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VIDEO | Keith's Macro Notebook 5/21: JAPAN UK OIL

YELP: Chat with the CFO (Recap)

Takeaway: We had a good conversation with YELP’s CFO…We are reiterating the Short


  1. INCREMENTAL COMPANY DETAILS: We have included some notes below to assist you with your models.
  2. ATTRITION ISSUES?: We are now more confident that the attrition issues we have been highlighting are occurring.
  3. TOTAL ADDRESSABLE MARKET: We suspect that the company sincerely believes its TAM is as large as it has publicly stated.  We have previously detailed why this isn't the case, and we'll have follow-up note on this topic shortly. 


We spoke with Rob Krolik of YELP yesterday.  We believe he was very honest and forthcoming with us.  He answered pretty much all of our questions with the exception of one very important one, which we will get to below.  


  1. Salesforce: YELP’s salesforce has been rising 50% y/y for about the past 8 quarters.  They now represent a little less than 60% of its total employee count of 2,156 (as of 1Q14).  Most of those reps focus on the Local Advertising Segment (Brand Advertising salesforce is fairly small).  The breakeven on those Local Ad reps is roughly 6-9 months (on a cash basis).
  2. Customers: Most customers sign 12 month contracts.  There is 2-3 month penalty for cancellation, but YELP doesn’t always enforce (e.g. client has financial problems or goes under).  The Active Local Business accounts reported by the company are essentially all of its customers excluding Brand Advertising; specifically all Local Advertising customers (which includes SeatMe as of 2014) and Other Services customers (Gift Certificates and Deals)


Where we didn’t get a tremendous amount of detail was when we delved into its customer repeat rate, which is how we are backing into its attrition rate.  We did spend some time discussing this topic, and while he wouldn’t explicitly verify or refute our attrition thesis, he did say that YELP has never said that they are not losing customers after we delved into its reported numbers.


The question he wouldn’t answer, which is a spin off of its customer repeat rate metric: “How many of your current customers have been generating revenue for YELP for over a year?”


This is the most important question because it drives at the heart of the retention issue we have been highlighting.  We estimate that in any given period that the overwhelming majority of YELP’s reported Local Business Accounts are accounts the company has signed within the LTM (meaning YELP is losing the majority of its accounts after the first year).    


He did point out that total accounts continue to grow on a quarterly basis at a strong rate (there’s no denying that), and he reiterated YELP’s strategy of focusing on acquisition vs. retention given its large addressable market; highlighting YP.com as a reasonable opportunity (575K customers).


To be explicitly clear on this front, we believe Rob (and the company) sincerely believes that YELP’s TAM is as large as they have publicly stated.  We do not; we have gone into detail on why this isn’t the case in our original YELP Short Best Ideas note (with much greater detail in the deck). 


We will be publishing another note shortly with incremental detail on YELP’s TAM to emphasize this point. 



If you have any questions, or would like to discuss in more detail, let us know.


Hesham Shaaban, CFA



It’s 2014

Client Talking Points


Consensus bullishness on the Nikkei and bearishness on the Yen continues to be one of the worst macro positions of the year. The Bank of Japan didn’t deliver the drugs overnight (60-70 TRILLION Yens still not enough!) so the Yen is breaking out to fresh year-to-date highs versus the US Dollar and the Nikkei was down for the fifth day in the last six to -13.1% YTD (Fed mins should be dovish next).


Got #StrongCurrency = Strong People (Consumption)? With the #StrongPound testing year-to-date highs in Q2 versus the US Dollar, UK Retail Sales for April were a barn burner of +6.9% year-over-year – that’s a 10 year high, reminding the Keynesians that they have the whole FX burning for 1920’s “export demand” completely wrong. It’s 2014.


Our breakout signals for both Brent and WTIC have been confirmed in the last two weeks as WTIC inflates another +0.8% this morning to $103.21 – one more #InflationAccelerating tax on American Consumers for Memorial Day weekend (unless, of course, you roll with Bernanke using car service for non-inflationary $400,000 Fed whispering sessions).

