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CLICK HERE to download the associated presentation in PDF format (38 slides).


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As always, feel free to ping us with any follow-up questions.


Best of luck out there,




Darius Dale


Nickels & Steamrollers | Is the Profit Cycle Past Peak?

Takeaway: Tops are processes & “late-cycle” is not some discrete peak on a Macro sine curve. Move while the music plays but don't be willfully blind.

This unlocked research note was originally published June 04, 2015 at 13:42 in Macro. Click here if you would like to learn more about our services and how you can stay a step ahead of consensus.

A CENTURY OF CYCLES: In our 2Q15 Macro Themes presentation we profiled the historical economic cycles of the last century, catalogued a selection of late-cycle indicators and contextualized the current expansion within the historical experience.   


Canonical Macro cycles, left to themselves (i.e. with central banks following a largely passive policy reaction function), follow a pattern that largely resembles the circular, counter-clockwise flow captured in the inflation-output loop depicted in the chart below. 


Conventional monetary policy is designed to function within the context of this naturally evolving cycle.  The broader goal of current policy efforts is to both jump-start and (perhaps discordantly) smooth such a cycle in the face of persistent cyclical challenges and sectoral/secular shiftings.  


Nickels & Steamrollers | Is the Profit Cycle Past Peak? - z Drake ... Inflation Output Loop


Nickels & Steamrollers | Is the Profit Cycle Past Peak? - Century of Cycles


“PATIENCE” - TOPS ARE PROCESSES:  The halcyonic days of the late-cycle invariably birth discussion about whether it is, in fact, different this time, whether the economic cycle actually matters to stocks over protracted, investible periods of time and whether great central-bank catalyzed volatility moderations can matriculate into perma-profiteering opportunities.   


The “It’s different” tag-line holds credence to the extent it refers to using the temporal pattern of typical business cycle oscillations as the appropriate anolog for the current expansion.  Indeed, a defining characteristic of financial/balance sheet crises is the muted and crawling pace of the subsequent recovery.  ‘Lower in Amplitude and Longer in Period’ is the periodic function speak we’ve used to describe the likely macro path over the last 2 years. 


As it stands, we’re now 73-months into the current expansion – which compares to a mean of ~60 over both the last century and post-war era.  What’s worth re-remembering is the fact that, on average, it takes between 6.5 and 8 years to reach pre-crisis levels of income following a financial crisis.  In the current cycle - real per capita income in the U.S. reached pre-crisis levels at the end of 2013, so just about 6 years from the onset of the recession. 


So, even with unprecedented intervention and global policy coordination we still fell basically right on the average. This time, in fact, was not particularly different. 


Nickels & Steamrollers | Is the Profit Cycle Past Peak? - Patience


Nickels & Steamrollers | Is the Profit Cycle Past Peak? - Longest Expansion


PROFITS PAST-PEAK?  As Keith referenced in an institutional highlight yesterday - during the 2000 and 2007 economic (and profit cycle) slow-downs, Wall St ramped M&A/IPO/Buyback activity to levels never seen before. I.e. the ramp in “everything is different” was happening to offset the cyclical slowdowns. 


Corporate Profits peak mid-to-late cycle and the last few quarters of data suggest we’re probably past peak in the current cycle.  Past peak profitability in combination with companies facing prospective acceleration in wage inflation, a continued dearth in aggregate global demand and the ongoing secular retreat in the worlds core consumption demographic of 35-54 year olds is not a factor cocktail supportive of a step function rise in capex.  


Nickels & Steamrollers | Is the Profit Cycle Past Peak? - Corporate Profits NIPA



Valuation is not a catalyst and investor’s maintain varying proclivities for particular multiples and conceptual valuation frameworks. There is good debate to be had regarding the superiority or shortcoming of different multiples but there is a more general point to be made about current levels of valuation. 


Looking across the selection of metrics below, broadly, current valuations are richer than pretty much at any point except the nose bleed tech bubble highs.  Lower neutral policy rates and perma central bank interventionism may indeed be supportive of higher mean valuations but that only modestly dilutes the conclusion.  When valuations are in the top decile of LT historical averages, subsequent returns over medium and longer-term periods are just not that compelling.   


Nickels & Steamrollers | Is the Profit Cycle Past Peak? - Valuation Composite


Nickels & Steamrollers | Is the Profit Cycle Past Peak? - World Mkt Cap to GDP


Nickels & Steamrollers | Is the Profit Cycle Past Peak? - CAPE vs 3Y Ave Performance



Solving for what drives prices higher as profits flag is trivial.  But if you’re going to be paying near-peak multiples on peak margins as margins appear to be past peak and the expansion enters its twilight, you should at least be aware that that’s what you are doing. 


