• run with the bulls

    get your first month

    of hedgeye free


GDP #Patriots

This note was originally published at 8am on February 02, 2015 for Hedgeye subscribers.

“The truth was incredible enough.”

-Glenn Beck


“It was so incredible, in fact, that a strange thing happened after it was reprinted in newspapers from coast to coast… The public didn’t believe it.” (Dreamers and Deceivers, pg 19)


In a riveting account of how former US President Grover Cleveland kept both his sickness and surgery a secret, in the aforementioned quote Beck describes America’s reception to investigative journalist, E.J. Edwards, discovering the #truth.


What was the #truth about US economic growth in both December and Q4 of 2014? It slowed. As growth slowed and #deflation expectations took hold, the #truth is that investing in the Long Bond (TLT) instead of late-cycle stocks got you paid.


GDP #Patriots - TLT cartoon 01.26.2015


Back to the Global Macro Grind


In stark contrast to this historical metaphor of groupthink in trusting officialdom in the late 19th century, I’m thinking that if you told most Americans that year-over-year growth in US GDP is closer to 2% than it is 5% - they’d believe you.


Most upstanding humans believe in those who fight for the #truth every day too. While there used to be a lot more of them in the US financial media, they call them #Patriots – “a person who vigorously supports their country and is prepared to defend it.”


My congratulations to the New England Patriots for winning another Super Bowl. Whether you like the man or not, I think you have to respect Tom Brady’s team leadership. The man is all about the team and the system he plays for; not about himself.


I play for the team that likes the Long Bond more than the Dow in 2015 – here’s the breakdown of the YTD score:


1. Dow Jones Industrial Index down -2.9% last week to finish JAN -3.7%

2. SP500 down -2.8% last week to close JAN down -3.1%

3. S&P Financials (XLF) down another -3.2% last wk to finish JAN -7.1% (worst S&P Sector)

4. S&P Utilities (XLU) -1.7% wk-over-wk to close JAN up +2.3% (best S&P Sector)

5. Long-term Treasuries (TLT) +10% YTD (pre interest payment) #timestamped


Academics like to talk about what was “causal” in driving performance numbers. I like to write about what is. There is very little to no evidence to refute that a slowing in the rate of change in both growth and inflation isn’t bad for certain macro investing styles and exposures – and very good for others.


Since Long-term Bond Yields had been front-running this Q4 GDP #slowing news since December, last week was more of an exclamation point than it was a new sentence about what actually happened in the US economy:


1. US 2yr Yield was down -3 basis points on the week, but are already down -21bps (-31%) YTD

2. US 10yr Yield was down -15 basis points wk-over-wk, but are already down -52bps (-24%) YTD

3. Yield Spread (10yr minus 2yr) compressed another -12bps last wk to -31bps (-21%) YTD


This is why it should surprise no one who is bearish on bond yields that:


A) US Regional Bank Stocks (KRE) are even worse than XLF at -9.5% YTD

B) US REIT Stocks (VNQ) are crushing it at +6.8% YTD (pre dividends)


Yep. It’s all the same macro trade. If you got the direction of both growth and inflation right, you got bond yields right (and everything that correlates positively/negatively in either equity style factors and/or asset allocations right).


What’s next?


First, have a #process that allows you to embrace the uncertainty of each and every centrally planned market day. Second, be prepared for a short-term correction in what’s been nothing short of a parabolic move in the USD vs. other devalued currencies.


Yep, that’s the other thing that happened as the US Dollar stopped going up at an accelerating rate last week. Some of the extreme correlation trades (CRB Index and Oil vs USD) went the other way:


1. CRB Commodities Index +1% last wk to -4.8% YTD

2. WTI Oil +4.5% last wk to -11.3% YTD


So just take the time to observe Mr. Macro Market’s message (i.e. don’t try to force a pass at the goal line when you have time to run the ball). As #Patient GDP Patriots, I’m confident we can intercept hurriedness, and capitalize on the other team’s mistakes.


Our intermediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.65-1.79%

SPX 1973-2020

Dow 17,032-17,410

USD 94.51-95.98

Oil (WTI) 43.61-48.34

Gold 1262-1290


Best of luck out there this week,



Keith R. McCullough

Chief Executive Officer


GDP #Patriots - 02.02.15 chart


The Week Ahead

The Economic Data calendar for the week of the 16th of February through the 20th of February is full of critical releases and events.  Here is a snapshot of some of the headline numbers that we will be focused on.


Click to enlarge.


The Week Ahead - cal1

Investing Ideas Newsletter

Takeaway: Current Investing Ideas: TLT, EDV, MUB, XLU, HOLX, MDSO, YUM and RH.

Below are Hedgeye analysts’ latest updates on our eight current high-conviction long investing ideas and CEO Keith McCullough’s updated levels for each.


