CHART OF THE DAY: Pre-Jobs Report Insights

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye U.S. Macro analyst Christian Drake. Click here to learn more.


"... Global demand and domestic output growth are down. And employment growth in excess of output growth – which remains the case currently- is paid for via lower corporate profitability. 


Absent improved productivity, “strong” employment trends = further margin compression = continued profitability pressure against a backdrop of forward earnings growth estimates in the mid-teens. We continue to think those expectations need to be marked lower."


CHART OF THE DAY: Pre-Jobs Report Insights - Labor vs. Output CoD2


“After the Show is the After Party”



My after-party life is past peak.


I’ve had some solid late night sessions with some unlikely characters ….. DMX, Dave Chappelle, Snoop Dogg, Pat Morita (Mr. Miyagi), that homeless guy I always used to see down the street ….


I’m pretty sure I wasn’t even old enough to be where I was for some of those but no harm, no foul and all that. Life is a collection of moments and I’ve made an effort to amass a menagerie of covetable memories. 


The after-party can be the funnest part of the night.  


It’s also the nursery for ill-conceived antics and subsequent regret.


After-Party - jayz


Back to the Global Macro Grind


We’ve been on this whole #GrowthSlowing thing for ~6 qtrs now.


Frankly, it’s getting kind of lame. Not wrong or unprofitable, just progressively less exciting. 


My enthusiasm is stagnating, secularly.


Over those 6 quarters, there’s been a certain recurrent rhythm to my macro inbox flow.


For instance, there’s the recurrent, occasional tendency towards an overbearish interpretation of our messaging.  


When that inbox sentiment crescendo’s I have to offer the gentle reminder that we are in post balance sheet recession expansion and expansions following Financial Crises are almost always longer in period and lower in amplitude than normal business cycle expansions (i.e. slow & lower for longer) - that is one of their defining characteristics.


Growth slowing is part of the cycle. It takes time to play out. Just because we harp on that reality regularly doesn’t mean we expect a recession to start this afternoon. That’s not how #TheCycle works. 


We are in month 87 of the current expansion. That compares to a mean and median duration of 50 and 59 months, respectively, over the last century of cycles. And with the Fed projecting continued policy normalization through 2018, they are implicitly forecasting the longest expansion ever.  


As rate cuts, QE, QQE, Forward Guidance and NIRP exhaust their utility and the collective global central banking chorus shifts the policy siren song towards fiscal expansion, the cyclical expansion show is coming to a close.   


The expansionary after-party is beginning. After-party’s aren’t known for being low-volatility, at least not the good ones.


After-Party - Eco Cycles CoD1


As Keith highlighted yesterday, the deep simplicity is that for #GrowthSlowing allocations to really stop working you need growth to accelerate.


Since it’s jobs day, let’s take a labor-centric perspective on that.


First, a quick review of what we already know. The goal here is not to spin a narrative, it’s to just quantitatively frame the set up and the implied growth implications. Remember, I’m a bored growthslowing bear and closet optimist. This is simply the context embedded in the math: 


  • Employment = Consumptions Middle-Man | the health and dynamism of the labor market is the primary proxy for the health of the broader Macroeconomy. In a more narrow sense – and the one that matters to GDP accounting and policy makers - Employment is the means to a Consumption and Investment End. 
  • Employment Growth = ↓ | Employment growth peaked in February of last year and has been progressively decelerating. Historically, once we roll off of peak rate-of-change, it’s a one way street towards convergence with zero and economic contraction. We need to add >282K jobs in July to avoid another sequential deceleration in NFP growth. That is unlikely. 
  • Income = ↓ |  Income growth defines the capacity for sustainable consumption growth for most households. With payroll growth slowing and weekly hours largely flat, the modest increase in wage growth has not been enough to offset the deceleration in employment and aggregate income growth has slowed. Remember, wage growth needs to move at a pace equal and opposite to employment slows to maintain the same capacity for consumption. 
  • Income + Credit = ? | While Income growth has slowed, revolving credit growth continued to accelerate until March, helping to support consumption growth in the facing of slowing aggregate income growth. Revolving credit has slowed in each of the last two months but will need pick up to maintain the current pace of spending growth, particularly if the emergent acceleration in wage inflation fails to extend.


Let’s consider another dynamic. Policy is labor market dependent both directly and indirectly as an explicit aim of policy is to foster maximum employment and labor market tightening drives the evolution of growth and inflation conditions to which policy must respond. 


