Tall Tales

“If you tell the truth, you don’t have to remember anything.”

 -Mark Twain


Let’s call a spade a spade - it’s hard to be 100% honest.   I mean we all stretch the truth a little at times.  Maybe it is small things like saying you are 6’2" when really you are 6’1", or saying your fund was up double digits when really it was up 8.5% for the year.  On some level, it is just human nature to tell a tall tale.


In a paper published in Human Communications Research in 2010, Professor Kim Serota and colleagues attempted to determine exactly how often people lie in their everyday lives.   She conducted an online survey of 1,000 people that asked how many times the participant lied in the last 24 hours, the conclusions were as follows:

  1. The average number of lies told per day was 1.65
  2. Only 40.1% reported telling a lie in the last 24 hours
  3. 22.7% of all lies were told by one percent of the sample, and half of all lies were told by 5.3% of the sample
  4. No statistically significant sex differences were found in the propensity to lie

So undoubtedly you get the ironic point of the survey, the most honest people in the survey were the ones that actually lied the most.


Tall Tales - 44


Back to the Global Macro Grind...


As it relates to central bankers, we haven’t exactly called them liars, but certainly they have misled the investing masses at times.  The one exception to that may be the honest Canadian at the head of the Bank of England, Governor Mark Carney.


Yesterday, Carney said what a lot of central bankers aren’t allowed to say, or are afraid to say, which is that the Bank of England would be “foolish” to fight current low inflation.  Specifically, Carney said that:


“That’s one of the key judgments the MPC has to make . . . the one thing we can’t do and the thing that would be extremely foolish would be to try and lean against this oil price fall today and try to provide extra stimulus up at this point in time.”


Carney’s point was that to add stimulus now would only lead to undue volatility in the English economy - a lesson certainly the Japanese and ECB should be learning in spades, only they are not.


Back in American central banking land, the WSJ’s Jon Hilsenrath, among other Fed watchers, is suggesting the next move by the Fed will be rhetorical in nature.  That is, the Fed is purportedly strongly considering removing the word “patient” from its policy statement.  The implication of this move would be that the door would then be left open for rate increases.  Well, that is assuming Fed insiders aren’t lying to Hilsenrath and his cadre.


In the Chart of the Day below, we look at employment versus PCE going back some 25 years.   As usual, stats don’t lie and what the chart shows us is that the Fed is going to face a real conundrum as it relates to reported inflation and its mandate.  Either they can find the truth, like Governor Carney, or yet again the Fed might surprise us all on the dovish side because as the chart clearly shows, at least based on PCE, we are in a deflationary environment.


Now the caveat to that is that employment, at least on the headline metric of the unemployment rate, is indicative of an economy that is operating at tight capacity.  Employment is also the foundation of the thesis for most equity bulls.   Historically, of course, the employment rate has been much more of a lagging indicator than a leading one.  On this topic, we are actually going to do a deep dive on employment on Tuesday March 17th at 11am on a conference call titled: “Employment: The Good, The Bad and The Ugly”.  Ping sales@hedgeye if you’d like dial in information.


Switching to Hedgeye stock calls, our Internet guru Hesham Shaaban, has been loudly calling out the management of Yelp.  If @HedgeyeInternet is correct in his analysis, Yelp management is likely in the category of the one percent of the sample that tells more than 22% of the lies every day.  In a note earlier this week on Yelp titled, “Hiding the Bodies”, Shaaban wrote:


“We originally believed revenues from SeatMe (reservation service) would be reclassified from YELP's Other Services segment into its core Local Advertising segment starting in 1Q15.  However, that likely happened in 1Q14.  We just didn't realize it because the reclassification wasn't explicitly disclosed in any of YELP's filings until its 2014 10-K filed two weeks ago.  Given that its previously-reported 2014 quarterly segment revenues haven't changed within its recently-filed 10-K, we have to assume that the change already occurred in 1Q14.”


