Abenomics Consensus: Stay Short

Takeaway: We reiterate our call for continued consolidation in the “Abenomics Trade” with respect to the intermediate term.

Editor's Note: This research note was originally sent to subscribers on April 30, 2014 by Hedgeye Macro analyst Darius Dale. Follow Darius @HedgeyeDDale.


Abenomics Consensus: Stay Short - Shinzo Abe 2623424b


  1. We reiterate our call for continued consolidation in the “Abenomics Trade” (i.e. short JPY/long Japanese equities) with respect to the intermediate term. We continue to think both the fundamentals and the crowded nature of positioning in this trade warrant said consolidation.
  2. Specifically, our models call for Japanese economic growth to slow sharply here in 2Q (in line with official estimates), which should weigh on structural inflation expectations and risk appetite among Japanese investors – effectively underpinning a domestic bid for the JPY. 
  3. Externally, we continue to pound the table on the non-consensus view we’ve held all year: accelerating inflation will slow domestic economic growth, at the margins, throughout the balance of 2014. Furthermore, we anticipate that this catalyst will result in decidedly easier monetary policy out of the Federal Reserve – which may manifest in particularly dovish forward rate guidance, or an outright “un-taper” by the mid-to-late summer. Refer to our 4/16 note titled, “10 Scary Charts on US Growth; 5 Not-So-Scary Charts on Chinese Growth” to review this thesis in more detail.
  4. The catalysts outlined in point #3 should continue to result in global selling pressure on the USD – which continues to careen to the downside as a leading indicator for this fundamental backdrop. That’s directly bullish for peer currencies, including the JPY; what’s bullish for the JPY continues to be bearish for the Japanese equity market given the tight inverse correlation that remains in place (YTD r² = 0.70).
  5. Long-term/low-turnover investors should continue to remain in the trade or remain on the sidelines in advance of what we anticipate will be far better entry prices on the short side of the JPY and long side of the Nikkei/TOPIX at some point over the intermediate term. When analyzed in the context of our forecasts for Japanese GDP and CPI, the BoJ’s downwardly revised growth forecasts and stagnant inflation forecasts at today’s non-event BoJ meeting lead us to believe that they are likely to expand their QQE program sometime in mid-to-late 3Q – well after it has become clear to consensus that the Yellen Fed isn’t the hawkish institution consensus currently assumes it is.


Abenomics Consensus: Stay Short - JAPAN


Abenomics Consensus: Stay Short - 1


Abenomics Consensus: Stay Short - 2


Abenomics Consensus: Stay Short - 3


Abenomics Consensus: Stay Short - 4


Abenomics Consensus: Stay Short - UNITED STATES


Abenomics Consensus: Stay Short - GROWTH


Abenomics Consensus: Stay Short - GDP COMPS


Abenomics Consensus: Stay Short - INFLATION


Abenomics Consensus: Stay Short - CPI COMPS


Industrial Production trends cooling off:

Abenomics Consensus: Stay Short - 6


Retail Sales pull-forward ahead of the April 1st consumption tax hike:

Abenomics Consensus: Stay Short - 7


Manufacturing PMI tanking as Abenomics fails to deliver the necessary structural reforms that can sustain Japan’s economic recovery:

Abenomics Consensus: Stay Short - 9


Consumer Confidence tanking as rising inflation takes a healthy bite out of the consumer’s wallet:

Abenomics Consensus: Stay Short - 11


Business Confidence following suit as the consumption tax hike is spread throughout the supply chain:

Abenomics Consensus: Stay Short - 12


Export growth mirroring the dollar/yen rate to some degree:

Abenomics Consensus: Stay Short - 13


Import growth surprisingly cooling in the YTD, but ripping alongside global energy prices in the most recent month:

Abenomics Consensus: Stay Short - 14


Inflation continues to accelerate and is poised to gap up as the consumption tax is largely passed on to consumers:

Abenomics Consensus: Stay Short - 15


Real wages are feeling the pinch of stingy Japanese corporations and policies to tax & inflate out of Tokyo:

