Anything Can Happen Here

Client Talking Points


While the no volume ramp in equity futures (total U.S. equity volume -22% vs 1 year average yesterday) provides for a nice narrative, most of that was driven by a massive counter-TREND move on Down Dollar; on a bad jobs report (Dollar Down, Rates Down), will they rip again?


A) good jobs report = 1.89%, B) bad jobs report = 1.64% - we’ll take B) only because every jobs data point we have for the last 6 weeks has been bearish, on the margin. Since the government makes up the number, anything can happen here - remember, jobs are late-cycle, and accelerated at the end of the cycle (slowing now).


The Shanghai Composite was down another -1.9% overnight, down 8 of the last 9 days, and -4.9% year-to-date  – so the China ramp won’t be followed by mainstream media anymore, but leaves one to wonder what central plannings really do for markets after their short-term pops as economies continue to slow...

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). As our declining rates thesis proved out and picked up steam over the course of the year, we see this trend continuing into Q1.  Short of a Fed rate hike, there’s no force out there with the oomph to reverse this trend, particularly with global growth decelerating and disinflationary trends pushing capital flows into the one remaining unbreakable piggy bank, which is the U.S. Treasury debt market.


As growth and inflation expectations continue to slow, stay with low-volatility Long Bonds (TLT). We believe the TLT has plenty of room to run. We strongly believe the dynamics in the currency market are likely contribute to a “reflexive deflationary spiral” whereby continued global macro asset price deflation and reported disinflation both contribute to rising investor demand for long-term Treasuries, at the margins.


Hologic (HOLX) is a name our Healthcare Sector Head Tom Tobin has been closing monitoring for awhile. In what Tom calls his 3D TOMO Tracker Update (Institutional Research product) of U.S. facilities currently offering 3D Tomosynthesis, month-to-date December placements signaled a break-out quarter after a sharp acceleration in October and slight correction to a still very high rate in November. We believe we are seeing a sustained acceleration in placements that will likely drive upside to Breast Health throughout FY2015. Tom’s estimates are materially ahead of the Street, but importantly this upward trend in Breast Health should lead not only to earnings upside, but also multiple expansion and a significant move in the stock price.

Three for the Road


In today's Early Look "Alternative Market Medicine" I explain what to do once you see the jobs report



The two most powerful warriors are patience and time.



54 million tons of freight move across our country each day.

YELP: Shot Itself in the Foot (4Q14)

Takeaway: Today’s sell-off will pale in comparison to the one coming the first time YELP doesn’t raise guidance, likely on the 2Q15 release


  1. DIRTY, DIRTY, POOL: YELP will be pulling its Active Local Business Account metric in favor of a new one focusing only on businesses contributing to its Local Advertising Revenue.  The customer repeat rate and reported account base will now be an apples-to-oranges comparison.  There is no other reason to do this other than to mask its rampant attrition issues. 
  2. SHOT ITSELF IN THE FOOT: Management needed to rebase expectations, but chose to guide inline with lofty consensus estimates instead.  What’s interesting is that YELP thinks it can somehow hit numbers while scaling down the rate of sales rep hiring...when its sales rep productivity is currently on the decline.
  3. WHAT HAPPENS FROM HERE: Revenue guidance is back-weighted, and consensus is going to raise the bar further. The first time that YELP doesn’t raise guidance, the stock craters.  That likely comes on the 2Q14 release (3Q14 guidance). 



YELP beat 4Q14 top-line estimates by ~1%, but we’re not sure if/how much its two international acquisitions contributed.  Net account growth slowed to 44% (ex Qype account transition) from 51% in the prior.  The slowdown was largely due to a sharp deceleration in new account growth to 30% from 40% in the prior quarter (also ex Qype).  YELP’s attrition rate improved to 18.5% from 19.1% in the prior quarter, but absolute attrition accelerated as it has for every quarter for as long as we can track the data. 