Please note that we added Yum! Brands (YUM) back this week and removed Gold (GLD).


We also feature two additional pieces of content at the bottom.

Investing Ideas Newsletter      - levels1 

Trade :: Trend :: Tail Process - These are three durations over which we analyze investment ideas and themes. Hedgeye has created a process as a way of characterizing our investment ideas and their risk profiles, to fit the investing strategies and preferences of our subscribers.

  • "Trade" is a duration of 3 weeks or less
  • "Trend" is a duration of 3 months or more
  • "Tail" is a duration of 3 years or less


Investing Ideas Newsletter      - complacency cartoon 02.10.2015



We briefly pulled Yum! Brands off of Investing Ideas in order to avoid event risk heading into the 4Q14 print.  While the earnings release was underwhelming, it was better than most had imagined.


Investing Ideas Newsletter      - y8


4Q Sales Results

YUM reported 4Q14 adjusted EPS of $0.61 (-29% y/y), well short of the $0.66 consensus estimate.  Despite this, strong relative topline trends appear to have saved the day.  China delivered a better than feared comp of -16% (-19% est), while Taco Bell (+6%) and KFC (+4%) also exceeded consensus estimates.  Pizza Hut (0%) fell short of feeble estimates, which is particularly disappointing considering the new menu and “flavor of now” launch.  Needless to say, this quarter did nothing to dismiss our view that the Pizza Hut business should be sold


Estimates Need to Come Down

Despite a slower than projected recovery in the China business, management reiterated its FY15 EPS growth goal of “at least 10%.”  This, in and of itself, looks like a tough hurdle and is dependent on a strong second half recovery in China.  The street, modeling 15% growth, will need to bring their estimates down. 



We expect the stock to be range bound for the first half of 2015, until we see a material uptick in the business.  It won’t be smooth, but we continue to like the long setup here given limited downside and the potential for significant upside.  There are a number of levers management can pull to immediately create value, the easiest of which would consist of undergoing a leveraged recapitalization to bring its debt ratio in-line with peers.  Management may be getting the benefit of doubt for now, but if the anticipated second half snapback doesn’t materialize, they will face serious pressure to make a transformational transaction.


Video Update

In a Q&A session Wednesday, Restaurants Sector Head Howard Penney discusses why we are giving YUM! Brands nearly a $100/share valuation with Director of Research Daryl Jones.


Penney touches on YUM's latest earnings release, the significant upside he sees in the stock, and why he believes management needs to be nudged into running an asset-light model in China. 


Click below to watch the video.


Investing Ideas Newsletter      - 44


Medidata Solutions announced a partnership this week with Garmin International where data from Garmin’s vivofit activity tracker will be integrated with the Medidata Clinical Cloud. While this agreement does not have any short-term financial implications, we view it as a long-term strategic positive as more sponsors utilize remote patient monitoring in clinical trials. Remote patient monitoring reduces trial costs, as patients do not have to report into a site to get their vitals checked, and improves efficacy and safety by providing sponsors with constant stream of data.


MDSO also announced a new platform win with TWi Biotechnology for a stage 2 study on metabolic disorders. TWi Biotechnology will be using both Medidata Rave (electronic data capture) and Medidata Coder. We expect to see more press released new business wins in coming months as the company executes on its pipeline.

Investing Ideas Newsletter      - mdso


Hologic, at this stage in their product cycle and in current stage of the economic cycle, has some very helpful tailwinds emerging to their revenue growth and the implied growth in the future. A stock will perform really well when doubt about future growth moves to optimism while the most recent data confirms the optimism. So far, we have a little bit of both; recent positive data like the December 2014 quarter upside and consensus estimates and ratings starting to move off of multi-year lows.


Our survey of 50 OB/GYN’s we’ve been conducting every month since 2013 is beginning to show us something a little extra. Where most are still doubtful, we can see the beginning of the end for the revenue headwind that resulted from the Cervical Cancer Screening Guidelines of 2012 which recommended women get a Pap Test every 3 years instead of every year.


Selling a product one third of the time than you usually do is called a problem. In the world of medicine, problems like guideline changes can take years to mature, however, and for Hologic, this has certainly been the case. While many practices in our survey report significant declines in Pap Test volume since the guideline changes 3 years ago, their forecast for reaching “compliance” with the 2012 Guidelines has remianed a constant 3 years. As physicans test less, which has moved from 51% to 46% of patients, simultaneously, the expected future growth rate is improving, from and expectation of -8% to close to -5%.


Also in our survey, patient volume remains solid in January 2015, making it more likely that the upside we saw in Hologic’s numbers in this last quarter, will continue in the current quarter. Supporting our volume outlook for patient volume and Pap testing (before the interval headwind) is the continued growth in employment for women ages 25-34, a key demographic for an OB/GYN office.