So the moral of the Yelp story is, it seems, that if the revenue doesn’t fit your tall tale then just reclassify, but just don’t tell anyone.


The larger issues with Yelp, though, is customer attrition.  By Shaaban’s analysis, Yelp loses roughly 80% of customer every year, so the attrition rate is very high.   Therefore unless Yelp’s TAM (total addressable market) is unlimited, which it is not, eventually growth will slow and dramatically slow for Yelp.   And in a story stock like Yelp, trust me you don’t want to be there when the growth music stops.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.96-2.26%

SPX 2034-2080
DAX 110

VIX 14.27-17.13
EUR/USD 1.05-1.08

Oil (WTI) 48.04-50.44 


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Tall Tales - COD

The Fed's Road

This note was originally published at 8am on February 25, 2015 for Hedgeye subscribers.

“The Road goes ever on and on… down from the door where it began.”



No, that is not from Janet Yellen’s testimony yesterday. It’s from J.R.R. Tolkien’s Lord of The Rings. It’s also the theme for a walking song that my favorite Tolkien character (Bilbo Baggins) cites in Chapter 19 of The Hobbit:


“Roads go ever ever on

Under cloud and under star,

Yet feet that wandering have gone

Turn at last to home afar.”


While Janet may have been pulled and pushed toward the path of “rate liftoff”, now she’s back to where she, Ben, and their fantasy novel has always been – back to the Shire of money printings and lower-rates-for longer, that is…

The Fed's Road - Deflation cartoon 02.24.2015


Back to the Global Macro Grind


To be clear, The Fed’s Road doesn’t end with green meadows that rest under shining stars. Policies to Inflate, ultimately end in #deflation. And that gets the Long Bond Bulls paid.


Long Bonds? Yes, as in the things that are at all-time highs in Europe and Japan (10yr German Bund and Japanese Government Bond Yields are trading at 0.36% and 0.33%, respectively) as long-term economic expectations there = #deflation.


While the USA’s 10yr Yield has dropped -14 basis points to 1.96% in the last 24 hours, it’s still trading at a +160-163 basis point premium to German/Japanese Long-term Bond Yields. Unless you think US inflation is pending, you’re long  the Long Bond (TLT).


So, thank you Janet – for pseudo telling the truth yesterday. My world needed that! What did she say?


  1. She kept the key-word “patient” in the Fed’s current policy vernacular
  2. She acknowledged inflation expectations being nowhere near the Fed’s “target”
  3. She reminded her fans that she is, allegedly, “data dependent”…


Why do these 3 things matter (in the same order)?


  1. Plenty of funds were pushing the idea that the “patient” language was going to be dropped
  2. Plenty of funds were trying to pull me into the narrative that the Fed “doesn’t care about inflation”
  3. Plenty of funds now realize that the next “data” points are really going to matter!

On the “data”, you need both a calendar and a forecast – here’s mine:


  1. Thursday’s CPI (consumer price inflation) report is going to slow (again) both sequentially and year-over-year
  2. Friday’s GDP report (for Q4 2014) is going to slow (again) both sequentially and year-over-year
  3. Next week’s US Jobs Report (for FEB) is going to do something that I have no edge on


While this game of front-running expectations isn’t easy, if I have 3 data points pending and I’m relatively certain about 2/3, I’d much rather see those 2 face cards first! I think both the bond and stock market see them the way I see them too.


In that regard, yesterday’s real-time market reaction to the Fed taking you right back down the road that they’ve always been on made complete sense to me:


  1. Bond Yields fell, and accelerated to the downside into the close (TLT +1.4% on the day)
  2. The US Dollar stopped going up – Burning Yens and Euros stopped going down
  3. Housing (ITB) and Consumer Discretionary (XLY) stocks led a stock market rally to all-time closing highs


Yes, all-time is a long-time – and that’s why I’ve been saying that it was more obvious to buy longer-term Bonds on the recent pullback than it was to buy the SP500. The 10yr US Treasury bond isn’t back to its all-time high yet = more upside!


