“Conquering of fear produces exhilaration.”
I don’t know about yours, but in my life the aforementioned statement definitely holds true. My fellow Canuck, Malcolm Gladwell, cited MacCurdy’s psychological work in David and Goliath (pg 148) to explain the resilience of the British during the London Blitz.
Do you need a psychiatrist? How many days after 2008 did it take you to conquer your fear about growth? The earlier in 2009 (or 2013) the better, obviously. But some of the savants sipping on Champagne in Davos this week are just starting to get bullish now. #Exhilarating
While Gladwell’s latest book is a little too thick on sociology for me, I loved a few of his stories simply because they spoke to me personally. Unfortunately, Mr. Macro Market couldn’t care less about me as a person. Whatever speaks to me this morning has very little place in my risk management process. The easiest way for me to conquer my market fears is to grind through the process and get on with my day.
Back to the Global Macro Grind …
With a day off here in the US, it’s a good time to take a step back and review what the score is for 2014. From a performance divergence perspective, it’s been an exhilarating start to the year!
In the land of Global Equities, here are the world’s Top 3:
In other words, the markets that some of the fear-based advertising blogs talked most about for the last 3 years are your portfolio’s top money-makers. After all, who in Davos didn’t tell you to buy Greece?
And here are the world’s 3 dogs (YTD):
Yep, remember the ole “BRICs” long-term investment theme from Davos before they had Davos? #Mint, that was. Brazil in particular has been just sad to watch – and who isn’t long Japan, after it being one of the world’s best performers in 2013 btw?
To summarize what we think will be a glaringly different year for asset allocation in 2014, we called one of our Top 3 Global Macro Themes for Q114 #GrowthDivergences. This theme should not only make for winners and losers in what we call Country Picking, but sector and stock picking within those countries too.
Speaking of #GrowthDivergences, check out the Sector Divergences in the US Equity market for both last week and 2014 YTD:
Yep, that’s a +545 basis point performance spread between two of the most widely held US stock market sectors. So much for Sector Variance (see our Q413 Macro Themes deck and Chart of The Day) hitting all-time lows. Mean reversion is #exhilarating, indeed.
And what’s driving that? In our GIP (Growth, Inflation Policy) model, the traverse from:
A) Quadrant #1 in our GIP Model (Growth Accelerating as Inflation Decelerates), to
B) Quadrant #2 in the same model (Inflation Accelerating alongside Growth Accelerating),
… shows you that Consumer Sectors are two of the worst sectors you can be in (makes sense because, on the margin, #InflationAccelerating (another Q114 Macro Theme), slows real consumption growth), while Healthcare and Tech are two of the best.
Technology (XLK) and the Nasdaq (QQQ) are up +0.03% and +0.5%, respectively, for 2014 YTD (versus the Dow and SP500 -0.7% and -0.5%, respectively).
Looking beyond US Equities, you can see the same performance divergence taking hold in Global Equities that you are already seeing in the world’s top and bottom 3:
So, maybe this year at Davos they put Captain Pie-Chart on “global emerging market equity diversification” in one of the breakout rooms. He’ll have plenty of time and space to hear himself talk. Maybe his government will pay for his psychiatrist and post meeting masseuse too.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.79-2.89%
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer
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.
To summarize our current thesis on CAKE, we believe the company’s three year run of improving margins is coming to an end. Specifically, we believe the decline in food costs, labor costs, and other costs have run their course.
To what extent has the decline in these expense lines since fiscal 2010 contributed to the recent traffic declines? That question is difficult to answer and even more difficult to pin on one factor. But, we do know that, collectively, all three can have an impact. We point to DRI and PNRA as other current examples of companies needing to reverse course.
The declining traffic trend suggests that we could see an increase in food, labor and other costs as the company reinvests in store operations. Below are a series of CAKE operational observations from a consultant within the Hedgeye restaurant industry network.
From these observations, there is a lot the company can do to improve traffic, but it will take some time and incremental investment which could pressure operating margins over the near-term.
FOOD AND BEVERAGE
MARKETING AND LOYALITY
The last point about management is certainly not lost on us. David Overton, Chairman, President and CEO, controls and owns 6.6% of the company. As a result, he could decide to sell the company at any given time. But with the stock currently trading at 9.0x EV/EBITDA, we view that possibility as highly unlikely.