YELP: Shot Itself in the Foot (4Q14) - YELP   New  Net  Lost 4Q14


The major red flag from the quarter was that YELP will be pulling its Active Local Business Account metric in favor of a new one focusing only on accounts contributing to its Local Advertising Revenue.  The customer repeat rate and its reported account base going forward will now be an apples-to-oranges comparison.  There is no other reason to do this other than to mask its rampant attrition issues.  Management is trying to buy some deniability to our attrition thesis, but skewing the numbers doesn't change anything. 


 YELP: Shot Itself in the Foot (4Q14) - YELP   Account Mix 4Q14



We expected YELP to guide light; our mistake was thinking management would approach guidance rationally.  Instead management basically guided inline to estimates that we estimate are well out of reach.  We have stated repeatedly that YELP will need to produce both accelerating new account growth and record low attrition to hit consensus estimates.  For perspective, YELP averaged 34% new account growth (y/y%) and 18.5% quarterly attrition in 2014.


YELP: Shot Itself in the Foot (4Q14) - YELP   2015 Consensus Scenario   Feb 2015


The risk to our thesis, at least in 2015, was that YELP was going to accelerate its sales rep hiring in 2015 to stuff the channel as much as possible.  Instead, YELP plans to slow the pace of sales rep hiring to a rate of 40% y/y in 2014 (vs. an average growth rate of 53% in 2014


Remember, YELP’s business model is predicated on aggressive sales rep hiring to drive enough new account growth to offset its rampant attrition.  So by choosing to scale down hiring when it can't produce new account growth in excess of its sales rep hiring is a suspect move.


YELP: Shot Itself in the Foot (4Q14) - YELP   New Acct vs. Sales 4Q14


1Q15 revenue guidance is roughly 20% of its 2015 revenue guidance, which essentially means guidance is back-weighted.  Consensus will likely raise the bar further to reflect the marginal upside to guidance, and may do so again following the 1Q print if YELP produces some upside on the heels of its international acquisitions and/or the YP partnership. 


But remember that YELP must consistently beat and raise to sustain its multiple.  The first time that YELP doesn’t raise guidance, the stock craters.  That likely comes on the 2Q14 release (3Q14 guidance).




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


Hesham Shaaban, CFA



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 80.52%
  • SHORT SIGNALS 78.67%

Alternative Market Medicine

“The traditional point of view doesn’t explain everything.”

-Deepak Chopra


Need some alternative Macro Market Medicine to get you through your risk management day? With the help of my man Deepak’s evolving professional experience, oh does the Mucker have something non-centrally-planned, for you!


“Deepak Chopra used to be firmly entrenched in a very traditional field of medicine: endocrinology. During the 1980s he worked as the Chief of Staff at New England Memorial Hospital… back then Chopra chugged coffee in the morning, smoked cigarettes, and drank whiskey in the evening to relax.” (The Medici Effect, pg 155)


No, I don’t drink whiskey to relax – neither am I recommending it as a medicine for the 100 point Dow swings you now have to deal with every day. I’m simply asking you to realize what Chopra did before he wrote 3 dozen books and decided to change his #process. He “started to notice things that could not be explained by theory.” In our profession’s case, those things are Old Wall theories.


Alternative Market Medicine - a. deepak


Back to the Global Macro Grind


Some of the Old Wall types still operate on a theory that if the stock market is going up, the economy must be going up. Then you have this other camp of quacks like me who’d remind you that if the bond market (Long Bond) is going up, the economy is slowing.


You also have all the poor bastards out there just chasing charts, who wouldn’t know the 2nd derivative of growth and inflation cycles from their next shot of Fireball. And, of course, you have mainstream media, who is left-leaning about everything economic anyway.


But that’s what makes a market. Mr. Macro Market doesn’t care about any of our individual strategies or stimulus preferences. He is naturally setting it up to provide the most amount of people, the most pain, at the most inopportune time.


