Keith's Macro Notebook 3/16: China | Europe | Oil


Hedgeye CEO Keith McCullough shares the top three things in his macro notebook this morning.


Takeaway: Easiest comps drives a better week.


There was some improvement this week from last due to a much easier comparison.  DTR of HK$691 fell “only” 22% YoY but the comp was the weakest of the month (-7%).  We still believe the trend is lower and while consensus GGR forecasts have dropped dramatically, EBITDA estimates remain much too high in our opinion. We fear the Street is missing the recent downturn in the grind mass which carries the highest margins of any segment.


Please see our detailed note:


Link to Report: SHAK: NYC Is Not The Center Of The Universe

  • We are adding SHAK to the Hedgeye Best Ideas list as a SHORT.
  • The market is valuing SHAK at $27 million per system-wide store versus the average store generating approximately $3.5 million in revenues.  This compares to CMG, which trades at $11.2 million per store.  If SHAK can execute at a CMG level and grow into that valuation, it would trade at around $20 per share.
  • Clink the link below to read more about our SHORT thesis.

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 80.43%
  • SHORT SIGNALS 78.35%

YELP: Salesforce Productivity?

Takeaway: "Rookies" aren't problem, as YELP suggested at a sell-side event last week. Declining salesforce productivity is likely a secular issue.


  1. SALES REP CHURN MAY HAVE ACCELERATED: Management attributed its declining salesforce productivity to a higher percentage of sales rep “rookies” , which YELP defines as reps hired 6-9 months ago.  A higher percentage of rookies on decelerating sales rep growth suggests elevated churn (at least in 4Q14).
  2. IT REALLY WASN’T THE ROOKIES: If it takes 6-9 month for a sales rep to ramp as management suggests, then we should have seen a 2H14 acceleration in new account growth from its 1H14 acceleration in sales rep hiring.  Unless salesforce attrition was elevated throughout 2014 (which would be a much bigger issue), then rookies can't explain the decline salesforce productivity that occurred throughout all of 2014.  We suspect the bigger issue is Point 3 below.
  3. PRODUCTIVITY LIKELY IN SECULAR DECLINE: YELP’s salesforce (telesales) is already large enough to canvas its entire addressable market in call volume.  Hiring more and more reps to call on the same number of clients is essentially the definition of declining salesforce productivity; only leads to higher call volume for existing prospects.  It also means that YELP's "rookie" problem could become a growing issue from escalating salesforce churn (too many mouths to feed).



Management attributed its declining salesforce productivity to a higher percentage of sales rep “rookies”, which YELP defines as reps hired 6-9 months ago.  We’re not sure what period management’s comments are pointing to (4Q14, or all of 2014), but we estimate productivity has been on the decline throughout 2014.


YELP: Salesforce Productivity? - YELP   New Acct vs. Sales 4Q14 2 


We suspect the more important takeaway is what that means for sales rep retention.  The only way YELP would have a higher percentage of rookies is if its salesforce was growing at an accelerating rate, which wasn’t the case in 2H14 (reps hired in 1H aren’t considered rookies anymore).  That said, it’s likely that YELP's sales rep attrition picked up in 4Q14, potentially 3Q14 as well.



Management suggests that it takes 6-9 month for a sales rep to fully ramp.  If that is the case, then we should have seen a 2H14 acceleration in new account growth following its 1H14 acceleration in sales rep hiring.  In the chart below, we’re comparing YELP’s new account growth against its growth in sales headcount on both a direct and leading basis (e.g. 2Q lead is showing headcount growth from 1Q14 in 3Q14, 2Q14 in 4Q14). 


YELP: Salesforce Productivity? - YELP   New Acct vs. Sales 4Q14 lead


Another explanation could be that YELP did experience a heightened level of sales rep attrition at some point in 2014.  But unless that occurred throughout all of 2014 (which would be a much bigger issue), it couldn't explain the decline in salesforce productivity that occurred throughout all of 2014.  Either way, it doesn't change the fact that YELP hasn’t been able to generate new account growth in excess of the rate that it’s hearing sales reps at any point in 2014. 


If there was ever an admission that YELP’s TAM isn’t large enough to support its model, it would be this persistent decline in salesforce productivity (see note below for our TAM analysis).


YELP: Debating TAM

06/30/14 01:10 PM EDT

[click here]



Hiring more and more reps to call on the same number of clients is essentially the definition of declining salesforce productivity.  YELP’s salesforce (telesales) is already large enough to canvas its entire addressable market in call volume. 


