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Trade of the Day: NSM

Takeaway: We bought back Nationstar (NSM) at 10:38am this morning at $41.11.

Buying back what we sold yesterday on green (a beauty +5% intraday rip). Hat tip to Hedgeye Jedi Financial Sector Head Josh Steiner. Steiner's bull case hasn't changed here. NSM’s price has. We’re just doing our best to risk manage the range of a high beta stock. 

 

Trade of the Day: NSM - NSM

 


Passing the Torch

This note was originally published May 24, 2013 at 08:04 in Newsletter

“To you from failing hands we throw the torch.  Be yours to hold it high.”

-Lieutenant-Colonel  John McCrae

 

Most of you probably haven’t played for the Montreal Canadiens, but if you had, you would know that the quote above is painted on the wall in the Canadiens locker room.  The idea is that current players are expected to live up to traditions of the past.  The line itself is taken from a poem called, “In Flanders Fields”, which was written by Dr. John McCrae in World War I.

 

McCrae enrolled at the age of 41 with Canadian Expeditionary Force following the outbreak of World War I.  Instead of joining the medical corps, which he had the option to do based on age and training, he instead volunteered to join a fighting unit as a gunner and medical officer and was immediately sent to the German front in Belgium.

 

Flanders is a region in Belgium where Germany launched the first chemical attack in the war during the second battle of Ypres.    At the conclusion of the battle, McCrae was inspired to write the poem after seeing the poppies grow on the graves of the dead at Ypres, thus the opening line of the poem, “In Flanders fields the poppies blow.” To this day, Canadians wear poppies on Remembrance Day in memory of those who died while serving in the Canadian military.

 

Back to the global macro grind . . .

 

This idea of transition from past to present is one we discussed in great detail on an expert call yesterday with Jim Rickards, the author of “Currency Wars: The Making of the Next Global Crisis”.  The focus of our discussion of transition related to the Federal Reserve. Specifically, what will happen as Chairman Bernanke’s term ends in January 2014?

 

On a basic level, if Bernanke moves on, whoever comes in to lead the Fed will be burdened with unwinding the most dovish monetary policy in the history of central banking, including the longest run of zero interest rate policy and a quantitative easing  program that is without parallel. Ultimately, the Fed will have to unwind the $3.4 trillion in securities on its balance sheet.  That torch is passed to you Mr. or Mrs. Next Fed Head!

 

One area in which we would hope to see an improvement from the next Chairman of the Federal Reserve is in economic projections.  In the Chart of the Day, we look at the U.S. GDP growth projections supplied by the Fed going back to the 2010.  Here is the skinny:

  • In 2010, the Fed’s peak GDP growth projection was 3.5%, which missed the actual number by 32%;
  • In 2011, the Fed’s peak GDP growth projection was 3.7%, which missed the actual number by 51%; and
  • In 2012, the Fed’s peak GDP growth projection was 2.7%, which missed the actual number by 19%.

If you didn’t know that economics isn’t a science, well, now you know. 

 

In terms of improving their internal models, we may just send the new Chairman of the Federal Reserve a Hedgeye dart board and some darts.  On a serious note, the fundamental problem with such shoddy projections is that the Federal Reserve is actually setting monetary policy based on these numbers, which currently involves purchasing $85 billion in securities monthly.  It should be no surprise then that we have market volatility.  

 

Speaking of central banking induced volatility, the Nikkei had a 7% intraday swing yesterday.  What was the catalyst you ask?  The Bank of Japan’s Kuroda came out midday and said that the “BOJ has announced sufficient monetary easing.”  Obviously, the markets don’t believe him.  Neither do we and therefore we are keeping our short Japanese Yen recommendation in our Best Ideas product.  We are also negative on JGBs on the recent break out above 1% on the 10-year.

 

No surprise, the Keynesian economic standard bearer Paul Krugman is taking the other side of our research this morning in an op-ed in the New York Times and calling, “Japan the Model”.  Like a fledgling hedge fund analyst that has to defend his position to the seasoned portfolio manager, Krugman finds the facts that best support his case.  We behavioral economists call this framing.

 

Interestingly, on one hand Krugman is heralding the success of Japanese monetary policy because “Japanese stocks have soared”.  Conversely though, he tells us not to worry about the recent sharp sell-off in Japanese equities when he writes:

 

“I’m old enough to remember Black Monday in 1987, when U.S. stocks suddenly fell more than 20 percent for no obvious reason, and the ongoing economic recovery suffered not at all.”

 

You can’t have your cake and eat it too Dr. Krugman!

