David Hay — Portfolio Update: A Confluence of Negatives (AAP to Hold)
Two halves with one message: get more defensive now, and do it with the weakest names first. The macro half stacks four negatives. Energy: markets have been "dangerously complacent" because crude sat at $70–$90 "despite the most severe loss of supply on record," but the energy people actually use is far dearer — "diesel… is now trading over $200/barrel, essentially double the price of crude" ($4.97/gal × 42 gal ≈ $209), "a profound threat" that "raises the ugly specter of stagflation." The war "approaching its eighth month" has widened: the Houthis' battlefield gains threaten the southern route, and they "have now attacked Saudi Arabia's East-West Pipeline" (4–5 mb/d, ~4% of global supply), so "most of the pre-war 20 million barrels/day" from the Gulf are off-line — "Yet, remarkably, the stock market remains very close to an all-time high." AI: a US uplift shared only by Taiwan and South Korea, now "under attack from both external and internal sources" (the anti-data-center movement plus insiders warning of "wiping out humanity"). Bonds: global yields are breaking out — TLT "clearly illustrates the price breakdown," the 30-year Treasury yield chart shows an upside breakout (5.33%), and France "appears to be on the cusp of an actual sovereign debt crisis" (spending 57% of GDP, debt service +25% y/y vs nominal GDP ~+3%: "the dreaded debt trap"). Hence the call: all but the most risk-tolerant "should consider raising cash. This is NOT a call to exit the stock market" — review "weaker names (like those rated Hold/Trim, Trim of Sell) as sources of cash," and sell "in IRAs and/or 401(k)s" as the most tax-efficient route. The portfolio half, by collaborator Daniel Bustamante, applies the same discipline to one holding: Advance Auto Parts (AAP) is moved from Buy to HOLD after a 24.6% post-Q2 drop — comps −0.5% (from +3.5%) on a fragile DIY customer, while margins, FCF and leverage kept improving (adj. op margin 5.6% vs 3.0%) but with $0.31 of the $1.03 EPS from tariff refunds. Verdict: the market "overreacted in magnitude," the turnaround is intact, the stock is "inexpensive against credible normalized earnings power" (~7× if 7% margins return), and "a weekly close above $48/share" is the technical trigger. Full Buys / Holds-Trims / Sells tables published — AAP is the only membership change.
One-line take: a raise-cash instruction with a sourcing rule attached, and a downgrade that shows the rule being applied. The macro section is the most explicit defensive call in recent weeks, but it is carefully bounded: "This is NOT a call to exit the stock market." What it adds over the Sep-08 "raise some cash while the raising's good" note is where the cash should come from — the weakest-rated positions first (Hold/Trim, Trim, Sell) and inside tax-deferred accounts ("the most tax-efficient way to become more defensive is by selling down stocks in IRAs and/or 401(k)s"). The justification is a four-part "confluence": (1) the energy shock is being measured at the wrong price — crude at $100 understates a $200+ diesel barrel that runs through the whole economy (stagflation risk); (2) the supply loss is worsening, with the Houthi strike on the East-West Pipeline closing the bypass around Hormuz and leaving most of the pre-war 20 mb/d Gulf flow off-line while equities sit near a record; (3) the AI growth engine faces a political and safety backlash; and (4) a global long-bond breakdown — TLT at new lows, a 30-year Treasury yield breakout, and France showing debt-trap arithmetic (debt service growing ~8× faster than nominal GDP). The calendar is invoked again ("the tendency for really bad stuff to happen in Septembers and Octobers past"). AAP is then cut to Hold, which in this framework puts it squarely in the "sources of cash" bucket the macro half just defined. The analysis is balanced rather than capitulating: the −24.6% reaction was "only illogical in scale, not in direction" — Q2 reset sales expectations (comps −0.5%, DIY weak in the final four weeks) without breaking the turnaround (gross margin 46.2%, adj. op margin 5.6%, YTD FCF positive, leverage 2.1×). Two honesty checks are built in: $0.31 of adjusted EPS was tariff refunds (underlying ~$0.72), and the guidance raise came from interest income, not operations. A five-point "what needs to happen next" list (DIY stabilizes; Pro stays positive; margins hold ex-refunds; 3.8–4.5% op margin + positive FCF delivered; hubs translate into share gains) is the scorecard, and a weekly close above $48 is the price confirmation. Rowed: AAP (Neutral — the Hold) and TLT (Negative — the bond breakdown). Referenced only: Taiwan Semiconductor, Samsung and SK Hynix (as the chip champions behind Taiwan's and Korea's AI uplift), the S&P 500, Worldpac (the divested AAP unit), CEO Shane O'Kelly.
