Debt Deflation Knives

“Second prize is a set of steak knives.”

-Alec Baldwin


That, of course, was one of the best one-liners from the 1992 classic Chicago real-estate brokerage movie, Glengarry Glen Ross (which was based on a 1984 Pulitzer Prize winning book by David Mamet).


Baldwin played Blake and the aforementioned quote came during his epic “motivational” speech to the sales-force. As many of you economic-cycle fans will recall, it’s always toughest to create sales and demand, when growth is slowing (1 was no different).


Debt Deflation Knives - z ab stk


“So,” it’s probably not different this time. The cover of The (now for sale) Economist is trumpeting “The Empire of The Geeks” (Silicon Valley) at another #bubble peak for “growth” assets. Instead, they should be asking themselves if this is a 1999 or 2007 cyclical slow-down.


Back to the Global Macro Grind


When the cycle slows, those who rotate out of #LateCycle styles of investing like:


A)     Inflation expectations

B)      Cyclicals (think peak growth and margin expectations)


Get 1st place… and those who are long:


A)     “Reflation” (commodities, currencies, and countries linked to inflation expectations)

B)      “Global Growth is back” (energy, basic materials, industrials, etc.)


Get to own the falling steak knives…


Here’s how that marked-to-market Global Macro score looked last week (in the context of the last month):


  1. Commodities (CRB Index) down another -4.4% wk-over-wk = down -8.5% month-over-month
  2. Oil (WTI) down another -6.0% week-over-week = crashing -20.5% month-over-month
  3. Gold down another -2.1% week-over-week = down -7.6% month-over-month
  4. Copper down another -4.5% week-over-week = down -9.2% month-over-month
  5. Canadian Dollar (vs. USD) -0.6% week-over-week = down -5.1% month-over-month
  6. Canadian Stocks (TSX Composite) -3.1% wk-over-wk = down -5.1% in the last month


Blame Canada? Nah. In US Dollars, let’s keep going on these hot-commodity-currency-country-links to inflation expectations:


  1. Russian Ruble -2.5% week-over-week = -down 6.8% month-over-month
  2. Russian Stocks -5.8% week-over-week = down -8.9% month-over-month
  3. Brazil’s Real -4.9% week-over-week = down -7.6% month-over-month
  4. Brazilian Stocks -5.9% week-over-week = down -8.5% month-over-month
  5. Nickel -1.8% week-over-week = down -11.6% month-over-month
  6. Rubber -2.2% week-over-week = down -14.0% month-over-month


Nickel and Rubber? Two of the BRIC’s (Brazil, Russia, India, China)? Damn those people who have to sell things in #deflating prices and/or have to buy/consume things in devalued currencies. #Deflation during a global growth slowdown has to be bullish, right?


Right. Right. Steak knives for everyone with a “diversified” asset allocation pie-chart last week! The Latin American “emerging markets” (MSCI) Index was -7% last week (-11.2% in the last month), and Chinese stocks were -8.5%, overnight. Booyah!


Uh, maybe we should be long, “decoupling”? Nope. We’ll stick with the #Quad4 asset allocations, which should have you long low-beta and yield chasing sectors (short Commodities). Currently I like Healthcare (XLV), REITS (VNQ), and Utilities (XLU); not the following:


  1. Inflation expectations (5yr breakevens) dropped another -13bps = down -28 bps in the last month (1.42%)
  2. Energy (XLE) and Basic Material (XLB) stocks down -4.0% and -5.4% (-9.1-9.3% in the last month) respectively
  3. Industrial stocks (XLI) deflated another -3.7% to -6.5% YTD (down -4.5% month-over-month)


If you’re levered long to inflation expectations another way to look at your risk is from a Style Factor perspective (mean performance of the Top Quartile vs. Bottom Quartile in S&P 500 companies):


  1. LEVERAGE: High Debt (to Enterprise Value) stocks were down -3.3% last week and are down -7.0% in the last 3 months
  2. BIG BETA: High Beta stocks dropped -4.2% last week and are down -8.7% in the last 3 months


In other news, our long-standing (back to the beginning of 2014 when TLT was at $108) best way to be positioned for growth and inflation slowing (Long-term Treasuries) had a great week last week.


The yield on a 10yr US Treasury Bond is down to 2.25% this morning and I still think that 1.75% happens before 2.75% does. I also love being long Low-Beta vs. short things that are highly levered to falling #DebtDeflation knives.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.21-2.34%

SPX 2069-2098
Nikkei 202
VIX 12.53-14.58
USD 96.61-98.35
Oil (WTI) 47.07-50.49

Gold 1067-1117


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Debt Deflation Knives - Z 07.27.15 chart

Monday Mashup

Monday Mashup - CHART 1




7/24/15 MCD | Right on Track


7/22/15 CMG | Is a Friend to Investors not a Faux





Friday, July 24

BWLD | Downgraded to neutral from buy at Dougherty & Co.  

Thursday, July 23

DNKN | In case you missed DNKN CEO blasting the NY wage board during their earnings call, here is a good summary (click here for article)

BWLD | Increases their credit facility from $100 million to $200 million (click here for 8-K)

SBUX | SBUX and PEP sign agreement to bring Starbucks ready-to-drink beverages to Latin America (click here for article)


Wednesday, July 22

DRI | Bondholders protest plan to spin off real estate (click here for article)

NY Board recommends phasing in $15 hourly wage (click here for article)


Tuesday, July 21

MCD | Might take all-day breakfast national (click here for article)

Lawmakers, White House explore tax revamp for U.S. firms with large overseas presence (click here for article)


Monday, July 20

DNKN | Announces plans for 26 new restaurants in Fresno and San Francisco (click here for article)



Casual dining and quick service stocks, in aggregate, underperformed the XLY last week. The XLY was down -0.4%, top performer from casual dining was RT posting an increase of 10.8%, while CMG led the quick service pack up 10.5%.