Tops are processes and “late-cycle” is not some discrete peak on a Macro sine curve.  We’re continuing to move tactically while the music plays but we won’t be willfully blind to the #LateCycle reality of it all.   


Nickels & Steamrollers | Is the Profit Cycle Past Peak? - Growth cartoon 05.19.2015



Christian B. Drake



Retail Callouts (6/17): NKE Mid-Tier Promotional Activity

Takeaway: Best case, this discounting is a non-event. Worst case, its bad news for KSS, FL and perhaps NKE.



Takeaway: Those who know us know that we very rarely call to attention seemingly insignificant near-term datapoints like retailer emails. But a promotional email from Dick's Sporting Goods caught our eye this morning. Not the fact that the company sent one (DKS sends an email almost every day), but this was the first time we've seen the company in the past 12 months run a broad based sale on Nike product. It's not premium product -- the AUR at full price is just under $80 for the men's and women's footwear listed, but that is the segment in the marketplace that is commoditized. The key factor for us is that we subsequently  saw nearly every single player in the mid-tier channel running very similar offers . Sports Authority (check), KSS (check), JCP (check), Academy Sports + Outdoor (check), and M (check) (see ads below). That tells us a few things…

  1. First off, it's a great example of the price transparency brought on by e-commerce. 5 years ago this bucket of retailers would have had far more opacity related to their discounting practices.
  2. On the plus side, the level of discounting is not particularly egregious. For many of these mid-tier players, a 25% discount is considered about as close to a full-price sale as they'll get.
  3. Could this be Father's Day-related? Yes, it's possible. But we checked email activity for all these retailers last year as well in the week before Father's Day, and we did not see this. The 2014 World Cup may explain away a part of that. But, our sense is that there is more at play.
  4. If there's anything that rubs us the wrong way on this one, it's that we've seen very strong sales for Nike in US Mid-Tier channels in recent quarters. Take Kohl's, for example...in the latest two quarters its Nike sales were up 19% and 24%, respectively or about $96mm in absolute dollar growth. The way we are running the math Nike accounts for between 3-5% of total KSS sales or about $800mm. That translates to $550mm at wholesale for NKE, or 33% of KSS' growth over the past 2 quarters.
  5. Nike does a great job in tiering its product by retailer, such that excessive inventory in one channel won't necessarily derail another.  But still, this raises a yellow flag for us for the Foot Locker's of the world.

  Retail Callouts (6/17): NKE Mid-Tier Promotional Activity - chart1 6 17 15


Nike/UnderArmour Management Age Considerations


Takeaway: One thing that we think is a constant point of controversy inside Nike is ensuring that the age of its executive management team does not run too far askew from the age of its target consumer, which is about 15-25 years old. Clearly, we don't expect to see Nike promoting recent college grads into its top ranks, but truly understanding the mindset of the key consumer is something that has been particularly important to CEO Mark Parker, who's now 58 years old. 


We ran an analysis of Nike's top brass in each of the past ten years, expecting to see an aging team relative to the target market (which would be bearish). This was surprisingly not the case -- especially when we compare to UnderArmour. Though there's no smoking gun here (bullish or bearish) we thought we'd share the analysis. Consider the following…


1. The line chart below shows the average age of the management team at Nike over time. At face value, it looks ugly, but we're only talking a shift from 48 yrs to 51 yrs over a 10-year period. That's not bad by any stretch.

 Retail Callouts (6/17): NKE Mid-Tier Promotional Activity - chart2 6 17 15


2. When zooming out a bit and looking at both NKE and UA in the context of the broader growth in this business, the spread relative to the core consumer (a range that could arguably have come up over time) is not alarming.


Retail Callouts (6/17): NKE Mid-Tier Promotional Activity - chart3 6 17 15


3. Comparatively speaking, the gap between Nike and UA has actually been shrinking over time -- from 9.5 years nearly a decade ago to about 3 years today.  In other words, UA's team is about 49 yrs old vs Nike at 52.


Retail Callouts (6/17): NKE Mid-Tier Promotional Activity - chart4 6 17 15

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LEISURE LETTER (06/17/2015)




  • June 23, 2015 - CCL Q2 2015 earnings call 10am


Macau full smoking bill - 

  • Macau’s Secretary for Social Affairs and Culture, Alexis Tam Chong Weng, said the government would send the bill to the city’s Legislative Assembly before the end of the month. The government remains committed to a full smoking ban, including the removal of enclosed smoking lounges currently located on some casino mass floors
  • But a group said to be representing Macau’s casino operators on the smoking issue said that the companies hoped there was still the chance of an alternative solution.
  • Macau CEO Fernando Chui Sai On said that whether a blanket casino smoking ban would affect Macau’s gaming revenue remained to be seen, pointing out that gaming receipts have been decreasing for the last 12 months despite the absence of a complete smoking ban in casinos.  
    • “… I don’t think the decreasing gaming revenue for 12 months is due to a smoking ban,” said Chui, adding the government would monitor what happens once the blanket smoking ban is in place and that the law would be reviewed every three years. 