What is maximum employment?


The employed share of the prime working age population (25-54 year olds) is currently 77.8%. 


The average over the last 30 years is 78.7% with cycle peaks of 80.2%, 80.3% and 81.9% over the last 3 cycles. 


So, unless the argument is that a structural shift has occurred, we seemingly still have some hay to bail to get to maximum employment. But the unemployment rate is already at the generally accepted NAIRU rate of 4.9%.


If we use the average peak employment-to-population ratio over the last three cycles (~81%) as our maximum employment bogey, that implies an additional 4.04MM jobs from current levels. 

  • Assuming a static labor force, that 4MM incremental jobs implies an Unemployment Rate of 2.4%. That doesn’t seem plausible.
  • Under a more reasonable assumption that half the jobs gains come from the currently unemployed and half come from re-entry of workers into the labor force, the implied Unemployment Rate = 3.6% with an uptick in the Labor Force Participation Rate to 63.5% (from the current 62.7%)


Maybe that’s more realistic but any residual labor slack would transition to full tautness and ….


  • The NFIB’s Jobs Hard to Fill Index remains at cycle highs
  • Job openings per available worker (Unemployed + Not in Labor Force but want a job) are already at an all-time low
  • Small Business Compensation plans are at cycle highs


Can we gain anywhere near that amount of jobs without wage inflation accelerating? Probably not.


But doesn’t that development become self-defeating if accelerating wage inflation drives tighter policy and a probable kibosh on what’s left of the labor cycle - taking the fledgling recover in the employment-to-population ratio with it.  


The employment participation party would end before it really started and as the employed share of the prime working age population peaked and rolled over before even getting to trough levels observed over the prior three cycles.   


Also, remember that domestic employment growth is coming in the face of decelerating global growth, an ongoing recession in capex spending and tightening corporate and consumer credit conditions (per the 3Q Senior Loan Officer survey). 


Global demand and domestic output growth are down. And employment growth in excess of output growth – which remains the case currently- is paid for via lower corporate profitability. 


Absent improved productivity, “strong” employment trends = further margin compression = continued profitability pressure against a backdrop of forward earnings growth estimates in the mid-teens. We continue to think those expectations need to be marked lower.  


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.40-1.60%

SPX 2145-2177

VIX 11.75-15.16
EUR/USD 1.09-1.12
Oil (WTI) 39.08-43.62

Gold 1


Hit the dance floor, take a shot for every rhetorical pivot from the Fed, enjoy the after-party. It might not be easy to navigate but it definitely won’t be boring.


Christian B. Drake

U.S. Macro Analyst


After-Party - Labor vs. Output CoD2

YELP | Thoughts into the Print (2Q16)

Takeaway: YELP is basically a binary event now: take-out or implosion. Can't yet refute the former, but aiming to revisit the short in 2H


  1. ALGO/PROMO NOISE: The two themes from 1Q (note below).  The algorithm change should be a material ARPU tailwind through 2016, especially since YELP was able to drive accelerating 1Q ARPU growth despite the drag from the surge in new Local Advertising Account (LAA) growth, which was partially driven by discounting.  The algo change may have had a limited impact in 1Q depending on when YELP implemented it, so there could be an incremental benefit in 2Q.  The trajectory of its promotional LAAs is the bigger question.  There’s no guarantee these LAAs stayed on in 2Q given YELP’s historical attrition issues; especially since we doubt many (if any) of these promo LAAs are under contract.  The other question is how many more promo LAAs are left to capture since distribution isn't an issue for self-serve (e.g. email blasts).  YELP may have already courted the bulk of those interested self-serve LAAs with the 1Q promo, so we can’t assume the 1Q LAA surge will continue through 2016.  So while the algo stunt may get YELP over the line in 2Q, 2H16 consensus revenue largely depends on whether it can sustain its self-service promo trajectory, which we doubt will happen.
  2. MASKING MAJOR INFLECTION? YELP suggested that a “meaningful percentage” of its 1Q16 account growth was driven by these promo LAAs.  If that percentage was anything over 10%, then its 1Q16 new LAA growth (ex promos) decelerated again on a y/y basis; if that percentage was over 25%, then new LAA growth declined on y/y basis.  Either way, it's a major concern given that its salesforce growth has been accelerating on a y/y basis since 1Q15.  But if it is the latter, then the YELP story took a major turn for the worse.  Remember how YELP’s model works; it must continually drive new LAA growth in excess of its rampant attrition, which we estimate is nearly all of its LAAs on annual basis.  That also means that whatever YELP reports as its LAAs in any given quarter is largely comprised of accounts it signed in the LTM.  So if new LAA growth (ex promos) did decline on a y/y basis, and if that continues through 2016, then it could be facing a precipitous deceleration, if not declines, in 2017 revenue growth depending on its promotional LAA growth.  But even then, those accounts generally come with lower ARPU by mgmt's own admission, and likely a shorter life (contract?), which means they can't effectively compensate for YELP's churn.  
  3. AUGUST 9th? We find it odd that YELP is releasing 2Q results almost 2 weeks later than usual.  Maybe we’re being paranoid, but we can’t see a reason for such a long delay unless mgmt was actively trying to work out some (any) deal before issuing 2Q results, especially considering Point 2 above.  While we shrugged off the possibility of a take-out last year, YELP’s deflated stock + 1Q results makes it an easier pitch this year since the acceleration in revenue/LAA growth may present YELP as a challenged but recovering business (vs. a dying business model) that might work better under someone else’s umbrella.  Yes, that sounds dumb to us too, but how many acquisitions have we all seen that just don’t make any sense.  But we wouldn’t be chasing a take-out regardless of how hard YELP may be shopping itself; especially since this is just speculation.  If YELP introduces any new red flags on the print/guide, we suspect much of its newfound optimism to get sucked out of the stock, and most of its potential suitors to lose interest as well.  



