"You've got to know when to hold 'em
Know when to fold 'em
Know when to walk away
And know when to run."
- Kenny Rogers, "The Gambler"
I'm out in Las Vegas for the week coaching and enjoying a little down time. The flight of course made me contemplate the role of luck in life and markets. After all, Vegas is all about the lucky streak!
In Vegas, the odds are always against you. In the long run, absent incredible luck, you are most likely to lose. Statistically the "house" is set up to win, which of course is why casinos are very profitable and highly valued endeavors (just ask my colleague Todd Jordan).
But what about the stock market... is the "house" also most likely to win over time? Sometimes it certainly feels that way. Other days as stock operators we feel we are the smartest people on the planet, especially when we are on the right side of #Quad2.
MIT did an interesting study on the role of luck in many games, including the stock market, and this was the conclusion:
“On a scale of zero (pure luck) to one (pure skill), coin flipping indeed ranked a zero. It’s pure luck. But moving back towards the stock market, the study also looked at 45,000 mutual funds’ performances from 2005 to 2015, and ended up giving mutual funds a score of 0.32. Some skill, sure, but mostly luck.”
So, for even professional investors, the role of luck is a key factor in determining market beating returns.
As for me, well I did walk off the floor of the casino with double my initial investment last night, so surely there was some skill involved...
Back to the Global Macro Grind…
At Hedgeye, as you may know, our view is that you can tilt the investing odds in your favor. This comes from getting the macro right, getting the market trends right (i.e. the prices), and then getting the bottom up stock picks right. Does it always work? Of course not, but over time the grind of putting this all together will help.
One thing that has worked year-to-date is the #Quad2 call of being long of inflation. Specifically, for the year, the oil sector has absolutely crushed the house with the XLE (energy) being the top performer in the SP500 up +44.3% with XLF (financials, also a Quad 2 overweight) being a distant second at +25.3%. The outperformance is set to continue with WTI oil surging to north of $76 a barrel this morning, or to almost 7-year highs.
The move in the price of oil continues to underscore our higher for longer call on inflation as well given its primary role in our inflation nowcast model and easy price comparisons from current levels through year-end. The other important contributor to inflation in our models for inflation is shelter, which comprises about 1/3 of CPI. In the May CPI report, shelter was up +2.2% Y/Y and so a drag on the headline number and below the historical average of between +3.0 and +3.5%.
While there is no perfect data series for looking at where the shelter component of CPI will go prospectively, we probably have to look no further than home prices, which in April based on Case-Schiller came in at +14.3% and, also, rent paid by consumers. On this front my colleague Rob Simone, who leads our coverage of the REIT sector, put together the Chart of the Day, which shows transacted rents for multifamily units up +8.4% in June with easy comparison into Q1 2022. Higher for longer inflation remains the high probability bet if you are in Vegas!
On the economic data front this morning, we have a few data series from Europe that are worth noting. Specifically:
- Eurozone retails sales came in +4.6% M/M and +9.0% Y/Y for May; and
- German Zew economic indicator came in at 63.3 in July versus the prior reading of 79.8, which is a deceleration BUT current situation spiked to 21.9 versus the prior negative reading of -9.1.
The bears could point to a deceleration in the Zew index, but the more important read through is probably the sharp acceleration in retail sales, the still high level of the ZEW (near 10-year highs), and the acceleration of the ZEW’s current situation indicator (view of the economy over the next six months). This data combined with last week’s acceleration in Eurozone Manufacturing PMIs continues to underscore our long European equities theme.
I would be remiss this morning if I didn’t leave you with a Vegas related stock pick. So, for those of you interested in rolling the proverbial bones on Las Vegas, take a look at Red Rock Casinos (RRR), which was a new Best Idea added by Todd Jordan and his team in late June.
The thesis on this one is relatively straight forward, namely 1) RRR is exposed almost entirely to the Locals Las Vegas market, which should be one of the top performing casino markets for a long time to come, 2) population growth, construction boom, and mostly fixed supply will be key macro drivers, 3) margins are coming out of COVID higher than ever (not dissimilar to many retail companies), and 4) the Company is now under leveraged versus its history. Jordan sees RRR as one to “hold and not walk away or run from” as it heads to his target of $55 per share.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 10yr Yield 1.41-1.56% (bullish)
UST 2yr Yield 0.22-0.29% (bullish)
SPX 4 (bullish)
RUT 2 (bullish)
NASDAQ 14,153-14,695 (bullish)
Tech (XLK) 143.03-150.97 (bullish)
Energy (XLE) 53.00-56.31 (bullish)
Financials (XLF) 35.69-37.68 (bullish)
Utilities (XLU) 62.70-64.69 (bearish)
Shanghai Comp 3 (bearish)
Nikkei 28,227-29,232 (bullish)
DAX 15,407-15,804 (bullish)
VIX 14.18-18.50 (bearish)
USD 90.15-92.70 (bearish)
Oil (WTI) 72.74-76.24 (bullish)
Nat Gas 3.34-3.81 (bullish)
Gold 1 (bearish)
Silver 25.66-26.98 (bullish)
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
