This note was originally published at 8am on December 26, 2013 for Hedgeye subscribers.
“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:
- Venezuela +478%
- Dubai +102%
- Argentina +88%
- Abu Dhabi +58%
- Japan +56%
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:
- Peru -25%
- Ukraine -18%
- Brazil -16%
- Chile -15%
- Turkey -12%
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