YELP | More Red Flags (1Q16)
05/06/16 08:55 AM EDT
[click here]


YELP | Thoughts into the Print (2Q16) - YELP   LAA v s. Sales 1Q16 scen

YELP | Thoughts into the Print (2Q16) - YELP   Prior vs. TTM lost 1Q16

YELP | Thoughts into the Print (2Q16) - YELP   Current vs. TTM new 1Q16

YELP | Thoughts into the Print (2Q16) - YELP   mgmt lie slide 1Q16



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


Hesham Shaaban, CFA
Managing Director




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Central Planning 101: BoE Crushes The People's Purchasing Power

Takeaway: BoE cut rates by to 0.25%, increased its QE target to £60 billion, which included £10 billion corporate bond purchases. ↓ GBP, ↓ 10yr Gilt

Carney did his best to devalue the purchasing power of The People yesterday (a little “market security” in exchange for what was a great driver for the UK consumer economy in 2015, #StrongPound). He got the GBP/USD down to $1.31 while blasting the 10yr Gilt Yield down to 0.63% where it’s holding this morning, down -14bps month-over-month.


Central Planning 101: BoE Crushes The People's Purchasing Power - pound 8 5

UK 10-year Gilt Yield

Central Planning 101: BoE Crushes The People's Purchasing Power - uk gilt 8 5


Editor's Note: The snippet above is from a note Hedgeye CEO Keith McCullough wrote for subscribers this morning. Click here to learn more.

The Macro Show #ROADWARRIORS | August 5, 2016

CLICK HERE to access the Daily Trading Ranges.


CLICK HERE to access the Early Look. 


CLICK HERE for a deeper look at the jobs report and added commentary from Macro & Housing analyst Christian Drake.

In lieu of The Macro Show on Friday here is a special note from Director and Senior Macro analyst Darius Dale.

 Keith and I have spent much of the past four weeks on the road visiting with existing and prospective clients the world over (~35 meetings in total). As always, the buysider-to-[former]-buysider nature of such dialogues allows for a higher order of debate and critical thinking that both parties typically find invaluable.


Below is a summary of what I found to be the most important, thoughtful and/or consistent topics of discussion, organized by theme (all quotations paraphrased); hopefully you find it helpful as well. Any associated charts, research notes or presentations are hyperlinked below for ease of review.




CLIENT: "I haven't seen anyone talk about the stealth tightening that is the ~15bps back-up in 3M LIBOR over the past month. Everyone talks about where the Fed Funds Rate is headed next, but the reality is that global debt is priced off of LIBOR. I wonder how much the pending rule changes in the money-market fund industry have been and will continue to be a contributing factor to the tightening we've seen across the short and long end of several noteworthy yield curves globally over the past few weeks."

