Things

One of my favorite investment process quotes comes from Warren Buffett, where he likens investing to playing bridge, “the approach and strategies are very similar in that you gather all the information you can and then keep adding to that base of information as things develop.”

Depending on your investment style, these “things” that Buffett alludes to, can most certainly vary. While it is sad that some still use a whisper of “Blue Horseshoe” as their dominant sourcing mechanism for information, there are plenty of investors out there who are well equipped with process oriented picks and shovels that combine global macro with bottoms up stock picking.

This morning is a great example of how we use both here at Research Edge. Yesterday, in our “Hedgeye Portfolio” you’ll see that we repurchased our Wal-Mart (WMT) position, ahead of their quarterly report today. This has been a fundamental bottoms up call that we have been bullish on since November of 2007. Yes, we have disclosed when we have sold strength into Street euphoria a few times, but we have also consistently bought weakness because my teammates, who are some of the best global consumer sector analysts in the world, like it. Buy Low, Sell High.

At the same time, we’re short Japan, which closed down another -51 basis points overnight. We’re also long a bag full of waterproof US Dollar denominated cash that has appreciated +6% in the last month. I outlined a proactive plan of moving to 85% cash ahead of what I thought was going to be a volatile 2 weeks of trading into a negative unemployment report and out of what should be a positive inflation report this morning. Once this CPI number is printed today, the “things” I care about will have indeed “developed”, and I can start considering the redeployment of capital.

With US Earnings Reporting season out of the way, we are going to get back to “macro” time. Obama will be back from his vacation in Hawaii, the Russians will be trying to explain why they are behaving like its 1968 all over again (when they invaded Czechoslovakia and took the capital), and John Thain at Merrill will contemplate whether or not to cut his dividend. So, what do we do next?

My first plan is always to wait. As a friend of mine likes to say, “the plan is … that plans will change”. I am data dependent, and that’s just the way that it is. On the global trading front, there are a few interesting developments to consider. One is re-shorting India. I have been out of this position for a month, and the BSE Sensex Index has rallied +17% during the same period that the S&P 500 put in that “bottom” that so many of the hopeful bulls are starting to call it from July 14th. India’s industrial production growth numbers are decelerating faster than a Chinese synchronized diver slicing into the Olympic pool – now you see it, then you don’t!

At -2.8% for August to date, the Singapore Dollar is chasing the Japanese Yen lower for worst Asian currency performer of the month. The world has slowed and Asian trading, across asset classes, is a leading indicator informing us that “things are developing” at a deteriorating pace!

Europe doesn’t look any better, so don’t expect me to be buying anything there anytime soon. The Euro is only a decade old don’t forget, and the newly formed Team “Euro Zone” is entering its first significant recession of consequence. Do you expect the Europeans to hold hands during times of adversity or point fingers? Russia’s answer is neither – they’d rather just start a war and get on with it.

Fundamentally, the US market still has some interesting pockets of security specific opportunity. I like liquidity; I like Wal-Mart; I like Hershey (HSY); and Tom Tobin and I still like Big Cap Pharma (Johnson & Johnson (JNJ), in particular). For the rest of our solidly positive year to date portfolio, you’d have to be a client to get a look at the “things” we like.

Best of luck out there today,
KM



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