But, for those of us who like to buy both stocks and bonds (I wouldn’t have an Independent Research business if I marketed one asset class over another, sorry), we want to be buying the parts of the US stock market that will go up the most.


We call these Sector Style Exposures. In Equities, the 2015 outperformance of the following sectors remains obvious:


  1. US Housing Stocks (ITB) were +2.5% yesterday to +8.8% YTD
  2. Healthcare Stocks (XLV) were -0.1% yesterday to +5.9% YTD
  3. Consumer Discretionary (XLY) stocks were +0.5% yesterday to +5.0% YTD


Whereas the Sector Styles we’d want to be net short (hedge funds) or underweight (mutual funds) like Energy (XLE) and Financials (XLF) are +1.6% and -0.9% YTD, respectively, are underperforming the SP500 (which is +2.7% YTD).


Don’t get me wrong, in a world facing both Global #GrowthSlowing and #Deflation headwinds, a +2.7% YTD gain is nothing to complain about. Being positioned on The Hedgeye Road of Long TLT, ITB, XLV, and XLY has simply been more fruitful.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.84-2.07%
SPX 2099-2125

ITB (Housing) 27.01-28.36
VIX 13.22-16.98
USD 93.70-95.18


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


The Fed's Road - 02.25.15 chart

Watch The Macro Show, Live With Keith McCullough


Here is the replay of The Macro Show for March 11, 2015. Hedgeye CEO Keith McCullough distills the world's key market, economic and political developments in 15 minutes or less for our Macro Institutional subscribers, then answers questions from viewers.


There is no better way to prepare for your market day.



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 80.47%
  • SHORT SIGNALS 78.70%

Cartoon of the Day: Crash and Burn

Cartoon of the Day: Crash and Burn - Euro cartoon 03.10.2015

The Euro is down big. Over -11% YTD. We think it gets even weaker.

EDV: Removing Vanguard Extended Duration ETF from Investing Ideas

Takeaway: We are removing EDV from Investing Ideas.

Please note that we are removing EDV from Investing Ideas today.


"It's just a risk management move to not be as long bonds, for now," according to Hedgeye CEO Keith McCullough. "We're keeping TLT and MUB."


EDV is up 13% since it was added to Investing Ideas on 9/5/14 versus a 2% return for the S&P 500.


Click image to enlarge.

EDV: Removing Vanguard Extended Duration ETF from Investing Ideas - edv

YELP: Hiding the Bodies (Update)

Takeaway: See update below on timing of SeatMe reclassification.

UPDATE: We originally believed revenues from SeatMe (reservation service) would be reclassified from YELP's Other Services segment into its core Local Advertising segment starting in 1Q15.  However, that likely happened in 1Q14.  We just didn't realize it because the reclassification wasn't explicitly disclosed in any of YELP's filings until its 2014 10-K filed two weeks ago.  Given that its previously-reported 2014 quarterly segment revenues haven't changed within its recently-filed 10-K, we have to assume that the change already occurred in 1Q14.  Details below.  All Key Points remain the same.   



  1. THE MODEL IS DETERIORATING: YELP’s business model isn't sustainable; we're already seeing signs that its model is breaking down at a progressively worse rate within its reported metrics. 
  2. HIDING THE BODIES: In response, management is now manipulating its reported metrics to mask what's really happening.  In addition, YELP made a very questionable acquisition (Eat24), and potentially understated its expected revenue contribution (link) to make its core business look better.
  3. PENDING IMPLOSION: The overriding theme is that these suspect moves aren't any more sustainable than its current business model.  Management may buy themselves a short-term reprieve on its stock, but are only raising the sell-side bar on a fading buy-side growth story.



YELP’s Local Advertising segment is riddled by an absurd level of attrition, which is becoming increasingly more challenging to overcome as the company presses up against a limited TAM that can’t support its model.  We can already see YELP’s model breaking down in its reported metrics.  So in response, management is now manipulating that very data in order to hide what’s really going on.


