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December 30, 2014

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BULLISH TRENDS

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BEARISH TRENDS

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Revolutionary Outlook

This note was originally published at 8am on December 16, 2014 for Hedgeye subscribers.

“The Revolution transformed science from a popular hobby into a full-fledged profession.”

-Sharon Bertsch McGrayne

 

While December 16th was one of the beauty days of the American Revolution (the Sons of Liberty dumped loads of tea in the Boston Harbor #TeaParty), that is not the revolution the aforementioned quote is alluding to…

 

Believe it or not, there was a time when the French were hard core evolutionists in math, science, and innovation too.”For almost 50 years (from the 1780s until Pierre Simon Laplace’s death in 1827), France led world science as no other country has before or since.

-The Theory That Would Not Die (pg 30)

 

Today, Canadians and Americans (sorry, had to include the homeland) have a once in a lifetime opportunity to revolt and redo the entire profession of mainstream economic and market analysis. During the 18th century American and French Revolutions, they needed a crisis to change. Sadly, I don’t think the change I’m envisioning will be born out of something that’s different this time.

Revolutionary Outlook - minutemen01 jpg

 

Back to the Global Macro Grind

 

While I realize there is tremendous value in fading the forecasts of the #OldWall (and that we should probably pay to keep them in business for that reason alone!), eventually redoing all of this means we must move forward and evolve.

 

Moving forward starts with understanding where we came from. So let’s do that and look at the almighty US growth and inflation “2014 Forecasts” (summarized in bond yield terms) from Barron’s on what was going to happen this year:

 

  1. Bank of America (Savita Subramanian) 10yr Yield forecast = 3.75%
  2. Tom Lee (formerly JP Morgan) 10yr Yield forecast = 3.65%
  3. Barclays (Barry Knapp) 10yr Yield forecast = 3.50%
  4. Morgan Stanley (Adam Parker) 10yr Yield forecast = 3.45%
  5. Citigroup (Tobias Levkovich) 10yr Yield forecast = 3.25%

 

With the 10yr US Treasury Yield crashing to 2.09% today (-31% YTD), my congratulations goes out to the fine folks at Citigroup for being closest to the pin. If you had client moneys in that strategy, you’d be short the Long Bond (and long the Russell, which is -2.1% YTD).

 

#sweet

 

Looking forward at Barron’s “2015 Outlook” for growth and inflation expectations (yes, they do manifest in the bond market):

 

  1. Tobias @Citigroup inched his forecast down to 2.95%
  2. Parker @MorganStanley opted for 2.85%
  3. And Savita @BofA went all-bearish on bond yields at 2.75%!

 

I couldn’t make this up if I tried.

 

And on the why, don’t ask me, because I genuinely do not understand A) the process that got them to 3.25-3.75% in 2014 to begin with and/or B) the risk management components of the 2.75-2.95% forecast cuts, when they should be 100 basis points lower than that.

 

Both Barron’s and Bloomberg Magazine recently ran “This Time It’s Different” on their covers (Barron’s did on the weekend before their almighty god Dow dropped over 700 points). But, for the life of me, I can’t find an 2014 Outlook that read something like this:

 

  1. Worldwide growth will start to slow in the back half of 2014
  2. In response to #GrowthSlowing Europe, Japan, and China will all panic and print
  3. After seeing late cycle inflation peak in 1H14, #deflation will take hold by Q4
  4. Oil will start to crash…
  5. Then Russia will crash…
  6. As Energy stocks crash
  7. And the High Yield debt markets will start to shake…
  8. As Emerging markets will continue to crash

 

I’ll stop there…

 

Q: Who nailed all of that? A: Not Ed & Nancy.

 

The only thing that is different this time are the names of the macro “forecasters” on the sell-side who are willing to subject themselves to my #timestamping. With Tom Lee out, JP Morgan has enlisted some dude named Dubravko.

 

“So”, excited to hear of new competition, I looked Dubravko up hoping to find some innovation in his process. Unfortunately, while his resume says he has some experience as a “Quantitative Researcher”, his 2015 “forecast” looks very #OldWall to me:

 

  1. US GDP Growth = 3.0%
  2. UST 10yr Yield = 2.80%
  3. SP500 “target” = 2250

 

Nice round numbers that ultimately imply:

 

A)     US growth to “de-couple” from global #GrowthSlowing and accelerate year-over-year

B)      US Bond Yields and Growth Equity returns to rise in response to that

 

I wish you luck, Dubravko. And thank you for being part of a Consensus Macro that we will continue to fade with a revolutionary process and risk managed outlook.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.09-2.21%

SPX 1980-2002

RUT 1125-1151

VIX 16.31-23.47

YEN 116.28-121.01

WTI Oil 53.27-61.15

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Revolutionary Outlook - 12.16.14 chart


YELP: The Key Question

Takeaway: We have received this question from a few of our subscribers. 3 things to consider

THE KEY QUESTION

Why can’t YELP just accelerate sales rep hiring even further to sustain its revenue growth trajectory? 

