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The Week Ahead

The Economic Data calendar for the week of the 2nd of June through the 6th of June is full of critical releases and events.  Attached below is a snapshot of some of the headline numbers that we will be focused on.



The Week Ahead - 05.30.14

Poll of the Day Recap: 58% Say U.S. Is Heading Into Recession

Takeaway: 58% said YES; 42% said NO.

In the first minute of his conversation with Hedgeye CEO Keith McCullough, Euro Pacific Capital CEO Peter Schiff discussed the US being “halfway to a recession.” But we wanted to know what you thought.


Today’s poll question was: Is the U.S. heading into recession? 


Poll of the Day Recap: 58% Say U.S. Is Heading Into Recession - national debt uncle sam begging

At the time of this post, 58% said YES; 42% said NO.

In a sampling of those who said YES, voters explained:

  • "I actually believe we are currently in a depression but with a modest growth bubble within that (same thing happened in the 30's). At 53 years of age, I have to say that my confidence in this economy (country) is at an all-time low. Yes, lower than 2008. To fix the system the system has to be blown up, but that will take 95% of the country with it, which includes my wife and I. We can't afford to start over and neither can the majority in this country."
  • "Yes eventually...but likely not in 2Q14 - the end of 2015 is likely when the trouble begins."
  • "GDP contracting Q114, consumer sentiment waning, price of stuff necessary for subsistence has increased significantly, wage inflation appears to be virtually flat, ability to under-consume/save is shrinking; therefore, most having less to spend will result in continued GDP contraction."
  • "Gas, food, rents & debt vs diminishing incomes are putting pressure on our consumption economy. Retailers are suffering. What happens when they have to raise prices. Seems like the economy is on the edge. Could go either way."
  • "If the CPI was computed accurately Real GDP would indicate we are already in a recession."

McCullough, too, agreed that the U.S. is heading into recession: "The probability continues to rise that we are heading into a US Consumer recession - #InflationAccelerating is slowing consumption growth, fast."

However, one NO voter pointed out, “We will see less than 2% in Q2 but that is growth.”


Cartoon of the Day: The Old Inflation Ball and Chain

Takeaway: Hedgeye continues to reiterate its US #ConsumerSlowing position.

Cartoon of the Day: The Old Inflation Ball and Chain - Consumer cartoon 5.30.2014


Early Look

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Summary:  The savings rate ticked up, the rich reduced spending on luxury goods and the estimate of healthcare consumption growth decelerated.  The result  = negative MoM growth in real consumption across services, durables, and nondurables with all 3 decelerating on a YoY & 2Y basis as well.  Growth estimates will get clipped (again). 





As we’ve suggested repeatedly over 1H14, the current level of consumption growth (which sat as the singular source of strength in 1Q14 GDP) is overstated and/or unsustainable at reported 1Q14 levels. 


Summarily, the thinking is essentially this: 


The savings rate is at historic lows (meaning incremental consumption growth can’t be achieved via further savings reductions) while the conflation of static income growth and rising inflation (growing at multiples of income growth in some instances) will constrain the capacity of other discretionary consumption. 


Accelerating spending on luxury goods buttressed a broader deceleration in demand for durables to start the year and the outlier acceleration in healthcare spending (which is very much an estimate and seemingly overstated in the context of reported 1Q14 Hospital results – see yesterday’s note MEXICAN STANDOFF: CLAIMS vs. GDP vs. EXPECTATIONS) was a primary driver of the reported growth in Services Consumption in 1Q. 


In the context of the above dynamics, the balance of risk to household spending growth is to the downside as the expanding spread between nominal spending and nominal earnings is unsustainable and any combination of higher savings, a deceleration in peak spending growth by the rich or lower estimates for healthcare spending growth would act as deceleration’ary pressures on PCE growth.   


We saw all three of negative dynamics manifest to start 2Q as the savings rate ticked up (from 3.6% to 4%), the rich reduced spending on luxury goods and the estimate of healthcare consumption growth decelerated.  The result  = negative MoM growth in real consumption across services, durables, and nondurables with all 3 decelerating on a YoY & 2Y as well.  


#GRAVITY: APRIL CONSUMER SPENDING  - Nominal Spending vs Nominal Earnings







On the positive side, personal income growth, disposable personal income (DPI) growth, and aggregate private sector & government wage growth all improved marginally, sequentially.  The sequential improvement is positive but not enough to support accelerating consumption growth, particularly alongside a higher savings rate, rising inflation, and a material slowdown in housing.   




#GRAVITY: APRIL CONSUMER SPENDING  - Salary   Wage Growth april


#GRAVITY: APRIL CONSUMER SPENDING  - Income   Spending Table Aprilf



Growth estimates will get clipped (again) on today’s spending data, but consensus expectations for the balance of the year are still too high.


Enjoy the Weekend.


Christian B. Drake



VIDEO | Keith's Macro Notebook 5/30: JAPAN UST10YR COMMODITIES

YELP: Refuting the Pushback

Takeaway: Management and the sell-side are looking to poke holes in our thesis. There is one question that will settle the debate.

Note summary

  1. PUSHBACK vs. REALITY: Management and the sell-side are trying to push back on our thesis.  Below is a summary of what we've heard, and our response with incremental data and analysis addressing each counterpoint.  Please let us know what other pushback your're hearing so we can address that as well. 
  2. SUPPORTING CHARTS & ANALYSIS: The initial version of this note was too long, so we cropped it, attempting to keep it text-light and chart-heavy.  Happy to send over additional analysis or discuss in more detail.  

