This note was originally published December 26, 2013 at 08:07 in Daily Trading Ranges
There were some epic shorts in 2013 (Gold and Bonds) - just not the ones consensus pundits called for. If only the 2013 perma bears could figure out what happened! Bottom line is you were either long growth (US stocks) and short fear (Gold, Bonds, VIX) or you were not. Meanwhile, the S&P 500 is notching a new all-time high today at 1838. As we like to say here at Hedgeye, all-time is a long time.
We're going to continue to hammer on the importance of getting style factors and sector allocations correct in 2014. Simply avoiding the most underperforming sectors would have been a boon for anyone’s portfolio in 2013. Of the 9 major U.S. equity stock market sectors, the outperformance between the top performing sector of Consumer Staples and the worst performing Sector of Utilities was more than 2,000 basis points! Simply getting the allocation to those two sectors correctly weighted, would have made any equity manager’s year.
|FIXED INCOME||0%||INTL CURRENCIES||25%|
Our bullish call on the British Pound was borne out of our Q4 Macro themes call. We believe the health of a nation’s economy is reflected in its currency. We remain bullish on the regime change at the BOE, replacing Governor Mervyn King with Mark Carney. In its October meeting, the Bank of England voted unanimously (9-0) to keep rates on hold and the asset purchase program unchanged. If we look at the GBP/USD cross, we believe the UK’s hawkish monetary and fiscal policy should appreciate the GBP, as Bernanke/Yellen continue to burn the USD via delaying the call to taper.
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. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.
Financials sector senior analyst Jonathan Casteleyn continues to carry T. Rowe Price as his highest-conviction long call, based on the long-range reallocation out of bonds with investors continuing to move into stocks. T Rowe is one of the fastest growing equity asset managers and has consistently had the best performing stock funds over the past ten years.
"Playing it safe is the riskiest choice we can ever make."
-Sarah Ban Breathnach
The top five performing global equity markets for the year were as follows:
Takeaway: Last week's labor market soft patch proved short-lived as this week's data has resumed its pace of steady improvement.
2013 in Review
With all but one week of 2013 now in the books the labor data is showing a non-seasonally adjusted year-over-year improvement of 8.2% on a full-year basis. For comparison, 2012 was better by 8.1% versus 2011. This morning's data point showed a 9.0% improvement y/y while the rolling 4-wk average is better by 10.2%. By most accounts the labor data remains strong and shows ongoing improvement. Last week we had flagged a speed bump in the data, but this morning's numbers suggest that a speed bump may have been all that it was.
We continue to expect that the strengthening labor market data will exert ongoing upward pressure on long-term rates. This morning the 10-year treasury yield is at 2.99%, just one basis point away from its September 5 high. We've demonstrated how bank stocks are very positively correlated to 10-year yields while homebuilders are very negatively correlated. For more on that, see our publication from 11/22/13 entitled #Rates-Rising: A Current Look at Rate Sensitivity Across Financials.
Prior to revision, initial jobless claims fell 41k to 338k from 379k WoW, as the prior week's number was revised up by 1k to 380k.
The headline (unrevised) number shows claims were lower by 42k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 4.25k WoW to 346.75k.
The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -10.2% lower YoY, which is a sequential improvement versus the previous week's YoY change of -7.7%
The 2-10 spread rose 6 basis points WoW to 258 bps. 4Q13TD, the 2-10 spread is averaging 240 bps, which is higher by 6 bps relative to 3Q13.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT
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THE MACAU METRO MONITOR, DECEMBER 26, 2013
'HALF' MGM COTAI FLOOR FOR ENTERTAINMENT: CEO Macau Business Daily
“Our Cotai project is more like a series of theatres or a series of galleries, where we can actually bring things. It’s probably in excess – just for the entertainment pieces – of 50% of the floor space. But the way we’re going to do that is it’s going to be interspersed with other activities,” said MGM China CEO Grant Bowie.
Macau watchers know that after years locally of ‘motherhood and apple pie’ speeches on the benefits of diversifying Macau’s economy away from hardcore casino gambling, this time the central government in Beijing appears to be really serious about achieving it. President Xi Jinping mentioned it again last week when he met Macau’s CEO Fernando Chui Sai On. So did Bai Zhijian, director of the Liaison Office of the Central People’s Government, at the anniversary celebrations on Friday marking Macau’s 1999 handover from Portuguese administration.
Simply putting an art gallery in a casino won’t in itself achieve Beijing’s goal. But the Macau government is likely to reward those casino operators that show greatest willingness to assist it in the diversification drive.