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Hologic is emerging from an extremely tough period which has left investors wary of further missteps. In our view, Hologic and its new management are set to show solid growth over the next several years. We have built two survey tools to track and forecast the two critical elements that will drive this acceleration.  The first survey tool measures 3-D Mammography placements every month.  Recently we have detected acceleration in month over month placements.  When Hologic finally receives a reimbursement code from Medicare, placements will accelerate further, perhaps even sooner.  With our survey, we'll see it real time. In addition to our mammography survey. We've been running a monthly survey of OB/GYNs asking them questions to help us forecast the rest of Hologic's businesses, some of which have been faced with significant headwinds. Based on our survey, we think those headwinds are fading. If the Affordable Care Act actually manages to reduce the number of uninsured, Hologic is one of the best positioned companies.


Construction activity remains cyclically depressed, but has likely begun the long process of recovery.  A large multi-year rebound in construction should provide a tailwind to OC shares that the market appears to be underestimating.  Both residential and nonresidential construction in the U.S. would need to roughly double to reach post-war demographic norms.  As credit returns to the market and government funded construction begins to rebound, construction markets should make steady gains in coming years, quarterly weather aside, supporting OC’s revenue and capacity utilization.


Legg Mason reported its month ending asset-under-management for April at the beginning of the week with a very positive result in its fixed income segment. The firm cited “significant” bond inflows for the month which we calculated to be over $2.3 billion. To contextualize this inflow amount we note that the entire U.S. mutual fund industry had total bond fund inflows of just $8.4 billion in April according to the Investment Company Institute, which provides an indication of the strong win rate for Legg alone last month. We also point out on a forward looking basis that the emerging trends in the mutual fund marketplace are starting to favor fixed income which should translate into accelerating positive trends at leading bond fund managers. Fixed income inflow is outpacing equities thus far in the second quarter of 2014 for the first time in 9 months which reflects the emerging defensive nature of global markets which is a good environment for leading fixed income houses including Legg Mason. 

Three for the Road


COMMODITIES: US growth stocks -1.7% yesterday vs Commodities up #InflationAccelerating @KeithMcCullough


"It's how you deal with failure that determines how you achieve success." - David Feherty


During his eight years as steward of the world’s largest economy, Ben Bernanke’s salary was about $200,000 a year. Now he makes that in just a few hours speaking to bankers, hedge fund billionaires and leaders of industry. This year alone, he is poised to make millions of dollars from speaking engagements. (New York Times)

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LEISURE LETTER (05/21/2014)



Wednesday, May 21

  • East Coast Gaming Congress

Wednesday, May 21 - Thursday May 22

  • G2E Asia - The Venetian Macao



Thursday May 23

  • Codere 1Q conf call

 Thursday May 27

  • Aristocrat F1H 2014 conf call


LVS (WSJ) is conducting a search for a new President and Chief Operating Officer as current COO Michael Leven's contract expires at the end of this year.

Takeaway:  Mike has done an excellent job but he is 76 so we are not surprised he is considering retirement.  This is a critical new hire. Sheldon won't be around forever either


PNK – withdrew its application for a proposed casino near Thruway Exit 23 near Albany NY (the Capital region) as its development partner chose a Global Gaming is the proposed operator. 

Takeaway:  Better to withdraw today and receive the $1 million application deposit refund than lose the deposit.


SGMS – is attempting to issue $375 million of 7-year senior subordinated notes  via private placement debt to QIBs.  UOP is to repay existing 9.25% senior subordinated notes due in 2019. 

Takeaway: We are keenly watching this placement as we expect BYD to be in the market in August with a refinancing transaction.

WYNN – appointed Stephen Cootey as the company’s CFO, SVP and Treasurer, effective immediately. Cootey has served as the company’s Treasurer since February 2014, and as the company’s SVP - Finance from January 2014 to May 2014.  Prior to WYNN, Cootey was VP Corporate Finance at Las Vegas Sands. 

Takeaway: A widely telegraphed promotion.  Mr. Cootey was previously an investment banker and debt money manager. 


