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Hedgeye's Morning Macro Call with CEO Keith McCullough: The Bubble Formerly Known as 2014


Please enjoy this complimentary look at our Morning Macro Call, a daily conference call for institutional investors. In today’s Morning Macro Call, CEO Keith McCullough gives his daily global macro rundown, talks about Hedgeye’s bullish view on housing, and takes questions from viewers. 


YELP: Is Eat24 Another Accounting Gimmick?

Takeaway: The precedent set by its SeatMe acquisition makes us question management's motivation behind the Eat24 acquisition.


  1. PAYING FOR A DISTRACTION: YELP is establishing a trend of questionable acquisitions following disappointing earnings releases (last quarter, it was two international acquisitions).  Today, YELP purchased Eat24 for $134M ($75M in cash, remainder in stock).  The company is guiding toward an incremental $36M in acquired revenues, although the actual contribution could be more (no historical Eat24 revenues provided). 
  2. THE BIG QUESTION IS ACCOUNTING: Where will YELP account for its newly acquired Eat24 customers? For context, YELP acquired SeatMe back in 3Q13.  Beginning in 2014, YELP discretely reclassified its SeatMe accounts as Active Local Business Accounts, and then stopped providing its total number of SeatMe customers beginning in 2Q14.  In essence, YELP inflated its core advertising account metrics by including accounts paying for the reservation service it acquired.  So, why should we expect anything different this time around?


For our most current thoughts on YELP, see the note below.  


YELP: Shot Itself in the Foot (4Q14)

02/06/15 07:38 AM EST

[click here]



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


Hesham Shaaban, CFA


Retail Callouts (2/10): ICSC, KATE Flash Sale, TGT, FINL

Takeaway: KATE's First Flash Sale of the year, no change in promotional cadence. Chain store sales number respectable, but 3yr downtrend continues.


Retail Callouts (2/10): ICSC, KATE Flash Sale, TGT, FINL - 2 9 chart2



ICSC RETAIL SALES (80 General Merchandise Stores)


Takeaway: Going against the toughest comp in calendar Q1 the 1 year decelerated 180bps sequentially, with a 25bp pop in the 2yr. Not spectacular, but respectable. The trend we're most focused on here is 3yr trend which eliminates all noise. It's decelerated in all but one week this year.

Retail Callouts (2/10): ICSC, KATE Flash Sale, TGT, FINL - 2 10 chart1

Retail Callouts (2/10): ICSC, KATE Flash Sale, TGT, FINL - 2 10 chart3





KATE - Flash Sale Promotions


Takeaway: We track the promotional cadence for about 100 retailers by keeping account of the promotional emails. There are a few variables that we will admit are hard to account for, specifically the volume and depth behind each campaign. But, comparing the YY change in the direct business we think is the most efficient way.

There was a lot of noise surrounding the promotional posture of the handbag industry to start the year -- it eroded $710mm in market cap for KATE over a 15 day period. We dug into KATE's promotional cadence and came back extremely positive, which was proven true when the company  pre-announced on 1/29. Opening the inbox this morning, we were hit with KATE's first 'Flash Sale' of the year, so we went back to the archives to see if the sales matched the prior years' offerings. And the results were exact down the to the calendar days and % off (pictures and details below). KATE is slowly pulling back the 'Flash Sale' concept to promote full price sales in its direct channel. It's held true to its stance to date - we'd point to the exclusion of a 'Flash Sale' in December of 2014, which Management discussed in August, as proof. Though we question the effect it will have on comps. In year one of this new posture, the company just reported a 26% comp.

  • 2013 - 2 day sale 2/5 - 2/6, 75% off
  • 2014 - 3 day sale 2/11 - 2/13, 75% off
  • 2015 - 3 day sale 2/10 - 2/12, 75% off

Retail Callouts (2/10): ICSC, KATE Flash Sale, TGT, FINL - KATE 2 10





TGT - Target and landlords in court battle over sale of leases



FINL - Imran Jooma Joins Finish Line as Chief Omnichannel Officer, Executive Vice President



West Coast port congestion could cost retailers $7 billion this year



EXPR, UA - Express Signs NBA All-Star Stephen Curry



New Look chief says retailer ready for IPO



BOSS - Permira Pares Hugo Boss Stake



ARO - Aeropostale, Inc. Announces Executive Appointments



BABA - Alibaba Urged to Step Up Action on Fakes



Pam & Gela to Launch E-Commerce



Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

Trading Post The Jobs Report

Client Talking Points


The USD is stabilizing in a narrowing risk range now (leading indicator for less FX volatility) and we think that takes out accelerating upside in both the CRB Index (+7% off the 213 lows) and Oil (WTI risk range = 43.07-53.88) from here, which would reverse plenty of sub-sector counter-TREND moves in the S&P 500 – we’ll see.


