This note was originally published at 8am on May 03, 2013 for Hedgeye subscribers.
“Self-control is more indispensible than gunpowder.”
-Henry Morton Stanley
Henry Morton Stanley was one the most well known African explorers of the late 19th century. He is probably most famous for finding the lost Scottish missionary David Livingstone in the small village of Ujiji after an eight month search. Stanley reported that the first words he uttered when finding Livingstone were the now famous, “Dr. Livingstone, I presume?”
To say Stanley was a remarkable man would be an understatement. He was orphaned at an early age and spent his formative years in a work house in Wales. At the age of 15, he crossed the Atlantic as a crewman of a merchant ship and jumped off in New Orleans where he befriended a local merchant and took his name. He then fought in the Civil War before launching a career in journalism. Clearly, Stanley was a bit of a 19th century “Renaissance Man”.
His expeditions into Africa, which among other things established the sources of the Nile and Congo, were widely considered the most grueling of that era. Unlike many of his contemporaries, observers marveled that Stanley never lost his discipline or civility on these long perilous expeditions in the dark heart of Africa. Biographers discovered an interesting fact about Stanley – he spent most of life, as he called it, “experimenting with will.”
As Roy Baumeister writes in “Rediscovering the Greatest Human Strength – Willpower”:
“Having piously lectured his men about the perils of drunkenness and the need to shun sexual temptations in Arica, he knew how conscious his own lapses would be. By creating the public persona of himself as Bula Matari, the unyielding Breaker of Rocks, he forced himself to live up to it. As a result of his oaths and image, Jeal said, “Stanley made it impossible in advance to fail through weakness of will.”
This concept of pre-commitment as a way of maintaining discipline and hitting goals has been proven in spades by Yale economists Ian Ayres through a company he started called stickK.com. Ayres’ company allows individuals to create commitment contracts. The company has found that when a contract is drawn up without a penalty, the person succeeds about 35% of the time. Conversely, when the contract includes a referee (so is public) and a monetary penalty (so accountable) the individual succeeds 80% of the time.
So for you young hedge fund analysts that spend too much time partying in the wilds of Manhattan on the weekends, a quick stop at stickK.com may not be the worst idea to re-establish some discipline.
Back to the global macro grind . . .
This market year has certainly been one that has required the willpower of sticking with what works. There have been many times that all of us could have been shaken out of the investment themes that have been effective this year, but growth stabilizing and strong dollar continue to play out in spades. Nowhere is this seen more clearly than within U.S. sector performance. On the positive have been healthcare and consumer staples which have outperformed the SP500 by about 50%. On the negative, materials is up less than half of the SP500. Unless the macro trends change meaningfully, the right discipline will be to continue to stick with what has been working.
My colleague, and Hedgeye’s U.S. focused economic guru Christian Drake, gave an update on this key theme of growth stabilizing yesterday when he looked at the trifecta of housing, labor and consumer confidence. Specifically, he highlighted:
- Employment - The positive acceleration in labor market trends continued this week with both the seasonally adjusted and non-seasonally adjusted Initial Jobless Claims series showing sharp sequential improvement. The headline number fell 15K to 324K w/w versus the prior week’s unrevised number while the 4-week rolling average in SA claims fell -16.5K w/w to 342K.
- Confidence - The Bloomberg Consumer Confidence Index (Chart of the Day) made a new 5Y high two weeks ago with confidence measures across age and income demographics showing broad improvement. The index held those gains last week and made a new 5Y with this morning’s reading improving to -28.9 from -29.9 w/w. The Conference Board Consumer Confidence as well as the University of Michigan Consumer Sentiment readings were confirmatory with the latest April readings accelerating sequentially to 68.1 and 76.4, respectively.
- Housing - Incremental data over the past week has reflected more of the same as Mortgage Purchase Applications remained at their YTD highs while the Pending Home Sales and Case-Shiller HPI data both accelerated sequentially. The Purchase application data and Pending Home sales numbers both suggest forward housing demand should remain strong. Additionally, President Obama’s likely nomination of Congressman Mel Watt to replace Ed DeMarco as head of the FHFA should be taken as a positive catalyst for housing. DeMarco has opposed underwater principal forgiveness for GSE borrowers – a stance that may be lightened should Watt be confirmed.
Now to be clear, not all economic data has been positive and certainly much of the European data has been depressing. The primary push back we got with this update yesterday is that regional PMIs have been decelerating and sequestration remains a major headwind.
While these points are valid, we continue to believe that the performance of consumer related economic indicators trump other weakness in an economy that is 70% consumption. Last week’s GDP report validated our view as Consumption was up +3.2% year-over-year versus +2.8% and contributed +2.24% of the growth (or 90% of the incremental growth).
Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, EUR/USD, USD/YEN, UST10yr Yield, VIX, and the SP500 are now $1394-1489, $98.13-103.85, $81.46-83.29, $1.29-1.32, 97.11-100.63, 1.63-1.71%, 12.06-14.51, and 1585-1610, respectively.
Enjoy your weekends and stay disciplined!
Keep your head up and stick on the ice,
Daryl G. Jones