1. Stocks & names mentioned
| Ticker | Name | Research | View | What he said | At |
|---|
| AAP | Advance Auto Parts | QT · SA · STK · FA | Neutral | DOWNGRADED from Buy to HOLD — moved from the Buys table to Holds/Trims (lot 05/01/2026 @ $58.78, marked $45.22, −23.07%). "The post-earnings decline was a bit excessive… though in truth it was not entirely unjustified": the stock "dropped 24.6% after earnings, despite management maintaining its full-year sales, comparable-sales, operating-margin, and approximately $100 million free-cash-flow outlook." What broke: comparable sales "declined 0.5%, reversing from 3.5% growth in Q1" — "the key metric the market wanted to see" — with weakness from DIY customers "particularly during the final four weeks of the quarter," while Pro still grew low-single digits. What kept working: adj. gross margin 46.2% vs 43.8%, adj. operating margin 5.6% vs 3.0%, adj. EPS $1.03 vs $0.69, YTD FCF positive, net leverage 2.1× from 2.4×. The caveat: "$0.31 of adjusted EPS came from tariff refunds… underlying EPS was approximately $0.72," and the $2.60–$3.30 guidance raise was "primarily because of higher-interest income, not stronger operating expectations." Verdict: the market overreacted "in magnitude" — "a reset in sales expectations, not evidence that the entire turnaround has failed." Valuation ~12.4× 2026 guidance midpoint, ~0.32× sales, ~7× normalized earnings at the original 7% margin target — "not exceptionally cheap against this year's still-depressed earnings, but… inexpensive against credible normalized earnings power." Technical trigger: "a weekly close above $48/share should set off some momentum higher and close the 'earnings gap.'" Watch-list: DIY stabilizes, Pro stays positive, margins hold without refunds, 3.8–4.5% op margin + positive FCF delivered, market hubs win share. "AAP Rating: HOLD." | read ↗ |
| TLT | iShares 20+ Year Treasury Bond ETF | QT · SA · STK · FA | Negative | The exhibit for a global long-bond breakdown — no trade, but an unambiguous bearish read. "Government bond markets worldwide are experiencing intense upward pressure on rates. This means that prices are moving exactly inversely; in other words, those are making new lows. The following chart of long-term U.S. Treasury bond ETF, TLT, clearly illustrates the price breakdown" (10-year Bloomberg price chart). On a yield basis "the upside breakout is resoundingly clear" (30-year UST at 5.33%, above the 2023 peak). "This is a global phenomenon with a few exceptions, such as the Chinese government bond market," and France is the acute case — "on the cusp of an actual sovereign debt crisis" (10-yr OAT 4.47%; spending 57% of GDP; debt service +25% y/y vs ~3% nominal GDP growth — "the dreaded debt trap"). Feeds directly into the raise-cash call. | read ↗ |
"View" is Haymaker's stance in this post. AAP carries the only rating action (Buy → Hold); TLT is the chart used to show the long-bond breakdown. Referenced only (not rowed): Taiwan Semiconductor, Samsung and SK Hynix (the "chip champions" behind Taiwan's and South Korea's AI uplift), the S&P 500 ("very close to an all-time high"), Worldpac (sold by AAP), CEO Shane O'Kelly, and Bloomberg (charts). The Buys / Holds-Trims / Sells tables published with this issue are transcribed at the end of the article text; this week's only membership change is AAP moving from Buys to Holds/Trims, with GOLD, PEP and UBER printing SB again (B on Sep-08) and CKHUY / COPX now printing T after the Sep-11 trims. Research: QT Qualtrim · SA Seeking Alpha · STK Stock Analysis.
