#EmergingOutflows Round II: March 2015 Update

Takeaway: We reiterate our bearish bias on Emerging Markets, a view we have held since late September. Feel free to email us with follow-up questions.

Watch an audio-visual update of our #EmergingOutflows theme below.


CLICK HERE to download the associated presentation in PDF format (29 slides).


CLICK HERE to access the latest version of our Tactical Asset Class Rotation Model (TACRM). Quantitatively speaking, slowing global growth and falling inflation expectations continue to be priced into global financial markets -- both of which continue to be material headwinds to EM asset prices.


Best of luck out there,




Darius Dale


Keith's Macro Notebook 3/12: USD | Japan | Russell 2000


Hedgeye Macro Analyst Darius Dale shares the top three things in Keith's  macro notebook this morning.

Retail Callouts (3/12): KSS, BONT, MW, NKE, VFC, WMT, TJX, DG, Retail Sales

Takeaway: KSS/Industry read throughs on Comps & Margins. MW 4Q-Remains on Long Bench. WMT wage ripple effects. China factory strike. FEB Retail Sales.


Retail Callouts (3/12): KSS, BONT, MW, NKE, VFC, WMT, TJX, DG, Retail Sales - 3 9 chart2







Takeaway: BONT isn't a name we talk about a lot, but we took a few interesting tidbits away from the company's press release this morning.

1) Comps -- the company posted a 4.3% number (+5.3% through Nov/Dec and -1.4% in January). That's the best comp number this company has posted in 8.5 yrs. Yea since 2006. Could it be that this company has found its mojo. It's possible, but this is a bottom tier regional department store chain operating in a category that's grown sales at a -2% CAGR over the past 20yrs. If poor quality retailers like BONT (we could list about 10 more concepts) are putting up record numbers we think that's very solid proof that the +3.7% KSS comp number is more telling of the retail environment in 4Q than the 'Greatness Agenda'.

2) Margins - The company took a 130bps whack on the chin because of the 'highly promotional' retail environment and distribution related e-comm expenses in the quarter. E-comm sales grew 25% for the year to $167mm (6% of sales). That's a big headwind for such a small piece of the business. BONT currently has no free shipping threshold in place, meaning that consumers must pay shipping for each order. But we should note that the company is currently running a free shipping at $25 spend promotion. Companies do this all the time, but as retailers move to protect market share online (the only real growth driver in the industry) we think the one-offs become standard moving the threshold towards $0.

Retail Callouts (3/12): KSS, BONT, MW, NKE, VFC, WMT, TJX, DG, Retail Sales - 3 12 chart3


MW - 4Q14 Earnings


Takeaway: All in a very good quarter for MW. Comps looked strong across the portfolio in the quarter which was enough for 1% beat on the top line, though we should note that on a 2yr basis all concepts were flat to down sequentially. Margins looked good and the 66% sales growth leveraged into a 92% increase in adjusted EPS. Run rate synergies ended the year at $35mm with $50-$55mm guide for 2015. We think management is sandbagging on the $100mm it's thrown out to the street. MW remains on our long bench while we vet the bigger investment thesis.

Retail Callouts (3/12): KSS, BONT, MW, NKE, VFC, WMT, TJX, DG, Retail Sales - 3 12 chart1


WMT, TJX - At Home comfortable with wage increase



Takeaway: At Home operates 83 stores centered mostly in the Mid West and South. Think a bigger version of Pier 1 or maybe an Ashley Furniture. If you want to see what the WMT wage increase ripple effect looks like across the industry look no further than At Home. The company is raising hourly wages for full time workers to a $10 minimum and $9 for part-timers. It's not a concept that one would think would have to compete with WMT for employees, but sure enough here it is. WMT employs about 1.4mm people in the US. That's about 16.5% of the workforce in the Food & Beverage, Health/Personal Care, Clothing, and General Merchandise categories. Or, put another way…the company swings a big stick.


NKE, VFC - Chinese Labor Strike: 5,000 Workers Strike At Factory Making Shoes For Nike, Timberland, Kenneth Cole; Police Dogs Deployed


Takeaway: This does not impact high-profile 'Launch' footwear for Nike, as it dual and triple-sources those products in different countries to diversify against risks such as this -- which seem to come along every 2-3 years. But truth be told, the plant would need to be closed down permanently to be a  shock to Nike's financial model -- and it'd only be a temporary one at that.




Takeaway: This confirms what we've seen from company's monthly sales numbers in Feb and the ICSC trend line. Sales decelerated on both a 1yr and 2yr basis to the lowest rates we seen in 12-13 months.

