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YELP: Perdition or Salvation?

Takeaway: Binary setup. Next print is likely a disaster, but we can’t explicitly rule out M&A before then. Best play is options if possible.

KEY POINTS

  1. 2Q15 PRINT = DISASTER: We expect YELP to miss 2Q consensus revenue estimates for Local Adverting and cut 2015 revenue guidance.  YELP will need a massive acceleration in new account growth to hit estimates, particularly in 2H15 (see first link below).  That will be a major challenge since YELP is now struggling to grow/retain its salesforce, the size of which drives its entire model. The fact that this is even remotely an issue means the model is unraveling, and is likely why YELP has decided to put itself up for sale.
  2. BUT IS THERE A BUYER? We don't believe so. There are very few who can afford, and much fewer (if any) who would be willing to look past YELP’s attrition issues and/or risk trying to fix the model.  The latter would require introducing lower-tiered products, which would ultimately result in declining revenue since YELP would essentially be replacing its account base at a lower ARPU.  Still, we can’t categorically rule out an acquisition since M&A can be illogical, even if we can't identify a likely buyer.
  3. PERDITION OR SALVATION: Basically, will YELP be saved before its model implodes?  We don't believe so, but if YELP is to be acquired, we believe it needs to happen before or during the 2Q15 release since a second consecutive guidance miss/cut would be a major red flag for any would-be suitor.  We want short exposure to the 2Q15 release, but we wouldn’t be naked short into the print since it is essentially a binary event than can go 20%-30% in either direction.  Best play here would be options if possible (e.g. buy puts or protect short w/ out-of-money calls).

 

We are planning on hosting an update call next week to address incremental developments to our short thesis and discuss the M&A landscape.  In the interim, see the below notes for supporting detail, and let us know if you have any questions.

 

YELP: The New Major Red Flag (1Q15)

04/30/15 08:53 AM EDT

[click here]

 

YELP: Salesforce Productivity?

03/16/15 08:10 AM EDT

[click here]

 

YELP: Debating TAM

06/30/14 01:10 PM EDT

[click here]

 

YELP: Death of a Business Model

04/04/14 10:05 AM EDT

[click here]

 

 

Hesham Shaaban, CFA

@HedgeyeInternet

 


UST 10YR Yield, Italy and Oil

Client Talking Points

UST 10YR

The UST 10YR Yield broke down through what the moving monkeys call support and has been doing what its been doing for the past 17 months which is making a series of lower highs. It has been a great week to be Long the Long Bond not only in the U.S. but in Germany, France and Italy as well. The immediate term risk range for the UST 10YR Yield is 1.98-2.20% (bearish).

ITALY

Italian PPI was down 2.3% year-over-year vs down 2.4% the prior month, CPI was up 0.2% vs 0.1% the prior month. This is just terrible if you are a producer, and this is the problem with GDP for a lot of countries that sell inflation expectations in their top-line (when inflation starts to fall GDP starts falling). 10YR bond yields are reflecting slower growth in Italy and Europe as a whole.

OIL

Immediate term risk range for WTI Oil is 57.01-61.35 (bullish). We like the series of events that was going to be a bad GDP report, a potential bad jobs report next week and then a Dovish Fed on June 17th. Our signal says short the USD (for a short term trade) be long Oil, long gold and long those things that are yield chasing. 

Asset Allocation

CASH 46% US EQUITIES 5%
INTL EQUITIES 10% COMMODITIES 13%
FIXED INCOME 24% INTL CURRENCIES 2%

Top Long Ideas

Company Ticker Sector Duration
VNQ

One way to invest in Lower-For-Longer, from an equity perspective, is being long U.S. REITS (VNQ). Unless the Fed wants to show the world it has the power to go both ways on rates, we don’t think the Fed will ever be able to justify hiking interest rates. We expect an unarguable slowing of the current economic cycle by Q4 of this year. If you think domestic economic growth is slow now, just wait until the U.S. economy faces very difficult growth and inflation comps in the second half of 2015.