Abenomics Consensus: Stay Short - 16

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YELP: Under the Hood

Takeaway: YELP failed to show anything to detract us from our Short thesis. 1Q14 was fairly strong at face value, but a deeper dive says otherwise


  1. 1Q14 FAIRLY STRONG...AT FACE VALUE: YELP beat revenues by $1.5M, Showing relatively strong growth across all its major cohorts.  Additionally, its "customer repeat rate" hit a new high
  2. UNDER THE HOOD: 1Q14 marks YELP's smallest top-line beat since 3Q12.  2Q Guidance calls for marked deceleration in revenue growth.  More importantly, It's customer repeat rate is misleading, and is somewhat distorted.  Net-net, new account growth is slowing, while its attrition rate is not improving.
  3. HEADS THEY LOSE, TAILS THEY LOSE: We expect YELP's attrition rate to accelerate alongside slowing new account growth in 2014.  The 1Q print didn't show us anything to suggest otherwise.  If not, it just creates a more challenging setup for 2015.  The stronger 2014, the more bearish we become for 2015.  See notes below for more detail.

1Q14 fairly face value


At face value, everything looked good.  

  • Revenues: YELP beat revenue estimates by 1.5M, ahead of its 1Q14 guidance by $2.5M at the midpoint.  Raised 2014 Revenue Guidance by $10M at the midpoint.
  • Active Customers: Ending Customers increased to 74K, up 64% y/y vs. 68% growth in 4Q13.  Customer Retention rate accelerated to 75% (from 70% in 4Q13), marking a new high for YELP
  • YELP Cohort Growth: YELP's legacy cohorts (2005-2006 & 2007-2008) continued its strong growth trajectory, only showing mild deceleration from 4Q13.  The 2009-2010 cohort accelerated, while the later cohorts decelerated 


YELP's 1Q14 top-line results were not that impressive, beating consensus by 1.8%, its lowest level since 3Q12.  It's 2Q guidance calls for a marked slowdown in revenue growth (56% at the high end of guidance vs. 66% in 1Q14).  But more importantly, its operating metrics are somewhat misleading.


The customer repeat rate is not its retention rate.  It's customer mix.  This is how Yelp defines it,


"Our customer repeat rate, defined as the percentage of existing customers from which we recognize revenue in the immediately preceding 12-month period"


YELP hit an all-time high in its customer repeat (75%); that means that the 

  1. Existing customers % of total is at a reported all-time high, and  
  2. New customers % of total is at a reported all-time low.

YELP: Under the Hood - YELP   Customer Mix


Now, in terms of attrition rate, which we calculate using its stated "customer repeat rate" [customer mix], the rate did improve to 17.2% in 1Q14 vs. 17.7% in 4Q13.  However, there is some distortion from the 2.2K Qype accounts that YELP migrated to its platform in 4Q13.  In actuality, those are acquired accounts.


 If we back those accounts out from both periods, the attrition rate held constant at 17.7%, so net-net, we haven't seen any material improvement in attrition.


YELP: Under the Hood - YELP   Attrition Rate ex Qype 1Q14


In aggregate, when we break this down, 1Q14 results suggest that attrition is accelerating, while new account growth is flattening.  We measure this on a per-market basis to net out the impact of geographic expansion, which only has a limited runway.  


Each new market that YELP enters will have a lower TAM than than its current footprint, so breaking down these metrics on a per-market basis is a glimpse as to what YELP will be facing as they yield from geographic expansion continues to slow.


YELP: Under the Hood - YELP   New vs. Lost Accounts


New Account growth on a per-market basis will eventually slow then decline.  Attrition on a per-market basis will only intensify as its account base grows.  It's nasty long-term setup that show no signs of abating. 


We expect YELP's attrition rate to accelerate alongside slowing new account growth in 2014. The 1Q14 Release didn't show us anything to suggest otherwise


But what if it doesn't? Let's say that new account growth accelerates, and the attrition rate holds constant.  All that does is create a more challenging setup for 2015.  It's starting customer base [attrition pool] would be larger, and any strength in 2014 is essentially pulled froward from later periods given its limited TAM.


