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QE Heroes

“The hero of a tragedy, in order to interest us, should neither be wholly guilty nor wholly innocent.”

-Napoleon

 

That’s the opening volley from a brick of a recently published #history book (926 pages) that has been staring me in the face for months – Napoleon – A Life, by Andrew Roberts.

 

Research truths tend to be revealed with time. And since there’s never been a definitive history of the Corsican formerly known as “Napoleone de Buonaparte”, this one is getting what I love in a good read – polarizing reviews.

 

In many ways, this makes me think about the short history of QE (Quantitative Easing). Ben Bernanke has been quick to try to shape his own version of the story. And while I think he’s suspect in doing so, only time will tell who the real heroes are.

 

Back to the Global Macro Grind

 

As long as stock markets around the world continue to hit all-time highs, the central planners will look wholly innocent to many who think equity gains reflect economic growth. All the while, they’ll look wholly guilty to those analyzing the economic data.

QE Heroes - Card house cartoon 12.03.2014

While the Japanese and Chinese stock markets are more obvious examples of the divergence between economic reality and stock “charts”, it will be interesting to observe how the American and European narratives change alongside market prices.

 

Last night Japan reported a bomb of a Retail Sales report at -9.7% year-over-year for the month of March. That compared to a paltry -1.7% in the month prior. And the Japanese stock market went up on that…

 

In other news:

 

  1. US Stocks stopped going up at their all-time highs yesterday post a weaker US Services PMI report
  2. Services PMI (Markit report) for APR slowed to 57.8 vs. 59.2 in MAR
  3. This begged me the question – are US consumption gains from “lower gas prices” slowing?

 

Contrary to however people who don’t understand our process, models, or investment conclusions think, we’ve actually been The Bulls on the US domestic consumption and #Housing economy for the last 4-6 months.

 

Some of our conclusions were born out of the following macro stimulus:

 

  1. #StrongDollar as a net benefit to the purchasing power of Americans
  2. #Deflation in commodities, gas prices, cost of living, etc.
  3. #Lower-For-Longer on interest rates = #HousingAccelerating

 

We’ve argued this is why:

 

  1. Housing, Consumer Discretionary, Healthcare, and Consumer Tech stocks have outperformed YTD
  2. Financials and Industrials (companies negatively affected by lower rates and #deflation) haven’t performed YTD

 

So why on earth would an easier Fed that:

 

A)     Weakens the Dollar and …

B)      Re-flates commodities prices and cost of living

 

… be good for real US consumption growth?

 

You’re right. It wouldn’t be. But it might be really good for Oil & Gas and Mining stocks!

 

This puts both the internal message of macro markets (stocks, bonds, commodities, FX, etc.) and US economic reality at odds with one another again. We’ve seen this movie before.

 

We’re seeing it in Europe and Asia every trading day. Mainstream economists and strategists are constantly being pulled towards a narrative of stock market gains being congruent with economic growth and inflation expectations.

 

Just to hold them to account - what if the 2H 2015 growth bulls are right, and a #DevaluedDollar + #RisingOilPrices is bullish for US economic growth? Shouldn’t interest rates be raised earlier then too? Then what happens to Housing and Biotech stocks?

 

Alongside some 2015 US equity bears capitulating to the upside yesterday (after getting bearish in January, covering your shorts at the all-time high isn’t a good #timestamp), Mr. Macro Market delivered that very message for us all to consider:

 

  1. Biotech (IBB) -4.2%, on the day!
  2. Housing (ITB) -1.3%
  3. Silver and Gold +4.5% and +2.4%, respectively

 

This had me asking myself if what’s been a solid run being long stocks into the Fed meeting has all been priced in? I hope it hasn’t been. But that’s not a risk management process inasmuch as the QE fans aren’t my economic #history heroes.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.86-1.99%
SPX 2093-2124
RUT 1
Nikkei 198
VIX 12.02-14.91
USD 96.45-97.85
EUR/USD 1.06-1.09
WTI Oil 52.35-58.16
Gold 1175-1208

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

QE Heroes - z 04.28.15 chart


YELP: Thoughts into the Print (1Q15)

Takeaway: The stock could see a bounce on this release, but at the cost of a much worse blow-up after the dust settles in 2Q15 (3Q15 latest).

KEY POINTS

  1. 1Q15 = INORGANIC TAILWINDS: We’re expecting a top-line beat with support from inorganic tailwinds; 2Q15 revenue guidance should follow suit for the same reason.  There will be a lot of noise distracting the street from the mounting pressure in its core Local Ad business, and without a clear downside catalyst, we wouldn’t be naked short into this print.
  2. SMOKE & MIRRORS:  Any upside from acquisitions/ancillary businesses could provide a temporary distraction from its core Local Ad business, but we believe mgmt can only play that card once; consensus will raise the bar on any material upside.  More importantly, we don’t believe the street will give YELP a pass if it misses on Local Advertising, or issues light quarterly guidance; both of which could we’re expecting on the 2Q print, latest 3Q.
  3. WHAT WE’RE KEYING IN ON: Salesforce productivity, which will be somewhat tougher to isolate since mgmt is pulling its legacy account metric, but we should be able to extract what we need from the print. If there was ever an admission that YELP’s business model is broken, it's that salesforce productivity has already seen a sustained decline, which speaks volumes to the size of its realistic TAM, and the viability of its model.

