Greece Votes 'No'. Risk On The Rise

"Born to raise hell, we know how to do it and we do it real well"



The referendum in Greece ended with a win of the "no" against the proposals of the European Union.


But this is not the end. It's the beginning.


For once, Greece's prime minister Tsipras' belief that this result will provide the country with more strength to negotiate was and is incorrect. If anything, the result brings the country one step closer to full intervention. Why?


As time passes, Greece is suffering not only from lack of funds to pay for public services and pensions, but its main industry, tourism, is also suffering, with a loss of more than 50,000 visitors in a week.


Greek banks are already requesting further liquidity from the ECB. It is not clear that support will remain indefinitely.


Greece is also facing bankrupcies in the private sector, where most companies are small shops and SMEs suffering from complete lack of credit.


Yes, as we explained last week in our call, this has been a political move, not one looking for the best financial deal.


Syriza has turned a problem of financing and liquidity into one of a possible failed state close to being intervened. While the Greek TV clings on to the "greater fool" theory of a possible Russian or Chinese aid, this has failed to materialize. Not only China and Russia face their own internal issues, but they are unlikely to come to the rescue of a country that sets lack of commitment to creditors at its core.


So, what now?


Don't expect a quick solution. The EU is unlikely to bow down ahead of a large maturity in August.


Additionally, Greece's vote is likely to cause shockwaves throughout Europe as we mentioned in last week's call, with fringe parties making this vote a validation of their own aspirations.


More importantly, so far we have only seen the reaction of the ones that receive... Let's wait for the answer of the ones that pay. The UK vote is coming soon, and it is unlikely that German, Finnish or Dutch citizens will feel happy to see their taxes raised to maintain Greece's public spending and generous pensions.


Greece's demands are simply impossible to grant. And what is most important is that, no matter what happens on a political level, investment and job creation will suffer after the country puts the word "uninvestable" at the door. Greeks are facing a prolongued period of recession and the very likely implementation of much harsher cuts than what they have voted against as the country moves to default and institutional implosion.


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For investors there is a very relevant fact to remember. The monetary bazooka of the ECB cannot contain the perception of risk throughout other countries if the EU allows the victory of the message that default and lack of commitment is feasible. This is why the IMF and EU's response has to be one of strength, or face slow implosion.


Low growth, lack of investment and poor job creation remain the central scenario. In the next months we have to add financial stability and the euro as a sustainable currency to the picture...again.


The referendum is not the end of the Greek drama. It is the beginning of the real drama.


-Daniel Lacalle


About the Author

Daniel Lacalle is an economist and fund manager, and author of 'Life In The Financial Markets' and 'The Energy World Is Flat' (Wiley).

The Week Ahead

The Economic Data calendar for the week of the 6th of July through the 10th 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.

Click image to enlarge

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Investing Ideas Newsletter

Takeaway: Current Investing Ideas: DE, VIRT, KATE, PENN, GIS, GLD, VNQ, EDV & TLT

Investing Ideas Newsletter      - 4th of july cartoon


Below are Hedgeye analysts’ latest updates on our nine current high-conviction long and short investing ideas as well as CEO Keith McCullough’s updated levels for each.  


Please note we removed ZOES, FNGN and ITB from the long side this week as well as HIBB (short).


We added DE and VIRTon the short side.


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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



We’re all-in on Kate Spade at current levels.


The Hedgeye Retail team notes that the stock is off 34% over the past 2 months, due to sentiment concerns around 'the space' (KORS is off 31%), but our fundamental outlook has not changed one bit. The business remains very strong. We think that comps are accelerating into the double digits in 2H, and we think that KATE’s margin guidance for this year will prove conservative.


Ultimately we think that numbers this year are 10% too low – a delta that widens to 20%+ next year, and to 50%+ by 2018 when we think KATE has $2.50 to $3.00 in earnings power. Using decelerating multiples as growth accelerates and the P&L matures gets us 50%+ upside in a year and a 2-3-bagger by 2018. 


Our Gaming, Lodging and Leisure team reiterates its high-conviction thesis on Penn National Gaming. PENN remains one of our favorite names on the long side. It maintains the best new unit growth story in domestic gaming.


PENN's property in Massachusetts has had an excellent start. We expect June to be as strong as May, setting up Q2 to be estimate-beating quarter for PENN.



