Get Busy

This note was originally published at 8am on October 18, 2013 for Hedgeye subscribers.

"Get Busy Living or Get Busy Dying"

-Morgan Freeman, Shawshank Redemption

 

Earlier this week, I raced a 95 year old lady down the Merritt Parkway on my way home from work. 

 

Well, kinda. 

 

To review:  while driving north from our new HQ in Stamford, I watched in my rearview mirror as a navy blue Mustang darted back & forth between lanes before pulling up beside me, then speeding ahead. 

 

After racing to catch-up for a confirmatory, second look…90 is, apparently, the new 25.     

 

The age was undeniable, but there were no coke bottle glasses, no cautious, granny-fied 3 o’clock- 9 o’clock hand positioning, no squinty eyed lean forward, no Buick or Oldsmobile.

 

Just a sharp gaze and tangible life energy. 

 

The experience was a pleasant surprise and a welcomed contrast to the latest, consuming iteration of beltway brinksmanship – which, unsurprisingly, lacked both pleasantness and originality. 

 

Back to the Global Macro Grind…..

 

I don’t know granny’s life recipe for sustained physiological alacrity – but the ‘pleasant surprise’ of her apparent vitality dovetails nicely with one of our top 3 Macro Investment themes for 4Q:  #GetActive

 

Without giving away the full, institutional macro alpha thunder, our call for an increase in active investment management is predicated on a few key points:

 

1.   Big Government Intervention:  Our fiscal policy creation process remains a circus and the new golden boy in the monetary policy arsenal – the “communication tool” – remains in beta testing and breeding decidedly more market uncertainty than price stability at present.  Collectively, we expect policy intervention to continue to perpetuate Market/Currency/Economic Volatility.  Volatility breeds both opportunity and a heightened probability for an expedited drawdown in equities and …

 

2.   Active Management outperforms in down markets:  Historically, on average, the HFRX Equity Hedge index outperforms the SPX in down markets and that outperformance increases as the magnitude of negative monthly S&P500 performance increases.  At extremes of negative market performance, the HRFX has outperformed by ~800bps on a monthly basis.  Hedge funds apparently hedge after all.

 

3.   Sector Picking will Matter:  As the Chart of the Day below illustrates, the variance in sector performance this year is near a historic low Put differently, it hasn’t really mattered what sector you bought  – beta has been the new alpha and simply buying the market was the best allocation decision.  Over the intermediate term, a mean reverting breakout in the variance of sector returns is almost a guarantee.  Consider the performance delta between Financials  and Utilities in the quasi-analogous post-1994 period, after Greenspan began his rate raising campaign.  Financials returned 50%, 32%, and 45% in 1995, 1996, and 1997 respectively.  Utilities returned 25%, 0%, and 18% over that same period.  A 3Y CAGR of 42% for Financials vs 14% for Utes. 

 

In truth, #GettingActive is really just an investment euphemism for Trading.   

 

Trading generally gets a bad rap because it doesn’t fit the canonical ‘stocks for the long-term’ dictum, it doesn’t market well and, well, it’s hard – the recent multi-year trend in collective hedge fund benchmark underperformance hasn’t been a siren song for incremental actively managed AUM either. 

 

Keith has actively managed market risk in the Hedgeye portfolio for 5+ years, actively manages the Hedgeye HFT (High Frequency Tweet) machine and is probably more” active” than constrained in opining on markets, policy and policy makers.

 

To the latter point, sometimes I think the punditry of the Early Look prose occasionally belies the reality of our risk managed positioning. 

 

For instance, while we were highlighting an increased likelihood for a policy induced deceleration in domestic growth back on Oct 9th/10th, at the same time, we were taking up both our gross and net long positioning into the back end of the 4% market correction. 

 

From a process perspective, our conviction level rises and we typically get louder about an idea when both the research (fundamental) view and the quantitative risk management signal are both in agreement. 

 

But what if there is no fundamental data?

 

The gov’t shutdown the last two weeks has served as an illustrative example of how our risk management process works in practice – primarily because  there was no incremental fundamental data to inform our marginal macro view,  leaving the risk management signal as our principal signaling mechanism for driving portfolio decisions.

 

Contrasting yesterday’s price signals and subsequent allocation decisions with those made a week ago exemplifies the process.  

 

What were the market and price signal dynamics back on Oct 10th and why did we buy the dip:

  1. $USD – V-bottomed off its long-term tail line of support at 79.21
  2. VIX – was breaching its TREND support level of 18.98 on the downside
  3. SPX – recaptured TREND support at 1663
  4. 10Y Treasury – Held TREND support of 2.58%
  5. U.S. Stocks moving towards immediate term oversold, down for 11 of the prior 15 days

With all the price signals in agreement, the highest probability swing was to get longer and play for the 24 handles of immediate term upside. 

 

Yesterday’s price signals were very similar:

  1. 10Y Treasury – 10Y was back to flirting with a TREND breakdown through 2.58%
  2. $USD – The dollar was moving back towards testing TAIL support at 79.21.

