“There was certainly never a more inopportune time to launch a new business.”
That’s what Irish born Samuel Sidney McClure said after the Panic of 1893 as he founded one of the most important investigative research companies in US history – McClure’s Magazine.
“He dreamed of creating a full time staff of writers who would be guaranteed salary and generous expense accounts. The job of staff writer was a new concept; in years to come, McClure would claim he himself almost invented it – a justifiable assertion…” (Doris Kearns Goodwin in The Bully Pulpit, pg 169)
Old School Research. That was what McClure’s Ida Tarbell, who exposed Standard Oil to America and helped force its breakup, did. Today’s stroking of government officials and storytelling execs in exchange for media access would be considered shameful back then. We started Hedgeye in 2008 to change that. Rather than fearing the system itself, opportunity knocked to change it.
Back to the Global Macro Grind…
With change comes trial and error. The first thing we needed to change was the platform of delivery. Not having the conflicts of interests embedded in a broker-dealer, investment bank, or advertising business was an easy change to make.
Changing the process, language, and pace of research communication was tougher. Technology (Google, Twitter, @HedgeyeTV, etc.) is now making this less tough. When your principles are transparency, accountability, and trust – all tech tools can do is expedite your vision.
Given the circumstances (a raging bull stock market), I think our analysts have done a great job shining a flashlight on what’s really going on at big US corporations in the last year: Caterpillar (CAT), McDonald’s (MCD) and Kinder Morgan (KMI) – that something is not always good. On macro matters however, some of the best opportunities in the last year have been in revealing what’s actually improving.
Our Macro Research Team does this call quarterly. There are 3 themes per call with anywhere from 45-75 slides of proprietary research and data. The idea of the call is to highlight the big themes in macro that are A) changing or B) trending.
In the case of A):
- Our models focus on rate of change (2nd derivative, slope of the line)
- The 3 Big Macs (macro factors) Growth, Inflation, and Policy (our GIP Model)
- Inflation is going to be the biggest change we focus on today (both locally and globally)
In the case of B):
- This happens most of the time in macro – that’s why we call them TRENDs (they trend)
- @Hedgeye TRENDs can either be cyclical or secular (sometimes both)
- On Twitter, I highjack the hash-tag on TRENDs we see developing before consensus does (#RatesRising, for example)
Today’s Hedgeye research hash-tags (Global Macro Themes for Q1) are going to be as follows:
#InflationAccelerating is a reversal from former Hedge Macro Themes #DeflatingTheInflation and #Bubble#3.
I know, too many hash-tags!
Bubble #3, of course, was Bernanke’s Commodity Bubble (2011-2012). You know, the one where you saw all time highs in Gold, Food, etc. – the one where the Fed would say they “see no inflation, because there is none in iPods.”
So that deflated (commodities crashed), and now The Economist has “The Perils of Deflation” on its cover as Ben Bernanke takes a “nailed it” victory lap around the weenie bins.
Inflation expectations are already rising. But you already know that – because we don’t do research on a lag. That and the #GrowthDivergences you are seeing manifest between Europe and Asia aren’t new either. With South Korea’s KOSPI -3.3% YTD versus Austria and Denmark’s stock market’s already +4.7% YTD, Mr. Macro Market gives you the research “call” every day.
From our un-conflicted and un-compromised financial media distribution platform, all we have to worry about is staying true to our principles. They will inevitably lead us to the truth. And, while there will never be an opportune time to be wrong about the truth, there will always be an opportunity to learn from our mistakes and improve our investigative research process.
Our immediate-term 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 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
daily macro intelligence
Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.
Takeaway: Stay with what’s been working from a style factor perspective, but be mindful of likely leadership rotations at the industry level.
CONCLUSIONS: In the note below, we highlight the key takeaways from six different analyses that will help portfolio managers appropriately allocate capital over the intermediate term.
- Quantitative risk management levels;
- Style factors – narrow focus;
- Style factors – broad focus;
- Hedgeye Macro GIP Model historical backtest results;
- Industry and sub-industry momentum; and
- Relative valuation.
We consider our primary responsibility to be the consistent identification of the most important top-down trends that will have an outsized impact on your P&L – be it from a beta, alpha or draw-down risk perspective. The vast majority of the time our efforts are focused on getting the directional component of market beta right, as well as trying to front-run meaningful drawdown risk(s).
Often times, we tend to help our subscribers generate alpha by simply having the correct non-consensus call on beta (e.g. our 2013 US equity bull case) or by helping them avoid the stuff that is blowing up (e.g. our 2012-13 gold and commodity bear case). #Alpha via happenstance, if you will.