Day 2 of consensus saying what they’ve been saying for a year (“rates up, litftoff, etc.”) and we guess we will have to endure this until the USA #deflation data (CPI and PPI) is reported for JAN (next week). China and Norway printed -4.3% and -12.4% year-over-year PPI’s this morning!


The S&P 500 (SPX) meandering at -0.6% year-to-date doesn’t exactly inspire fund flows, so it’s probably time to start adding to U.S. Equity exposures that are not affected by the #deflation factors coming back into the market place. We still like U.S. domestic consumption plays like XLY (Consumer) and ITB (Housing) on the long side.

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


Going LIVE in 15 min. Send in your questions for @KeithMcCullough and @HedgeyeDDale via Twitter or the YouTube chat. https://www.youtube.com/watch?v=YmHcuyWSiH0



Great works are performed not by strength but by perseverance.

 -Samuel Johnson


The percentage of Russians whose opinion of the U.S. is very or mainly bad rose to a record 81% in January from 44% a year ago, according to the latest poll by the independent Levada Center, which has tracked attitudes since 1990.

Zero To Something

“Every moment in business only happens once.”

-Peter Thiel


I started reading Peter Thiel’s Zero To One on the treadmill yesterday. That’s the opening sentence of one of the better intros I’ve read in a while on independent thinking:


“… it’s easier to copy a model than to make something new. Doing what we already know how to do takes the world from 1 to n, adding more of something familiar. But every time we create something new, we go from 0 to 1.”


If I didn’t passionately believe in creating something new here @Hedgeye, I’d have just gone back to doing what I did before. While a lot of people have asked me about that over the years, a lot less have asked lately. That means building this only happens once.


Zero To Something - zero to one


Back to the Global Macro Grind


Whether it’s the birth of your children or an entrepreneurial business strategy that is unique to you and those around you, this is why you get up in the morning – to find special moments in your life that only happen when preparation meets opportunity.


This is one of the core problems I have with being centrally planned. There is no creativity or progression in that. To think that some room full of bureaucrats can smooth non-linear economic realities like growth and inflation is downright regressive.


But no matter how creatively destructive we are in building our businesses, we have to deal with these people, for now. What happens when the Fed goes from 0% to n? And what are the unintended consequences associated with moving preemptively?


Post a rainbows and puppy dogs jobs report, both US stocks and bonds have been down for 2 days… Why?


  1. Interest rates shot straight up from 1.64% on the UST 10yr to 1.99% this morning
  2. Rate sensitive (aka #YieldChasing) sectors of the SP500 went straight down on that


I’m not sure what got rates to go up more:


A)     The short-term alleviation of fear that the US jobs picture has hit its cycle-peak

B)      Legitimate fear that the Fed raises rates during global #GrowthSlowing + #Deflation


As I’ve said many times, what the Fed SHOULD do with a CPI trending towards (and below) 1% and COULD do are two very different things. Can you imagine they signal a rate hike into jobs reports that get as bad as the last 6 were good?


It isn’t just #deflation that the Fed should be concerned about – it’s their broken forecasting model. Janet Yellen is using a carbon copy of what Ben Bernanke used. In forecasting growth, they overweight the most lagging of late-cycle economic indicators.


For those of you that don’t know that Non-Farm Payrolls (Employment) are the latest of late-cycle, please see today’s Chart of The Day where Christian Drake reminds you of when the cycle of payrolls peak à AFTER the cycle is already slowing!


Back to the Global #deflation risk that blew up plenty of portfolios between late-September 2014 and January 2015’s lows:


  1. China just printed a PPI (producer price index) of -4.3% year-over-year for JAN (vs. -3.3% FEB)
  2. Norway reported, get this, -12.4% year-over-year #Deflation in their JAN PPI
  3. Switzerland reported a new low in CPI (Consumer Price Inflation) of -0.5% year-over-year in JAN


Sure, Oil (WTI) was +2.1% yesterday and is +9.5% for the month of February alone – but that’s just a counter-TREND move within a nasty deflationary risk. My immediate-term risk range can get you $43 oil as fast as this bounce can stop at $54-55/barrel.


Then what?


  1. The USA is going to report decelerating CPI and PPI reports next week (JAN reports)
  2. And there’s plenty of risk that the February employment report isn’t what January’s was


Then what?


Ahead of the March 18th Fed meeting, we could very well be sitting here in early March as concerned about Global #Deflation risk as we were at the beginning of January!


Is it easier for the Fed to keep using the same model that has rendered its growth and inflation forecasts inaccurate almost 70% of the time since 2007 than to create a new one?


That’s a rhetorical question. Sadly, they’re going to go from zero to something – and there will be loads of cross asset class volatility associated with their own flip-flopping internally about timing that.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.62-1.99%

VIX 16.06-21.44
USD 93.47-95.35

Oil (WTI) 43.07-54.88
Copper 2.42-2.62


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Zero To Something - Labor cycle table CoD

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