2. Talking points
Energy complacency — crude is the wrong price to watch
- "It's been the contention of this newsletter for most of this year that the financial markets have been dangerously complacent about the current energy crisis," helped by oil staying "$70 to $90… at least until lately when they broke back above $100" — "despite the most severe loss of supply on record."
- The price that matters is the one users pay: "diesel is the ultimate example… It is now trading over $200/barrel, essentially double the price of crude" ($4.97/gal × 42 gallons ≈ $209/bbl).
- "Because diesel consumption is so pervasive throughout the global economy, this is a profound threat to markets and economic activity. It also raises the ugly specter of stagflation."
The war widens — the Hormuz bypass is hit
- "What was supposed to be a conflict lasting a few weeks is approaching its eighth month."
- The Houthis' gains in the southwestern Arabian peninsula put them "in a position to control the flow of oil to the south, forcing shipments north through the Suez Canal which is unable to handle super-tankers."
- They "have now attacked Saudi Arabia's East-West Pipeline" — the route out to the Red Sea that avoided Hormuz — carrying "four to five million barrels/day, roughly 4% of global supply."
- Result: "most of the pre-war 20 million barrels/day of crude shipments from the Persian Gulf region are off-line… Yet, remarkably, the stock market remains very close to an all-time high."
AI — the uplift and the backlash
- The AI boom lifted the US economy in a way "few other nations, outside of Taiwan and South Korea (due to their chip champions like Taiwan Semiconductor, Samsung, and SK Hynix), have enjoyed."
- "However, AI is now under attack from both external and internal sources" — the anti-AI data-center movement, plus "increasing reports from industry insiders about the potential for wiping out humanity."
The global bond breakdown — TLT, the 30-year, France
- Yields worldwide face "intense upward pressure… prices… are making new lows," and "TLT… clearly illustrates the price breakdown"; on yield, "the upside breakout is resoundingly clear" (30-yr UST 5.33%).
- "A global phenomenon with a few exceptions, such as the Chinese government bond market."
- France "appears to be on the cusp of an actual sovereign debt crisis. (It might soon be time for a Sixth Republic.)" — spending 57% of GDP, debt service +25% y/y, nominal GDP ~+3% (real <1%): "a lot like the dreaded debt trap."
The call — raise cash, from the right places
- "Along with the tendency for really bad stuff to happen in Septembers and Octobers past, we think all readers, except those who have enormous risk tolerance, should consider raising cash."
- "This is NOT a call to exit the stock market. Rather… reviewing weaker names (like those rated Hold/Trim, Trim of Sell) as sources of cash."
- "The most tax-efficient way to become more defensive is by selling down stocks in IRAs and/or 401(k)s. If there was ever a market primed for a serious shakeout, we'd suggest this is it."
AAP — what changed in Q2
- Comparable sales −0.5% after +3.5% in Q1 — "the key metric the market wanted to see and it punished the stock for this."
- Weakness from DIY customers, "particularly during the final four weeks… as tighter household budgets constrained spending"; the Pro business still grew low-single digits.
- Profitability kept improving: gross margin 46.2% (43.8%), op margin 5.6% (3.0%), EPS $1.03 ($0.69), YTD FCF positive, leverage 2.1× (2.4×).
- The asterisk: "$0.31 of adjusted EPS came from tariff refunds" (underlying ~$0.72), and the guidance raise to $2.60–$3.30 was "primarily because of higher-interest income."
AAP — "did the market overreact? Yes, in magnitude."
- A 24.6% drop despite unchanged full-year sales, comp, margin and ~$100M FCF guidance.