HEDGEYE: That's a very astute observation and one we do not yet have a proven answer for. Here's what we do know: The sharp backup in Japanese interest and inflation swap rates across the curve over the past few weeks (5Y and 10Y JGBs +19bps since 7/27; 20Y JGB +27bps and 30Y JGB +34bps since 7/6; and 5Y5Y Forward Inflation Swap Rate +20bps since 7/16) has caught our attention and is indicative of one of the following two outcomes. 

The Macro Show #ROADWARRIORS | August 5, 2016 - chart1


On one hand, the market may be responding positively to the government's recently announced ¥28.1T ($277B) stimulus package and pricing enough of a recovery in Japanese economic growth to perpetuate an increase in risk-taking among Japanese investors.

Conversely, the market could be front-running the beginning of a global, politically-driven shift away from the dominance of monetary easing - which lowers interest rates by creating excess demand for sovereign debt securities - to fiscal stimulus - which may perpetuate higher interest rates via excess supply of sovereign debt (in the absence of helicopter money).

The fact that Japan's benchmark Nikkei 225 Index is down -2.5% since 7/27 is supportive of the latter [more-bearish] theory. Regardless of the underlying driver(s) of the aforementioned backup in Japanese rates, a lasting "JGB Tantrum" is likely to prove quite negative for now-crowded yield trades globally - just as the "Bund Tantrum" was before it. The $1.9B outflow from high-yield bond funds in the week to 8/3 - the first of its kind since June and the largest outflow in seven weeks - is evidence of said unwind risk.

Going back to aforementioned discussion of money-market fund rule changes, it's important that investors understand the drag on economic activity that may result from the associated tightening of capital markets. Specifically, the move to require prime money market funds to hold more short-term debt and allow their NAV's to fluctuate (versus remaining at $1) has perpetuated a $420B outflow from the industry over the past year, leaving the industry with assets below $1T for the first time since 1999.

This would seem to suggest companies reliant upon prime funds for liquidity are likely to have to find other ways to borrow, at the margins - either via costlier bank loans or long-term bond issuance. It's probably not a huge deal given that government money-market funds have more than absorbed the aforementioned outflow (AUM +$509B YoY to $1.5T), but it's just one more headwind to a U.S. economy that is facing cycle-peak comparisons for its lone growth driver (i.e. consumer spending) as far as the eye can see. 

The Macro Show #ROADWARRIORS | August 5, 2016 - chart2


CLIENT: "Central planners are destroying the financial services industry. It's as if they do not want us to exist - and the reality is they probably don't. Yellen is critical of income inequality, no?"


HEDGEYE: Right...


Hopefully you've found these discussions helpful. Best of luck out there incorporating the aforementioned factors into your existing and respective research and risk management frameworks.



Happy Summer Friday,




Darius Dale


PCLN | Earnings Call Notes (2Q16)

INTRODUCTION: We chose not to opine ahead of the 2Q16 print largely because our tracker appeared to have exaggerate bookings guidance on the last print, and was once again calling for an acceleration in bookings growth into 3Q16, which we had a hard time trusting.  2Q bookings growth (ex Fx) decelerated by 5% points, but naturally was suppressed by a flurry of negative events late in 2Q; suggesting the 2Q guide was sandbagged even more than the beat suggested.  PCLN’s 3Q guide accelerated off the range it provided for 2Q, suggesting mgmt may be expecting an acceleration off of actual 2Q results; agreeing with our tracker.  Moving forward, we’ll be providing tracker updates for our original tracker (ARPU) as well a new tracker (volume) we recently built.  Below are our earnings call notes; we’ll provide another update after we see where consensus shakes out