Takeaway: Full smoking ban bill on its way - not unexpected but not good either.


SGMS- Bally Gaming has reached an agreement to provide at least 2,000 VLTs to the Oregon Lottery.  The Company has submitted the product and software to the Oregon Lottery and will begin shipping games later this year, after completion of a field trial and receipt of approval from the Oregon Lottery. All games will be part of a multi-game suite on the Bally ALPHA 2 Pro V32 cabinet.   

Takeaway: As mentioned yesterday, there could be another 5,000 VLT upgrades up for grabs for the suppliers in Oregon. 

MGM - Kirk Kerkorian, has died at the age of 98. Tracinda Corp, the holding company founded by Kirk Kerkorian, said the billionaire's will requires the company to dispose of its stake in MGM. Tracinda had a 16.2% stake in MGM Resorts, according to the company's filing on Tuesday. (Roughly $1.75 billion worth)


Takeaway: Only real implication is that there will be stock for sale.


IGT - Announced that it will provide the new Plainridge Park Casino in Plainville, MA with a wide selection of new content and cabinets, including more than 400 games


Takeaway: 32% ship share is about right for IGT.  Earlier, SGMS had reported 44% new slot share or roughly 26% total ship share for Plainville, according to our estimates.


HLT - Offering a deal for summer travel in China, and Hong Kong.  Bookings made between June 15 and August 14, 2015 and completed between June 17 and December 31, 2015 at participating Hilton Worldwide hotels, will enjoy savings of up to 25% off the Best Available Rate.



HT - Hersha Hospitality Trust has acquired the St. Gregory Hotel & Suites south of Dupont Circle for $57 million, its third hotel in D.C. ($386,000 per key) The property was acquired from an affiliate of St. James Associates. 



RCL -  Plans to deploy a luxury vessel from its Celebrity Cruises fleet in Abu Dhabi on a home-port basis from November 2016. The move will serve to strengthen the UAE capital’s ambition to become a major cruise hub. During peak season, the ship is expected to attract some 15,000 visitors to Abu Dhabi.



Macau Travel -  According to official data, Macau dropped from fifth most popular place to sixth during the first quarter, with declining numbers of tourists. Receiving 24.1% less Chinese tourists traveling via agencies from the previous quarter, Macau is now the sixth most popular destination for them during the first quarter from the fifth most. 



LEISURE LETTER (06/17/2015) - pop 


Macau smoking rooms - Two-thirds of Macau’s casino employees think casinos should keep their smoking rooms.  According to the results of the survey, which covered 34,000 employees of all six of Macau’s casino operators.

  • The survey also covered casino patrons, and found that 32% of VIP gamblers would go somewhere other than Macau to gamble if smoking was banned in the city’s casinos.



Asia Pacific - In the next five years, the Asia Pacific region will put 17 new casinos into operation. 

  • Macau will grab a third with six gaming properties scheduled. 
  • South Korea has three new casinos in the pipeline. 
  • The Philippines, Australia, New Zealand and Russia are expected to invest in two casinos each within the next five years.



Hedgeye Macro Team remains negative on Europe, their bottom-up, qualitative analysis (Growth/Inflation/Policy framework) indicates that the Eurozone is setting up to enter the ugly Quad4 in Q4 (equating to growth decelerates and inflation decelerates) = Europe Slowing.

Takeaway:  European pricing has been a tailwind for CCL and RCL but a negative pivot here looks increasingly likely in 2015.

CHART OF THE DAY: Commodity Price Volatility Cometh?

Editor's Note: The excerpt and chart below are from this morning's note written by Hedgeye Director of Research Daryl Jones. For information on how you can become a subscriber click here


...Speaking of volatility, my colleague and resident Hedgeye energy analyst Ben Ryan put together an interesting Chart of the Day this morning on commodity volatility.   While much has been made about the increased volatility on the bond market over the course of the year, volatility in the commodity market has remained somewhat muted this year.


The chart shows two key things.  First, specifically related to energy based commodities, their volatility typical spikes into FOMC announcements.  Second, these same commodities are near their lows of the year in terms of implied volatility.  So, what do you think, is the world of energy commodities going to get more or less volatility in coming months? 