Is today one of those days? Simple question – with a not so simple answer. Here’s the setup:


  1. STOCKS: One week ago today, after a bad US GDP report for Q4, the SP500 closed at 1995
  2. BONDS: as GDP growth slowed, the 10yr US Treasury Yield hit fresh new lows at 1.65%
  3. Then, zoom… stocks rallied +3.3% off those lows and the 10yr has popped back up to 1.81%


But what was it that drove the “stocks” up – and what kind of stocks really went up?


  1. US Dollar Down has driven a massive counter-TREND move in all of the Correlation Risk trades
  2. Both Oil and Energy stocks related to Oil’s counter-TREND move led the zoom…
  3. And crazy macro guys like me just day-traded my way around the pylons, trying to stay in the black


Soh-rry. In Canadian hockey speak we call them pylons. In USA Hockey, they call them “cones.”


However you play the game, you do need to zig and zag when macro markets move like this. After all, inclusive of this week’s no-volume ramp (total US Equity market volume was -22% vs. its 1yr avg yesterday) the SP500 summary for the YTD = 0.19%.


Yeah, I know you know. But just a friendly reminder to your friends that don’t (please forward this to them) if you’re long the Long Bond (TLT, EDV, ZROZ, etc.) you’re already up +7-8% YTD by just staying the global #GrowthSlowing course.


“So”, what will today’s US jobs report bring?


  1. Rocketing wage growth, booming capex hiring cycles in Oil & Gas, puppy dogs & rainbows?
  2. Or, blah…


Blah. As in what always happens in the latest of late-cycle economic indicators (employment)… what if there’s just nothing, blah?


I don’t predict stock and bond markets will do nothing on that. Fully loaded with Dollar Down, Rising Gas Prices, and 2014 #Bubbles (GPRO, YELP and Pandora) Imploding, I predict #fun!


And if you can’t have fun playing this game, I don’t have any alternative medicine for that anyway.


Our immediate-term Global Macro Risk Ranges are now (giving you all 12 Big Macros today with our intermediate-term TREND view in brackets):


UST 10yr Yield 1.64-1.89% (bearish)
SPX 1 (neutral)

Nikkei 179 (bullish)

DAX 102 (bullish)

VIX 16.06-21.76 (bullish)

USD 93.05-94.52 (bullish)
EUR/USD 1.11-1.14 (bearish)
YEN 116.27-117.99 (bearish)
Oil (WTI) 42.48-53.09 (bearish)
Natural Gas 2.54-2.74 (bearish)
Gold 1 (bullish)
Copper 2.40-2.63 (bearish)


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Alternative Market Medicine - 02.06.15 chart


This note was originally published at 8am on January 23, 2015 for Hedgeye subscribers.

“I consider that all that I have learned of any value to be self-taught.”



I disagree with Darwin on that. In both my formal Ivory Tower econ education and my Wall Street experiences, I’ve found tremendous value in learning what not to do. Believing gravity-bending-linear-economists and their forecasts tops the list.


In markets and economies there are plenty of theories, but there are also realities. My self-teachings come from both books and Mr. Macro Market – not what some un-elected ideologue is trying to jam down my throat.


Pardon the terseness of that. I’m sick and in no mood to pander to what most financial media did yesterday as Mario Draghi provided 2008 like “shock and awe” to currency and equity markets, but only perpetuated #deflation risk in doing so.

Self-Teachings - Sisyphus cartoon 01.22.2015

Back to the Global Macro Grind


As we learned in both 2008 and 2011, when central planners move into panic mode, they also perpetuate volatility, across asset classes. That’s mainly because they are trying to artificially inflate (centrally plan) asset prices higher.


In doing so, they open up what we call the risk of the market’s most probable range. What I’ve learned by doing over the course of the last 15yrs is that widening risk ranges tend to lead to rising volatility.  


The only way to tone down volatility is for the output of the central plan to actually be believed. So that’s really your #1 risk management question this morning: do you believe that Draghi devaluing the Euro is going to deliver “price stability”?


What does Mr. Macro Market think?