  • Happy with results despite competition and macro volatility
  • Currently have 1 million alternative accommodation rental properties on their platform, grew by +30% YoY
    • Listings are up have doubled in the last year
    • Currently have 493K instant book Vacation Rentals (VR),  +39% YoY
  • 23.7 million total listings
    • 16.3 million via their hotel partners
    • 7.3 million in homes and other unique places to stay
  • Broke their companywide record of daily bookings as 1 million reservations  were booked in 1 day this Q
  • Agoda continues to grow – running a world class merchant model.  Pleased to see group members leveraging the large supply platform
  • Kayak exceeded expectations
    • Search queries revenue growth and profit were up YoY
    • FB messenger service getting traction
  • Car days growth seen mostly through platform, which showed pronounced strength across all major markets
  • Mobile channel continues to grow and building share continues to be a top priority
  • Feel good about their outlook for 3Q despite the volatility and frequency associated with terrorist attacks and other geopolitical events
  • Performance look back
    • Growth in room nights didn’t decelerate like they expected, leading to stronger than forecasted room night growth and total gross bookings. This momentum has also carried into 3Q
    • Exposure to UK destination and source business is about 10% or less of PCLN
    • Hotel ADR’s were consistent with their forecast
    • FX impacts were slightly unfavorable compared to the prior year and guidance
    • Difference in constant currency bookings growth and room night growth is largely driven via the decline in airline ticket bookings, lower accommodation ADRs and slower rental car bookings
    • Timing of Easter hurt 2Q profitability & margins
    • Int’l gross profit up 19% y/y, US up 8%
    • Operating margins pressured on a y/y basis by Easter shift, and ad budget shifting from 1Q to 2Q
    • Performance Advertising ROIs under pressure y/y, extending into 3Q
    • Net income benefited from a lower tax rate -due to the impact on deferred tax balances of a change in state tax law, but hit by $12.9M write-down of Hotel Urbano
    • Operating cash flow +38% YoY
    • Repo’d $299 million worth of common stock in 2Q and have repo’d $69 million in 3QTD
  • Guidance Update 3Q 2016
    • 3Q guidance implies deceleration later in the Q following a strong start in July, mainly due to size of their business and longer term trends
    • FX basket weakened by 2% since their last call
    • Expect 260bps of deleveraging non-GAAP op margins
    • Pressure to advertising ROI due to strengthening comparisons
    • Forecast does not assume any changes in the macro and travel market 


  • China outbound
    • Continues to be a market they view as great opportunity, favorable demographics
    • China economy slowing down, but still very attractive for them in the immediate term
    • China exposure through Ctrip partnership (PLCN int’l inventory shown to Ctrip travlers), and & Agoda directly (China outbound)
  • Alternative accommodation
    • Inventory of dynamically bookable listings should fuel future growth
    • Distribution network also key to driving future growth
    • Network and ability to market these properties is highly competitive    
  • Cancellation trends – all factored into their guidance
    • Cancellations were up slightly in the quarter and there was more volatility but within expectation and have factored it into their guidance
  • Brand spend –
    • Expected seasonally higher brand spend in 2Q but it came in slightly below their forecast, should continue to see similar level of spend in the US for 3Q.
  • Geo Segment Trends:
    • Europe continuing to grow solidly, but at slower rates given the size of its market and law of large numbers.
    • US growing faster than their consolidated growth rate   
  • Bookings for alternative accommodation? Will not provide that number
  • Markets stricter on alternative acoomm giving the hotels any lift? No not that they can see
  • Would look to work with FB more, have had success with them early on.  Would look to add more performance oriented placements
  • Corporate bookings roughly 1/5 bookings, trends?
    • Opportunity to grow in the future but difficult to suggest how the share of overall bookings will shake out
    • Business transient is only 30% of room nights to begin with (in the US)
    • Unlikely that the share of bookings shifts to 50/50
  • Kayak FB messenger service – fairly new product but the opportunity is big
  • Environment with Hotels pushing direct bookings
    • Don’t expect hotels to go too far given that they need to charge higher ADRs, if they did push lower rates, PCLN is more than appropriately positioned for that kind of environment
  • Lodging cycle impact on when hotels need to lean in on OTAs?
    • They feel they should always be leaning on the OTAs but naturally towards the end of the cycle the hotels would be more reliant
    • If occupancy drops then hotels would be more inclined to use the OTA product
      • GLL note: Occupancy is currently flat to negative on YoY basis in the US)
  • What does the TAM look like for new hotel room additions?
    • “There still is opportunity in the hotel space as well. So in some, substantial opportunity to continue to increase the size of the platform, although diminishing return in terms of the number of rooms available per property.”
    • Typical average size of the new properties they are bringing on is smaller since they are mostly dealing with alternative accommodation and smaller hotels   
  • Vacation Rental (VR)
    •  feel they have the superior product, one day people will shop for VR like they do for hotels
    • They like their scale and offerings – feel they are positioned for this inevitable transition in the VR business
  • Travel Trends
    • Spain and Portugal performing very well.  Ireland and Germany also doing well.
    • Turkey, France, Belgium doing poorly – naturally as a result of recent events
    • Nothing they can see from their side that would suggest corporations are pulling back on overall travel 
  • CEO search continues – right in the middle of it 


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



Hesham Shaaban, CFA
Managing Director



Todd Jordan
Managing Director


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