Click on images to enlarge.

Investing Ideas Newsletter      - PAP interval progress

Investing Ideas Newsletter      - women emp

Altogether, a less-worse trend in Pap testing and rising patient volume, can combine to get us close to flat for Hologic’s Cytology (Pap) business. That’s a big deal as investors and the sellside evaluate what price to pay for HOLX. AS the growth in Cytology improves and is less of a drag, the 3D Mammography growth can flow through. We think the outlook is bright, and with a few more datapoints, we think a lot more investors will agree with us.



What do XLU, EDV, MUB, and TLT have in common? They are all ETFs we want you to own in our current yield-chasing, growth slowing environment. It’s math. When growth and inflation are decelerating, these asset classes outperform. We’ve tested it…


The trend in domestic growth is that it is still slowing, and the counter-TREND moves we’ve seen the last few weeks (@Hedgeye TREND is our view on a 3-Month or more duration) remain something to fade until we can see more follow-through that growth is taking a more positively (second-derivative positive).


For an example on what a “counter-TREND” move is, it happens when we have a bullish intermediate to longer-term bias on the U.S. dollar and short-term the dollar sells-off.


So what tells us that growth and inflation are slowing?


Late-Cycle Economic Indicators are still deteriorating on a TRENDING Basis (Manufacturing, CapEX, inflation) while consumption driven numbers have improved (See the sequential improvement in services PMI for January.) The Q1 numbers will not begin being released until April, so stay put with these allocations.


January Inflation Readings (#SLOWING):


• Deceleration in CPI on both a year-over-year and trending basis

o Y/Y: +0.8% vs. +1.3% prior

o M/M: -0.4% vs. -0.3% prior


Growth (#SLOWING):

• Real GDP growth decelerated -20bps to +2.5% YoY for Q4 2014

• The GDP deflator decelerated -40bps to +1.2% YoY


Investing Ideas Newsletter      - ben3

Investing Ideas Newsletter      - ben2

Investing Ideas Newsletter      - ben1


Pier 1 Imports (PIR) updated guidance on Tuesday 2/10. The stock had traded up 22% since the company reported earnings on 12/18 and 15% since they posted holiday comps 190 basis points ahead of the street. Then, on Tuesday, the market closed and the bottom fell out after the company guided the top end of the EPS range down 22%. This appears to be completely self-inflicted and there is a body count to prove it with the CFO having been shown the door.


More importantly, as it relates to Restoration Hardware:


1. We never liked PIR as a comp, but given the small cadre of names in this industry that trade on the capital markets it's something we have to live with. It's a completely different customer group and the decorative/furniture split is 60/40. It's the inverse at RH. Not to mention dot.com as a % of sales is still in the single digits, compared to RH in the high 40's.


2. This isn't endemic to the industry. Simply the case of a management team misunderstanding the business model. We don't expect that the market will beat RH up over this, but if they do it's a name we still like a lot up here. The company is on track to grow revenue by 30% and EPS by 50% in 2015, and remains our favorite name in retail.



* * * * * * * * * * 


ici fund flow survey: on the defensive - 5 for 5 weeks of stronger fixed income interest

Fund flows continue to be defensive. On average, investors contributed +$1.9 billion more to fixed income than equity in each week of 2015.

Investing Ideas Newsletter      - 90

nike - cfo retirement = negative development

This is a bad event. The business is absolutely fine – no issues there. But Blair is as good as they come. Stay away for now.

Investing Ideas Newsletter      - n22


Commodities: Weekly Quant

Commodities: Weekly Quant - chart1 deltas

Commodities: Weekly Quant - chart2 deltas

Commodities: Weekly Quant - chart3 usd correls

Commodities: Weekly Quant - chart4 volume

Commodities: Weekly Quant - chart5 open interest

Commodities: Weekly Quant - chart6 implied vol

Commodities: Weekly Quant - chart sentiment



Ben Ryan


YELP: Grand Tales of ROI

Takeaway: YELP threw out a +500% ROI figure on its CPC ads. Before drinking the Kool Aid, let's take a look at its fuzzy math, and prior ROI claims.


  1. YELP'S FUZZY MATH: YELP provides a dashboard to businesses that attempts to quantify revenues generated off of its platform.  There are two inherent flaws in its calculations: business revenues are calculated primarily off leads (not transactions), and those leads are not mutually exclusive events.  It's likely that YELP's stated CPC ROI figure is generated using the same kind of fuzzy math, especially since...
  2. PRIOR ROI CLAIMS GROSSLY EXAGGERATED There is a reason why YELP isn't publishing any supporting data behind its +500% CPC ROI figure.  It made that mistake with its BCG study, which we tore apart last year, and found that its core CPM ad product produces a negative to limited ROI at best across most business categories.  