Monday Mashup - CHARt 2

Monday Mashup - CHART 3



From a quantitative perspective, the XLY remains bullish on a TRADE and TREND duration.


Monday Mashup - CHART 4



Monday Mashup - CHART 5

Monday Mashup - CHARt 6



Monday Mashup - CHARt 7

Monday Mashup - CHART 8

The Macro Show Replay | July 27, 2015




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July 27, 2015

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YELP: Thoughts into the Print (2Q15)

Takeaway: We're expecting mgmt to fall on its sword, but the buy side may be too. The latter is a mild risk, but not enough to consider covering.


  1. 2Q15 PRINT = DISASTER: We suspect the reason why YELP left 2015 guidance in tact after missing 1Q revenues and guiding light for 2Q15 was because it was shopping itself, and it's much easier to do so when chalking up its recent weakness as temporary.  We suspect that will come back to bite them on this print.  YELP will need a massive acceleration in new account growth and record low attrition to hit consensus Local Advertising estimates, particularly in 2H15.  We're expecting YELP to miss 2Q Local Advertising estimates, guide light for 3Q15, and cut 2015 guidance. 
  2. BUT AN EXPECTED DISASTER? We're getting minimal buy-side pushback lately, and the sell-side isn't stepping up to endorse the name pre-print as they usually do.  The stock is down an additional 10% since the news broke that YELP is supposedly not shopping itself anymore (after selling off ~10% that day).  YELP is now lower than it was post 1Q15 release, and short interest is now back to pre-takeout rumor levels.  We're not expecting a squeeze on anything short of a beat and raise, but need to flag the risk regardless.  
  3. THIS ISN'T TEMPORARY: We’re expecting mgmt to use lingering issues with its 1Q15 salesforce territory redistribution as the scapegoat. The issue is the model itself, which is predicated on hiring enough new sales reps to drive new account growth in excess of its rampant attrition.  YELP's TAM isn't large enough to support its model, which has manifested into a persistent decline in salesforce productivity, and is now devolving into a mounting exodus of its sales reps (see note below).  That latter means that the model is unraveling, and the story is going to get much uglier than we initially expected.  


Let us know if you have questions, or would like to discuss further.


Hesham Shaaban, CFA




YELP: The New Major Red Flag (1Q15)

04/30/15 08:53 AM EDT

[click here]



Takeaway: Our visit to PENN’s new Plainridge casino has only enhanced our already high enthusiasm for its contribution to PENN’s equity value


Following Friday’s site visit to PENN’s new slot facility in Plainville, we’re raising our win per day per slot assumption to $500 from $400.  Terrific highway access, a lower gaming tax rate and garage parking provide a competitive advantage in what seems to be a deeper market than the consensus view. Our 2015 and 2016 estimates are materially above the Street for EBITDA and EPS. Most importantly, we think PENN should generate an ROI of 28% on Plainridge, much higher than the Street anticipates.


After raising the win per slot per day assumption from $400 to $500 going forward ($525 for Q3), our Plainridge EBITDA run rate forecast rises to $69 million.  PENN owns the real estate in Plainville so EBITDA=EBITDAR.


On Friday, we attended PENN’s analyst day at the Plainridge Casino in Massachusetts.  We struggled to find any negative takeaways.  The property opened very strong in late June, and the strength continued in July.  Here are some takeaways:

  • Parking is ample and the garage gives them an advantage over their nearest competitor, Twin River in Rhode Island.  Despite the porte cochere, 85% of visitors enter through the garage.  Day time patrons usually prefer garage parking in the summer but the bigger advantage could be in the winter months in a heated garage.
  • Highway access is terrific – right of I495 and very close to I93 and I95. This is a big advantage over Twin River.
  • Twin River’s advantages are table games (not allowed at Plainridge) and smoking
  • The biggest surprise to PENN management is the volume of day time visitation and the strength of high-end slots.  At casinos that are this busy, it’s difficult to grow the weekend segment which is already running at full capacity.  The day part activity is very encouraging.  Players are more experienced than anticipated which is driving the high end.
  • Video poker machines are generating huge win per day so PENN is increasing the number of these games.  The trend here is probably indicative of a lot of repeat customers.
  • Another surprise is the amount of visitors arriving from the Providence area – the breakdown is 35% from the Boston area, 35% from southeast MA, and 20% from Providence and 10% Other.  This could be evidence of a superior product over Twin River and the aforementioned advantages.
  • Food and beverage revenues have also been a nice surprise to the upside
  • 62k Plainridge customers were added to PENN’s database of 3m
  • Southeast MA gaming license - Brockton.  Only 1 applicant.  It appears that the state is waiting to see out federal action regarding tribal casinos.  The current Attorney General seems to be against awarding the Southeast license.  PENN management feels they have at least 3 years before there is any new competition from southeast or WYNN in Everett.


PENN has a done a nice job with the new casino (clean bathrooms and ample parking) and it’s showing in the early results.  We believe Street estimates for PENN will need to move higher as early as Q3 and certainly for 2016, due in part to the strength of Plainridge.  We’re now projecting $340 and $383 million in company EBITDA for 2015 and 2016.  Our EPS estimates are $0.66 and $1.10 for 2015 and 2016, respectively - 12% and 16% above the Street, respectively. 

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