Down Rates + Down Dollar + Rising Policy Uncertainty is not a factor setup we want to be long of over the intermediate term, but we kept the portfolio unchanged at 6 Longs, 3 short into the close. Why?

  1. SPX – higher highs are bullish and equities were not signaling immediate term overbought
  2. VIX – Debt Default fear remained for sale with the VIX continuing in free fall
  3. Squeezage – with  hedge fund short positions as YTD highs there’s room to let the squeeze rally breath a bit.
  4. Hilsenrath’s mid-afternoon proclamation that Oct-Taper is officially a no-go & Bernanke/Yellen risk remains acute juices the immediate term downside risk for both the dollar and interest rates. 

So, we didn’t buy the rip or tighten up net exposure. 

 

What will we do today?  I don’t know – and that’s largely the point.  As always, we’ll let the market signal tell us which way to lean.

 

Does timing matter?  Implicit in allocations to active strategies is a belief that it does.

 

As Keith queried on twitter yesterday afternoon:

 

“If timing didn't matter, why are you watching Twitter right now?”

 

Similarly, are markets efficient or irrational and reflexive? 

 

Fama won the Nobel prize for “proving” the former.  At the same time, Shiller won for proving the latter.  Seems about right. 

 

Activity/Variety is both the spice of life and nature’s most potent cerebral exfoliant. 

 

Take a different route to work in the morning, eat dinner with your left hand, simplify a few radical expressions,  invest some incremental capital in the growth inflection happening across the pond, turn down CNBC and turn on #tweetshow today at 3pm.  

 

Switch it up, Get Busy. 

 

Our immediate-term Risk Ranges are now:

 

UST 10yr Yield 2.55-2.67%

SPX 1695-1745

VIX 12.61-15.24

USD 79.21-80.31

Euro 1.35-1.37

Pound 1.60-1.62

 

Enjoy the Weekend. 

 

Christian B. Drake

Senior Analyst 

 

Get Busy - Get Active

 

Get Busy - z. vp 10 18


Did the US Economy Just “Collapse”? "Worst Personal Spending Since 2009"?

This is a brief note written by Hedgeye U.S. Macro analyst Christian Drake on 4/28 dispelling media reporting that “US GDP collapses to 0.7%, the lowest number in three years with the worst personal spending since 2009.”

read more

7 Tweets Summing Up What You Need to Know About Today's GDP Report

"There's a tremendous opportunity to educate people in our profession on how GDP is stated and projected," Hedgeye CEO Keith McCullough wrote today. Here's everything you need to know about today's GDP report.

read more

Cartoon of the Day: Crash Test Bear

In the past six months, U.S. stock indices are up between +12% and +18%.

read more

GOLD: A Deep Dive on What’s Next with a Top Commodities Strategist

“If you saved in gold over the past 20 to 25 years rather than any currency anywhere in the world, gold has outperformed all these currencies,” says Stefan Wieler, Vice President of Goldmoney in this edition of Real Conversations.

read more

Exact Sciences Up +24% This Week... What's Next? | $EXAS

We remain long Exact Sciences in the Hedgeye Healthcare Position Monitor.

read more

Inside the Atlanta Fed's Flawed GDP Tracker

"The Atlanta Fed’s GDPNowcast model, while useful at amalgamating investor consensus on one singular GDP estimate for any given quarter, is certainly not the end-all-be-all of forecasting U.S. GDP," writes Hedgeye Senior Macro analyst Darius Dale.

read more

Cartoon of the Day: Acrophobia

"Most people who are making a ton of money right now are focused on growth companies seeing accelerations," Hedgeye CEO Keith McCullough wrote in today's Early Look. "That’s what happens in Quad 1."

read more

People's Bank of China Spins China’s Bad-Loan Data

PBoC Deputy Governor Yi says China's non-performing loan problem has “pretty much stabilized." "Yi is spinning. China’s bad-debt problem remains serious," write Benn Steil and Emma Smith, Council on Foreign Relations.

read more

UnderArmour: 'I Am Much More Bearish Than I Was 3 Hours Ago'

“The consumer has a short memory.” Yes, Plank actually said this," writes Hedgeye Retail analyst Brian McGough. "Last time I heard such arrogance was Ron Johnson."

read more

Buffalo Wild Wings: Complacency & Lack of Leadership (by Howard Penney)

"Buffalo Wild Wings has been plagued by complacency and a continued lack of adequate leadership," writes Hedgeye Restaurants analyst Howard Penney.

read more

Todd Jordan on Las Vegas Sands Earnings

"The quarter actually beat lowered expectations. Overall, the mass segment performed well although base mass lagging is a concern," writes Hedgeye Gaming, Lodging & Leisure analyst Todd Jordan on Las Vegas Sands.

read more

An Update on Defense Spending by Lt. Gen Emo Gardner

"Congress' FY17 omnibus appropriation will fully fund the Pentagon's original budget request plus $15B of its $30B supplemental request," writes Hedgeye Potomac Defense Policy analyst Lt. Gen Emerson "Emo" Gardner USMC Ret.

read more