“If you really don’t know what’s going on, you don’t even have to know what’s going on to know what’s going on.”
Sadly, one of my favorite authors and financial writers, George Goodman, passed away this weekend. He was 83 years old. After graduating magna cum laude from Harvard and winning a Rhodes Scholarship, Goodman published his first novel, The Bubble Makers – then went onto to join the “US Army Special Forces in 1954 in the intelligence group known as Psywar.” (Wikipedia)
“Goodman’s first non-fiction book, The Money Game (1968), was a number one bestseller for over a year. In the book he memorably introduced the catchphrase “assume a can opener” to mock the tendency of economists to make unjustified assumptions.” (Wikipedia)
Over the years, I’ve cited The Money Game many times. Today’s quote comes from that book and my Early Look is dedicated to Goodman who taught me a great deal while he wasn’t watching. Taped on the insert of one of my notebooks is that “a man is really at his best, his most fulfilled, when he’s on his way to becoming what he is going to become…” I’m grateful for that opportunity, every day.
Back to the Global Macro Grind…
If you really don’t know what’s going on in markets for 2014 YTD, now you know. It’s sitting right there in front of you on your screen. That is the score. That is Mr. Macro Market’s Game. And we’re all tasked with playing the game that’s in front of us.
On the heels of Asian Equity markets getting banged up last week, Japan opened 2014 for stock market trading overnight and got smoked for a -2.4% drop in the face of a barely up Japanese Yen. Get the Yen right, and you’ll get the Nikkei right – for now.
China reported yet another #GrowthSlowing data point last night as well. Its Services PMI print for DEC slowed to 50.9 versus 52.5 in NOV and Chinese stocks dropped another -1.8% on that. For 2014 YTD, the Shanghai Composite is already down -3.3%.
With Japan and China -2.4% and -3.3%, respectively, what other big Equity indices are down so far for the YTD?
- SP500 -0.9%
- MSCI World Index -0.9%
- MSCI Emerging Latin American Index -2.1%
- MSCI Emerging Market Index -2.3%
- MSCI Asia ex-Japan Index -2.4%
This shouldn’t be a huge conceptual surprise given that the US Dollar is +0.9% YTD. Emerging Markets in particular do not like #StrongDollar. But those of you who embraced that reality into the USD’s 2013 highs (July) know what’s going on there too.
Can the US Dollar continue higher? With Janet Yellen being confirmed tonight, I doubt it. But my doubts are often wrong, so we’ll deal with whatever Mr. Macro Market decides on this front. Is there any other way to accept what’s really going on?
From a long-term @Hedgeye TAIL risk perspective, where the US Dollar Index is at is significant in that it’s a principal and directional driver for other massively interconnected global macro risks. Check out the last price of the following Big 3 Macro levels vs. our TAIL lines:
- US Dollar Index long-term TAIL line = $81.12
- Copper’s long-term TAIL line = $3.33/lb
- WTIC and Brent Oil long-term TAIL lines = $98.26 and $108.89, respectively
While Dollar UP, Oil DOWN doesn’t yet have the correlation risk in our model that we’d jump up and down about (30 day and 180 day USD/Brent Oil correlations are +0.21 and -0.45, respectively), that doesn’t mean the Mr. Macro Market won’t change that.
On last week’s +0.5% move in the US Dollar Index:
- WTIC Oil was down -6.3%
- Brent Oil was down -4.7%
- Oil Volatility (VIX) was +30.9%! to 20.60
As I am sure Goodman would agree, volatility in an “asset class” that everyone and their brother is net long of breeds contempt. A breakout towards 30-40 Oil VIX would most certainly wake up consensus – because consensus is big time long of oil.
Looking at last week’s closing CFTC Futures/Options consensus positioning, here’s what I mean by that:
- BULLS: Crude Oil is the biggest net long position in Global Macro right now at +381,392 contracts
- BEARS: Japanese Yen is the biggest net short position in Global Macro at -143,384 contracts
In other words, if you are long Oil and the Nikkei on Down Yen expectations, join the club.
I don’t feel like we need to make a call for the sake of making a call right here and now on things like Oil and Yen. Going into last week we weren’t short Oil, so I missed that – but won’t miss shorting it on the bounce if it fails at TAIL resistance again. If Brent or WTI crude oil recapture TAIL supports, so be it.
That’s what’s going on in macro. The game is constantly changing. And it’s our job to change alongside it.
Our immediate-term TRADE Risk Ranges are now:
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
This note was originally published at 8am on December 23, 2013 for Hedgeye subscribers.
“The mass of the American people are most emphatically not in the deplorable condition of which you speak.”
That’s what a 28-yr old Teddy Roosevelt said to a fear-mongering-class-warfare-guy when he ran for mayor of New York City in 1886. In one of the first debates of his career, he went on to pummel the parasitic politician with positivity and resolve:
“… the states-men and patriots of today are no more responsible for some people being poorer than they are for some people being shorter… if you had any conception of the true American spirit you would know we do not have “classes” at all on this side of the water…” (The Bully Pulpit, pg 126-127)
While a lot of people spent a lot of time whining about the #EOW (end of the world), government spending cuts, and #RatesRising in 2013, many of us went on doing what American Doers do – grow. Relative to where consensus was, this country hasn’t seen a growth surprise to the upside like this in a long-time. I’d like to thank all of you who grew your businesses for contributing to that.