HT – holder GRS Advisors discloses 6.2% stake and intends to engage management in discussions to identify opportunities to increase HT's valuation and share price.

Takeaway: A new, more management friendly form of activism? 

NCLH – announced "Norwegian NEXT" and will spend more than $250 million through 2015 to enhance dining, drinking, entertainment and other aspects of its cruise product. 

Takeaway: You have to spend to keep up with the cutthroat competition.  It is the right decision for NCL but it's still cash out the door.


Prestige Cruise Holdings(Cruise News) recent commentary indicates Prestige has approved the construction of two new ships or Oceania Cruises by Fincantieri.  The new vessels will be sister ships for the Marina and the Riviera.

Takeaway: Pipeline of new ships is growing.

SNOW – announced the resignation of Juan Perez, SVP and Corporate Controller effective May 15, 2014.

Takeaway:  Yesterday, we found it very curious to read a Form 4 filing on behalf of Mr. Perez indicating he forfeited shares and without further explanation from the company until the 8K filing.  Also seems unusual given SNOW's recent IPO and Mr. Perez joining SNOW in September 2011.



American Gaming Association - (WSJ) Withdrew support on online gambling

AGA CEO Geoff Freeman said disagreements among casino operators over online gambling is "an issue that the association cannot lead on" so it has withdrawn from the fight.

 Takeaway:  Another blow to hopes of federal legalization of internet gambling.  Adelson is cheering somewhere (we think from Macau).


Massachusetts – Massachusetts Gaming Commission is delaying the Boston region casino license again.  It will now hand out the license between end of August and beginning of September to give communities enough time to finalize mitigation agreements with Wynn or Mohegan Sun.  Commission still plans to issue the Western Region license (MGM Springfield - sole bidder) on June 13.

Takeaway:  Award of license to MGM remains on track although groundbreak probably won't happen until the Repeal issue is resolved.


Online Gaming in California – the Pechanga and San Manuel Native American tribes are working to bring online poker legislation to the California legislature.

Takeaway: Will be a slow moving legislative process in California


China - (WSJ) unveiled details of its plans to let private capital take part in major infrastructure projects. The reform commission listed a total of 80 such projects, covering railways, gas pipelines, telecommunications and clean energy

Takeaway: Would appear the Chinese Central is fiscally constrained.


China - Zhu Baoliang, head of the State Information Center's economic forecasting department, said the rising cost of borrowing is weighing on China's enterprises, especially real estate developers. Zhu called for more flexibility in the PBoC's monetary policy, including cutting the reserve-requirement ratio for banks

Takeaway:  Still waiting for the RRR cut


Hedgeye remains negative on consumer spending and believes in more inflation.  Following  a great call on rising housing prices, the Hedgeye

Macro/Financials team is turning decidedly less positive. 

Takeaway:  We’ve found housing prices to be the single most significant factor in driving gaming revenues over the past 20 years in virtually all gaming markets across the US.


Chart of the Day: Midterm Elections As Market Catalyst

Takeaway: Simply put, politics drive policy, which in turn drive markets.

Chart of the Day: Midterm Elections As Market Catalyst - Chart of the Day

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Republican Landslide?

“The people who cast the votes don’t decide an election, the people who count them do.”

-Joseph Stalin


A key upcoming market and economic catalyst on the horizon is the 2014 congressional midterm elections to be held on November 4th.  Historically, we’ve provided extensive election analysis into the election. The next six months will be no different.  Simply put, politics drive policy, which in turn drive markets.


The most famous national election surprise was probably the 1948 Dewey versus Truman presidential race.  It is widely considered the greatest election upset in American history.  Literally every prediction, both with and without associated polls, predicted that Dewey would defeat Truman.  In fact, in late September, Gallup had Dewey with an unbelievable 17 point-lead over Truman.


Republican Landslide? - truman


Given that most pundits believed he had no chance at winning the Presidency, Truman adopted a no holds barred approach to campaigning.  He attacked Dewey at every stop and “Give’em hell Harry” was consistently yelled by his supporters from the crowd.  With this gusto, Truman was able to narrow the deficit, but he still lost all of Gallup’s post convention polls, was endorsed by a mere 9% of the nation’s newspapers, and 50 of 50 “experts” in Newsweek selected Dewey to win.