 

Our ever savvy Healthcare sector head Tom Tobin offers an alternative thesis to the long decline of Japan’s economy, which is simply that over the last 50 years the population growth rate has been in steady decline.  Not surprisingly, this decline in population growth has correlated very closely with GDP growth.  That’s not our prognostication on the holy pages of the New York Times, but rather the simple math.

 

The fundamental problem that Keynesian economists who advocate printing to infinity and beyond have is that they can’t explain how printing leads to more jobs and higher employment.  Simply put, that is because debasing a currency doesn’t incentivize companies to invest and hire.  In fact, it does the opposite.

 

We are happy to continue to trade the market volatility induced by Keynesian economics, but at some point we do hope that the torch is passed on from these charlatans.

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, Weimar Nikkei, and the SP500 are now $1343-1424, $101.61-103.92, $83.24-84.29, 101.42-103.69, 1.95-2.05%, 13.11-15.73, 14,271-15,097, and 1634-1657, respectively.

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

Passing the Torch - xx. chart of the day

 


Stick With What's Working

Client Talking Points

S&P500

Excellent month to be long our #GrowthAccelerating call. S&P 500 +3.5% in May.  No, we weren’t in the “Sell in May, Go away” camp. Not by a long shot. Financials up almost 8% for the month. Talk about sector divergence: utilities down over 8% for month. 1600 basis point divergence there. Futures were down this morning which represented another buying opportunity. When you’re long #GrowthAccelerating as we are, you don’t buy gold or Treasuries. You buy financials and consumption. Stick with what’s working.

USD

We bought back one of our big macro favorites #StrongDollar yesterday. It was oversold within our bullish intermediate-term trend. Should have shorted the Euro which banged the top end of our risk range at 1.30. Yes, I make mistakes sometimes.

Asset Allocation

CASH 30% US EQUITIES 22%
INTL EQUITIES 18% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 30%

Top Long Ideas

Company Ticker Sector Duration
IGT

Decent earnings visibility, stabilized market share, and aggressive share repurchases should keep a floor on the stock.  Near-term earnings, potentially big orders from Oregon and South Dakota, and news of proliferating gaming domestically could provide near term catalysts for a stock that trades at only 11x EPS.  We believe that multiple is unsustainably low – and management likely agrees given the buyback – for a company with the balance sheet and strong cash flow as IGT.  Given private equity’s interest in WMS (they lost out to SGMS) – a company similar to IGT that unlike IGT generates little free cash – we wouldn’t rule out a privatizing transaction to realize the inherent value in this company.  

WWW

WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. 

FDX

With FedEx Express margins at a 30+ year low and 4-7 percentage points behind competitors, the opportunity for effective cost reductions appears significant. FedEx Ground is using its structural advantages to take market share from UPS. FDX competes in a highly consolidated industry with rational pricing. Both the Ground and Express divisions could be separately worth more than FDX’s current market value, in our view.

Three for the Road

TWEET OF THE DAY

Tons of "smart" people in this business; their intelligence often impedes their mental flexibility

@KeithMcCullough

QUOTE OF THE DAY

“I have noticed even people who claim everything is predestined, and that we can do nothing to change it, look before they cross the road.”  - Stephen Hawking

STAT OF THE DAY

72,600,000: Record number of Americans enrolled in Medicaid for at least one month in fiscal 2012.


investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

Morning Reads From Our Research Team

Takeaway: A brief look at what the Hedgeye Research Team is reading today.

Daryl Jones - Macro 

Global Oil Demand Seen Falling: 'Cocktail for Weaker Prices' (via Gulf Times)

Chinese Sovereign Fund Shifts Focus to U.S. Real Estate; How This Will Affect Home Prices (via Trefis)

 

Josh Steiner - Financials

Payday Lenders Evading Rules Pivot to Installment Loans (via Bloomberg)

For a Pundit's Popularity, Confidence Trumps Accuracy (via Washington State University)

 

Howard Penney - Restaurants

Record Unemployment, Low Inflation Underline Europe's Pain (via Reuters)

 

Jonathan Casteleyn - Financials

Ken Fisher: Don't Pigeonhole Your Stocks (via Forbes

 

Matt Hedrick - Macro

Merkel Tells Hollande Reform Is Price of Deficit Waiver (via Bloomberg)

Some Italian Banks Risk Problems, Central Bank Chief (via Reuters)

 

 

 

 

 



Macro Imagination

“I raise my flags, don my clothes
It's a revolution, I suppose.”

