"Teamwork is the ability to work together toward a common vision. The ability to direct individual accomplishments toward organizational objectives. It is the fuel that allows common people to attain uncommon results."
– Andrew Carnegie
It is no easy feat to achieve uncommon results as a stock market operator. In the path to outperforming the market, one will have to get the macro call correct, the positions sizes correct, the market exposures correct, and, like most other things in life, probably also need a little luck.
One thing that certainly helps us all on the path to stock market glory, though, is having the right team around you to support your research and decision making. As we've progressed as a firm, we increasingly see the benefit of a strong team every day.
In aggregate the Hedgeye Research Team comprises a few major areas:
- Demography - This group is led by Neil Howe and focuses on longer term thinking relating to the growth (or as it relates Japan the decline) of populations. Then within that, the evolution and preferences of specific generations.
- Policy - Our team is in D.C. is led by the ageless J.T. Taylor and the objective of this group is to try to stay ahead, or at least abreast, of any significant policy changes that may have a meaningful impact on the markets – both generally and within specific industries.
- Data - We have continued to expand this group over time, but their job is to help us crunch the reams of data that exist in the world to hopefully develop more predictive models and improve our results. Currently, we are running or supporting some 150 unique data trackers across economies, industries, and companies.
- Sectors - These are, of course, are colleagues that focus on specific sectors and generate the long and short ideas. We've consistently added to this group over time and will likely have a few more world class research analysts by early next year. Afterall, everyone loves a good stock pick!
- Macro - The evolution of our Macro Team also continues. Originally when Hedgeye started, it was just Keith and myself and we now have a team of six colleagues that are grinding every day to support, improve, and expand on our proprietary macro framework.
All of this comes together daily in our Research Call every morning, which we then release to the public a few hours later. (If you don't have access to our Research Call, please ping to sign up.)
To me, the best part about working on a great team is the relationships and friendships that develop over time by being in the foxhole together every day. We will get things wrongs, we will have big wins, but ultimately that trust and belief in your teammates is paramount. It is also great, when they give you the benefit of the doubt for getting the Early Look draft in a little late . . .
Back to the Global Macro Grind...
As we continue to test all-time highs, it has been an interesting quarter to say the least. At the start of the quarter, our models had a conditional probability of some 95% that we would be in #Quad4. Our market signals, on the other hand, were suggesting that it was likely to evolve into #Quad3.
As the data has been reported, this is exactly how the quarter has played out. Currently based on our GIP Model, the probabilities for Q3 sit at 52.9% for #Quad3 and 44.6% for #Quad4. So, as we expected, with incoming data the probabilities have increased meaningfully for #Quad3 (stagflation!) this quarter.
Those investors waiting for a deflationary Armageddon may also be disappointed with our conditional probabilities for #Quads in Q4. At the moment, it is a fairly fair fight across conditional probabilities. Currently, these conditional probabilities sit at: #Quad1 30.8%, #Quad2 15.2%, #Quad3 17.8%, and #Quad4 36.2%.
As Keith and I have been discussing on The Macro Show, and the data recently has been suggesting, it again seems unlikely that #Quad4 ultimately prevails for Q4. Let’s review some of the recent data this week:
- U.S. Flash Manufacturing PMI for August decelerated slightly from July to 61.2, but the prices component (inflation) accelerated to another all-time high at 75.9;
- Similar read through in Eurozone Composite Flash PMI for August, which decelerated slightly to 59.5 (though still near a 15-year high), while supplier delivery times and prices remained again near all time highs and up double digits Y/Y;
- In the German IFO report from a yesterday, 70% of industrial companies see supply chain constraints and 2/3s of companies intend to increase prices;
- Finally, the July Capital Goods reading from yesterday, which is a proxy for corporate cap-ex, came in at +0.05% M/M, +15.6% Y/Y, and +8.1% on 2-year average . . . so was downright #Quad2 in terms of growth (chart attached).
So, inflation remains very sticky, if not accelerating, and the main components of economic growth while decelerating a bit from Q2 . . . are still showing strong Y/Y organic growth and may potentially be setting up for an acceleration into year-end. We could especially see this globally, if the recent COVID outbreak continues to abate.
Based on our view of the economic set up, our current top ETFs ranked by signal strength are: LQD, XLU, PTY, XLRE, EWL, XLI, EWG, EWQ, QQQ, INFL, NIB.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 10yr Yield 1.22-1.39% (bullish)
UST 2yr Yield 0.21-0.26% (bullish)
SPX 4 (bullish)
RUT 2139-2259 (neutral)
NASDAQ 14,714-15,166 (bullish)
REITS (XLRE) 46.19-47.22 (bullish)
Tech (XLK) 153.61-159.16 (bullish)
Utilities (XLU) 68.04-70.11 (bullish)
Energy (XLE) 45.34-50.19 (bullish)
Shanghai Comp 3 (bearish)
Nikkei 26,970-28,064 (bearish)
DAX 15,703-16,040 (bullish)
VIX 13.67-19.43 (bearish)
USD 92.24-93.61 (neutral)
Oil (WTI) 62.08-70.28 (bullish)
Nat Gas 3.76-4.11 (bullish)
Gold 1 (bullish)
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