CHART OF THE DAY: Commodity Price Volatility Cometh? - z Implied in energy

We Petty Men

“He doth bestride the narrow world like a Colossus; and we petty men walk under his huge legs, and peep about to find ourselves dishonorable graves.”



Over the last 7 or 8 years, today has become a day that most stock market operators have fixated on.  Unless you’ve been stranded on deserted island with a volleyball named "Wilson," you know what we are referring to – FOMC announcement day.  As the Fed has wanton to do since the Great Recession, it has made us feel like petty men as we wait with bated breath on every word from the central planning colossus.


Hopefully, the Fed colossus does not pronounce anything overly surprising.  After all, it would be a shame to start digging our investment graves only midway through the year.  According to the Barclay’s Hedge Fund Index, hedge funds in aggregate are up right around 4.5% for the year-to-date, so it would only take a little volatility to get the grave of negative returns started.


Inasmuch as we can all criticize the Fed and begrudge our myopic focus on its pronouncements, there is a constituency that has more reason to complain – savers and those who live on fixed incomes.   As former Fed Chairman Bernanke noted in a speech in 2012:


“In the case of savers, you know, we think about all these issues, and we certainly recognize that the low interest rates that we’ve been using to try to stimulate investment and expansion of the economy also imposes a cost on savers who have a lower return . . . I guess the response I would make is that the savers in our economy are dependent on a healthy economy in order to get adequate return. … So I think what we need to do, as is often the case when the economy gets into a very weak situation, then low interest rates are needed to help restore the economy to something closer to full employment and to increase growth and that, in return, will lead ultimately to higher returns across all assets for savers and investors.”


So in theory, savers will eventually get a return, which is fair, except that interest rates have been at ZIRP for six and half years. (Side note: the average expansion since World War 2 has only lasted six years!)


We Petty Men - Fed cartoon 02.23.2015


Back to the Global Macro Grind...


Speaking of volatility, my colleague and resident Hedgeye energy analyst Ben Ryan put together an interesting Chart of the Day this morning on commodity volatility.   While much has been made about the increased volatility on the bond market over the course of the year, volatility in the commodity market has remained somewhat muted this year.


The chart shows two key things.  First, specifically related to energy based commodities, their volatility typical spikes into FOMC announcements.  Second, these same commodities are near their lows of the year in terms of implied volatility.  So, what do you think, is the world of energy commodities going to get more or less volatility in coming months?


Speaking of graves, for those investors that have been long the commodity market over the last month, their graves may have been dug.  We track 21 major commodities and over the last month 16 of them have had negative performance.  In the period, the five worst performers were as follows:


Sugar - -12.3%

Copper - -11.31%

Silver - -8.92%

Hogs - -7.44%

Nickel - -7.31%


The weakness over the last month is likely partially driven by a stronger dollar, but also on some level indicative of a global economy that is not firing on all cylinders.  How else to explain such a broad based underperformance of seemingly unrelated commodities like sugar and nickel over the last month?


But as we’ve alluded to, the next move in commodities may well be a function of the next move in the central banking colossus, which could come today. On that note, Keith is over in Europe visiting subscribers on the continent this morning, but in his Direct from KM note this morning (ping if you want to be added), he said the following:


“Day 3 in London and oh boy is sentiment bearish – could make for a rip higher (stocks, bonds, commodities) on Fed day:


  1. US Dollar – if you ask Doctor Dollar, Janet may very well do what I think she should do and stay “data dependent” with no timing on rates – that would = Down Dollar, Down Rates – Up almost Everything (much like my March 18th FOMC meeting call); I think both US equity futures (yesterday), and Oil again today are front-running this scenario
  2. VIX – ramped right to the top-end of my range yesterday then backed off – no support to 12.75 on a potential buy everything ramp – sentiment is bearish (both this morning’s II Bull/Bear Spread at YTD lows and SPX NET SHORT position (futures/options) at YTD highs)
  3. EUROPE – sorry, you get #StrongerEuro on this – and the DAX, CAC (both -4% in the last month) no likey Down Dollar because it means up Euro – so I like long US Equities still vs short EuroStoxx with the Slower-For-Longer (down rates) view, for now … “


Good luck out there on Fed Day! And god speed to the day when we petty men (and women) can stop worrying about the Fed.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.16-2.49%

SPX 2072-2113 
VIX 12.75-15.98 
USD 94.06-96.15 
Oil (WTI) 58.11-61.90 

Gold 1168-1203


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


We Petty Men - z Implied in energy

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