-Imagine Dragons

 

For the last five plus years, Hedgeye has delivered an Early Look to your inbox every market morning.  Primarily, it has been Keith delivering the goods with the rest of the team chipping in from time to time.  With over 1,000 Early Looks written, you would think it takes some sort of Macro Imagination to get these notes out the door every morning. 

 

Fortunately for us the world provides a great amount of economic fodder and this morning is no exception, but to be fair some amount of creativity is required to keep these notes at least somewhat interesting.  Moreover our research team, like your teams, requires creativity to generate interesting investment ideas.  But, what exactly is the root of creativity?

 

A study by Jordan Peterson of the University of Toronto found that the, “decreased latent inhibition of environment stimuli appears to correlate with greater creativity among people with high IQ.”  In layman’s terms, the research says that people whose brains are more open to stimuli from the outside environment will likely be more creative.

 

Conversely, the risk of too much outside stimuli is mental illness due to overload.  In this regard, the differentiator between creativity and madness is a good working memory and a high IQ. In essence, with these attributes a person has the capacity to “think about many things at once, discriminate among ideas and find patterns”.  Without them, one can’t handle the increased stimuli.

 

So even if we know the root of creativity and innovation, how do we accelerate it within our companies and ourselves?  Interestingly social networks may be giving us a huge leg up in this regard.  According to Martin Ruef from Stanford Business School:

 

“Entrepreneurs who spend more time with a diverse network of strong and weak ties...are three times more likely to innovate than entrepreneurs stuck within a uniform network."

 

In a nutshell, creative people are more open to outside stimuli and best leverage that creativity when exposed to broad network of loose ties. (And just think, my ex-girlfriend used to tell me I spent too much time on Facebook!)

 

Back to the global macro grind . . .

 

As I noted earlier, this morning is certainly providing a fair amount of economic fodder.  A few points to call out:

  • The Shanghai composite sold off hard into the close on chatter that tomorrow’s manufacturing PMI will come in below 50.  This is consistent with the flash PMI reading from Hong Kong and also the pattern of economic data being leaked early (we removed long Chinese equities from our Best Ideas list earlier this year);
  • Japanese equities outperformed over night, but finished down -5.7% on the week.  The more interesting data point from Japan was April CPI which came in at -0.4% and clearly signals that the Bank of Japan has more to do before sustainable inflation is generated (Short Yen remains on our Best Ideas list); and
  • Japanese government pension fund with $1.1 trillion in assets indicated it would consider increasing its allocation to equities.  To buy one asset class, another asset class must be sold.  If the action in the Japanese government bond market is telling us anything it is that this allocation is already occurring as yields on 10-year JGBs have been spiking recently.

Domestically, our thesis of economic growth going from stabilization to acceleration continues to be validated.  Market internals clearly support this as the SP500 is up more than 16% this year and the treasury market is literally at 12-month lows.  If you didn’t know, now you know . . . economic growth is good for equities and bad for bonds.

 

As we dig deeper in the market internals, the performance of the sub-sectors of the SP500 validate this view even more.  As of last night, the top two performing sectors in the year-to-date are healthcare up 23.3% and financials up 23.0% and the two worst performing sectors are utilities up 8.6% and materials up 9.1%.  There we have it again, the growth sectors are dramatically outperforming. 

 

Now if you are a thoughtful stock market operator, you probably want to call me out on something from the last sentence, which is that materials should do well in an environment in which growth is accelerating.  This is true except for the one important factor: the U.S. dollar.  In the Chart of the Day, we highlight the impact of the dollar and the associated correlations over the last 180 days, which are +0.80 with the SP500, -0.72 with the CRB index, and -0.83 for gold.  A strong dollar equals weak commodities.

 

This Macro theme of up dollar and down commodities is very positive for a number of sectors.  This year our Restaurant team of Howard Penney and Rory Green has done an outstanding job leveraging the macro call with their stock specific work.  One of their best ideas in my view has been a sell call on McDonald’s on April 25th and since then the stock has underperformed the market by some 800 basis points.

 

At the time more than 30 firms had recommendations on MCD and no one had a sell.  This is creative and contrarian research at its finest.  Needless to say, our restaurant team eats alpha for breakfast, lunch and most value meals!  Ping us at if you want access to trial our restaurant research.

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST10yr Yield, VIX, and the SP500 are $1, $101.03-103.89, $83.10-83.98, 100.31-103.71, 2.03-2.19%, 12.28-15.31, and 1, respectively.

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Chief Creative Officer

 

Macro Imagination - Chart of the Day

 

Macro Imagination - Virtual Portfolio


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