Today, however, we’re applying a more proactive approach to the search for alpha. Sourcing analyses from a host of proprietary quantitative tools, we think over at least the next 3-6M US equity market alpha will be found by employing the following strategies:
1) Stay long of market beta, fading the top end of Keith’s immediate-term risk range and Buying the Damn Bubble (#BTDB) at the low end of said range. CLICK HERE for our latest S&P 500 risk management levels note.
2) Continue to be overweight low dividend-yielding stocks and underweight high dividend-yielding stocks as long-term interest rates continue to make a series of higher-highs and higher-lows amid pervasive bond fund outflows.
3) High growth stocks continue to outperform across all noteworthy durations, and investors would do best to position for a continued widening of the spread between high-growth stocks – on both LT EPS growth expectations and NTM sales growth expectations – and low-growth stocks, as well as for a continued widening of the spreads between high-rated stocks and low-rated stocks and low debt stocks and high debt stocks. The relative performance of the aforementioned style factors since the DEC 9th bottom in domestic inflation expectations (via 5Y breakevens) has generally confirmed prevailing trends. Lastly, the spread between high beta stocks and low beta stocks has actually been accelerating of late and we think investors should capitalize on this momentum accordingly.
4) Consider overweighting the Internet Retail, Semiconductor Oil & Gas Drilling and Biotech GICS Level 4 Industries and underweighting the Trucking, Tires & Rubber, Home Furnishings and Department Stores GICS Level 4 Industries as the US economy moves into a state of #InflationAccelerating (i.e. either Quad #2 or Quad #3 on our GIP model).
5) Those focused on long/short, absolute return strategies are likely to do well by pairing off the following GICS Level 4 Industries:
- Long ideas (ranked according to highest-to-lowest VAMDMI score*):
- Education Services
- Electronic Equipment & Instruments
- Health Care Equipment
- Other Diversified Financial Services
- Casinos & Gaming
- Life Sciences Tools
- Regional Banks
- Cable & Satellite
- Short Ideas (ranked according to lowest-to-highest VAMDMI score*):
- Food Retail
- Trading Companies & Distributors
- Electric Utilities
- Computer & Electronics Retail
- Personal Products
- Household Products
- Oil & Gas Equipment Services
- Wireless Services
- General Merchandise Stores
6) From a valuation perspective, the Footwear, Retailing, Specialty Retail, Apparel Retail, Home Improvement Retail, Food Retail, Distillers & Vintners, Research & Consulting Services, Data Processing & Outsourced Services, Application Software and Gas Utilities industries and/or sub-industries are all grossly overvalued from a structural perspective (i.e. relative to their respective trailing 10Y average Price/NTM Earnings and EV/NTM EBITDA multiples).
The market has been straight-up-and-to-the-right for over a year now, so there’s not a ton value out there for those looking to load up on “cheap” names. That said, however, we do flag the Oil & Gas Drilling, Oil & Gas Equipment Services, Technology Hardware & Equipment and Communications Equipment industries and/or sub-industries as being relatively undervalued from a structural perspective (i.e. relative to their respective trailing 10Y average Price/NTM Earnings and EV/NTM EBITDA multiples).
Feel free to ping us with any follow-up questions or if you’d like a list(s) of the specific tickers comprising any of the aforementioned industries and/or sub-industries. As always, we’re here to help.
Have a great evening,
Associate: Macro Team
VAMDMI SCORE EXPLANATION
VAMDMI is short for “Volatility-Adjusted, Multi-Duration Momentum Indicator”. The VAMDMI score is derived by calculating three independent z-scores of closing price data on a weekly basis and then calculating the arithmetic mean of this sample.
- Short-term z-score: 1-3M sample
- Intermediate-term z-score: 3-6M sample
- Long-term z-score: 6-12M sample
Each independent sample size is determined dynamically by prevailing trends in US equity market volatility. Specifically, if the VIX Index is making lower-lows on an intermediate-term basis, then each of the sample sizes are larger in duration; if the VIX Index is making higher-lows on an intermediate-term basis, then each of the sample sizes are smaller in duration.
Only a handful of states have released gaming revenues for December but the verdict is in
- Not sure the Street was ready for the onslaught of bad numbers but they’re here.
- Ohio and Pennsylvania – relatively new gaming states – are already out with high single digit/low double digit same-store declines
- The mature gaming state of Illinois released a -13% YoY same-store decline
- We think the sell side will likely lower Q4 estimates for PENN, PNK, and BYD
real edge in real-time
This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.