 

1Q15 = INORGANIC TAILWINDS

We’re expecting a top-line beat with support from a full quarter of revenues from its two international acquisitions from 4Q14, and potentially Eat24 revenues.  2Q guidance should follow suit for the same reason. 

 

YELP reported a fairly strong surge in 4Q14 int’l revenues on 2 months of acquired revenue.  While not a game changer, it could be enough to push Local Ad revenues over the line.  On Eat24, all we know is that mgmt expects “60% plus growth in 2015” on $24.5M in 2014 revenues.  The associated guidance raise of $36M (~11 months of revenue) on the announcement translates to exactly 60% growth, so the question is the magnitude and timing of that “plus”. 

 

The takeaway is not that any of these acquisitions are a game changer; it’s really just how much of an incremental lift they can collectively contribute to results this year, particularly in 1Q15 when no one really know what to expect given the lack of historical context.

 

YELP: Thoughts into the Print (1Q15) - YELP   Int l rev 4Q14 

 

SMOKE AND MIRRORS

Any upside from acquisitions/ancillary businesses could provide a temporary distraction from its core Local Advertising business, but we believe mgmt can only play that card once.  Consensus will raise the bar on any material upside, likely back-weighting its estimate raises into 2H15/2016.  

 

More importantly, we don’t believe the street will give YELP a pass if it misses on Local Advertising, or issues light quarterly guidance; both of which we are expecting to occur on the 2Q15 release, 3Q15 at the latest.

 

We’re expecting attrition to exert greater influence across YELP’s model as it struggles to find enough new account growth to effectively mitigate that pressure.  Our scenario analysis below illustrates this point, with YELP needing both a considerable acceleration in new account growth (ex Qype) and historically low attrition to hit consensus 2015 Local Advertising revenue.  

 

YELP: Thoughts into the Print (1Q15) - YELP   2015 Local Scen Anly 

 

WHAT WE’RE KEYING IN ON

Salesforce productivity, which will be somewhat tougher to isolate since mgmt is pulling its legacy account metric, but we should be able to extract what we need from the print. 

 

Our Short thesis in a nutshell is that YELP's Local Advertising business model is unsustainable; it is plagued with rampant attrition, and YELP's TAM isn't large enough to support it.   

 

If there was ever an admission that YELP’s business model is broken, it's that salesforce productivity has already seen a sustained decline, which speaks volumes to the size of its realistic TAM, and the viability of its model.  For more detail, see the notes below.

 

YELP: Thoughts into the Print (1Q15) - YELP   New Acct vs. Sales 4Q14 3

 

YELP: Salesforce Productivity?

03/16/15 08:10 AM EDT

[click here]

 

YELP: Debating TAM

06/30/14 01:10 PM EDT

[click here]

 

 

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

 

Hesham Shaaban, CFA

@HedgeyeInternet


REPLAY | The Macro Show with Keith McCullough

Miss it this morning? Here's the replay of today's edition of The Macro Show with Hedgeye CEO Keith McCullough.

 

 

Every weekday morning Hedgeye CEO Keith McCullough distills the world's market, and economic developments in 15 minutes or less, then answers questions from individuals tuning in - all to give viewers a leg up on the trading day ahead.


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Cartoon of the Day: Fee! Fie! Foe! Fum!

Cartoon of the Day: Fee! Fie! Foe! Fum! - China cartoon 04.27.2015

"The epic ramp in China continues with the Shanghai Composite up another +3% overnight to +40% year-to-date," Hedgeye CEO Keith McCullough wrote this morning. "It's now up +96% since OCT 2014 as speculation runs rampant about precisely what at this point, we do not know!"


This Sector Is the Biggest Beneficiary of Our Dovish Fed

In this excerpt from today’s edition of RTA Live, Hedgeye CEO Keith McCullough discusses an area in the market we’ve been (and remain) bullish on. He also discusses one of our Retail team’s biggest calls, Restoration Hardware (RH).


This Is Retailers' New Offensive Weapon to Win Market Share

Editor's Note: This is an excerpt from a note sent out earlier this morning by our Retail team. Click here for more information on our array of services and how you can subscribe.

*  *  *  *  *  *  *

Good article today in WWD - Free Shipping: Retail's New Battleground

 

Takeaway: Free shipping = an offensive weapon for retailers to gain market share.

 

We have seen it used sporadically from players in the department store/mass channel. Most notably, Target (TGT), who over the holiday season eliminated the free shipping threshold all together, and then in February cut its free shipping  threshold from $50 to $25.

 

Over the next 18-24 months, it's likely we see free shipping across the board. That will manifest itself during this holiday season when retailers make a free shipping offensive play.

This Is Retailers' New Offensive Weapon to Win Market Share - 99 t

We've seen retailers, most notably Kohl's (KSS), talk about how a $25 shipping threshold isn't sustainable from a profitability perspective. We agree with the company on that.

 

For Nordstrom (JWN), it makes sense to offer free shipping and returns given the basket size, but for the mid-tier space...it's 600-1000 bps dilutive. The problem is that a)

  1. Consumers want it (in chart below its nearly twice as important as any other online shopping feature)
  2. If one domino falls, all others will have to move accordingly

 

CLICK IMAGE TO ENLARGE

This Is Retailers' New Offensive Weapon to Win Market Share - z retail


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