ITB

Housing got its mojo back in May, rebounding strongly over the last couple of weeks alongside the moderation in rates and ongoing strength in reported price/volume data. Below is a round-up of the data thus far in 2Q:

  • Housing Starts:  New 7-year high in the latest month
  • Purchase Applications (existing market):  2Q15 Tracking +14% QoQ and +13% YoY, on pace for best quarter in two years.
  • Pending Home Sales (existing market):  PHS are up an average of +11.8% year-over-year the last two months
  • New Home Sales (new market):  NHS are up an average of +22.5% year-over-year the last two months
  • HPI:  After a year of discrete deceleration in home price growth in 2014, 2nd derivative HPI has seen 3 consecutive months of acceleration through the latest March data.
TLT

The strength of the labor market continues to be a good indicator of our positioning in the current cycle:

  • Seasonally adjusted jobless claims came in at 274k last week vs. 270K est.

Despite the slight miss, the rolling 4-week SA figure dropped to 266.3k (lowest rolling SA figure since the week ending April 15th, 2000, which also came in at 266.3k) We all know what happened afterwards…..

Three for the Road

TWEET OF THE DAY

VIDEO (1min) The Biggest Threat to the Stock Market https://app.hedgeye.com/insights/44346-mccullough-this-is-the-biggest-threat-to-the-stock-market… via @hedgeye

@KeithMcCullough

QUOTE OF THE DAY

Don’t be fooled by the calendar. There are only as many days in the year as you make use of.

Charles Richards

STAT OF THE DAY

GDP print was -0.7% quarter-over-quarter with the year-over-year revised to +2.7% (from +3.0%). 

 

The Macro Show - CLICK HERE to watch today's replay.


We the People

“Government spending is taxation.   When you look at this, I’ve never heard of a poor person spending himself into prosperity; let alone I’ve never heard of a poor person taxing himself into prosperity.”

-Arthur Laffer

 

Hedgeye Early Look reader and friend Governor George Pataki officially threw his hat in the ring last night for the Republican nomination for President.   The political punditry is by and large calling him the darkest of dark horses.   And who knows, maybe they are correct – Governor Pataki has been out of public for nine years, currently is not well funded, and is centrist among Republicans.

 

The reality remains, though, that the Republican is currently ripe for a new face.  Someone that is above the fray and perhaps, on some level, embodies the “disinterested statesmen” that was originally envisioned by the Founders as a key characteristic for the Presidency.  The Republican race also needs some plain talk and who better to offer it than a candidate that has little to lose.

 

As a Canadian citizen, I can’t actually vote, so I’m no danger to any of you partisans out there, but a more centrist Republican who is trying to push the party beyond social issues and hasn’t been directly involved in the massive buildup of the federal government over the past ten years will be appealing to some.  The central tenet in Pataki’s launch video is a focus on government as the problem.

 

Certainly, a lot of politicians and political candidates pay lip service to reducing the size of the government, while few actually follow through.  If there were ever a time for follow through it is 2016, a year in which the federal government’s spending will be over $4.0 trillion and government debt will accumulate to $23.5 trillion.  Undoubtedly one point that all of us can agree on is that governments are the most ineffective allocators of capital.

We the People - z debt

 

Back to the Global Macro Grind...

 

Staying with the theme of the Presidential race this morning, there is one big challenge facing Pataki or any Republican – Hillary Clinton.   In the race for the Democratic nomination, she has a staggering lead of 51 points in poll aggregates over the second nearest candidate Elizabeth Warren. Meanwhile versus the large Republican field, Clinton outpolls the top contenders by between 8 and 10 points.

 

So, what, if anything, can stop the Clinton coronation?  Well, as we touched on it a note a few weeks ago, there are a number of legitimate headwinds to a Clinton Presidency. The top four headwinds we see are outlined below:

 

1. The Clinton Foundation - This risk is the most topical right now given the current scrutiny the Foundation is receiving thanks to Peter Schweitzer’s book, “Clinton Cash: The Untold Story of How and why Foreign Governments and Businesses Helped Make Bill and Hillary Rich.” It is also very likely an issue that will not go away.  On some level, whether the Clintons acted ethically as it relates to the Foundation is irrelevant because there is enough fodder that it will allow Republicans to continue to keep the heat on the Foundation.  To the extent the scrutiny accelerates, the Foundation has the potential to become Clinton’s “Swift Boat” moment.
  