The stronger 2014 is, the more bearish we become in 2015.  You can read more about our Short Thesis in the notes below.  


 If you have any questions, or would like to discuss further, let us know


Hesham Shaaban, CFA




YELP: The Sad Truth 

04/28/14 01:49 PM EDT


YELP: Death of a Business Model

04/04/14 10:05 AM EDT





Takeaway: The positive data streak ends at five. While we attribute this mainly to Easter, this morning's print shows considerable w/w softening.

Labor Data Hits a Speed Bump

As we pointed out last week, Easter week is notoriously choppy from a data standpoint so investors should take the data with a grain of salt. Based on this distortion, we've seen significant volatility in the data in the last couple weeks. For instance, on a y/y NSA basis, this week claims were up 5.1% as compared with down 8.3% in the prior week. The 4-week rolling average, the better measure, showed a decelerating rate of improvement, moving to -8.2% from -10.9% on a y/y basis. 


We're not overly concerned by the sudden deterioration in this week's print as the ADP number for April was reasonably strong and the Challenger report, while up slightly m/m, was in-line with recent trends. That said, should we see a continuation of this week's print in next week's data that would be more disconcerting.


For now, it appears the labor market recovery remains on track, albeit at a moderately decelerating rate of improvement.


The Data

Prior to revision, initial jobless claims rose 15k to 344k from 329k WoW, as the prior week's number was revised up by 1k to 330k.


The headline (unrevised) number shows claims were higher by 14k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 3k WoW to 320k.


The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -8.2% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -10.9%
































Yield Spreads

The 2-10 spread fell -2 basis points WoW to 224 bps. 2Q14TD, the 2-10 spread is averaging 229 bps, which is lower by -10 bps relative to 1Q14.






Joshua Steiner, CFA


Jonathan Casteleyn, CFA, CMT


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 80.46%
  • SHORT SIGNALS 78.35%

Retail Callouts (5/1): TGT, ANF, ARO, AMZN

Takeaway: TGT new CIO - PR move. ANF adds more new board members. ARO shuttering P.S. concept. Uniqlo expanding to SoCal.




  • GIL - Earnings Call: Friday 5/2, 8:30am




TGT - Company plans to enable REDcard portfolio with MasterCard chip-and-PIN technology



  • "Effective May 5, Bob DeRodes will lead Target’s information technology transformation as executive vice president and chief information officer. In his role, DeRodes will assume oversight of the Target technology team and operations, with responsibility for the ongoing data security enhancement efforts as well as the development of Target’s long-term information technology and digital roadmap."
  • "DeRodes comes to Target with more than 40 years of experience and is a recognized leader in information technology, data security, and business operations. He has been a senior information technology advisor for the Center for CIO Leadership, the U.S. Department of Homeland Security, the U.S. Secretary of Defense, and the U.S. Department of Justice."
  • "Today, Target also announced a significant new initiative as part of the company’s accelerated transition to chip-and-PIN-enabled REDcards. Beginning in early 2015, the entire REDcard portfolio...will be enabled with MasterCard’s chip-and-PIN solution. Existing co-branded cards will be reissued as MasterCard co-branded chip-and-PIN cards."
  • "Earlier this year, Target announced an accelerated $100 million plan to move its REDcard portfolio to chip-and-PIN-enabled technology and to install supporting software and next-generation payment devices in stores. The new payment terminals will be in all 1,797 U.S. stores by this September, six months ahead of schedule."


Takeaway: This is as much a PR move as anything else. Sure the company needed a new CIO after the former head 'stepped down' in early March, and we can't argue with this guy’s resume. But it means more to the average consumer than it does to the company that a former advisor from the Department of Homeland Security is helping protect their information.