Back to the Global Macro Grind…
As 2013 comes to an end, the year’s growth score-card will be reported on a lag. Mr. Macro Market obviously didn’t miss making this call in real-time however. What a run US GDP growth went on into the highs of Q313. #Boom!
At +4.12% GDP growth in Q3, the 1st takeaway shouldn’t be someone who missed it whining about “inventories” (newsflash: businesses build inventories as growth in demand accelerates – it’s called a cycle); it should be that GDP of +4.12% was actually understated!
The US GDP Deflator (subtracts from nominal growth to get you real-inflation-adjusted GDP growth) for Q313 was overstated at +2% (that compares with the MIT billion prices project of +1.7% and the CRB Commodities Index which was tracking -6-7% year-over-year). Which means nominal US GDP growth was over +6% in Q3 and the real print could have been 4.5-5%!
The US stock market didn’t miss this. Neither did the Bond market (#RatesRising), nor Gold (crashing -29% YTD). The people who really missed this were actually the politicians. Who, like in 1886, were busy trying to tell stories about the economy they need you to believe rather than the one you had.
When we write about “growth” we’re talking about investment “style factors.” Here’s how the market prices those YTD:
- LOW YIELD STOCKS (i.e. growth stocks) = +44.2% YTD (vs slow-growth High Dividend Yield stocks +16.8%)
- TOP 25% EPS GROWTH STOCKS (by S&P quartile) = +40.4% YTD
- HIGH BETA STOCKS = +37.6% YTD
In other words, being long these GROWTH styles even beat the high flying US stock market indices:
- SP500 = +27.5% YTD
- Russell2000 = +35.0% YTD
- Nasdaq = +35.9% YTD
And obviously the major US Equities indices smoked being long things like:
- Fear (VIX) = -23.5% YTD
- Gold and Silver = -29.1% and -36.5% YTD
- Utilities (XLU) = +8.3% YTD
Utilities, MLPs, REITs got crushed relative to any domestic growth and/or cyclical sector of the US Stock market too:
- Consumer Discretionary (XLY) = +38.4% YTD
- Healthcare (XLV) = +37.7% YTD
- Industrials (XLI) = +35.3% YTD
And sure, some might quibble with Healthcare being called a US domestic “growth” sector, but that’s what we’ve called it since making it one of our favorite sectors in our Q113 Global Macro Themes, so they can quibble away.
Quibbling and whining might win people on your respective teams a few arguments, but these kinds of players (and class warfare dudes) don’t help you win championships. Those with open, objective, and flexible minds do.
The hardest thing to do in this business is having the humility to embrace that Mr. Macro Market might know something you don’t know. And clearly, whether by +4.12% GDP growth (old news now) and/or growth style factor performance in the marketplace, as the great behavioral philosopher Notorious B.I.G wrote, “if you don’t know, now you know.”
Our immediate-term Global Macro Risk Ranges are now:
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
Daily Trading Ranges
20 Proprietary Risk Ranges
Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.
Takeaway: Current Investing Ideas: CCL, FDX, FXB, GHL, HCA, MD, RH, TROW and WWW
In this weekend's edition of Investing Ideas, we feature our regularly scheduled updates on Hedgeye analysts' nine current high-conviction stock ideas. As we're sure you already know, 2013 was a very good year to be an Investing Ideas subscriber. From Nike to Starbucks, to Wolverine World Wide and many more, our analysts uncovered myriad stocks which outperformed the benchmark S&P 500 which itself was up 30%.
We are also pleased to highlight two institutional research notes following the stock updates which shed some macro light on current market and economic dynamics.
Finally, please see below CEO Keith McCullough's refreshed levels for our current high-conviction stock ideas.
Trade :: Trend :: Tail Process - These are three durations over which we analyze investment ideas and themes. Hedgeye has created a process as a way of characterizing our investment ideas and their risk profiles, to fit the investing strategies and preferences of our subscribers.
- "Trade" is a duration of 3 weeks or less
- "Trend" is a duration of 3 months or more
- "Tail" is a duration of 3 years or less
CCL – Shares of Carnival have risen 11% since we added it to Investing Ideas just before Thanksgiving. For comparison's sake, the S&P 500 is up 2% during that time. The Gaming, Leisure & Lodging team remains bullish on CCL and says there are no new news or catalysts this week.
FDX – Shares of FedEx closed the week north of $140, near its all time high. Industrial Sector Head Jay Van Sciver says all the negative press around delayed Christmas deliveries is likely to have little relevance for FDX shares, which he adds is one advantage of operating in a rough domestic duopoly. If anything, higher than expected capacity utilization in the capital intensive Express segment would seem favorable. The press also highlights FDX’s exposure to e-commerce, which could again become a solid growth narrative. Van Sciver expects the next key data point in UPS’s earnings report on January 30th.