YELP: Hiding the Bodies (Update) - YELP   New Acct vs. Sales 4Q14



Below are series of suspect moves that management has taken to mask its rampant attrition issues, and overstate the fading strength in its core Local Advertising segment. 

  1. **SEATME ALREADY RECLASSIFIED IN 2014**:  We originally believed that its SeatMe (reservation service) would be reclassified into its Local Advertising segment starting in 2015, which would provide an artifical boost to local ad revenues.  However, that boost likley happenned in 2014.  What confused us was that the SeatMe reclassification was never explicitly disclosed in any of YELP's filings until its 2014 10-K filed a couple weeks ago.  Given that its 2014 quarterly segment revenues previously reported haven't changed within its recently-filed 10-K, we have to assume that the change already occurred in 1Q14.  Note that the decision to shift SeatMe into its Local Advertising segment must have happened sometime between 3/14/14 and 4/30/14 (i.e. 2013 10-K filing date and 1Q14 earnings release).  In short, SeatMe already boosted Local Ad revenues in 2014.  
  2. HIDING THE BODIES: Starting in 2015, YELP will no longer provide its legacy Active Local Business Account metric in favor of a new metric called “Local Advertising Accounts”, which only includes accounts contributing to its Local Advertising Revenue.  The implications here is that YELP will buy itself some deniability on our attrition thesis.  YELP’s customer repeat rate is based off the legacy account metric that mgmt will be retiring. This means that we can’t explicitly calculate its customer mix (and attrition) moving forward.  This gives management deniability, but doesn’t change anything.
  3. BUYING GROWTH: YELP has a history of making questionable acquisitions to mask weakness elsewhere in its business.  With its most recent Eat24 acquisition, there's a good chance that management grossly underestimated Eat24's expected revenue contribution given that associated $36M revenue guidance raise is roughly inline with what Eat24 may have been generating back in 2013 (link).
    1. SeatMe: Reservation service acquired into 3Q13.  SeatMe accounts were reclassified into Active Local Business Accounts beginning 2014, and its revenues are being reclassified in Local Advertising starting 2015.
    2. Cityvox SAS/Restaurant-Kritik: International competitors acquired in 4Q14 after YELP couldn’t produce revenue growth off its international Qype acquisition from 4Q12. 
    3. Eat24: Food-ordering service acquired in 1Q15.  We have no idea how YELP will account for the service, but if it can reclassify its SeatMe reservation service as an Advertising business, there is nothing stopping them from doing the same with Eat24.



The overriding theme is that these suspect moves aren't any more sustainable than its current business model.  Management may buy themselves a short-term reprieve on its stock, but are only raising the sell-side bar on an a fading buy-side growth story. 


This is how we see the progression of the YELP's earnings releases as we move through the year.

  1. 1Q15: Let's say YELP knocks the cover off the ball on the 1Q15 release and raises guidance. Consensus then raises estimates even higher as they always have (likely 2H15 weighted, with 2016 even higher).  
  2. 2Q15: the bar is now higher.  YELP could produce 2Q15 upside, but its 3Q15 guidance release is likely less impressive, if not light.  
  3. 3Q15: YELP can't guide 4Q15 estimates above consensus estimates since the sell-side has raised the bar too high throughout the year.  
  4. 4Q15: Consensus expectations for 2016 have steadily risen throughout 2015 with the sell-side trying to justify their price targets.  Now, YELP needs a much bigger acquisition and/or a more egregious accounting maneuver to distract the street...while hoping no one catches on.

In short, the setup for YELP will become progressively more challenging as we move through 2015 into 2016.  Even if the stock pops on the 1Q15 release, it likely ends the year lower than it started once YELP doesn't raise guidance above expectations (likely 2H15).



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


Hesham Shaaban, CFA




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