ANF - A&F to Nominate New Directors to Board



  • "The retailer said Wednesday that it would nominate four new independent directors at its annual meeting as part of a settlement agreement with activist investor Engaged Capital, which has been pushing the company for change."
  • "The directors include Hudson’s Bay Co. vice chair Bonnie Brooks, Gap and Ralph Lauren veteran Sarah Gallagher, former Bath & Body Works ceo Diane Neal and former Ernst & Young retail leader Stephanie Shern."
  • "They take the places held by Lauren Brisky, Kevin Huvane, Jack Kessler and Liza Lee, who will not stand for reelection."
  • "Once these changes are made, Abercrombie’s board will be made up of 12 directors — 11 of them independent and seven of whom will have been added this year."


Takeaway: That makes 9 additions to the board and management team since January - 7 board members, COO, and CFO. But, the company refuses to make the move that really matters.




9983 - Uniqlo to enter Los Angeles market in September; announces five locations



  • "Uniqlo will continue its expansion in the United States by entering the Los Angeles market. The Japanese retail powerhouse announced it will open five stores in the Los Angeles area, starting in September, with locations at South Coast Plaza, Costa Mesa; Northridge Fashion Center, Northridge; and Glendale Galleria, Glendale."
  • "In October, the company will open at the Beverly Center, Los Angeles, followed by a store at Los Cerritos Center, Cerritos, in spring 2015."
  • "Currently, Uniqlo operates are 20 stores in the U.S., as well as, which offers nationwide online shopping."


AMZN - Puts Wearable Technology at Your Fingertips with Launch of New Store



  • ", Inc. today announced the launch of its Wearable Technology store – a one-stop shop where customers can easily discover the latest in wearable technology and research wearable devices including activity trackers, smart watches, wearable cameras and more. In addition to the largest selection of items from top brands including Samsung, Jawbone and GoPro, the store features products from emerging brands like Basis and Misfit as well as devices coming soon from brands like Narrative and Bionym."


ARO - Aeropostale Provides Update To Strategic Initiatives



  • "Following a strategic business review, the Company has identified key initiatives it estimates will generate approximately $30 million to $35 million in annualized pre-tax savings, of which approximately $5 million to $10 million is expected to be achieved in fiscal 2014."
  • "Based on changing consumer patterns, particularly of the 'mom' shopper, the Company has made the determination to close approximately 125 mall-based P.S. from Aeropostale stores by the end of fiscal 2014.  The Company plans to restructure the brand to focus on faster growing sales channels, including off-mall locations (including outlets), e-commerce, and international licensing."
  • "In line with prior guidance, the Company continues to expect first quarter 2014 operating losses in the range of$64 million to $68 million, which translates to a net loss in the range of $0.70 to $0.75 per diluted share. This outlook is provided on a non-GAAP basis because it excludes the impact of today's announced strategic initiatives, as well as any expected consulting fees associated with these announcements."


BRBY - Christopher Bailey Begins New Joint Role at Burberry



  • "Christopher Bailey has now been appointed as chief creative and chief executive officer of Burberry and a director of the company, Burberry said in a statement to the London Stock Exchange Thursday."
  • "Ahrendts has left the company to join Apple as senior vice president of retail and online stores, and she stepped down from her role as Burberry ceo and resigned her directorship there April 30."


PVH - Lagerfeld Brand Inks Deal in Middle East



  • "Karl Lagerfeld BV has signed a five-year agreement with Dubai-based Chalhoub Inc. that calls for the retail and luxury specialist to open 10 Karl Lagerfeld concept stores and 15 shops-in-shop by 2018."


Alec Richards


ICI Fund Flow Survey - Below Average Equity and Better than Average Fixed Income Flow

Takeaway: This past week saw a rebound in both equity and fixed income flows, albeit to just running year-to-date averages.

Investment Company Institute Mutual Fund Data and ETF Money Flow:


In the most recent 5 day period, absolute money flow into both equity and fixed income mutual funds rebounded week-to-week to near the year-to-date averages, reversing last week's negative trends:


Total equity mutual fund flow accelerated sequentially week-to-week, producing a tally only slightly below the 2014 year-to-date weekly average. The $3.5 billion that came into all equity mutual funds during the most recent 5 day period ending April 23rd was split between a $1.4 billion inflow into U.S. equity funds and an improved $2.1 billion inflow into international stock funds. This higher demand for foreign equity products has been consistent over the past two years with international stock fund inflow having averaged $2.9 billion per week this year and $2.6 billion per week last year in 2013 with domestic fund products averaging an inflow of just $1.3 billion thus far in '14 and a $451 million inflow last year in comparison. The 2014 running weekly average inflow for all equity mutual funds is now $4.1 billion, an improvement from the $3.0 billion weekly average inflow from 2013. 