NEW CENTURY SEIZED OVER DEBTS TO TRAVEL AGENCY BOSS Macau Business Daily
The New Century Hotel, Taipa, has been seized for unpaid debts that were due the owner of a Macau-based travel agency, according to a judgement of the Court of First Instance. Hoi Cheng Nga, head of Macau-based Energy Travel Agency Ltd, had sued Empresa Hoteleira de Macau Lda – the Macau-registered operator of New Century. Within the grounds of the hotel is Greek Mythology Casino, which operates under the gaming concession of Stanley Ho Hung Sun’s Sociedade de Jogos de Macau SA.
“If money is your hope for independence you will never have it. The only real security that a man will have in this is a reserve of knowledge, experience, and ability.”
In Canada, today is more commonly known as Boxing Day. The origin of Boxing Day is believed to be in medieval England when servants, and those of lesser means, were given Christmas Boxes, which were filled with money and other small gifts. The boxes were given in appreciation for service throughout the year.
In much of the Commonwealth, Boxing Day is still a bank holiday even though the Commonwealth is largely independent of Great Britain. Across the current and former Commonwealth, the day has morphed from a day to recognize servants into becoming one of the most prominent shopping days of the year.
In addition, Boxing Day is another day to spend with one’s family and community. Personally, I am back in my small hometown of Bassano, Alberta, and have been enjoying every minute of it. In the Chart of the Day today, I’ve shown a picture of me with a few friends from our annual town hockey game with the growth in Canadian oil production over the last two decades graphed in the background.
Speaking of independence, as you can see from the chart, Canada has seen massive growth in its oil production over the last couple of decades. This growth has been primarily driven by accelerating production in non-conventional oil from Alberta’s oil sands. When combined with the fact that the United States is, as of last month, producing more oil than it imports, one can envision a future in which oil from the Middle East plays a much less significant role in Western economies.
Will there be a future of complete energy independence in the Western world? Certainly, the growing production in the U.S. and Canada is a hopeful sign. The other hopeful sign of course is the increasing efficiency of fuel consumption in motor vehicles (no irony that Henry Ford is in the opening quote). According to the Energy Information Administration in their most recent long term outlook:
“The decline in energy imports reflects increased domestic production of petroleum and natural gas, along with demand reductions resulting from rising energy prices and gradual improvement in vehicle efficiency. The net import share of total U.S. energy consumption is 4% in 2040, compared with 16% in 2012 and about 30% in 2005.”
Clearly, the path forward is one of increased energy independence in the United States and not less.
Back to the Global Macro Grind...
For those that measure annual performance, this year is all but in the bag with basically less than four trading days left in the U.S. stock markets. Either you made your bogey this year and beat your respective benchmark, or you didn’t. Regardless, the only move left this year is likely some tax loss selling.
In terms of global equity market performance, 2013 was certainly an interesting one. The top five performing global equity markets for the year were as follows:
Now admittedly, playing some of the stock markets above are akin to going to our Gaming, Lodging and Leisure Sector Head Todd Jordan’s favorite American city, Las Vegas, and putting down your year-end bonus on the roulette table, but those are some juicy returns nonetheless.
On the flip side, of course, are the global equity market losers. Based on the markets we actively monitor, the top five worst performing equity markets in 2013 were the following:
The other story of haves versus have nots is the performance differential seen between hedge funds and traditional long only money managers. According to Absolute Return Magazine, the top performing hedge fund strategies from January through November of 2013 were distressed (up +13%), U.S. equity (up +13%), and event driven (up +12%). While positive, this performance certainly pales in comparison to the return of the SP500 500, which is already up 29% for the YTD and the MSCI world index up 23% for the YTD.
Domestically, sector allocation was likely one of the more significant drivers of outperformance. Of the nine major U.S. equity stock market sectors, the outperformance between the top performing sector of Consumer Staples and the worst performing Sector of Utilities was more than 2,000 basis points. Simply getting the allocation to those two sectors correctly weighted, would have made an equity manager’s year.
Speaking of style factors and hedge fund returns, one key reason for the relative underperformance of the hedge fund industry is the relative out performance of high short interest stocks. According to our U.S. Style Factor Performance Monitor, a report published by my colleague Darius Dale, high short interest stocks (so the 10% of U.S. stock with the highest short interest) are up almost +42% in 2013. Obviously, the short book going up more than long book is a tricky recipe for any long / short hedge fund.
We are going to continue to hammer on the importance of getting style factors and sector allocations correct in 2014. As noted, simply avoiding the most underperforming sectors or style factors would have been a boon for anyone’s personal or professional portfolios in 2013.
As rates continue their upward climb, fixed income and bond portfolios should be the focus for any asset allocators. Historically, gentleman, and retirees have preferred bonds, but as the proverbial Queen Mary of global macro factors turns (interest rates), a factor to consider is underperformance in bond markets. Specifically, as The Wall Street Journal today notes, the Barclay’s muni-bond index is down -2.6% on the year. One thing I know for sure, bonds rarely trade independent of interest rates.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.90-2.99%
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
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