Yelp provides a dashboard for "Businesses to Measure Success".  Note that red boxes in YELP's graphic below: the top box is the sum of all the customer leads from the bigger box below.  Revenues are calculated by applying an ASP to each of those leads.  


YELP: Grand Tales of ROI - YELP   Dashboard


There are two major flaws in its calculations that grossly exaggerate revenues

  1. Revenues are calculated primarily off leads (not transactions).
  2. Those leads are not mutually exclusive events.  


For example, a website click doesn't guarantee a transaction, and is counted as such.  Further, each one of those "leads" is assumed to be a unique user, but that's not always the case.  For example, one person could click the website, make an online reservation, and pull up directions/map all for one transaction, but Yelp is counting each event individually as 3 distinct transactions. 


This type of fuzzy math is likely the basis for its +500% CPC claim (e.g. assuming every click results in a transaction).


prior roi claims grossly exaggerated

BCG conducted a survey on YELP's behalf to illustrate the revenue benefit of Yelp to small businesses in the US (link).  However, BCG's calculation of "Incremental Revenue" is inherently flawed to the point where one could consider it intentionally misleading (same could be said for the above-mentioned Dashboard).  


YELP: Grand Tales of ROI - YELP   BCG Study


The metrics in the chart above compare incremental revenues for businesses that either advertise (green bars) or have claimed pages (blue bars) vs. businesses without a Yelp presence at all.  Naturally, incremental revenue in this case should be based on what an advertising business generates over a non-advertising business on the platform (essentially the difference between the green and blue bars), which is what we did in the table below.


We aggregated BCG's figures from the reported figures and chart data.  We then netted out YELP's stated average ad revenue from that study to arrive at net revenue.  We also layered in a gross margin scenario analysis to determine the actual return these businesses are generating from YELP advertising.


YELP: Grand Tales of ROI - YELP   BCG Analsysis table


In summary, BCG's study (which YELP helped finance) suggests that for certain categories, if there is any cost associated with the transaction, advertising with YELP will produce a negative ROI.  In aggregate, the ROI will be highly dependent on that business's gross margin.  Remember YELP's core market is local businesses; many lack economies of scale and inherently have lower profit margins.  For context, many of the largest public retail companies struggle to generate north of 40%.


YELP: Grand Tales of ROI - Retail Gross Margins 2014



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


Hesham Shaaban, CFA




The Outlook For Buy-And-Hold Returns Over The Next Decade Is Terrible

What’s the biggest risk to the market right now?


Most people would probably answer this question with one of the following: Oil, China, Russia/Ukraine, Terror/Middle East. To be sure, these are all big risks. The biggest risk I see, however, is valuation and that’s not a very Hedgeye thing to say.


One of the more interesting weather vanes for valuation is the Shiller PE, also known as the CAPE ratio. It looks at the market’s price relative to the trailing 10 years of earnings to smooth out the normal cyclical variability of corporate earnings. Hedge Fund billionaire Cliff Asness, co-founder of AQR, and frequent author (https://www.aqr.com/cliffs-perspective) published a terrific analysis of the Shiller PE several years ago. 

The Outlook For Buy-And-Hold Returns Over The Next Decade Is Terrible - Crazy bull cartoon 08.19.2014

To summarize, he looked at the monthly Shiller PE multiple from 1926-2012 (n=1,032) and then looked at the subsequent market returns over the following decade. What he found was really interesting. He took all those observations (each monthly value over 86 years) and broke them into deciles and then looked at the subsequent 10-year return by decile of starting Shiller PE. He found that S&P 500 returns matched perfectly against those starting Shiller PE multiples.


In statistical speak, the returns are monotonic to the starting multiple’s decile. In other words, you make the most money buying the market when the Shiller PE multiple is in the bottom decile (i.e. the market is the cheapest) and vice versa. The highest valuation decile begins at a multiple of 25.1x and goes up to the highest multiple ever observed, 46.1x. Following that period, the real return for equities in the ensuing decade was just 0.5%/year. The current Shiller PE is 27.3x. The table below shows these returns by decile, while the chart below that shows the current (and historical) Shiller PE.


While 10 years is a long time, and the markets could always rally higher in the short term, the reality is that unless almost a century’s worth of market history is suddenly irrelevant (the mother of all “It’s Different This Time” arguments), the outlook for buy-and-hold returns over the next decade is terrible, which is why we at Hedgeye constantly emphasize the need to be keep moving out there.


The Outlook For Buy-And-Hold Returns Over The Next Decade Is Terrible - steiner1

The Outlook For Buy-And-Hold Returns Over The Next Decade Is Terrible - steiner2


get free cartoon of the day!

Start receiving Hedgeye's Cartoon of the Day, an exclusive and humourous take on the market and the economy, delivered every morning to your inbox

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.