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.
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:
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).
Looking forward at Barron’s “2015 Outlook” for growth and inflation expectations (yes, they do manifest in the bond market):
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:
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:
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%
WTI Oil 53.27-61.15
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
Takeaway: We have received this question from a few of our subscribers. 3 things to consider
Why can’t YELP just accelerate sales rep hiring even further to sustain its revenue growth trajectory?
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.
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.
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).
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.
For a detailed breakdown of our YELP TAM analysis, see note below.
YELP: Debating TAM
06/30/14 01:10 PM EDT
Let us know if you have any questions or would like to discuss in more detail.
Hesham Shaaban, CFA
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Hedgeye CEO Keith McCullough shares the top three things in his macro notebook this morning.
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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).
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.
The UST 10YR Yield is -4 basis points to 2.21% this morning with no support to 2.05%.
Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.