Many members of the mainstream media were so confident of a victory that stories were written in advance of the election that discussed the “Next President Dewey” and “The Truman Failure.”  The most famous photo of the campaign was a copy of the Chicago Tribune held by President Truman that declared, “Dewey Defeats Truman,” after Truman had actually beat Dewey by a reasonable margin of 49.6% of the popular vote versus 45.1% for Dewey.


Back to the Global Macro Grind...


As of now, we certainly are not of the mind that there is going to be a massive surprise in the midterm elections, although we did get your attention with the title we’re sure!  In fact, with the advent of more advanced and real-time polling, a massive surprise is quite unlikely.  If there is a surprise, it may well be that the Republicans may actually do better than expected. But first let’s look at how the race stands today.


According to the RealClearPolitics 2014 Generic Congressional Vote aggregate, the race is fairly tight.  In fact, the Democrats currently have a slight edge over Republicans with the Democrats at 43.4 in the poll versus the Republicans at 42.8, for a positive edge to the Democrats of +0.6, but effectively is a near tie. Back in late October of 2013, this poll favored the Democrats by a spread of+6.6, so Republicans have certainly narrowed the margin.


Interestingly, if we go back to the 2010 midterm elections, this same set of polls also showed the election basically tied at this point in time (we show this in the Chart of the Day below).  Ultimately, that election turned into a Republican landslide and the Republican Party won more Congressional seats than almost any “expert” predicted.  Even the much avowed Nate Silver got the election wrong.


Republican Landslide? - Chart of the Day


In part, what many pundits missed in 2010 was the broad disdain for Congress.  That disapproval has continued to prevail and currently the RealClearPolitics Congressional Approval Poll Aggregate shows literally the lowest approval rating for Congress in the history of political polling.  Currently, the approval rating for Congress is 13.7%.  Needless to say, polls that ask about the Direction of the Country very much mirror this with only 28% of respondents saying the country is going in the right direction.


The other key point that many prognosticators missed in 2010 was the Republican motivation to vote.  Poll after poll showed that Republicans felt much stronger about the election in 2010.  As a result of this elevated enthusiasm, Republicans came out in droves.  Will that happen again this year again? It may be too early to tell, but President Obama’s low approval, which is currently at an abysmal +42, is likely to motivate Republicans and not get Democrats overly excited.


Perhaps the most interesting recent poll related to potential outcomes is a Politico poll from Monday that looked at States and races that are actually in contention.   In this poll the current edge for Republicans is somewhat staggering. 


According to the poll, 41% of respondents said they would vote for Republicans, 34% said they would vote for Democrats, and 25% were undecided.  When asked specifically about Senate races, the Republican edge increased to 43%.  Further, according to this poll, approval for Obama is just 40% and almost 50% favor an outright appeal of the Affordable Care Act.  Campaigning against an unpopular brand in Obama and unpopular policy in Obama Care may make this midterm strategically easier to execute on for the Republicans.


Speaking of elections, perhaps the most noteworthy one internationally is the upcoming election in the Ukraine.  Currently the front runner is Petro Poroshenko, or as he is better known for his candy empire, the Chocolate King. The Chocolate King was the lone Ukrainian oligarch to join in the popular protests that led to the ousting of President Yanukovych in February, which seems to be giving him an edge with the masses. 


Regardless of who is ultimately victorious in the Ukrainian election, the results will be watched very closely by the international community, especially as it relates to Russian acceptance of the outcome.  Let’s just hope a relative of Josef Stalin isn’t counting the votes.


Our immediate-term risk ranges are now as follows (we have 12 Global Macro ranges with a TREND signal overlay in our Daily Trading Ranges product):


UST 10yr Yield 2.46-2.57%

RUT 1083-1112

Nikkei 132

VIX 12.13-14.18

USD 79.61-80.21

Gold 1 


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research  

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