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Grexit? Not So Fast

Constipation over Greece? You bet!  The political indecision leading to a call for snap general elections on January 25th has sent Greek bonds down -7.4% and Greece’s Athex Index down -24% over the last month.

Grexit?  Not So Fast - vv. yields greek

Grexit?  Not So Fast - vv. athex


There’s also spillover talk this week of Greece exiting the Eurozone as a result of an article in the German publication Der Spiegel over the weekend. The article cited an unnamed German government source who said both German Chancellor Angela Merkel and her Finance Minister Wolfgang Schaeuble have a contingency plan for a Greek exit, labeling it manageable.


The story helped send the EUR/USD to a 9 year low near $1.1865; however, Merkel’s government was quick to counter the article by saying it will continue to support Greece in the Eurozone. 


What can we as investors believe as the fate of Greece?


Below we give the puts and takes on why we believe it’s unlikely that Greece exits the Eurozone. While elections on January 25th threaten to increase global market risks over the next weeks (into and out of the event), the recent trend suggests downside risk is much more concentrated in Greek markets (rather than the broader Eurozone markets). WE EXPECT THIS TREND TO PERSIST. 


This new dynamic, where Greek news and events do not drag down international markets (or at least to a much lesser extent), may in fact suggest that Greece’s risk profile is different this time as is the sovereign community and banking industry who are much more prepared for the potential of a fallout. 


That said, we assign less than a 10% chance that Greece exits the Eurozone, as we believe both the Greek and Eurozone/international community will be incentivized to make concessions where needed (regardless of how a coalition forms after elections) so as not to rock the cradle of the Eurozone project.


We continue to expect weakness in the EUR/USD (the cross remains broken across its TRADE, TREND and TAIL duration levels). Eurozone headline risk mixed with the prospect of QE with which ECB President Mario Draghi continues to tease the market (along with outlining for a Q1 2015 release). We’re not buyers of Greek or European equities here. Note that both the STOXX50 and STOXX600 are broken across our TRADE and TREND levels.


Grexit?  Not So Fast - vv. eur usd


The Political, Cultural, and Financial Climate Spell NO Exit

Eyes on January 25th – the date of the Greek snap general election:  keep in mind that despite polls suggesting that the far left anti-austerity Syriza party (headed by Alexis Tsipras) leads in polls (by around ~3% ahead of the ruling conservatives New Democracy) his party stands far from an absolute majority even if it takes the top spot.


Some Key points that suggest the likelihood of No Exit:

  • Tsipras will have to form a coalition and his potential partners are decidedly against an exit. Based on a survey poll by Rass conducted on December 29-31, Syriza is holding a 3.1% lead at 30.4% vs 27.3% for New Democracy. This compares to a 3.4% lead in a poll carried out a week prior.
  • Tsipras/next government must play to an electorate that is decidedly against an exit:  a recent poll by Rass last month showed 74.2% of Greeks said the country must stay in the Eurozone at all costs, while 24.1% disagreed.
  • Tsipras himself has moved away from a past position that Greece should exit the Eurozone. In fact in the last weeks he’s been very vocal suggesting that Greece should stay in the Eurozone, which makes sense given populous sentiment in favor or staying.
  • Tsipras/next government wants to play ball with Troika (The EU, IMF, and ECB):  Despite numerous bailouts (public and private) since the sovereign ‘crisis’ began in 2010, the public debt load remains a monster €317 billion (~ $386.7 billion) or about 175% of Greek GDP. If Tsipras/next government can strike a deal with them on a “path to reform” they may forgive some of the country’s debt. 
  • Troika Wants to play ball with Greece:  most of Greece’s debt, around €250 billion, is held by the official sector: the IMF, the ECB, the European Financial Stability Facility (EFSF) and bilateral loans by Eurozone member states. This means there is a strong incentive to not see these loans default, nor any investor ripple effects that may bring further downside to the broader European markets.
  • Eurozone officials remains committed to Greece:  in late December the board of the European Financial Stability Facility (EFSF) granted Greece a 2-month extension of funding from originally December 31, 2015 to an extended February 28, 2015 cutoff. This allows an additional/remaining €1.8 billion of funds to be disbursed.  This “charity” further shows the commitment of the Eurozone to Greece and its ability to amend/make compromises on fiscal matters. 

Risk Rising – This Time Is Different?

The dynamic around Greece may in fact be different this time. While in past years since the crisis began, the smallest of Greek news had the power to tank global markets. 