2. Likeability (and accessibility) – Since announcing her candidacy more than 45 days ago, Hillary has limited interaction with the press.   Whether this lack of accessibility is ultimately perceived as a lack of a common touch (think Hillary going into Chipotle wearing sunglasses and not leaving a tip) remains to be seen. However, her favorability has taken a steady decline since she left office as Secretary of State in February 2013.

 

3. Bill’s Gaffes – While there is no question that Bill Clinton is one of the most talented politicians of his generation, there is also no question he is (and maybe increasingly so) prone to putting his foot in his mouth. In today’s hyper-plugged in digital world, where no one is safe from a rogue iPhone recording a candidate’s every word, this may pose a delicate challenge for the former commander in chief. 

 

4. Benghazi (and general track record) – In aggregate, Hillary Clinton’s role as Secretary of State is regarded favorably and without much controversy with one big elephant-in-the-room exception – Benghazi.  This was of course the unfortunate turn of events that led to the deaths of U.S. Ambassador J. Christopher Stevens and three other Americans when the U.S. diplomatic mission in Benghazi, Libya was attacked.

 

We are going to reserve analysis of the events, but believe this will become a major thorn in her side, especially as it gets into the nitty-gritty of the campaign post the nominating conventions.   The downside of having a track record is that it can and will be scrutinized.  With the eventual planned releases her emails as Secretary of State, her record will be subject to accelerating scrutiny.

 

Certainly, if the election were held today, it is hard to argue that Clinton would likely win in a landslide.  But whether it is the emergence of a new Republican contender or a current front runner breaking from the pack, the polls will narrow into Election Day as they always do.

 

For Clinton specifically, as touched upon above, her favorability ratings continue to decline.  Currently based on poll aggregates, 47.8% view her unfavorable and 45.9% view her favorably.   These are her worst readings since 2009.

 

Make no mistake about it: there will be a race in 2016.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.98-2.20%

SPX 2107-2130

Nikkei 20091-20688

VIX 12.76-14.42

Oil (WTI) 57.01-61.35

Gold 1180-1205 

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

We the People - z 05.29.15 chart


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 80.28%
  • SHORT SIGNALS 78.51%

CHART OF THE DAY: U.S. Debt

Editor's Note: The brief excerpt and chart below are from today's Morning Newsletter which was written by Hedgeye Director of Research Daryl Jones. Click here for more information on how you can subscribe.

 

Certainly, a lot of politicians and political candidates pay lip service to reducing the size of the government, while few actually follow through.  If there were ever a time for follow through it is 2016, a year in which the federal government’s spending will be over $4.0 trillion and government debt will accumulate to $23.5 trillion.  Undoubtedly one point that all of us can agree on is that governments are the most ineffective allocators of capital.

 

CHART OF THE DAY: U.S. Debt - z 05.29.15 chart


Ceaseless Attention

This note was originally published at 8am on May 15, 2015 for Hedgeye subscribers.

“In order to lead an army, you have to ceaselessly attend to it.”

-Napoleon Bonaparte

 

The way my typical day goes is as follows: ceaseless attention to Global Macro market moves, news, and analysis in the morning – meetings in the afternoon – and, family, hockey, and #history (in that order) in the eve.

 

The compare and contrast of the macro morning to a history book at night couldn’t be more drastic. Before bed last night I was enthralled in early 19th century European history (Napoleon, A Life). This morning I feel like I’m watching a version of it 200 years later.

 

I don’t do it because it’s cool. I do it because I love it. I do this because I’ve realized that every book I read reminds me how much I don’t know. And since I’m leading an independent army against an Old Wall guard that seems to know everything, there’s work to do.

 

Ceaseless Attention - 80

 

Back to the Global Macro Grind

 

Can you contextualize immediate-term market moves within the intermediate-term? How about the long-term? What is the long-term? Is it 3 years or 200? If you could know everything about everything, across durations, I’m betting you would.

 

Since I write every day, I spend a lot of time trying to contextualize the TRADE (3 weeks or less) within the TREND (3 months or more). But especially during times like these, it’s critical to attempt to have a view of what TRENDs are doing within long-term TAILs.

 

We define longer-term TAILs as having a duration of 3 years or less. I use that time horizon because A) I really suck at calling things 3 years out and B) unless they have permanent Buffett-like capital, mostly everyone else does too.

