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The Idea Generation Game

This note was originally published at 8am on February 03, 2015 for Hedgeye subscribers.

“It constipates the whole process.”

-Stephen King

 

While I am sure he has plenty of it, that’s what the King pin of American supernatural fiction had to say about cash. “Money is great stuff to have, but when it comes to the act of creation, the best thing is to not think of it too much.”

 

Sadly, that is not how some think about what they call their “dough.” On the independent research battle front, I can’t count how many people told me we’d be wrong on interest rates falling because guys with a lot more money than me thought otherwise.

 

Who raised these people to think that way? America was built on a meritocracy of new ideas replacing broken ones. The day we wake up thinking that only the people with money are “smart” is the day we start losing. Anyone can win the idea generation game.

 

The Idea Generation Game - 2 it

 

Back to the Global Macro Grind

 

Fast or slow, you probably can’t win this year’s game. Not with our July 2014 call for a breakout in cross asset class volatility in play. Just watch Greece go from -13% to -2% YTD on a floater headline that their “new” Finance Minister is “creative”, and you’ll get my point.

 

Don’t confuse moving slowly with moving patiently either. There’s a big difference. #Patient players can move both fast, and slow. That’s the point. There’s a time to risk manage your active portfolio – and there are times to wait and watch.

 

Risk manage your portfolio? Yes. It’s commonly called trading – and while you can feel really “smart” buying and holding stocks at 10 VIX, at VIX 15-25… not so much. Look what led yesterday’s v-bottom rally off the terrible January ISM report’s lows:

 

  1. US listed Oil & Gas Stocks (XOP) = +6.1%
  2. US listed Energy Stocks (XLE) = +3.1%
  3. US listed Financials (XLF) +1.6%

 

Yes, 2015’s biggest losers led yesterday’s gains. Unless you made some counter-TREND moves (i.e. booked gains in shorts that were working and went long some of the inversely correlated sectors and asset classes linked to a Down Dollar move), you lost ground yesterday.

 

While generating both absolute and relative returns, every day, would be nice – that only happens on either Twitter or in fictional novels about rainbows and puppy dogs. Real world risk management is far closer to Stephen King’s “It!”

 

What is it? What is that thing that helps Portfolio Managers and Self Directed Investors alike beat the market year-in and year-out? I’d say it has a lot do with having a more flexible #process than a constipated one.

 

Did consensus really think the US Dollar was going to go up, every day?

 

  1. Friday’s GDP miss/slowing was a clean cut negative for the US Dollar
  2. So was yesterday’s ISM slowdown from an already slowing 55.5 in DEC to 53.5 in JAN
  3. And so would be a bad jobs report on Friday…

 

But you already know that since the flexible and prepared player knows this USD correlation matrix is dominating:

 

  1. Inverse correlation between USD and the CRB Index (19 commodities) on a 90-day duration is -0.97
  2. Inverse correlation between USD and Oil on a 90-day duration is -0.95

 

In other words, if you got the rate of change in the USD right, you’ve gotten both the commodities and Oil crash right. Oh, and you played the counter-TREND reversal beautifully too!

 

Seriously. Getting that right is not that easy.

 

But not being Consensus Macro is easier than thinking it’s “smart.” Here’s where the “smart” hedge fund futures and options bets were (non-commercial CFTC net futures/options positioning) going into yesterday’s counter-TREND macro move:

 

  1. Peak multi-year net LONG position in US Dollars of +70,456 contracts (vs. the 1yr avg of +24,739)
  2. Peak multi-year net SHORT position in the Euro of -177,296 contracts (vs. the 1yr avg of -83,603)
  3. Net SHORT the Russell 2000 at its peak net short position of the year (-30,174 net short contracts)

 

That’s right, after all of these things have worked, big time, for 6 months – all of the “smart” money has crowded into them.

 

Sure, there was a net LONG position of +324,181 in Crude Oil going into yesterday’s rip, but don’t forget that Wall Street was been levered long Oil the entire way down too (the 1yr avg net LONG position in Crude is +366,487 contracts!).

 

“So”, don’t constipate yourself with consensus. Motivate yourself to open your mind and move aggressively when the big things moving macro markets move. That sure beats counting your moneys. “There’ll be time enough for countin’, then the dealing’s done.”

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.64-1.78%

SPX 1984-2032

VIX 18.25-21.92
USD 93.41-95.82
WTI Oil 42.84-51.31
Gold 1260-1290

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

The Idea Generation Game - 02.03.15 chart


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,

KM

 

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


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 80.32%
  • SHORT SIGNALS 78.48%

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

CARTOON OF THE WEEK

Investing Ideas Newsletter      - complacency cartoon 02.10.2015

IDEAS UPDATES

yum

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. 

 

Upshot

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

MDSO

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

HOLX

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.

TLT | EDV | XLU | MUB

 

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

RH 

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.

 

 

* * * * * * * * * * 

ADDITIONAL RESEARCH CONTENT BELOW

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

Analyst


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.

KEY POINTS

  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'S FUZZY MATH

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

@HedgeyeInternet

 

 


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