Greek Drama: A Hedgeye Contributor View

Editor's Note: We are pleased to present this special Contributor View written by Daniel Lacalle. Mr. Lacalle is an economist, fund manager and author of Life In The Financial Markets (Wiley) and The Energy World Is Flat (Wiley). You can follow him on Twitter at @dlacalle. 

Greek Drama: A Hedgeye Contributor View - z gra


By Daniel Lacalle


You can check out any time you like but you can never leave.” -Hotel California


The Greek drama continues to unfold and puts pressure on European markets despite the fact that Draghi´s “monetary laughing gas” continues to pump €60bn per month into the slowly recovering European economy.


The call by the ruling party, the communist Syriza, for a referéndum in Greece, is the last episode of a soap opera that´s starting to be sadly comical.


For once, Syriza is calling a referéndum on State fiscal policy, something that the Greek constitution specifically forbids. It is simply a measure to try to make citizens forget the atrocious negotiating tactics of their government, who could have reached a benefitial agreement much earlier without putting the country on the verge of a bank run.


Additionally, the  government is trying to show to the citizens that the Troika proposals are unacceptable when the difference between the document presented by Syriza and the EU´s suggestions are minimal (0.5% of GDP).


The real drama is that none of the measures announced will solve Greece´s real issues. No, it´s not the euro, or the austerity plans. It´s not the cost or maturity of debt. Greece pays less than 2.6% of GDP in interest and has 16.5 years of average maturity in its bonds. In fact, Greece already enjoys much better debt terms than any sovereign re-structuring seen in recent history.

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Greece´s problem is not one of solidarity either. Greece has received the equivalent of 214% of its GDP in aid from the Eurozone, ten times more, relative to gross domestic product, than Germany after the Second World War.


Greece´s challenge is and has always been one of competitiveness and bureaucratic impediments to create businesses and jobs.


Greece ranks number 81 in the Global  Competitiveness Index, compared to Spain (35), Portugal (36) or Italy (49). In fact it has the levels of competitiveness of Algeria or Iran, not of an OECD country.  On top of that, Greece has one of the worst fiscal systems and limits job creation with a combination of agressive taxation on SMEs and high bureaucracy. Greece ranks among the poorest countries of the OECD in ease of doing business (Doing Business, World Bank) at number 61, well below Spain, Italy or Portugal.


Greece´s average annual déficit in the decade before it entered the euro was already 6%, and in the period it still grew significantly below the average of the EU countries and peripheral Europe.


Between 1976 and 2012 the number of civil servants multiplied by three while the private sector workforce grew just 25%. This, added to more than 70 loss-making public companies and a government spend to GDP figure that stands at 59%, and has averaged 49% since 2004, is the real Greek drama, and one that will not be solved easily.


One thing is sure, the Greek crisis will not finish by raising VAT – impacting consumption – and increasing taxes to businesses, nor making small adjustments to a pension system that remains outdated and miles away from those of other European countries. A new 12% “one-off” tax on companies generating profits of more than 500,000 euro will not help job creation and will likely incentivise more tax fraud.


The inefficacy of subsequent Greek governments and Troika proposals is that they never tackle competitiveness and help job creation, they simply dig the hole deeper raising taxes and allowing wasteful spend to go on.


From a market perspective the risk is undeniably contained, but not inexistent. Less than 15% of Greek debt is in the hands of private investors. Most of the country´s debt is in the IMF, ECB and EU countries’ hands. The most impacted by a Greek default would be Germany, which holds bonds of the hellenic republic equivalent to 2.4% of its GDP, and Spain, at 2.8% of GDP, small in relative terms.


Additionally, the ECB prints “one Greece” every three months.


However, the main risk for the Eurozone comes from a prolongued period of no-solutions. Not a Grexit but a “Gredrag,” dragging on for months with half baked attempts to sort the liquidity crisis.


This prolongued agony is unlikely to help investors´confidence. And it might raise questions of the possibility of similar illogical behavior from other fringe parties close to Syriza´s views in the Eurozone, particularly in Spain and France. Because behind this all what lies is an ideological agenda, not the best financial deal for the country. Syriza could be looking to do something similar to what Nestor Kirchner did in Argentina in 2005, cut ties with the IMF and agree to alternative financing with Venezuela at double the cost just for ideological reasons.