If we look to our European Financial monitor as an indicator, this time around we see a major spike in Greek banks' CDS (widened between 159 and 229 bps last week), whereas Bank CDS throughout the region was flat to slightly down, on the whole. Additionally the big downside moves in the Greek equity and debt market since PM Samaras called an early presidential election were largely contained domestically.  Surely these are partly indications that governments and market participants are more comfortable with the prospect of a Greek exit.


However, we believe the political, cultural, and financial points mentioned above spell the very unlikely probability that Greece exits the Eurozone anytime soon.  Given the interconnectedness of markets and also the still very bloated and weak sovereign and fiscal state of Greece, it appears that any gains that could be realized by its own currency and central bank to set interest rates are trumped by fears of weak growth and the inability to pay down its debt and raise credit if were to go at it alone.


Once again it appears that the Eurocrats will continue to trumpet their Eurozone project and the Greeks believe their own prospects are better if they stay IN rather than OUT of the union. 


We’ll be waiting and watching (with an investment in Greece on sidelines) as we approach elections on January 25th


Matthew Hedrick



Grexit?  Not So Fast - chart1 FInancials CDS

Retail Callouts (1/6): ICSC, Online Holiday Sales, COH Deal, KATE

Takeaway: ICSC-strong data point driven by discounting. COH-This Is A Really Bad Deal. IBM-dot.com Holiday sales +14% but AUR -8%



Thursday (1/8)

FDO - Earnings Call: 10:00am

BBBY - Earnings Call: 5:00pm




Takeaway: Strong start to the year with a +3.8% reading. Our sense -- which is likely to be backed up with the data points that come out over the next week from the companies -- is that this was driven by promotional activity due to greater than usual excess inventory available after the Holiday.

Retail Callouts (1/6): ICSC, Online Holiday Sales, COH Deal, KATE - 1 6 chart1








Takeaway: Coach’s purchase of Stuart Weitzman is the ultimate sign of its perennial mediocrity. When Michael Kors, Kate Spade, Ralph Lauren, or Tory Burch want to get into the shoe business, they use their greatest asset to get there – their own brand name.  When Coach wants to get there, it buys somebody else’s brand name. That’s almost all we need to know. Link to the full not can be accessed by clicking the link (COH - This Is A Really Bad Deal).


IBM: 2014 Online Holiday Sales up 14%, Mobile up 27%



Takeaway: This data point syncs with what we've seen from other sources that track online spending during the holiday season. ComScore reported that sales were up 15% from 11/1 - 12/21 and Channel Advisor #'s for 11/27 - 12/21 reported a similar number at 14%. These numbers represent a sequential acceleration. With IBM accelerating from 8.5% in '13 to 14% in '14 and ComScore up 500bps from 10% in '13. That make sense to us given the accelerated shift we've seen during the Holiday season from in-store to online. That's the positive, on the negative side AUR was down 8% according to IBM. Contrary to most peoples opinions, online sales are a drag on profitability for retailers who don't own content. The best example we have of that is KSS where online EBIT margins are 600bps below Brick and Mortar. So not only is the online channel cannibalizing what otherwise would have been B&M sales at a less profitable rate, retailers drove that growth through a heavy dose of discounts. Not the earnings driver many of the retailers need this 4th quarter.




KATE - Kate Spade Swimwear Debut

Retail Callouts (1/6): ICSC, Online Holiday Sales, COH Deal, KATE - 1 6 chart2


Saban Brands Purchases Mambo



IBM: Retail Cyber Attacks, Victims Drop in 2014




COH – This Is A Really Bad Deal

Takeaway: Coach’s purchase of Stuart Weitzman is the ultimate sign of its perennial mediocrity.

Coach’s purchase of Stuart Weitzman is the ultimate sign of its perennial mediocrity. When Michael Kors, Kate Spade, Ralph Lauren, or Tory Burch want to get into the shoe business, they use their greatest asset to get there – their own brand name.  When Coach wants to get there, it buys somebody else’s brand name. That’s almost all we need to know.


But there are so many other parts of the transaction that don’t make sense to us.

1) Coach’s $574mm bid bested that of Advent International – a savvy investor whose job it is to make high quality acquisitions. Advent was the one who stepped in to buy half of Chip Wilson’s LULU stock for $845mm as the former Lululemon Chairman backed away from the company. Advent has a very long holding period, and is not afraid of high near-term valuation. So why should Coach, which has never done an acquisition in its life, be comfortable paying more than someone with a better balance sheet/access to capital, and one of the best track records of creating value with retail acquisitions?