 

 

KEY POINTS

  1. THE MODEL IS ALREADY FAILING: YELP’s model is predicated on hiring more and more sales reps to drive enough new account growth to offset its rampant attrition.  2014 already showed us that its business model is starting to fail.  YELP is now at the point where it can’t produce account growth in excess of the rate that it is hiring sales reps.  That means its business model isn’t sustainable over the long haul; likely because its TAM isn’t large enough to support it.
  2. THE OTHER ATTRITION ISSUE: Data from Glassdoor and LinkedIn suggest that YELP’s salesforce is a revolving door as well.  That means YELP needs to add an ever-increasing number of new inexperienced reps to offset its rampant sales rep turnover as well...in order to drive enough new account growth to offset its rampant account attrition.  As the company becomes larger, this will only get tougher to achieve.
  3. ALREADY AT PEAK COVERAGE? YELP’s salesforce operates in a boiler-room setup: high-frequency cold-calling (+80 daily calls often cited on Glassdoor reviews).  We estimate that YELP’s current salesforce has grown to the point where it can canvas the company's entire U.S TAM in less than a month, which means that YELP’s strategy of rampant sales rep hiring will only lead to the same prospects just receiving more and more calls. 

 

THE MODEL IS ALREADY FAILING

YELP’s model is predicated on hiring more and more sales reps to drive enough new account growth to offset its rampant attrition, which has gone largely unnoticed for this very reason.  

 

2014 marked a major inflection for the company.  YELP is now at the point where it can’t produce account growth in excess of the rate that it is hiring sales reps.  So the better question is why is the happening? The answer is that YELP’s TAM isn’t large enough to support its business model; if it was, this wouldn’t be happening.  In short, the model is failing.  We delve into YELP’s TAM in greater detail in the note below.

 

YELP: The Key Question - YELP   Reps vs. New Acct

YELP: The Key Question - YELP   Reps vs. Net Acct

 

THE OTHER ATTRITION ISSUE

The recurring theme from employee reviews on Glassdoor.com is that YELP’s salesforce is a revolving door as well (link).  LinkedIn employee count metrics appear to corroborate YELP’s employee turnover issues as well: 2,977 current employees vs. 3,411 former employees for a company that had less than 1,000 employees in 1Q12. 

 

YELP’s revenue growth is largely driven by the size of its salesforce, so this creates another challenge for the company.  In short, YELP needs to add an ever-increasing number of new inexperienced reps to offset its rampant sales rep turnover as well...in order to drive enough new account growth to offset rampant account attrition.  As the company becomes larger, this will only get tougher to achieve.

 

ALREADY AT PEAK COVERAGE?

Management has repeatedly stated that its focus is on account acquisition, likely because it genuinely believes that its TAM is as large as they say it is (last hard estimate was 27M).   

 

However, as we detail in the table below, YELP’s TAM is roughly 3.4M under a best-case scenario given that the overwhelming majority of businesses in the US can't afford YELP’s cheapest ad package (~$300/month), and half are B2B companies outside YELP’s purview (see note link below for additional detail).

 

YELP: The Key Question - YELP   US TAM 1 

 

It’s important to note that YELP’s salesforce operates in a boiler-room setup: high-frequency cold-calling (+80 daily calls often cited in reviews on Glassdoor.com).  We estimate that YELP’s current salesforce has grown to the point where it can canvas its entire U.S TAM in a little less than a month, which means that YELP’s strategy of rampant sales rep hiring will only lead to the same prospects just receiving more and more calls.  

 

We're not arguing that additional prospect touch points are futile, but the yield from this incremental call volume will progressively deteriorate.

 

YELP: The Key Question - YELP   TAM Coverage 

 

 

For a detailed breakdown of our YELP TAM analysis, see note below.  

 

YELP: Debating TAM

06/30/14 01:10 PM EDT

[click here]

  

 

 

Let us know if you have any questions or would like to discuss in more detail.  

 

Hesham Shaaban, CFA

@HedgeyeInternet


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Cartoon of the Day: The Sound of Deflation

Cartoon of the Day: The Sound of Deflation - Deflation cartoon 12.29.2014

That sound you're hearing around the globe? Deflation.


Keith's Macro Notebook 12/29: Europe | UST 10YR | Russell 2000

 

Hedgeye CEO Keith McCullough shares the top three things in his macro notebook this morning.


This Is a Much Bigger Risk Than Greece

Editor's note: This is a brief excerpt from Hedgeye research earlier this morning. For more information on how to become a subscriber click here.

 

*  *  *  *  *  *  *

Markets seem agitated by the Greek vote this morning. Worldwide deflation is the much bigger risk.

 

The Greek stock market continues to crash (it’s down -10% this morning to -34% year-to-date). But the more interesting breakdowns @Hedgeye TREND resistance are those in Italy’s MIB and Spain’s IBEX – don’t forget who #deflation hurts the most, #debtors (hence why central planning policies will do anything to try to avoid deflation).

 

This Is a Much Bigger Risk Than Greece - a1

 

On a related note, the best Big Macro, low-volatility, liquid long position to have on if you agree with us on global #GrowthSlowing and #Deflation is the Long Bond (TLT, EDV, etc). That’s been one of our best calls in 2014. But you have to be there on the pullbacks like we saw last week.

 

This Is a Much Bigger Risk Than Greece - a2

 

The UST 10YR Yield is -4 basis points to 2.21% this morning with no support to 2.05%.



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