We illustrate this point in the two tables below, which we are flexing by total sales reps and required daily call volume (note: the recurring theme from employer reviews at suggests the salesforce is required to make at least 80 calls a day).


In the first table below, we’re calculating how long it would take YELP's salesforce to call all 14.4M B2C business in the US (see TAM note above).  Based on YELP’s ~1,500 reps making 80 calls daily, YELP’s salesforce could call every B2C business in the US within 120 days.  YELP guided to growing its salesforce by 40% (to 2,100), which will only shrink that window to 86 days.


YELP: Salesforce Productivity? - YELP   B2C call volume


However, we suspect the primary focus of YELP's salesforce is the 2.0M businesses that have claimed a page on their site (since 2008).  YELP probably doesn’t have the current contact info for all 14.4M B2C businesses in the US (YELP licenses business lists from third-parties).  Repeating our analysis above for claimed businesses, the call window shrinks to 12 from 17 days.


YELP: Salesforce Productivity? - YELP   Claimed call volume


In short, adding more and more reps just means increasing call frequency, which naturally has a waning benefit.  We suspect this is the reason why salesforce productivity is on the decline, and why we believe the issue is secular.  We also suspect this will exacerbate YELP's "rookie" problem in the form of escalating salesforce churn (i.e. too many mouths to feed).   



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


Hesham Shaaban, CFA



LULU Black Book - Fish Or Cut Bait

Takeaway: Please join us 3/24 at 11am ET. We'll walk through the global oppty and survey results to nail down whether to fish or cut bait on LULU.

We’ll be issuing our next Black Book on Lululemon on Tuesday March 24th and will be hosting a call at 11:00 am ET to review our findings.


When we added the name to our Best Ideas list as a Long on June 15 of last year, the decision tree was simple – the Board and ownership structure was near certain to be shaken up, CFO John Currie likely to be pushed out, LULU’s brand perception by consumers (per our survey) had found a bottom, there was a big call option on an LBO, and the Street was capitulating after the stock lost 50% in the preceeding six months.


But today, after a 65% move in nine months (vs 7% for the market and 16% for the XRT) the call needs to be radically different. Simply put, now you’ve really got to believe that this brand has a lot more than staying power. It has to have both the opportunity and the operating plan to back it up. With new CFO Stuart Haselden only being on the job for five weeks, it’s unrealistic to expect him to have made any impact on the operating plan. But the brand opportunity is something we’ve always questioned (at $37, it just didn’t matter).


With that as a backdrop, the crux of this Black Book will be the global opportunity for LULU. In the past we’ve conducted consumer surveys to gauge brand health, but they have beel largely US-centric. This time, our survey looks at competitive positioning in several key markets for LULU, including the US, Canada, the UK, Australia and China. As we’ve learned with other athletic brands, there are dramatic differences in brand perception with even slight changes in geography. That means a different competitive set, and the need for appropriate branding, marketing, and pricing.  We aim to address these factors in our report.


Key Topics Will Include…

1) What is LULU’s addressable market? The sportswear market in the US is a $58 billion industry, but just how much of that market does LULU participate in given its restrictive price points and foundations in Yoga wear. The brand has roots in running and created its own niche in the lifestyle/everyday category. We’ll quantify the market potential based on demographic spending patterns in each country not only today, but 5yrs from now.

2) What’s the market opportunity in the US? LULU currently has 201 stores on its way to 300 in the US. To understand the opportunity of future store growth we need to first understand the demand characteristics of a) the specific local markets where the brand already operates and b) potential un-tapped markets. We’ll then be able to estimate the market share in order to keep productivity rates at current levels.

3) Competition. Yoga wear has become ubiquitous in the marketplace. How does that look on a market by market basis?

4) International. We surveyed consumers across 5 different countries (Canada, US, Australia, the UK, and China) to gauge awareness, athletic participation rates, and purchase history. Each region is at a very distinct point in its developmental life-cycle. We’ll look at the differences by region to gauge LULU’s opportunity as it kicks off its International expansion.

5) Infrastructure. Historically this has been LULU’s Achilles heel. We think that’s primarily due to the weak finance culture within the organization overseen by ex-CFO John Currie. That changes now with Advent/ Michael Casey hire, Stuart Haselden, taking the reins. We will dissect the company’s infrastructure needs in both the US and Internationally as the company builds from $2bil in revenue to $4bil. More importantly, we’ll quantify the capital needed and subsequent margin implications in order to support that type of top-line growth.


Call Details

Dial-In Number: 

Toll Free Number:

Conference Password: 13604247

Materials: Link will be provided prior to call

Hairy Little Forecasters

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

“A foolish consistency is the hobgoblin of little minds.”