Greece exiting the euro remains a distant possibility, despite the headlines. The much publicised “Russian solution” forgets that Russia is not stupid and doesn´t lend at better terms or with easier conditions – think of Syria and Ukraine.


A Grexit would not solve Greece´s challenges, as the country spent decades unsuccesfully trying to solve structural imbalances before joining the euro with competitive devaluations and failed keynesian bets on public spending.


Greece doesn´t need to be a failed state. But governments seem to be inclined to prefer a bank-run and capital controls than to reduce unnecessary spending. The fact that Syriza´s first measure was to re-open the public TV network – undoubtedly a “priority” in a debt crisis- shows how little they care about the “social urgency”.


Greece should stay in the euro, open its economy to business, attract capital, privatize inefficient public sectors, incentivize high productivity sectors with tax deductions, and reduce wasteful spend, not feed the government machine with ever rising taxes to get a few crumbles left by the survivors of the disaster.


If not, in three years time we will be talking of the “Greek crisis” again.

Investing Ideas Newsletter

Takeaway: Current Investing Ideas: KATE, ZOES, FNGN, PENN, GIS, GLD, VNQ, EDV, ITB, TLT & HIBB

Below are Hedgeye analysts’ latest updates on our eleven current high-conviction long and short investing ideas as well as CEO Keith McCullough’s updated levels for each.  Please note we added ZOES (please watch the video below) and KATE this week. 



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Trade :: Trend :: Tail Process - These are three durations over which we analyze investment ideas and themes. Hedgeye has created a process as a way of characterizing our investment ideas and their risk profiles, to fit the investing strategies and preferences of our subscribers.

  • "Trade" is a duration of 3 weeks or less
  • "Trend" is a duration of 3 months or more
  • "Tail" is a duration of 3 years or less


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Despite a recent bounce, the euro has fallen 18% since this time last year.



FNGN still has room to grow. Our bullish thesis is built on the following:

  1. Independent advisory works and boomers need advice - “Help” services including independent advisory or proper use of target date funds empirically result in meaningful outperformance compared to “Non Help” returns which can greatly assist 401K participants in achieving their goals.
  2. Glacial and not massive shift is occurring in the retirement market - 

    Much has been made of the Baby Boomers starting to redeem retirement assets and pull in their 401K wealth. While survey data is relaying that 2014 was the first year on record with more withdrawals than contributions, the drawdown is slight and won’t be immediately impactful.

  3. AUC and providers win should rebound the stock - Our research shows that AUC and not earnings drive the stock, and with a new product in Income Plus and potentially a new provider coming on, the stock with very high short interest and positive near term catalysts should rebound. We see $55 per share before $35 per share as an outcome.


PENN remains one of our Gaming, Lodging and Leisure Team's favorite names on the long side and maintains the best new unit growth story in domestic gaming. PENN’s new property, Plainridge Park in Massachusetts, had a strong opening.


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We expect slot win per day of $400, above Street expectations. In addition, June state gaming revenues will begin to roll out in 1-2 weeks. We expect June to be as strong as May, setting up Q2 to be estimate-beating quarter for PENN.


Builders and housing related equities turned in a 3rd week of outperformance alongside continued strength in the New Home Market, a notable uptick in 1st-time buyer activity in the Existing Market and strong results out of homebuilder Lennar (LEN).


EHS | 1st-time Buyers Stirring:  First-time buyers represented 32% of Existing Sales in May, up from 30% last month and 27% in May of last year.  It’s been our view that ongoing improvement in labor and income fundamentals along with maturation of the employment recovery beyond the 2-year mark for the key 20-34 year old age demographic would support household formation growth with slow flow through to demand in the single-family market.  


It’s difficult to take a convicted view of a single month of data in isolation but with investor/distressed sales declining, mortgaged purchases rising and young buyer demand percolating the slow march towards market normalization is progressing. 