Retail Callouts (3/12): KSS, BONT, MW, NKE, VFC, WMT, TJX, DG, Retail Sales - 3 12 chart4






Retail Callouts (3/12): KSS, BONT, MW, NKE, VFC, WMT, TJX, DG, Retail Sales - 3 12 chart5


PETM - BC Partners Completes Acquisition of PetSmart, Inc, Appoints Michael J. Massey as its President and Chief Executive Officer



TJX - TJX, Bluestar Eye Jones New York



APP - Robert Mintz Exits American Apparel



PLCE - Barington Capital, Macellum Advisors Urge Changes at Children’s Place



WMT - Women-owned logo arrives on Walmart shelves



GME - GameStop expands gift card trade-in program



UA - Under Armour opens digital center in Austin, Texas



In the Works: Four new retail concepts



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Initial Claims | Strong

Takeaway: This morning's strong claims print reinforces the conclusion that the labor market remains on solid footing for now.

Below is the detailed breakdown of this morning's initial claims data from Joshua Steiner and the Hedgeye Financials team. If you would like to setup a call with Josh or Jonathan or trial their research, please contact 


The last few weeks saw claims rising steadily, but that changed in the latest week of data. Claims fell by a momentous 36k on a single week SA basis, bringing them back below 300k. Meanwhile, the rolling data improved WoW by 4k to 302k.


The YoY RoC in NSA rolling claims slowed to 8.3% this week, but this isn't suprising as YoY RoC should be converging towards zero as we get closer to lapping the frictional floor of 300k. All in all, the data this morning is strong and paints a picture of ongoing stability/improvement in the US labor market.


For the last few months we've been calling out the energy sector as an area of acute weakness amid the broader backdrop of strength for labor. The update there this week is that the energy state complex was relatively flat relative to the rest of the country. 


Initial Claims | Strong - Claims18 normal  2


The Data

Prior to revision, initial jobless claims fell 31k to 289k from 320k WoW, as the prior week's number was revised up by 5k to 325k.


The headline (unrevised) number shows claims were lower by 36k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -3.75k WoW to 302.25k.


The 4-week rolling average of NSA claims, another way of evaluating the data, was -8.3% lower YoY, which is a sequential deceleration versus the previous week's YoY change of -8.8%


Initial Claims | Strong - Claims2 normal  2


Initial Claims | Strong - Claims3 normal  4


Initial Claims | Strong - Claims4 normal


Initial Claims | Strong - Claims5 normal


Initial Claims | Strong - Claims6 normal  3



Joshua Steiner, CFA


Jonathan Casteleyn, CFA, CMT


***UNLOCKED RESEARCH | $YELP: Hiding the Bodies (Update)

Takeaway: See update below on timing of SeatMe reclassification.

This note was originally published by our Internet & Media Sector Head Hesham Shaaban on March 10, 2015 at 11:46. For more information on how you can subscribe to America's fastest-growing independent financial research firm click here.

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.


***UNLOCKED RESEARCH | $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





USD, Japan and The Russell 2000

Client Talking Points


A generational ramp for #StrongDollar finally signals immediate-term TRADE overbought (within a very bullish TREND) at $99.99 on the U.S. Dollar Index (Gretzky should be proud he got paid in Dollars, not Loonies!) and the EUR/USD bounces at what was our intermediate-term target of $1.05.


The Weimar Nikkei screamed higher overnight +1.4% to +8.9% year-to-date (vs S&P 500 -0.9% year-to-date) on Burning Yens, but that YEN vs USD cross is signaling oversold too – so we should see a short-term bounce in USD traded (Oil, Gold, etc.) and the Nikkei correct some tonight.


The Russell 2000 is up on the day with the SPY down -0.2%  and we like it on the long side here into the Retail Sales print (which should beat) – being long domestic consumption in the U.S. remains our best relative long idea on the other side of our Global #Deflation call – Russell revs are 80% U.S. domestic.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

iShares U.S. Home Construction ETF (ITB) is a great way to play our long housing call, U.S. #HousingAccelerating remains 1 of the Top 3 Global Macro Themes in the Hedgeye Institutional Themes deck right now. Not only did U.S. home prices accelerate (in rate of change terms) in the Core Logic data this week to +5.7%, but the supply/demand data has been improving throughout the last 3 months.


Penn National Gaming is the best way to play improving domestic regional gaming trends due to its superior operational management and unit growth opportunities. Catalysts include positive estimate revisions, the opening of the first Massachusetts casino in June, and industry leading earnings growth in 2015 and 2016.


Low-volatility Long Bonds (TLT) have plenty of room to run. Late-Cycle Economic Indicators are still deteriorating on a TRENDING Basis (Manufacturing, CapEX, inflation) while consumption driven numbers have improved. Inflation readings for January are #SLOWING. We saw deceleration in CPI year-over-year at +0.8% vs. +1.3% prior and month-over-month at -0.4% vs. -0.3% prior. Growth is still #SLOWING with Real GDP growth decelerating at -20 basis points to +2.5% year-over-year for Q4 2014.The GDP deflator decelerated -40 basis points to +1.2% year-over-year.

Three for the Road


GERMANY: whopping -0.2% correction day for the DAX, which is +20.2% YTD vs $SPX -0.9%



In the middle of every difficulty lies opportunity.

-Albert Einstein


After 6 weeks of inflows, domestic stock funds returned to redemptions losing almost $2 billion in the most recent survey.

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