 

So today, to keep it simple, I just wanted to give you my TREND vs. TAIL views, across Global Macro:

 

  1. US Dollar = bearish TREND; bullish TAIL
  2. The Euro = bullish TREND; bearish TAIL
  3. Japanese Yen = bearish TREND and TAIL
  4. US 10yr Treasury = bullish TREND and TAIL
  5. US 30yr Treasury = bullish TREND and TAIL
  6. Japanese Government Bond (10 yr) = bullish TREND and TAIL
  7. SP500 = bullish TREND and TAIL
  8. Russell 2000 = bearish TREND; bullish TAIL
  9. US Equity Volatility (VIX) = bullish TREND and TAIL
  10. Nikkei = bullish TREND and TAIL
  11. German DAX = bullish TREND and TAIL
  12. BSE Sensex = bearish TREND; bullish TAIL
  13. CRB Commodities Index = bullish TREND; bearish TAIL
  14. Oil (WTI) = bullish TREND; bearish TAIL
  15. Gold = bullish TREND; bearish TAIL

 

I better stop there, or I am going to confuse you. I used to get confused by intermediate-term TREND views disagreeing with longer-term TAIL ones. But after building, breaking, and re-building my #process, I don’t dwell on the non-linearity of it all as much.

 

Most of our confusions have to deal with our own emotional baggage. We are humans, after all. And when something goes one way for a period of time that we think we understand – then it goes the other (that we don’t understand), we get frustrated.

 

That makes our collective challenge to see the macro market for what it is, as opposed to what we’d like it to be. This is not easy. And it gets a heck of a lot harder if we don’t do the longest of long-term #cycle work to contextualize the “de-couplings.”

 

I wrote about why I think USD continues lower from an intermediate-term TREND perspective yesterday (Commodities, Oil, Euro, etc. higher), but I didn’t spend any time on why it could strengthen after easier Fed policy and slower growth is baked into consensus.

 

The longer-term case for:

 

A) US Dollar Index to put in a long-term-higher-low at around 89-90 on the USD Index (EUR/USD 1.19-1.20)

B) Commodities (CRB) Index to put in a long-term-lower-high in the 248-253 range

C) Oil (WTI) to start to fade and fail at lower-long-term-highs of $69-71

 

Is as follows:

 

  1. Currency War (centrally planned FX devaluations to create growth and inflation) will see Japan, Europe, and the USA fail
  2. As each of the 3 majors sees growth and/or inflation slowing, they’ll take their turn with more of what has not worked
  3. In the end, the US has the best demographics of the 3, so they’ll have the best real growth of the 3 (and strongest currency)

 

The most important words in those 3 points are “they’ll take their turn.” In almost every macro strategist/economist piece there is either a complete disregard for that and/or a blind faith that real economic growth will be born out of these policies to begin with…

 

Look up the Wall Street Journal article this morning on US “Economist’s Expecting Recovery”:

 

  1. US economic growth to magically re-accelerate to +3.0% year-over-year in 2nd half of 2015
  2. US non-farm payrolls (NFP) to average 223,000 for the rest of 2015
  3. A “Strong Dollar” to weaken, which was the “headwind” to the US economy in Q1 2015

 

Meanwhile, the Hedgeye Predictive Tracking Algorithm has US GDP growth at +1.8% year-over-year growth in 2H 2015 and we could easily see non-farm payrolls at half of that expectation, in our most bullish case.

 

If I rattled off the Japanese and European “economist” expectations, the only ones that are in the area code of close are Japan’s. But that’s only because they have been forced to predict that none of this “growth” policy has worked for 20 years!

 

I realize this is the longest Early Look of the year. My apologies for that. If you’d like to ceaselessly stare at the S&P Futures, please refer to our risk ranges. Buy at the low-end (sell at the high-end) of the range, but please pay attention to TRENDs and TAILs too.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.95-2.31%

SPX 2098-2129
RUT 1212-1248
Nikkei 19199-20024
VIX 12.11-15.67
EUR/USD 1.10-1.14
YEN 118.77-120.58
Oil (WTI) 55.67-61.60

 

Best of luck out there today and enjoy your weekend,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Ceaseless Attention - z 05.15.15 chart


The Macro Show Replay | May 29, 2015

 

Today's show featured Financials and Housing Sector Head Josh Steiner. Below is his 18-minute segment. 


the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

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