Whether the mini-step function rise in 1st-time buyer demand in May represented a head-fake or an early inflection back towards the historical average of ~40% share of EHS remains to be seen but its evolution will represent a fulcrum factor for the direction of the existing market from here with transaction activity having retracted back to longer-term historical averages.


Indeed, the sequential +5.1% rise in May took aggregate existing sales up to 5.35MM units SAAR, marking the strongest level of housing demand since the artificially (tax-credit) amplified late 2009 period.


Further, the high-frequency weekly Purchase Application data from the MBA – which clocked purchase demand growth at +18% year-over-year in the latest week – suggests the strength observed across Pending and Existing Sales in March/April extended to May/June.


New Home Sales | Acceleration Continues: New Home Sales in May rose +2.2% month-over-month to +546K, the strongest level since February 2008 (88 months).  On a year-over-year basis, sales growth registered +19.5% with the positive revision to the prior month (+1.3% MoM) taking April sales growth up to a remarkable +30% year-over-year. Given the favorable comp dynamics, it’s likely we see similar strength from a rate-of-change perspective in the coming months. For context, if sales were to hold flat at current levels, year-over-year growth would come in at +34%, +35% and +20% over the next 3-months, respectively.    


LEN | Pick Your Metric: Similar to what we saw from KBH last week, LEN beat across basically every operating metric in 2Q15 with top and bottom line, deliveries, new orders, pricing and home sales gross margins all coming in ahead of estimates. Company Commentary was upbeat with management raising its outlook for deliveries, highlighting continued strength in rental demand/occupancy and pointing to ongoing improvement in demand in new single family construction. 


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Nothing has changed to our bullish General Mills (GIS) thesis. We are still long for all the same reasons reiterated below. Earnings are coming up on July 1st, which will be a big date for us.


We remain very bullish on the strength of General Mills’ brands and the long-term growth potential of the stock. The 2015 fiscal year was a busy one for GIS as they underwent a major restructuring project and the $820MM acquisition of Annie’s.


As they enter FY16, they announced Project Compass on 6/25/15; this is a cost cutting initiative similar to Project Catalyst, which will be taking place in the International segment. This restructuring effort is expected to be completed by early fiscal 2017, and will generate approximately $45 to $50 million, with approximately $25 to $30 million of cost savings being realized in fiscal 2016.


We don’t believe this should be a sign that times are still bad at GIS. With Project Catalyst recently ending in February, the organization simply needed time to digest learnings and then implement the initiatives across the broader organization. Albeit small in actual dollars, management continues to impress us with their willingness to make the tough calls that are necessary to succeed.


We see multiple ways you can win being LONG GIS:


1. The current management transforms into an Activist management team -15% chance

2. Fundamentally – Gluten Free Cheerios is a home run – 40% chance

3. Management sells the company – 10% chance

4. An Activist shareholder takes a position – 35% chance


All-in-all this stock is built for growth and with it currently paying a generous 3.1% dividend, that has never been decreased or interrupted, it is a worthwhile bet that this ship will turn.


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After a Fed-fueled week of strength in slow-growth, yield-chasing asset classes and long duration fixed income, both the Dollar and interest rates re-couped their losses from Fed Week. The dollar declined, rates increased, and as a result, those long of gold took some pain:

  • TLT: -2.9% on the week as the ten-year ripped 20 bps to the upside
  • EDV: -4.7% on the week back below the pre-Fed lows
  • VNQ: -4.5% on the week on the rates move
  • GLD: -2.5%--> Gold does not like a strengthening USD and rising rates. It likes a declining USD and declining rates


Will this continue? Will a long, sustained rate liftoff ensue? We don’t think so.


The market traded this week as if Thursday’s trifecta of data points supporting the strength of the consumer (69% of GDP is consumption) signals that the economy is back, and we’re right around the corner from an interest rate tightening cycle. Following up on Thursday’s data releases, the UofM Consumer Sentiment reading on Friday for June accelerated markedly sequentially.