- "The reaction was only illogical in scale, not in direction… a reset in sales expectations, not evidence that the entire turnaround has failed."
AAP — the five-point scorecard
- DIY stabilizes; Pro stays positive (Main Street Pro outperforming); margin gains persist without tariff refunds; the 3.8–4.5% op-margin range and positive FCF are delivered; market hubs and supply-chain work show up as availability, delivery speed and share gains.
- Framed as overlapping, self-reinforcing developments rather than five independent hurdles.
AAP — valuation and the $48 trigger
- Since O'Kelly was named CEO (Aug-2023, ~$69) the stock is ~38% lower at ~$44, although Worldpac was sold, stores closed, leverage cut and margins improved — "exactly what he and the team said they would do."
- ~12.4× 2026 EPS guidance midpoint · ~0.32× 2026 sales · ~7× normalized earnings at a 7% op margin: "inexpensive against credible normalized earnings power."
- "We're changing the rating to Hold… a weekly close above $48/share should set off some momentum higher and close the 'earnings gap.'"
The published tables
- AAP moves from Buys (B) to Holds/Trims (H, highlighted) — the only membership change.
- Rating prints vs Sep-08: GOLD, PEP, UBER back to SB; CKHUY and COPX now T (the Sep-11 trim refreshes); HBM prints H/T.
- Sells ledger unchanged: ACN, EWY, GS, IBM, XOM.
3. In plain English
AAP — Advance Auto Parts Neutral
Advance Auto Parts sells car parts to two kinds of customers: do-it-yourselfers who walk into a store, and professional repair shops ("Pro"). For years it was badly run compared with rivals AutoZone and O'Reilly, with thin profit margins. A new CEO arrived in 2023 and did the unglamorous fixes he promised — sold a side business (Worldpac), closed weak stores, consolidated warehouses and paid down debt. Haymaker bought it in May 2026 at about $59 as a turnaround bet.
The latest quarter was mixed. Profits kept improving — the share of each sales dollar kept as operating profit nearly doubled, from 3% to 5.6%, and the company started generating spare cash. But same-store sales slipped 0.5% after rising 3.5% the quarter before, mostly because lower-income DIY customers cut back late in the quarter. And part of the profit beat was flattering: 31 cents of the $1.03 per share came from one-time tariff refunds, and the raised guidance came from interest earned on cash rather than from selling more parts. The stock fell about 25%.
Haymaker's view is that investors overreacted in size but not in direction: sales recovery is slower than hoped, but the turnaround hasn't failed. At about $44–45, the shares are cheap if the company can eventually earn the 7% margins it originally targeted (roughly 7 times those earnings), though not especially cheap on this year's depressed profits. So the rating drops from Buy to Hold — still own it, don't add. The things to watch are DIY sales steadying, margins holding without refunds, and on the chart a weekly close above $48, which would suggest the post-earnings drop is being repaired. Note that "Hold" is exactly the category the same post says to look at first when raising cash.
TLT — iShares 20+ Year Treasury Bond ETF Negative
TLT is a fund that holds long-dated US government bonds (20 years and more). When interest rates rise, existing bonds that pay lower rates become worth less, so TLT's price falls; long bonds are the most sensitive to that. Hay uses a 10-year TLT chart to show prices breaking down to new lows, and a 30-year Treasury yield chart showing yields breaking out above their 2023 peak to about 5.33%.
His point is that this is not just an American problem: government bond yields are rising almost everywhere except China, and France looks closest to a real debt crisis — the government spends 57% of the economy, its interest bill is growing 25% a year while the economy grows about 3%, which is the classic "debt trap" where borrowing costs outrun the income that has to pay them. Rising long-term rates make stocks less attractive and borrowing more expensive, which is one of the four reasons he gives for raising cash now.
Summary derived from the paid Haymaker newsletter (text in transcript.txt, with the portfolio tables transcribed from the published images). For personal study. Not investment advice. © Haymaker / David Hay for source material.