-Ralph Waldo Emerson


I think we all know what little minds are. If you don’t know what their foolish consistencies look like, come watch 5-7yr olds play Mite Hockey. They’ll go offside again, and again, and again – until they finally learn that the referee’s whistle stops them from scoring.


Do you know what a hobgoblin is? Per Wikipedia: “Hobgoblins seem to be small, hairy little men who—like their close relative, brownies - are often found within human dwellings, doing odd jobs around the house while the family is lost in sleep.”


That, to me, seems like a reasonable definition of what people do at the Fed. While the rest of the world is dealing with the realities of economic gravity, these little-known people continue to rummage through data, forecasting both inflation and GDP growth inaccurately.

Hairy Little Forecasters - GDP cartoon 01.30.2015


Back to the Global Macro Grind


Did you know what 2014 US GDP growth was? Per Q4 #GrowthSlowing data that was reported on Friday, US GDP growth slowed to +2.4% year-over-year in 2014, well off what seems like a perpetual consensus growth expectation of +3-4%.


As you know, long-term bond yields have been tracking the rate of change in year-over-year US growth. When US growth finally surprised to the upside (Q413) at +3.1% year-over-year, the 10yr UST Yield climbed over 3%.


With US GDP falling closer to 2%, the 10yr Yield fell that way too. If you know people who still foolishly look at the q/q SAAR GDP number (instead of y/y), send me their contact info and I’ll send them a pair of tickets to  Shakespeare’s A Midsummer Night’s Dream.


The best known hobgoblin has a hockey name (Puck, from Shakespeare’s aforementioned classic). I kind of like that inasmuch as I enjoyed last week’s macro moves (I was in dire need of a good week!):


  1. #StrongDollar – US Dollar Index ramped +1.1% back to its JAN highs at +5.6% YTD
  2. Burning Euros – EUR/USD down another -1.5% on the wk to YTD lows of -7.1%
  3. Commodity #Deflation – CRB Index -0.4% wk-over-wk to -2.6% YTD
  4. Oil #Deflation – WTI down another -2.1% last wk to -8.3% YTD
  5. Lower Rates – UST 10yr Yield -12bps on the wk to 1.99% (-18 bps YTD)


Not to be confused with anything other than a Global #Deflation signal (consumers like it; debtors and their banks do not), the flow-through to the US stock market last week looked a lot like it did in January:


  1. Energy stocks (XLE) led losers -1.9% on wk-over-wk at -0.2% YTD
  2. Financials stocks (XLF) were down -0.4% on the wk to -1.5% YTD
  3. Consumer Discretionary stocks (XLY) led gainers, +0.7% on the wk to +5.3% YTD


Follow the proverbial performance chasing puck (not to be confused with a furry little forecaster by the name of John Williams) and if you’ve picked your Sector Styles in the US stock market right, you’re beating your competition on both an absolute and relative basis.




Beating beta isn’t easy, but it is achievable. Full loaded with the February v-bottom US stocks put in after a terrible January, neither the Dow nor the SP500 (+1.7% and +2.2% YTD, respectively) are beating the Long Bond (TLT total return +3.3% YTD).


But that’s not new either. As you can see in the Chart of The Day, the Long Bond (TLT) has been beating CNBC’s core advertising quote (SP500) handily ever since both growth and inflation started slowing at the beginning of 2014.


In addition to picking the right sectors of the SP500 (Housing, Consumer, Healthcare = +5.3-6.8% YTD) and having an overweight position in the Long Bond, the biggest asset allocation we continue to think you should avoid is Commodities:


  1. Oil (WTI) is down another -1.4% this morning to $49.09 = down -7.8% YTD
  2. Natural Gas (after a -8% drop last week) is down another -1.3% today at $2.70 = down -6.3% YTD
  3. Coffee Prices #deflated another -8.1% last week and are down over -17% for 2015 YTD


Yep, stay with the big cap Consumer Discretionary (XLY) long that is the recipient of that last one, Starbucks (SBUX) – which, incidentally, also has over a 3% weight in the XLY consumption ETF (SBUX +13.9% YTD).


Nah, we’re not perma bullish or bearish on anything really. Every sector and asset allocation has a growth and inflation environment that loves them. Our job is to find the nice little furry ones that make me look more like a teddy bear than your thrashing hobgoblin type.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.88-2.08%

SPX 2093-2115
USD 94.08-95.67
EUR/USD 1.11-1.13
Oil (WTI) 47.66-53.08
Nat Gas 2.65-2.85


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Hairy Little Forecasters - 03.02.15 chart

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