  • Net sales: Net sales increased 1% on a constant-currency basis to $17,630mm, coming in just shy of consensus at $17,635. The 53 week contributed roughly 1 point of net sales growth and the addition of the Annie’s business provided another 1 point lift. So backing those out sales were down roughly 1%. This year started off rough, but gained traction in the 2H, and we expect this momentum to continue into FY16.
  • Segment operating profit: Declined 2% on constant-currency basis to $3,035mm coming in above consensus estimates of $2,899mm.
  • Adjusted diluted EPS: Totaled $2.86 for the full year, up 4% from a year ago levels on a constant-currency basis. The 53rd week drove much of the improvement versus last year, contributing $0.04 of EPS for the full year.


Gaining Share in Key Categories: General Mills improved their share in key growth categories of U.S. Retail. Increasing Grain snacks share by 168 basis points (bps), Frozen Hot Snacks by 97bps, Yogurt by 88bps, RTE Cereal by 26 bps and Frozen Pizza by 23bps. Now, not all the performance was positive they lost substantial share in underperforming categories. Frozen vegetables lost 168bps, Dessert Mixes down 144bps and Dry Packaged Dinners down 72bps, all categories that we believe need to be divested.


Robust growth seen across the International segment, on a constant-currency basis, Latin America increased 17%, Asia / Pacific up 5%, Europe up 5% and Canada was about flat. This robust growth was driven by innovation in key markets like Brazil with Yoki and China’s dumpling and ice cream businesses.


Convenience & Foodservice continues to improve the product portfolio by pruning lower performing SKUs, freeing the business to focus on the key priority platform. These platforms (cereal, snacks, yogurt, mixes, biscuits and frozen breakfast) are providing all the growth for the division, collectively up 9% this year.


FY16 Hedgeye Guidance ―

Looking into FY16 we are excited about the possibilities. Management is working hard on their “Consumer First” initiative and making great changes to current product while also introducing new products.  Below is not a comprehensive list but some of the biggest things that we are looking forward to this year:

  1. Yoplait in China
  2. Gluten-Free Cheerios
  3. No artificial colors or flavors in the cereal
  4. Granola innovation / Muesli
  5. Greek Plenti / Whips
  6. Original yogurt sugar reduction
  7. Renovation on Grain Snacks
  8. Strong push on Natural & Organic products
  9. Delivering Value to consumer on brands like Totino’s and Hamburger Helper
  10. Bringing U.S. innovation International


Bottom line is they are still struggling; we don’t want to shy away from that. But the core of the portfolio is growing and management seems to be working tirelessly on implementing changes to grow the rest of the portfolio, especially cereal.  We also still believe that to have continued growth into the future a sizeable acquisition or divestiture would be beneficial to the business. 


Investing is difficult, but investing in shares subject to weather conditions adds to the challenge.  Welcome to Ag Equipment. 


We see the agricultural equipment down cycle as a multi-year affair with a good deal further to run.  The significant move higher in agricultural commodity prices from 2006-2013, along with ethanol mandates and equipment tax incentives, facilitated an accelerated refresh of the large agricultural equipment fleet.  A young fleet should depress new equipment demand for the next several years.


Used equipment inventories are also elevated, adding to industry pressure.  Farm land values, the dominant asset in the farm balance sheet, have declined recently after years of strong gains in a potential negative for confidence. Other key markets, like Brazil, have already shown sharp declines in equipment demand. 


For Deere in particular, we expect another leg down in production volume to have a meaningful impact on profitability given present utilization.


We are using the recent strength in DE shares associated with its FY2Q beat and a bounce in grain prices since mid-June as an entry point.  A key risk to our view is that agricultural commodity prices continue to move higher, perhaps driven by unfavorable growing conditions in key regions (i.e. weather).  Still, we expect sales of large agricultural equipment to normalize in coming years, pushing DE’s results below current estimates.  


Financials Sector Co-Head Jonathan Casteleyn writes that, "shares of newly issued Virtu Financial are very richly valued. Despite principal risk in their daily trading operations, the stock is being priced in-line with the exchanges."


He adds that VIRT has no tangible equity capital to absorb a potential trading loss. It would have to draw down credit lines should their historical track record in trading break down. He estimates shares are worth $18 per share or the mid point of our scenario analysis.


The Hedgeye Growth, Inflation, Policy (GIP) model is signaling a move into QUAD 3 for the second half of 2015. This is a set-up for the domestic economy where growth is slowing and inflation is accelerating.