FXB – Positive economic data out over the holiday week, while sparse, offered further, confirmatory evidence of emergent strength in the UK economy. UK mortgage approvals hit a 6-year high, net consumer credit accelerated sequentially, and the UK Manufacturing PMI (57.3) reflected another month of healthy expansionary activity. Moreover, the UK Construction PMI printed 62.1 for December, just below the 6-year high recorded in November. In addition, with the FTSE and British Pound both holding in Bullish Formation, the quantitative risk management signal continues to support our positive, fundamental view on the UK economy.
In short, we believe a strengthening UK economy coupled with the comparative hawkishness of the Bank of England (versus Janet Yellen et al.) will further propel #StrongPound over the intermediate term.
GHL – Greenhill & Company announced a solid pipeline of advisory mandates over the course of December, including a $2 billion mandate to advise AT&T in the sale of its wireless assets in the state of Connecticut. As a reminder, at $2.0 billion this was the largest advisory win for GHL since October.
(Click to enlarge)
Shares of Greenhill remain a favorite idea of Senior Financials sector analyst Jonathan Casteleyn’s. One of the intermediate to longer-term dynamics in play will be rising interest rates, which have historically led to growth in deal activity. Corporations tend to focus less on dividends and buybacks, and more on strategic M&A activity to reward shareholders.
The recent uptick in Greenhill activity during the past week is being validated by overall industry volumes. According to Bloomberg, weekly announced M&A volume in December in both the U.S. and Europe is showing signs of both a sequential and year-over-year improvement. Weekly U.S. M&A volume has hit $33.8 billion thus far in December, over a doubling from the $16.3 billion per week last month in November, and also a 16% improvement from weekly activity in December 2012.
HCA – HCA Holdings was up 4% this week compared to a 0.72% gain for the S&P 500. Healthcare Sector Head Tom Tobin is on vacation and will provide an update on HCA in next week's Investing Ideas.
MD – Mednax finished the trading week up almost 1% compared to a 0.72% gain for the S&P 500. Healthcare Sector Head Tom Tobin will provide an update next week.
RH – Restoration Hardware disclosed a few days before Christmas that two of its Independent Directors, Thomas Mottola and Mark Demilio, purchased approximately $1 million and $500 thousand worth of RH stock, respectively. Insider buying and selling is something that we track on an ongoing basis, and it makes up a considerable part of one of our most important financial screens – the "Retail Sentiment Monitor," which we provided for you in the 12/21 installment of the Investing Ideas Newsletter.
We track these sales and purchases for good reason. At the end of the day, company Executives and Directors are motivated by the same forces as everyone else – profit. We could reference countless Sentiment charts where the price line fills up with red circles (indicating an insider sell) and the price sinks like a stone soon after, and the same is true for the inverse.
Company insiders have unparalleled access to the health records of the company, so insider buys are generally viewed as a bullish event and sells would be bearish. As we stated earlier, this is simply an idea screen and isn’t sufficient analysis on its own. However, when coupled with a deep dive on the fundamentals, it can provide an insider’s take on the trajectory of the business. In the case of RH, it only serves to strengthen our conviction in our thesis.
TROW – T. Rowe Price remains a favorite long idea of Senior Financials sector analyst Jonathan Casteleyn as rates continue to rise. Fed tapering is fueling bond selling, which, in turn, is driving outflows from bond funds. These outflows are begetting further selling, and around and around it goes. Bonds are currently still in the early stages of underperformance and that underperformance will lead to further outflows.
Some of those bond outflows are going to find their way into actively managed US equity funds, and historically the funds that garner the biggest share of inflows are Morningstar 4 and 5 star rated funds. TROW stands out among peers on this front, as it has 72% of its fund assets held in 4 and 5 star rated funds. By comparison, fund manager Janus has just 34% of its fund assets in 4 and 5 star rated funds. This positively disposes
WWW – Wolverine World Wide announced that they will be presenting at the annual ICR conference on January 14th. Retail Sector Head Brian McGough will be there in Orlando to hear management first hand. He will report back after the conference. In the meantime, McGough remains the bull on WWW. Shares of Wolverine are up over 42% since he added it to Investing Ideas. The S&P 500 is up 15%. Not a bad run.
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Please click on the titles below to unlock the institutional research notes.
A second week of “clean” initial claims data confirms a return to the Trend rate of improvement, ISM New Orders and Employment both continued their respective advances to multi-year highs and, while Bloomberg’s weekly confidence data deteriorated marginally WoW, the positive reversal for consumer sentiment in December was unanimous across all the primary survey’s.
(Editor's note: The following note was written by Industrials Sector Head Jay Van Sciver)
After a long tenure on the buy side, I can only evaluate a year by performance. A research and investment process that fails to generate performance is of no value. Capital markets are noisy, making it difficult to extract the feedback needed to improve one’s process rapidly. But a year is a good chunk of market time and year-end is a decent moment to reflect on what is working and what is not. So how did we do in 2013? Pretty well and we can get better.
We thank you for your trust and your business.
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