  3. THE ONE QUESTION THAT MATTERS: The only way management can settle the debate is by answering one question: "What percentage of your current customers have been advertising and/or generating revenue for YELP for more than a year?" Everything else is just noise.  

PUSHBACK vs. Reality

Not surprisingly, management and the sell-side pushing back on our thesis; mostly through attacking the messenger, rather than the thesis itself (i.e. ad hominem). Below is a summary response to each attempted rebuttal, with supporting details in the next section.  

  1. CAN'T CALCULATE ATTRITION RATE?from the customer repeat rate. This is all about the language.  When management says this, they are referring to calculating the annual rate from the quarterly customer repeat rate, they're not saying that we can't calculate the quarterly rate, nor does it address absolute levels of attrition.  
  2. EFFECTIVE SALESFORCE? The pushback is that if YELP is having heightened attrition issues, it must have a very effective salesforce to compensate. The reality is the exact opposite.  YELP's salesforce has been growing ~50% y/y each of at least the last 8 quarters. We estimate that its salesforce would be wildly unproductive if YELP wasn't having these attrition issues (i.e. unprofitable).
  3. COHORT GROWTH TOO STRONG: The pushback is that the strong growth in its early cohorts wouldn't be possible if YELP was having heightened attrition issues. The reality is that ~50% of US Businesses reside in these cohorts, and YELP was very slow to penetrate these cohorts in terms of both Claimed & Active Businesses.
  4. OTHER SERVICES SKEWING METRICS: The pushback is that customer repeat rate could be distorted in any one period from accounts intermittently deploying deals & gift certificates.  The reality is that argument doesn't consider customer overlap.  Regardless, quarterly fluctuations across less than 5% of its revenues don't matter; especially since its attrition issues are a recurring quarterly theme. 


Can't Calculate Attrition Rates?: There is no debating the quarterly attrition rates, or the magnitude of new and lost accounts.  We can't calculate the exact annual rate, but that is function of the source of those lost accounts (prior vs. new customers), not whether YELP is actually losing them.  Most advertising customers sign annual contracts, meaning most of its new business can't be lost within a year (without paying 2-3 month penalty).  So the bulk of those lost accounts are coming from existing accounts signed before the most recent LTM period.  Comparing cumulative lost accounts to prior-year period accounts, and cumulative new accounts to current period accounts, tells the story.



YELP: Refuting the Pushback - YELP   Accounts New Lost Spread 1Q14

YELP: Refuting the Pushback - YELP   Cum Attrition Q edit

YELP: Refuting the Pushback - YELP   Cum New Q edit


Effective Salesforce: The chart below measures New Revenue/Rep: 

(New Accounts x YELP stated ARPU)/Trailing Sales Reps.  The Reps are lagged on a 9-month basis (so any hires during the quarter or in the 6 months prior are assumed to generate no revenue).  The difference in the two metrics below is our calculation for new revenue vs. what is implied by account growth in YELP's reported metrics; the latter suggests its salesforce isn't generating enough new business to cover their own salaries (note: this is base only, not inclusive of ancillary employment costs). 


YELP: Refuting the Pushback - YELP   Sales Rep Productivity edit 2


Cohort Growth:  YELP had been slow to penetrate this segment, with only ~300 claimed businesses at the end of 2010 out of the total pool of at least 1.9M potential businesses in these cohorts.  In short, most of the early cohort wasn't even on YELP by the end of 2010.  Cohort growth remains strong because YELP didn't meaningfully penetrate this group until it started ramping its salesforce.  Since 50% of US businesses reside in these early cohorts, we expect YELP will see decelerating growth in the later cohorts first given that included markets are relatively smaller.  


YELP: Refuting the Pushback - YELP   Cohort Markets

YELP: Refuting the Pushback - YELP   Cohort Businesses 2 


Other Services Skewing Results: The pushback doesn't assume customer overlap between Local Advertising and Other Services (e.g. a customer could could stop offering a deal, but still advertise with YELP).  Even if there weren't any overlap, Deals/Gift Certificates are less than 5% of revenue, so how much of an impact could these fluctuations in these services make on the overall quarterly attrition trend? Regardless, the attrition trend is too consistent for this argument to hold any water.


YELP: Refuting the Pushback - YELP   Attrition Q Rate ex Qype 1Q14


"What percentage of your current customers have been advertising and/or generating revenue for YELP for more than a year"


Answering this question will settle the debate, and is the only way that management can refute our analysis, or make any claims that it is not experiencing heightened attrition.  


This question is basically a derivative of its customer repeat rate metric, so the only reason management would avoid the question is if they have something to hide.  


We asked YELP's CFO this question, and didn't get an answer: YELP: Chat with the CFO (Recap).  So if you have a line into management, see what they say.  If you happen to get a number or a ballpark figure, let us know, and we'll let you know if the math makes sense. 


The key to answer the answering this question will come from YELP's customers, not management.  In this regard, stay tuned.


In light of M&A activity heating up, this remains the key risk to our call. A recent rumor suggests a major player is looking at YELP. While possible, we think it unlikely once the potential acquirer gets a look at their financials.


Management and the sell-side will try to spin the story any way they can to avoid addressing the core issues.  Collectively, we haven't heard anything remotely close to a credible rebuttal to our thesis.  But please, let us know what other pushback you're hearing so we can address that too.  Truth be told, we're having some fun with this.



Hesham Shaaban, CFA