We reiterate our intermediate to long-term bullish bias on long-duration Fixed Income and gold.


Our back-testing results cast a favorable outlook for Long-Term Treasuries, REITs, and Gold with a favorable set-up as seen in the first three charts below. When growth is slowing (QUAD 3 and QUAD 4), long term rates tend to move lower.  The logic is simple:

  • #GrowthSlowing: As growth slows, a revision in forward-looking growth expectations manifest in lower yields
  • #InflationAccelerating: Commodity prices have made a significant move off of the 2015 lows as seen in the last chart below, and we expect the follow-through to play out in Q3 inflation readings. CPI readings track the commodity price sample used in chart #4 below very closely and CPI compares are easy in 2H 2015 vs. more difficult GDP comps (QUAD 3)       

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LEISURE LETTER (07/02/2015)



WYNN - Summer specials at the Wynn Macau for Macau residents include the following. 

  • Accommodation – Macau residents can stay at the Forbes Five-Star Wynn Macau. The package includes one-night’s accommodation, choice of breakfast for two persons, complimentary WiFi, complimentary parking and late check-out till 3pm. 
  • Dining – Restaurants at Wynn Macau will be offering tasting menus for local residents. 
  • Spa – Residents can enjoy 20% saving on all spa treatments available at the Forbes Five-Star Spa at Wynn with a range of spa services including facials and massages. Complimentary parking is inclusive.



MGM - The Mandalay Bay Resort and Casino in Las Vegas has begun the final phase of a $100 million renovation, in which all 3,211 guestrooms will be updated.  


MGM - MGM Resorts is pitching a $1 billion gambling complex for downtown Atlanta that backers say would funnel tens of millions of dollars into the HOPE scholarship.  But first it would have to overcome stiff opposition in the General Assembly and the governor’s office. 

  • MGM’s proposal would create 3,500 jobs and offer Las Vegas-style casino gambling, as opposed to past ideas involving video slot machines, said state Rep. Ron Stephens, who chairs the House’s economic development committee. He called it the “Cadillac” of casino projects.
  • An MGM Resorts spokesman confirmed the company’s interest in Atlanta but said its analysis in “the very preliminary stages.”



Airbnb - Panel of Hoteliers argue that boutique hotels are less at risk throughout the expansion and growing popularity of Airbnb. Takeaways from panel:

  • CEO of Trust Hospitality argued that Airbnb was simply a play on price, and that's the main reason why anyone uses the platform. With that mentioned, the panel made the case that the Airbnb customers are interested in both the experience and the price. 
  • Here to stay. The panel was in agreement that Airbnb is not going anywhere and the current regulatory and they will overcome the majority of their regulatory headwinds. 


Takeaway: Airbnb continues to make waves in the headlines 

CCL - The 1,266-passenger Ryndam will return to Harwich a day early, on Friday July 3, so staff can perform a deep clean before its next cruise. The ship was forced to cut short the 14-day round-trip cruise from the U.K. due to a Norovirus outbreak.



China Anti-Graft - The People’s Daily, an organ of the Communist Party of China, as saying the party’s Central Commission for Discipline Inspection will use the country’s telecommunications companies to keep tabs on mainland officials when they are abroad. 


Las Vegas Housing - Las Vegas slipped out of the "Top 5 Distressed Markets" for the month of May, but that is not expected to last long. The market’s share of distressed sales fell by nearly half in May, to 13% of the market. That was down from 23.8% in May 2014. 

  • Nevada’s default laws went through several iterations in 2011 and 2013, which banks said complicated their ability to foreclose. As lenders have adjusted, foreclosure starts — first-time filings of notices of default — have picked up noticeably in 2015. 
  • It was also cited that due to the stabilization in home prices and negative equity dropping, homeowners will likely be able to exit their homes without the 'distressed' tag associated with the sale. 



Athens, Greece - The Hellenic Gaming Commission, arrived at a radical change of circumstances which will lead to the actual  suspension of OPAP VLTs business activity. The new regulation, decided by the Gaming Commission only a few days prior to the scheduled launch of the VLTs. 


Takeaway: Bad news for the suppliers 


Hedgeye Macro Team remains negative on Europe 

Takeaway:  European pricing has been a tailwind for CCL and RCL but a negative pivot has happened in 2015.

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