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Scouting Information

This note was originally published October 19, 2012 at 07:32 in Early Look

“What defined a good scout? Finding out information that other people can’t.”

-Billy Beane

 

I was eating a delicious lobster roll on a pier in Camden, Maine yesterday and all of a sudden my iPhone went batty. The market went from straight up, to straight down. Google was “halted.”

 

So, I jogged back up to my hotel room, fired up my machines, ran GOOG through my quantitative screens – and there it was – someone knew something! Someone always does. They don’t always get caught.

 

Most people in this business are honest, hard working and intelligent enough to not take on orange jump suit risk when they buy or sell securities. But some people are so “smart” they are stupid. This isn’t baseball. “Finding out information that other people can’t”, in many cases, is illegal. That’s why we have to continuously evolve our analytical processes so that we can win more than we lose.

 

Back to the Global Macro Grind

 

The aforementioned quotes come from another excellent chapter in Nate Silver’s The Signal And The Noise, “All I Care About is W’s and L’s.” Silver has credibility because he built (and sold) a projection system for baseball called PECOTA. The chapter’s title is a quote from the “not physically gifted” Dustin Pedroia of the Boston Red Sox – a player that PECOTA screened as a stud when scouts disagreed.

 

That’s where you really win in this game – when you make a bet on a stock, commodity, bond, etc. that sits outside of consensus. This doesn’t just happen. Scouting for ideas requires a fast and flexible process. If you are doing it legally, it’s a grind. “Billy Beane, the protagonist of Moneyball, sees relentless information gathering as the secret to good scouting.” (page 99)

 

As you build your team, machines, and processes, it actually gets harder as you achieve success. People who cut corners and cheat don’t want you to win. They’ll do whatever it takes to take you down. So, you have to be resilient. As Silver reminds us, the real lesson of Moneyball is that Beane “was very threatening to people in the game; it seemed to imply that their jobs and livelihoods were at stake.”

 

Here’s what our multi-factor, multi-duration, research and risk management process is telling me this morning:

  1. US Dollar Index held its long-term TAIL line of $78.11 support
  2. Euro (EUR/USD) failed, again, at its long-term TAIL risk line of $1.316 resistance
  3. US Treasury Yield (10yr) made another lower-high vs the SEP high of 1.89%
  4. SP500 made a lower-high on accelerating volume (on yesterday’s down move) vs SEP’s 1474 high
  5. Russell 2000 continues to make a series of lower-highs versus the 846 closing high of March 2012
  6. US Equity Volatility (VIX) continues to make higher long-term lows, holding 14.22 TAIL risk support
  7. Technology Stocks (XLK) have gone from the market’s top performer to its worst (down -2.8% OCT)
  8. Financial Stocks (XLF) are immediate-term TRADE overbought, leading what’s left of the market’s gainers
  9. Chinese Stocks (Shanghai Comp) failed to show any follow through at its 2141 TREND line overnight
  10. European Stocks are making lower-highs, across the board, versus their SEP closing highs (7451 DAX)
  11. Commodities (CRB Index) remain a bubble that’s popping; TAIL risk line for CRB = 312
  12. Gold failed to overcome its immediate-term TRADE line of 1761 resistance yesterday on green
  13. Copper, down -1.1% this morning, failed, again, at TRADE ($3.76) and TAIL ($3.95) resistance 

I’ll stop there. These are both quantitative signals and noise (they both matter). And stopping on lucky 13 on the anniversary of 1987’s Black Monday is just me being cute. So is the storytelling that “everyone is bearish and you have to buy stocks because they are up YTD.” After a -23% down day on October 19th of 1987, the market still “closed up YTD” too.

 

On the research side (very different than the quantitative side of what we do, but critically complimentary), here’s what’s new this morning:

  1. Microsoft (MSFT) joins IBM, INTC, and GOOG as just one more example of growth and #EarningsSlowing
  2. Chinese Foreign Investment (FDI) dropped -6.8% y/y in SEP (vs -1.4% AUG), the 10th month of outflows in the last 11
  3. Federal Reserve Balance Sheet assets of $2.849 TRILLION is actually falling (slope) y/y at this point by -$6.6B this wk

Slapping all 16 of those pieces of Hedgeye Scouting Information onto my notebook this morning doesn’t make me particularly bullish on anything other than buying US Dollars and bonds. Why pretend to be smarter than the market when the market can tell me when not to swing at outside pitches?

