“I found the PM not easy to talk to.”
That’s what Eleanor Roosevelt said about her dinner discussions with Winston Churchill in the early 1940s. That’s what I’ve heard plenty of analysts say over the years in this business about their PMs too.
From a leadership perspective, what makes a good PM (Portfolio Manager)? What makes a great one? I’d love to hear your thoughts, because my sense is that there is a best practices answer developing. We are all hostage to the narrow scope of our own personal experiences and confirmation biases.
Of all the hedge fund PMs I’ve had the opportunity to work with, I’d say that Jon Dawson (former Dawson Samberg) was the easiest to talk to. When you are a young analyst, that’s helpful – having a good coach helps you learn. As you mature into a senior analyst, then a junior PM, it’s easy to start talking to yourself.
Back to the Global Macro Grind…
This game isn’t easy. That’s why I like to play it out loud. It’s the ultimate test of the mind. You have to be disciplined but flexible; aggressive, but calm; and patient, but nimble.
Staying in it to win it on the long-side of both US (and Global) Equities for the last 6 weeks hasn’t been easy. The first 17 days of January have left the SP500 stuck right at a 5-year closing high of 1472. I have 6 points of immediate-term upside left.
Contextualizing what that means to me doesn’t start with valuation – it starts with price performance:
- From the recent freak-out Fiscal Cliff low (NOV15) of 1353, the SP500 is up 119 pts (+8.8%)
- From the Bernanke Top (SEP14 intraday top of 1474), the SP500 is down 2 handles
- From the all-time SP500 high (OCT2007), the SP500 is still down -5.9%
Since buying tops isn’t cool (if you bought the SEP14 top, you had to slog for 4 months and be up +8.9% to get back to break-even), you want to be really careful when a market starts signaling that is might be done making higher-highs.
Particularly if you are paid to beat a relative performance bogey, that’s precisely why it’s so hard for PMs to sell-high, and then buy everything back lower. How do you know when a market is going to put in an immediate or intermediate-term top?
Now I am hardly suggesting my PM process is perfect on this front, but it’s better than bad. It’s been built out of making mistakes. And if you ask any absolute return PM in this business with a good to great long-term track record, I guarantee you they tell you this: the key to performing is eliminating big mistakes.
So let’s try to not do that.
If the market takes another run at the bears today, it may very well turn out to be as big a beta mistake being really long US Equities for the next 3 weeks as it was being short them for the last three.
I’m not just randomly choosing this morning to say that – my signals are all about price/volume/volatility:
- Last night was the 1st night in the last 10 trading days that my S&P Sector Model wasn’t what I call “perfectly bullish”
- Yesterday’s close also featured a fresh new negative-divergence with the Russell2000 not making a higher-high
- Since the prior closing high for the Russell (884) was an all-time high, that might matter – all-time is a long time
- Healthcare (XLV) signaled its 1st lower-high in my model of the year (it’s the #2 Sector at +4.5% YTD)
- Financials (XLF) signaled its 2nd consecutive lower-high in my model for the yr (it’s the #1 Sector at +4.6% YTD)
- US Equity Volume registered a bearish signal (SP500 tested making new highs on a down -19% volume signal)
- US Equity Volatility (VIX) signaled immediate-term TRADE oversold at 13.16
- US Equity Market Breadth was negative (44% advancers vs 52% decliners) with the SP500 at the highs
Apple had a 1-day move that explained some of this market skew (Nasdaq up vs Russell down). And that’s where having a quantitative view on a big index name like AAPL helps contextualize the rest of what I am being told to look at.
Since the core principle of how I think about risk management is to Embrace Uncertainty, I don’t know (and don’t really care to attempt to predict), what my signals are going to tell me. I have learned to shut-up, and just listen to them.
It’s not easy to listen. But, as my man Hemingway said, “I like to listen. I have learned a great deal from listening carefully. Most people never listen.”
Our immediate-term Risk Ranges for Gold, Oil (Brent), Corn, US Dollar, USD/YEN, UST10yr Yield, and the SP500 are now $1, $109.08-110.85, $7.12-7.41, $79.33-79.98 (USD is overbought), 88.06-89.85 (we re-shorted Yen via FXY yesterday), 1.81-1.89%, and 1, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
This note was originally published at 8am on January 03, 2013 for Hedgeye subscribers.
“It is gone forever.”
That’s what legendary investor, Jeremy Grantham, started off his Quarterly Letter with in November. It was titled “On the Road to Zero Growth” and was published right around the time that the Barron’s cover read “Are We Headed For A Recession” (November 12, 2012).
I have a tremendous amount of respect for Grantham’s long-term TAIL risk work, but that doesn’t mean I always agree with him; especially on timing. For the last six weeks, our Global Growth Model has explicitly disagreed with A) a global recession and/or B) anything that remotely resembles 1% US growth, never mind 0%.
Since the mid-December cover of The Economist was titled “A Rough Guide To Hell”, I think being relatively bullish on stocks (and bearish on both Bonds and Gold) here is still the contrarian call to make. I don’t make calls on forever.
Back to the Global Macro Grind…
I’ll come back to the multi-duration, multi-factor, risk management support for the aforementioned research view in a few minutes. First, let’s just take a moment to respect what yesterday was – easily the most bullish 1-day move for growth expectations in at least a year.