2) Sycamore Partners has owned Weitzman for less than a year – through its acquisition of Jones Apparel Group in February 2014. We can’t imagine that it would have shopped Weitzman so quickly if it’s view of its prospects were ‘just so good’.

3) This is an example where one private equity firm shopped a company (Weitzman), and bypassed another PE company in favor of a strategic investor who is willing to pay more with shareholder’s capital.

4) Don’t forget that Jones bought Weitzman in 2Q10. If there’s one thing you can say about JNY (and I’ll go to the mat on this one with historic examples), it’s that the company was second to none when it came to acquiring content/licenses and drawing out near-term cash flow at the expense of long term value. We’re near certain that this deal will end up costing COH well North of $574mm.


The punchline: We covered our long-standing short about nine months ago in the low $30s. The cash flow characteristics of the company were simply too attractive to us, which made an acquisition/LBO all too plausible – even if Coach is forever relegated to an outlet brand. But now the acquiree has turned acquirer. So to own Coach today you have to actually believe that 1) the (new) management team can turn around the core brand over a multi-year duration without sacrificing profitability, and 2) that this new deal will not destroy value.  We can’t believe either of those things.


If it weren’t for the likelihood that COH can engineer earnings growth for a few quarters as it integrates Weitzman, we’d go outright short today. If the stock works as earnings bounce, we’ll be the first to jump on board the short side. This one is now on our Short Bench. 

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January 6, 2015

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Takeaway: In today's version of the Macro Playbook, we revisit our bearish thesis on emerging markets. We do NOT see "deep value" in this asset class.


Long Ideas/Overweight Recommendations

  1. Health Care Select Sector SPDR Fund (XLV)
  2. Consumer Staples Select Sector SPDR Fund (XLP)
  3. iShares National AMT-Free Muni Bond ETF (MUB)
  4. iShares 20+ Year Treasury Bond ETF (TLT)
  5. Vanguard Extended Duration Treasury ETF (EDV)

Short Ideas/Underweight Recommendations

  1. iShares TIPS Bond ETF (TIP)
  2. SPDR S&P Regional Banking ETF (KRE)
  3. SPDR S&P Oil & Gas Exploration & Production ETF (XOP)
  4. iShares MSCI European Monetary Union ETF (EZU)
  5. iShares MSCI France ETF (EWQ)


***Please note that we have removed the iShares Russell 2000 ETF (IWM) from the short side of our thematic investment conclusions as of yesterday afternoon, opting to replace it with the iShares TIPS Bond ETF (TIP). Tune in to our Q1 Macro Themes conference call this Thursday at 1pm EST for an even broader update to our core long/short asset class recommendations. Email for dial-in details.***



Since our 9/23 bullish-to-bearish phase transition research note titled, “EMERGING MARKETS: THE EM RELIEF RALLY IS LIKELY OVER”, EM asset prices have fallen sharply:


  • The MSCI Emerging Markets Equity Index is down -8.9%
  • The JPMorgan Emerging Markets Currency Index is down -8.7%
  • OAS on the Bloomberg USD Emerging Markets Corporate Bond Index has backed up +141bps to post-crisis wides of 437bps


Those returns compare to a +1.9% advance for the S&P 500 and a more modest widening of +104bps for U.S. HY OAS. Moreover, those returns don’t compare to the absolute bloodbath occurring at both the regional and country levels:




To review our bearish thesis, we see three key fundamental risks that threaten to take EM asset prices dramatically lower over the intermediate-to-long term:


  1. #StrongDollar translating to commodity price deflation and debt service inflation
  2. Market structure risks (i.e. illiquidity and crowding) perpetuating a broad de-risking of this asset class amid fund outflows
  3. Growth in Chinese demand slowing to levels that threaten the debt sustainability of commodity producing nations


To assess these risks in greater detail, please review our 12/16 presentation titled, “#EmergingOutflows Round II: This Time Is Actually Different”.


Ironically, hosting a conference call expanding upon our bearish thesis on emerging markets at the depths of the Russian ruble crisis on December 16th was either very fortuitous or unfortunate, depending on how one views it (i.e. generating interest via marketing vs. mark-to-market timing). Specifically, this low-volume bounce to lower-highs across the spectrum of EM asset prices has rendered our EM “short book” slightly more ineffective than we would’ve liked thus far:



Source: Bloomberg L.P.




That being said, the longs have held up quite nicely; Turkey (TUR) in particular has lead all of our ideas the bounce, suggesting we’ve likely made the correct call here. The jury is still out on whether or not Philippines (EPHE) will deliver positive absolute returns over the intermediate term (good for hedge funds) or merely outperform its peers (good for long-onlys).