  • Real Personal Consumption Expenditures (PCE) growth accelerated in May on a sequential, trending, and longer-term basis
  • The savings rate ticked lower by 30 bps implying the strength behind our consumer-led economy (i.e. acceleration in PCE and more spending, less saving)
  • For the second consecutive month, aggregate wage growth is accelerating on both a 1 and 2-year basis

Sure, the consumption side of the economy looks good for now, but how about the early-cycle manufacturing side which is the first to crack? Looks awful. To add to the apparent recent strength of the consumer, we outline a few headwinds for the consumer that has directional GROWTH, INFLATION, and POLICY implications into the second half of 2015:

  • The labor market always looks great at the end of an economic cycle, as we’ve emphasized exhaustingly. An increase in hours worked and hourly wages, as reported with PCE on Thursday, speaks to the nature of our position in the current cycle.
  • Retail gasoline prices are up +40% off of their March lows as we enter the height of driving season in the U.S.
  • With our internal models signaling that the economy faces very difficult comparisons in 2H2015 vs. prior periods (Y/Y of course), we would need to continue seeing a trend in data supporting an inflection in the direction of the consumer.  

We continue to repeat that the chance of further downward revisions to forward looking growth estimates from the Federal Reserve and consensus macro is much more likely than not. The attempted suspension of economic gravity from policy makers weakens the currency and puts pressure on bond yields. We remain long of this set-up with gold and long-duration fixed income. 


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Nike has been pushing the Direct to Consumer (DTC) envelope, which includes Nike Stores and e-commerce, and we think that poses a real threat to athletic retailers like Hibbett (HIBB) who now have to compete directly with the brand for sales.


To be clear, Nike has always had a brick and mortar presence and currently runs 180 outlet stores and 33 full price stores in the U.S. But, online is the greatest threat facing the traditional wholesale model because…


1) Customers continue to shift purchases away from brick and mortar

2) Customers prefer to shop directly with the brand over traditional wholesale accounts (one of the key reasons we’ve seen e-commerce growth outpace its wholesale partners) *based on our survey work 

3) it’s a less capital intensive way to reach customers

4) the gross margin for NKE on a direct sale is 1800bps higher than a typical wholesale sale and the actual gross profit dollars are about 4x.


On Thursday, Nike reported their 4th quarter and 2015 fiscal year results. Its Direct to Consumer sales were up 27% with e-commerce sales up 51% accounting for about 45% of the company’s growth. That’s significant for HIBB when you consider the fact that Nike accounted for 55.7% of HIBB's purchases in FY15, and if you exclude equipment upwards of 70%. 


As you can see from the chart below, we’ve seen a significant slowdown in the HIBB comp trend as NKE has pushed the pace on its direct business. That will continue to be a sizable headwind exacerbated by the fact that HIBB has no e-commerce operation so they are incapable of capitalizing on the shifting consumer behavior.


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RTA Live with Keith McCullough [UNLOCKED]

We are pleased to unlock the June 19th edition of RTA Live with Hedgeye CEO Keith McCullough, heralded by many subscribers as one of the best sessions yet.

In every RTA Live session, Keith gives commentary on all open signals in Real-Time Alerts, then takes subscriber questions, doling out analysis on securities, commodities, management teams, and providing risk ranges.

Ready to sign up for Real-Time Alerts and have access to every RTA Live? Click Here

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

The Week Ahead

The Economic Data calendar for the week of the 29th of June through the 3rd of July is full of critical releases and events.  Here is a snapshot of some of the headline numbers that we will be focused on.


The Week Ahead - 06.26.15 Week Ahead

CEO's Aren't As Important As Cycles Are

In this excerpt from today's edition of The Macro Show, Hedgeye Inudstrials Sector Head Jay Van Sciver explains that not even the savviest CEO is immune to the cyclicality that exists in the capital equipment space.


Subscribe to The Macro Show today for access to this and all other episodes. 


Subscribe to Hedgeye on YouTube for all of our free video content.

Retail Callouts (6/26): RH, NKE, FINL, RL, VNCE, Retail Wage Hikes

Takeaway: Big Inside Buy at RH | FINL Comps, can't leverage occupancy | Ralph still 81.3% of vote + a cool $24mm comp | IKEA enters wage boost game.