Fixed income mutual fund flow also accelerated substantially on a w/w basis, reversing last week's trend lines in the product graphs below, which had displayed decreasing momentum for bond funds versus equity funds. For the week ending April 23rd, $2.3 billion flowed into all fixed income funds, as opposed to last week's paltry $659 million inflow. The improvement in bond fund inflow this week is the result of $1.7 billion that flowed into taxable products and $531 million that flowed into tax-free or municipal products. The inflow into taxable products this week was the 11th consecutive week of positive flow and the inflow into municipal or tax-free products was the 15th consecutive week of positive subscriptions. The 2014 weekly average for fixed income mutual funds now stands at a $1.9 billion weekly inflow, a vast improvement from 2013's weekly average outflow of $1.5 billion, but still a far cry from the $5.8 billion weekly average inflow from 2012 (our view of the blow off top in bond fund inflow).


ETFs experienced dramatically positive w/w changes in trends, with a notable week subscription for Bond ETFs, which experienced an inflow of $1.2 billion, in contrast to the previous week's $204 million inflow. Stock ETFs left last week's $2.2 billion outflow far behind, netting $193 million in new inflows last week. The 2014 weekly averages are now a $973 million weekly inflow for equity ETFs and a $931 million weekly inflow for fixed income ETFs. 


The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a positive $276 million spread for the week ($3.7 billion of total equity inflow versus the $3.4 billion inflow within fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52 week moving average has been $5.4 billion (more positive money flow to equities), with a 52 week high of $31.0 billion (more positive money flow to equities) and a 52 week low of -$37.5 billion (negative numbers imply more positive money flow to bonds for the week). 


Mutual fund flow data is collected weekly from the Investment Company Institute (ICI) and represents a survey of 95% of the investment management industry's mutual fund assets. Mutual fund data largely reflects the actions of retail investors. Exchange traded fund (ETF) information is extracted from Bloomberg and is matched to the same weekly reporting schedule as the ICI mutual fund data. According to industry leader Blackrock (BLK), U.S. ETF participation is 60% institutional investors and 40% retail investors.   



ICI Fund Flow Survey - Below Average Equity and Better than Average Fixed Income Flow - 1



Most Recent 12 Week Flow in Millions by Mutual Fund Product:



ICI Fund Flow Survey - Below Average Equity and Better than Average Fixed Income Flow - 2


ICI Fund Flow Survey - Below Average Equity and Better than Average Fixed Income Flow - 3


ICI Fund Flow Survey - Below Average Equity and Better than Average Fixed Income Flow - 4


ICI Fund Flow Survey - Below Average Equity and Better than Average Fixed Income Flow - 5


ICI Fund Flow Survey - Below Average Equity and Better than Average Fixed Income Flow - 6



Most Recent 12 Week Flow Within Equity and Fixed Income Exchange Traded Funds:



ICI Fund Flow Survey - Below Average Equity and Better than Average Fixed Income Flow - 7


ICI Fund Flow Survey - Below Average Equity and Better than Average Fixed Income Flow - 8



Net Results:



The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a positive $276 million spread for the week ($3.7 billion of total equity inflow versus the $3.4 billion inflow within fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52 week moving average has been $5.4 billion (more positive money flow to equities), with a 52 week high of $31.0 billion (more positive money flow to equities) and a 52 week low of -$37.5 billion (negative numbers imply more positive money flow to bonds for the week).



ICI Fund Flow Survey - Below Average Equity and Better than Average Fixed Income Flow - 9 




Jonathan Casteleyn, CFA, CMT 




Joshua Steiner, CFA


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