All told, we think the U.S. dollar rally has legs as G-3 monetary policy is set to continue diverging over the intermediate term. That should continue to weigh on EM asset prices, at the margins, as well as deter capital flows into this asset class.














***CLICK HERE to download the full TACRM presentation.***



#Quad4 (introduced 10/2/14): Our models are forecasting a continued slowing in the pace of domestic economic growth, as well as a further deceleration in inflation here in Q4. The confluence of these two events is likely to perpetuate a rise in volatility across asset classes as broad-based expectations for a robust economic recovery and tighter monetary policy are met with bearish data that is counter to the consensus narrative.


Early Look: 2015 Predictions (1/2)


#EuropeSlowing (introduced 10/2/14): Is ECB President Mario Draghi Europe's savior? Despite his ability to wield a QE fire hose, our view is that inflation via currency debasement does not produce sustainable economic growth. We believe select member states will struggle to implement appropriate structural reforms and fiscal management to induce real growth.


Draghi Jawboning and EURO Falling, Again (1/2)


#Bubbles (introduced 10/2/14): The current economic cycle is cresting and the confluence of policy-induced yield-chasing and late-cycle speculation is inflating spread risk across asset classes. The clock is ticking on the value proposition of the latest policy to inflate as the prices many investors are paying for financial assets is significantly higher than the value they are receiving in return.


#Bubbles: “Hedge Fund Hotel” Edition (Part II) (12/8)


Best of luck out there,




Darius Dale

Associate: Macro Team


About the Hedgeye Macro Playbook

The Hedgeye Macro Playbook aspires to present investors with the robust quantitative signals, well-researched investment themes and actionable ETF recommendations required to dynamically allocate assets and front-run regime changes across global financial markets. The securities highlighted above represent our top ten investment recommendations based on our active macro themes, which themselves stem from our proprietary four-quadrant Growth/Inflation/Policy (GIP) framework. The securities are ranked according to our calculus of the immediate-term risk/reward of going long or short at the prior closing price, which itself is based on our proprietary analysis of price, volume and volatility trends. Effectively, it is a dynamic ranking of the order in which we’d buy or sell the securities today – keeping in mind that we have equal conviction in each security from an intermediate-term absolute return perspective.   

Time to Redeploy Some Capital

Client Talking Points


The VIX is +32% in the 4 straight down days in the SPX from the 2090 no-volume-year-end-markup, and now that front month VIX is signaling immediate-term TRADE overbought (within its bullish TREND), we think you buy/cover U.S. equities this morning. The risk range for the VIX risk is 16.36-20.59.


Registering the 1-handle this am at 1.99% and that’s not a Long Bond (TLT) buy signal – that’s a book some gains in your Long Bond core long positions and redeploy that capital into some oversold U.S. domestic consumption exposure (XLY, XLP, etc.); still our Best Macro Long idea, but we don’t buy at every price.


After another fast -3.1% correction, the Russell is signaling immediate-term TRADE oversold, so we’ll take it off our Best Ideas list on the short side (and review why on our Macro Themes call on Thursday); as opposed to 1 year ago when we loved it short side, now it’s a hedge fund consensus short (-25,000 net short position in futures/options contracts).

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). As our declining rates thesis proved out and picked up steam over the course of the year, we see this trend continuing into Q1.  Short of a Fed rate hike, there’s no force out there with the oomph to reverse this trend, particularly with global growth decelerating and disinflationary trends pushing capital flows into the one remaining unbreakable piggy bank, which is the U.S. Treasury debt market.


As growth and inflation expectations continue to slow, stay with low-volatility Long Bonds (TLT). We believe the TLT has plenty of room to run. We strongly believe the dynamics in the currency market are likely contribute to a “reflexive deflationary spiral” whereby continued global macro asset price deflation and reported disinflation both contribute to rising investor demand for long-term Treasuries, at the margins.


Our models are forecasting a continued slowing in the pace of domestic economic growth, as well as a further deflation. The confluence of these two events is likely to perpetuate a rise in volatility across asset classes as broad-based expectations for a robust economic recovery and tighter monetary policy are met with bearish data that is counter to the consensus narrative. Consumer Staples is as good as any place to hide as the world clamors for low-beta-big-cap-liquidity.

Three for the Road


Dr. KOSPI continues to signal global #GrowthSlowing -1.7% overnight; India tagged for a -2.9% drop



In all likelihood world inflation is over

-Per Jacobbson, IMF, 1959


Beijing removes tax rebate for steel-boron products which accounted for 31% of steel exports for 2014 through November.

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