This unlocked note was originally published December 31, 2013 at 08:14 in Morning Newsletter for subscribers. If you like what you see here and would like to become a subscriber click here.
“All hockey players are bilingual. They know English and profanity.”
The big picture
Yes, it can be a profane game. We aren’t exactly politically correct when we’re all fired up playing it either. Fans call it passion. Foes call it petulance. If you catch our emotions just right, you can watch us fight – and a hockey game might just break out in the meantime.
It’s 37 below in my hometown of Thunder Bay, Ontario this morning. But after the World Junior Hockey tilt between Canada and the USA today, lots of little boys and girls will be tugging at their Dad’s red and white jerseys to get them suited up to play on their outdoor rinks. There is no such thing as a PTA snow day. There’s always time to play hockey.
While the love of a childhood game can’t be replicated in this Canadian’s craw, I wanted to thank you all for putting up with how I play this one. I’m well aware that I can be an irritating player who likes to stir the pot and start fights. But I love the game and it’s all in good competitive fun. Best of luck and health to you, your families, and firms for a fantastic 2014 Macro season.
As Teddy Roosevelt was coming up through the US political ranks, the Boston Evening Times wrote that “he isn’t afraid of the newspapers, and he is always ready for a fight… his aggressiveness is a great factor in a good cause.” (Doris Kearns Goodwin’s The Bully Pulpit, page 141)
Calling it like it is isn’t for everyone. Neither are the principles of transparency, accountability, and trust. But, as you’ll see from the World Junior Hockey Championships in Sweden today, on NFL Playoff Sunday, or in any arena of competitive life, these are the foundations of leadership. And we intend to stand by your side upholding them.
As I wrote yesterday, I have no idea what is going to happen wire-to-wire across the 12-month period that will be 2014. That would be like hearing Randy Carlyle (Coach of the Toronto Maple Leafs) have the hubris to predict how each and every play of tomorrow’s NHL Winter Classic versus the Detroit Red Wings will go – oh, and then predict every other game of the season after that.
The best prediction we can make is to proactively prepare ourselves to Embrace The Uncertainty of the game.
You were either long growth (as an investment style) when you had opportunities to position yourself that way in 2013, or you were not. The game always lets you in – it’s your job to realize that, and play the game that’s in front of you.
We won’t “predict” 2014 – we will begin with our position and start playing the game from there. There will be wins. There will be losses. And god help me if I don’t get into any Twitter fights.
Here’s how we are positioned on the last day of 2013 in the Hedgeye Asset Allocation Model:
1. Cash = 37%
2. Foreign Currency (FX) = 30% (Pound, Euro, Kiwi, etc.)
3. International Equities = 15% (Germany, Italy, Japan, etc.)
4. US Equities = 15% (Growth Equities, not Utilities)
5. Commodities = 3% (Natural Gas)
6. Fixed Income = 0% (it was 0% for 184 trading days of 2013)
Lets sprinkle a little color on these “allocations.” For starters, I may be a Mucker but I am not yet brain dead. Buying-the-damn-bubble #BTDB in US and International stock markets that continue to hit all-time highs is not for the faint of heart. So I have a big pad of cash.
Cash is cool.
In fact, having a nice fat asset allocation to cash beats being in bonds or something commodities that continues to crash. Never forget that Rule #1 of Risk Management is “don’t lose money” (Buffett). That starts and ends with not allocating your assets to a Fisher Price looking pie chart that keeps you in bubbles (Gold and Bonds) that are in the midst of imploding.
On the FX side, remember that our Top Global Macro Theme for Q413 was called #Eurobulls. Pivoting from bullish to bearish on the US Dollar like we did from Q313 to Q4 means it’s a lot easier to have a big asset allocation to other currencies. The British Pound is popping to a fresh YTD high this morning of $1.652 versus USD. That and the Euro remain in Bullish Formations @Hedgeye.
When I think about asset allocation, I don’t ignore the concept of diversification. While allocating to cash is a risk managed choice, so is capping my max allocation to any asset class at 33% of my total net wealth. That’s precisely the number I invested into Hedgeye in 2008 and going to 30% international FX right here and now (i.e. 91% of my max conviction to an asset class) is the same.
Some people call going to 90-100% of your max “conviction.” And while it’s really important for me to communicate where my investment convictions are (and where they are changing), don’t confuse that with what I have the highest conviction in of all – our process.
Thank you again for providing me and my teammates an opportunity to play this game out loud and in front of you every day. Making mistakes out on the proverbial ice for all our fans and foes to see has helped expedite our learning and maturation process immensely. The day I stop learning how to get better at this game is the day I’ll realize it’s time to retire. God willing, I have a lot of years in me yet.
- CASH: 37%
- US EQUITIES: 15%
- INTL EQUITIES: 15%
- COMMODITIES: 3%
- FIXED INCOME: 0%
- INTL CURRENCIES: 30%
Our immediate-term Global Macro Risk Ranges are now (with bullish or bearish TREND in parenthesis):
UST 10yr Yield 2.94-3.06% (bullish)
SPX 1823-1861 (bullish)
VIX 11.84-14.91 (bearish)
Best of luck out there today, and Happy New Year!
Keith R. McCullough
Chief Executive Officer