 

One by one, they’re picking off the bad guys in this business. Using steroids to juice returns is no longer cool. As Nate Silver writes at the end of chapter 3, “in the most competitive industries, like sports, the best forecasters must constantly innovate…. The key is to develop tools and habits so that you are more often looking for ideas and information in the right places.” (page 106)

 

It’s October. The good news is it’s a cleaner game than it was 5 years ago and they don’t have Candy or replacement umps. Batter up!

 

My immediate-term risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, GOOG, and the SP500 are now $1731-1751, $111.71-113.54, $79.02-79.82, $1.29-1.31, 1.74-1.82%, $687-731, and 1444-1468, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Scouting Information - Chart of the Day

 

Scouting Information - Virtual Portfolio


ENERGY: Becoming Efficient

Hedgeye Energy Analyst Kevin Kaiser presents us with a unique chart for today. It shows recent gains in fuel efficiency as well as target rates for several different countries which make up some of the world’s largest economies. Says Kaiser, “The long-term impact of improvements in fuel efficiency on oil demand is underestimated, in our view.”

 

ENERGY: Becoming Efficient - 1


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Ice-ing On The Cake

ICE-ING ON THE CAKE 

 

CLIENT TALKING POINTS

 

ICE-ING ON THE CAKE

IntercontinentalExchange (ICE), rival to CME Group, is going to close its open outcry trading pits in lower Manhattan today. It is the end of an era for those who are used to yelling and shouting orders for everything from cotton to cocoa. The proliferation of electronic trading across multiple asset classes has helped improved price discovery, costs and availability to traders both retail and institutional. There are hardly any independent futures exchanges left in the United States aside from the two giants: CME Group and ICE. CME’s floor pits in Chicago are hanging on borrowed time and will likely close sometime in the near future. It’s the end of an era and the beginning of a new one - for better or for worse.

 

 

A SLOWDOWN IN EARNINGS

Call us crazy, but our #EarningsSlowing theme continues to gain traction as more companies report this month. It seems that everyone from Microsoft (MSFT) to Morgan Stanley (MS) to AMD (AMD) are feeling the hurt from the global macroeconomic environment. If you think stocks look “cheap” here and are poised for another “big time rally,” you are mistaken. Cheap gets cheaper and the November election will play a big role in where we’re headed as a country and economy into 2013.

 

_______________________________________________________

 

ASSET ALLOCATION

 

Cash:               DOWN

 

U.S. Equities:   Flat

 

Int'l Equities:   Flat   

 

Commodities: Flat

 

Fixed Income:  UP

 

Int'l Currencies: Flat  

 

 

_______________________________________________________

 

TOP LONG IDEAS

 

BRINKER INTL (EAT)

Remains our top long in casual dining as new sales layers (pizza) and strong-performing remodels (~5% comps) should maintain sales momentum. The company is continuing to enhance returns for shareholders through share buybacks . The stock trades at a discount to DIN (7.7x vs 9.3x EV/EBITDA) and in line with the group at 7.3x.

  • TRADE:  LONG
  • TREND:  LONG
  • TAIL:      LONG            

 

PACCAR (PCAR)

Emissions regulations in the US focusing on greenhouse gases should end the disruptive pre-buy cycle and allow PCAR to improve margins. Improved capacity utilization, truck fleet aging, and less volatile used truck prices all should support higher long-run profitability. In the near-term, Paccar may benefit from engine certification issues at Navistar, allowing it to gain market share. Longer-term, Paccar enjos a strong position in a structurally advantaged industry and an attractive valuation.

  • TRADE:  LONG
  • TREND:  LONG
  • TAIL:      LONG

 

HCA HOLDINGS (HCA)

While political and reimbursement risk will remain near-term concerns, on the fundamental side we continue to expect accelerating outpatient growth alongside further strength in pricing as acuity improves thru 1Q13. Flu trends may provide an incremental benefit on the quarter and our expectation for a birth recovery should support patient surgery growth over the intermediate term. Supply costs should remain a source of topline & earnings upside going forward.

  • TRADE:  NEUTRAL
  • TREND:  LONG
  • TAIL:      LONG

  

_______________________________________________________

 

THREE FOR THE ROAD

 

TWEET OF THE DAY

“BREAKING: Obama credits Tiger win to GM bailout #fairshare” -@KeithMcCullough

 

 

QUOTE OF THE DAY

“The Bible tells us to love our neighbors, and also to love our enemies; probably because they are generally the same people.” -G.K. Chesterton

                       

 

STAT OF THE DAY

Microsoft profit down 22% on falling sales of Windows. 