- After holding its 1419 line of TREND support, the SP500 ripped to within 0.8% of its September 2012 intraday high
- The Russell 2000 closed up +2.9%, making an ALL-TIME higher-high at 873 (versus 865 in April of 2011)!
- Both VOLUME and VOLATILITY signals finally confirmed the PRICE moves – and it was broad based, across sectors
In our multi-duration S&P Sector Model, all 9 sectors are bullish on all 3 of our core risk management durations (TRADE, TREND, and TAIL) for the first time since December of 2011. We call those Bullish Formations.
Yes, in spite of the Fed and Congress – global growth stabilized as expectations for future Fed Intervention came down huge (CFTC Futures and Options net long contracts dropped -49.5% from their all-time top in September to the December lows).
Rather than using Grantham’s duration (his 0% growth forecasts extend out to the years 2030-2050 – yes, you can fire me if I ever try durations like that), let’s focus on where at least 90% of money managers have to focus on these days – the intermediate-term TREND.
- Let’s start with where US GDP Growth is at – at least +2-3%, not 0 to 1%
- You can get mad about how Obama is getting to +2-3% (spending), but you also have to understand it
- Government spending is tracking +9.5% on an annualized basis – that’s a big pop
*Reminder: GDP = C + I + G + (EX-IM). So, given that Congress just yard-saled the can on spending cuts, the G (government spending), is not going to be a headwind for Q113 GDP either. It might be in Q2 or Q3 – we’ll let you know when we think we know.
And a lot can happen in between now and Q2. What if the employment report tomorrow starts getting consensus thinking about a 6% handle on the US unemployment rate?
Oh, no you didn’t Bernanke – you didn’t take your “experimentation” too far in targeting random numbers now did you? What if Bernanke is what he usually is – wrong on his growth forecasts? What if unemployment rate expectations start to fall towards 6.5% in 2013 instead of in 2017? Inquiring Bond and Gold bulls would like to know…
I have no idea what the unemployment rate is going to be tomorrow – but what I can tell you is that:
- Yesterday’s Employment component of the US manufacturing PMI reading accelerated to 52.7 in DEC vs 48.4 NOV
- Weekly US Jobless Claims have been tracking well below our critical employment growth level of 385,000
- Both Bonds and Gold have been signaling this shift in employment growth stabilizing for the last 3 weeks
Again, this doesn’t mean I am bullish on US growth forever. To the contrary, what I am really telling you is to really respect that Big Government Intervention perpetuating short-term economic cycles works both ways.
Growth scares work just as well on the upside as they do on the downside. And if the market is sniffing this one out right, wouldn’t it be ironic and deserving, all at once, for Ben Bernanke’s latest policy expectations gamble to pop the biggest bubble of them all – bonds.
Fund flows out of bonds and into stocks would come back to this market in a hurry. The US stock market perma-bulls have been waiting for that train since 2007. If #GrowthStabilizing holds, that loco market machine may have already left the station.
Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1671-1690, $110.39-112.61, $3.61-3.77, $79.49-80.14, $1.31-1.33, 1.78-1.85%, and 1429-1474, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
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Takeaway: Order and Backlog data, along with signs of Chinese competitive entry in offshore, continue support the short side in SK shipbuilders.
Shipbuilding Update: Walking Down a Long Plank
- Backlogs Sinking Fast: Consistent with long down-cycle in commercial shipbuilding, there has been no meaningful rebound in orders. That has left shipbuilders to drain backlogs, reporting revenues that relate to years-old demand. Backlogs have been on a steady downtrend, inflating revenues relative current demand. Chinese backlogs fell from 169.3 mil tons at the end of 2011 to 116.4 mil tons at the end of September.
- Short Fuse: Samsung Heavy has only about two years of work left in backlog, while Hyundai Heavy has only about 1.5 years. When backlogs with high margin orders are gone, revenues and profits should reflect the more averse current market. Using multiples of income statement items produced by draining backlogs is not a reasonable valuation approach, in our view.
- Pricing Highly Competitive: Global shipyards are desperate for new orders to keep their docks full (article). As backlogs continue to fall, pricing is likely to become irrational, in our view. Chinese competitors may be particularly aggressive. This will happen for a long time, if previous cycles are any guide.
- About Offshore: It has been our contention that Chinese shipyards will become increasingly proficient in offshore energy production vessels, undermining the bullish thesis on South Korean shipbuilders. Since this cycle will take upwards of a decade, the Chinese have plenty of time to enter every relevant offshore market, in our view. Chinese entry has continued to be aggressive, as discussed in the WSJ yesterday here.
- Performance & Opportunity: Since we first posted a note on the short opportunity in the Korean shipbuilders here, Samsung Heavy has only underperformed the KOSPI by ~ 8%. We think there is a good deal more that this short has to run as favorably priced orders in backlog are not replaced and margins contract toward historical (read: low) norms. We value Samsung Heavy at around krw 10000-14000 in our base-case DCF vs. a current market price of krw 37800 and we expect that gap to close over the next few years.
- Additional Information: We have additional background on the Shipbuilding industry, so feel free to follow-up if this industry is of interest.
Jay Van Sciver, CFA
HEDGEYE RISK MANAGEMENT
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