For full research note: CLICK HERE

If you (like us) were wondering why Nike was so expensive, well now you know. Is this company for real? We expected a big earnings beat, and we got it (GAAP $0.98, $0.92 adj vs our $0.90 and the Street’s $0.83). But by just about any stretch, we should have seen some stress in Nike’s US Futures numbers with this print. No dice.  Growth is healthy throughout the portfolio, margins are strong, and guidance is up for the quarter and full year. Revenue was +5%, GP +6%, EBIT +15% and earnings +26%. Not bad. The simple fact that we’re not seeing any holes (when we otherwise should) either a) speaks to the company’s increasing dominance with the consumer globally, b) points to the excess profits Nike is seeing as it’s e-commerce engine kicks into high gear, or c) suggests that CFO Don Blair jettisoned his usual conservatism in issuing guidance as Nike starts its new Fiscal Year (and Blair hands off these expectations for his successor to deliver upon – starting on Aug 1). We think it’s all of the above. Outlined in our note.


RH - $2mm Insider Buy

Takeaway: Lead Independent Director, Thomas Mottola, made a $2mm open market purchase on Wednesday. This is the first meaningful insider buy we've seen at the company since CEO Gary Friedman bought a $2mm slug back in September of 2014. That's when the stock was 25% lower than it is today. RH doesn't require its Board members to maintain a minimum ownership position, so this buy is all about Mottola's confidence in managements ability to execute on its long term plan.


RL - Ralph Voting % at 81.3%


RL Proxy Takeaways...

-Board now set at 11 directors vs 12 prior, 8 class B and 3 class A, as the board chooses not to replace Steven Murphy who resigned in May to become a company consultant.

-Ralph retains 100% of voting over the 8 class B directors -- no change there. That amounts to 81.3% of total voting power.

-Ralph's compensation came in at $24mm down from $24.5mm LY -- still among the highest paid CEOs in America. Given where the stock is, we'd expect this to come down materially in 2015.


IKEA to Ratchet Up Its Hourly Pay in U.S.


Takeaway: This IKEA decision is interesting for a couple of reasons.

1) For starters it's a non-public company that doesn't have to answer to the public markets, so it has a bit more wiggle room to be aggressive on wages.

2) The $11.62 minimum wage floor is 64% higher than the current federally mandated minimum wage and almost 20% higher than the $10 floor implemented by WMT, MCD, TJX, and TGT. The delta can be attributed to IKEA's need to attract and retain the right type of talent. We think that gets lost in the wage discussion. It's all about maintaining the spread for each retailer between itself and WMT, which means the reach of the wage hikes is far more widespread than many may otherwise assume.


FINL - Good Quarter. Interesting/Perplexing Insight into Occupancy

The headline EPS number looked good relative to expectations especially with short interest just off 2yr peaks at 11%. Reported comps for the month of May were up 12.6%. That syncs with commentary we heard out of HIBB and FL who indicated at the time of the 1Q release on 5/22 that May comps to date were up LDD QTD. Commentary from management indicated that June comps 85% of the way through the month were up MSD. On HIBB specifically there are considerable headwinds as we enter July with the shift in Tax Free Holidays in HIBB's core market from 2Q last year to 3Q last year. One notable factor is that management noted that FINL will not leverage occupancy costs -- even on a mid-single-digit comp. We've seen luxury retailers (KORS) with relatively high occupancy leverage hurdles, but never a retailer with an average basket below $100. That's either a sandbag, or its very disconcerting.

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VNCE - Vince CFO is Resigns


Every time we step-up our work on VNCE as a potential long, something emerges that gives us pause. CFO resignation for a volatile high-priced apparel brand that is a) potentially still over-earning and b) really doesn't know what it wants to be -- is just flat out scary. There's something to do with this stock, we just don't know if its long or short. Either way, it's worth doing the work -- particularly given the eventuality of being bought by another company.





LULU - Lululemon recalls 185,000 tops in Canada for dangerous drawstrings



AMZN - What’s a Treasure Truck? Ask Amazon



More exec changes at 99 Cents Only


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