 

 


THE M3: CHANGI TRAFFIC

The Macau Metro Monitor, October 19, 2012

 

 

MONTHLY BREAKDOWN OF PASSENGER MOVEMENTS Changi Airport Group

Passenger traffic at Singapore's Changi Airport rose 4.84% YoY in September to 4,002,344.

 

THE M3: CHANGI TRAFFIC - spore


Shock Me

This note was originally published at 8am on October 05, 2012 for Hedgeye subscribers.

“Shocks create change.”

-Myron Scholes

 

Ex the Nobel Prize thing, Mr. Scholes and I have a few things in common. We’re both Canadian-American economists. We’re both from Northern Ontario (he’s from the home of the Timmins’ Benjamin Bears). We’re both ex-hedge fund managers!

 

Admittedly, Scholes’ 1998 blow up of Long-Term Capital Management was more shocking than ours at Carlyle in 2007. His team got a bailout. Ours didn’t. But we’ve both had an opportunity to learn from our mistakes.

 

In one of the most timely chapters of The 4% Solution, “Not All Growth Is Good”, Scholes made some of the simplest but relevant risk management points I have read in a while: “We have to encourage success (and allow for failure), because that is how we grow… we need to remain flexible… adapt to changing circumstances… let’s not let a good shock go to waste.” (page 115)

 

Back to the Global Macro Grind…

 

I was on the road this week in both Denver, Colorado and Kansas City, Missouri. I love the road. It’s where I became both an athlete and an investor. As a risk manager, the road is where I get a non-groupthink pulse in this country.

 

Every cab I got into in Kansas City yesterday was blaring Rush Limbaugh. Every cabbie was all fired up about the debate. No matter what your politics, Mitt Romney shocked the country yesterday. That’s what this country (and market) needed.

 

Bobby Valentine got a little shock of his own last night too. I’m guessing Red Sox fans probably appreciate the accountability assigned to wins, losses, and leadership.  That’s the America I immigrated to in the 1990s. I think it’s the one we all love too.

 

Shocks create change

 

Or at least, in free-market economy, they should. Could a change in overall US Growth Expectations shock the country? You tell me. If my macro model gets as much as a whiff of a +3% US GDP Growth probability that’s greater than 33%, I may have to dress up as a bull for Halloween.

 

That’s scary.

 

And so was the Old Wall’s March 2012 consensus that the USA would see +3-4% GDP growth with all this debt and uncertainty. While I have had no problem leaning longer in the last 3 weeks, I’ve had even less of a problem selling on green.

 

Why? Because #EarningsSlowing is going to continue to shock the bulls in certain stocks throughout earnings season. That starts next week. So, no matter where we go on a made-up and politically massaged government number today, there we will be.

 

What if Romney’s Rally wasn’t a one off?

  1. Financials (XLF) could continue to shock you to the upside (Financials lead the market in October at +3.0%)
  2. Energy stocks (XLE) could continue to shock you to the downside (Energy lead losers in October at -0.4%)
  3. Strong Dollar, Strong America (higher long-term lows for the USD) could surprise the world

What if Romney continues to build momentum, but Earnings Season is worse than I expect?

  1. I don’t know
  2. But the bond market could continue to be right in 2012, with bond yields making lower-lows
  3. And, on mean reversion risk alone, the SP500 could drop to 1419 (-3%) in a day

A 3% down day? Never. It’s different this time. Right?

 

Right. Right. Until it isn’t, I guess. India’s stock market (the Nifty) dropped -16% this morning on “erroneous orders” and they had to halt trading for 15 minutes. Imagine that happened here? It has. So you don’t have to imagine too hard.

 

This market is as laden with both risk and opportunity right now as I can remember. I like to be shocked the right way. But I fully expect to be shocked, at any given moment of my centrally planned day, the wrong way.

 

And that’s all I can say about that.

 

My immediate-term risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, 10yr UST Yield, and the SP500 are now $1770-1794, $108.41-111.89, $79.29-80.13, $1.29-1.31, 1.59-1.73%, and 1446-1466, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Shock Me - Chart of the Day

 

Shock Me - Virtual Portfolio


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