurdle, the lower it's future growth.  


The sad truth is that YELP's current year strength will become next year's weakness since it can't hold on to its customers, and it's addressable market is much smaller than many believe (see note below more detail).  In turn, the stronger YELP's 1Q14 revenues, the more bearish we become.  


YELP: The Sad Truth - YELP   Start vs. Lost Members 


We provide more detail on our short thesis in the note below, and far more detail in our YELP Short Best Ideas Slide Deck.  For a copy, or to discuss our thesis in more detail, let us know.


YELP: Death of a Business Model

04/04/14 10:05 AM EDT



Hesham Shaaban, CFA



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