  1. On the “news”, Euro’s burned to $1.12 vs USD, taking the US Dollar Index to multi-yr highs
  2. European equities ripped higher, making them some of the best YTD returns in Global Equities at +7-8%
  3. US Equities had a big up day (SPX 6th + day in the last 15), taking SPX and Russell to +0.2% and -1.2% YTD
  4. Commodities (CRB Index) deflated -1.3% on the “news”, hitting multi-yr lows
  5. US Equity Volatility sold off to higher-lows but held both TRADE and TREND duration support


In other words, if you are long France because the economy sucks, you’re killing it! The CAC 40 (France) is now beating the beloved SP500 by +800bps for 2015 YTD. Oh, and #deflation expectations only rose yesterday in the face of Draghi smirking.


When one of the few reporters with a spine questioned the sly Italian jobber on the actual economic impact of his decision to float a number (50B) to the media that he could beat by 10B, he did everything but answer the question.


Do you think a ramp in Belgian stocks to +7% YTD is going to improve the youth unemployment situation in Southern Europe? Or is the story now that crushing the purchasing power of Europeans is the new consumer spending catalyst?


In other European news this morning:


  1. France’s services PMI for JAN (oui, c’est le service economie, stupide) 49.5 vs 50.6 in DEC
  2. Germany’s flash PMI slowed again to 51.0 from 51.2


Get used to nothing. Unless it’s different this time, I don’t see Draghi delivering inflation or real economic growth.


Does anything in our Global Macro playbook change post yesterday’s central plan? Not really:


  1. BEST IDEA: Our best way to play global #GrowthSlowing and #Deflation = long the Long Bond (TLT, EDV, ZROZ, etc.)
  2. COMMODITIES: while I’m getting interested in Gold, I’ll keep our net allocation to that asset class at 0%
  3. CENTRALLY PLANNED EQUITY MARKETS: from this time/price, I’d rather buy Weimar Nikkei than Europe
  4. US EQUITY LONGS: stick with the long early cycle-consumption and yield chasing sectors (XLP, XLV, XLU, VNQ)
  5. US EQUITY SHORTS: stick with the late-cycle economic and #Deflation ideas (XLE, XLB, KRE, XLI)


Notwithstanding the 2-day ramp in European, US, and Japanese equity beta, the best vs. worst returns (highest absolute, with the lowest volatility = best kind of #alpha people pay for) remain glaring:


  1. YTD Winners: Healthcare (XLV) +4.3%, Utilities (XLU) +3.8%, Consumer Staples (XLP) +3.6%
  2. YTD Losers: Financials (XLF) -2.8%, Energy (XLE) -2.5%, Consumer Discretionary (XLY) -1.6%


Put another way, Mr. Macro Market’s self-teachings have set up for one of the best Global Macro investing environments for active managers (long and shorts – over-weights and under-weights) that I can remember.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.75-1.93%

SPX 1989-2066

VIX 16.05-23.03
EUR/USD 1.12-1.15
Oil (WTI) 44.82-49.06

Gold 1260-1323

Copper 2.48-2.61


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Self-Teachings - 01.23.15 chart


Takeaway: The Strip’s recovery is not very deep or sustaining


It’s almost the anti-Macau play but not really:  Buy MGM because the company has less Macau exposure.  How about buying something without any Macau exposure? I suppose the best way to play the Strip would be to buy MGM and short 2882.HK.


So let’s look at what you’re getting if you could isolate Strip exposure. Solid RevPAR growth? Yes, but if you’re looking for that why not buy a hotel stock like HLT or HOT. Las Vegas RevPAR has actually lagged the rest of the country.  Gaming revenue growth?  Outside of Baccarat we’ve seen very little actually.  And the 2nd derivative in Baccarat went negative in August and the 1st derivative turned in November.


Unlike Macau, Las Vegas is at least stable.  Stability is hardly an investment thesis, though.


Please see our detailed note:

investing ideas

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