TODAY’S S&P 500 SET-UP – January 21, 2014
As we look at today's setup for the S&P 500, the range is 29 points or 0.75% downside to 1825 and 0.83% upside to 1854.
CREDIT/ECONOMIC MARKET LOOK:
MACRO DATA POINTS (Bloomberg Estimates):
WHAT TO WATCH:
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
The Hedgeye Macro Team
This note was originally published at 8am on January 07, 2014 for Hedgeye subscribers.
“I just lied to someone else, but you can trust me because I’d never lie to you.”
That was an excellent quote John Hamm used to discuss “implied distrust” in a solid chapter in Unusually Excellent titled “Being Trustworthy.” We are who we are – and, as a new Wall Street evolves, our goal is to be a 2.0 research source you can trust.
“Be honest… Be vulnerable… Be Fair… “ (Unusually Excellent, pg 36) – these are some of the simplest rules of relationship building, yet some of the most difficult to rinse and repeat each and every market day.
Trust isn’t allocated in this profession. It’s earned, daily.
Back to the Global Macro Grind…
With a polar vortex rolling through the USA and Florida State coming back from 21-10 at the half to win the championship (with 13 seconds left) last night, does anyone really care that the US stock market closed down 25 basis points yesterday?
Is this going to be another 1-2% correction in US stocks, or the beginning of yet another #EOW (end of the world)? I need to make some real-time asset allocation decisions around the answer to that question. So I’m not going to lie to you – I bought-the-damn-bubble #BTDB on red again yesterday.
I’ll go through the why on that in a minute, but first, here’s how I’ve re-positioned in the 1st three days of 2014:
1. Dropped CASH in the Hedgeye Asset Allocation Model from 50% to 30%
2. Raised my allocation to International FX from 27% to 30%
3. Raised my allocation to International Equities from 10% to 18%
4. Raised my allocation to US Equities from 10% to 16%
5. Raised my allocation to Commodities from 3% to 6%
6. Moved to 10 LONGS, 5 SHORTS in #RealTimeAlerts (vs 5 LONGS, 5 SHORTS on January 1)
Nope. I’m not going all wild and crazy, investing all the cash at the all-time highs in US Equities. That’s not how I roll. I’m a gradualist, of sorts. I like to work my way into a situation that appears to be developing. If it stops developing, I stop.
To be clear, buying into some spotty US #GrowthSlowing data doesn’t exactly fire me up. But buying at the low end of my SP500 risk range does. And I’ll do more of that, every time the process tells me to.
Unlike the ISM Manufacturing report for DEC (which was solid and did not slow), yesterday’s ISM Services (non-manufacturing) print was what it was, slowing on the margin versus its 2013 peak. Let’s break that down a little further:
1. ISM Services headline slowed to 53.0 in DEC vs 53.9 NOV (I know, the horror of it all)
2. New Orders in the ISM Services report slowed faster to 49.4 DEC vs 56.4 NOV (not good)
3. Business Employment in the report ACCELERATED to 55.8 DEC vs 52.5 NOV (good)
So… with the stock market red on the headline slowing (marginally – but that’s the point about what happens on the margin, it matters) I didn’t just start buying blindly. Instead, this is how I thought about it:
1. LEVELS: SP500 tested the low end of my immediate-term TRADE range (1822-1848) – that’s a buy/cover signal
2. TIMING: the next calendar catalyst is the US Employment Report on Friday
3. DATA: Friday’s employment data could easily rhyme with strength in the ISM (services and manufacturing) reports
Since I don’t just do US stocks, I also thought through how this could play out across multiple-factors:
1. BONDS: US 10yr Treasury Yield weakened on the ISM Services headline but held all lines of @Hedgeye support
2. GOLD: strengthened on weaker data + rates falling; that’s how Gold is trading now (but failed @Hedgeye resistance)
3. DIVERGENCES: Financials (XLF) made new highs (+0.23% for JAN) vs Utilities (XLU) down -1.69% JAN
That last point is a sneaky one. Stocks that look like bonds (slow-growth, high dividend yield) continue to act like dog breath (the smell of that doesn’t lie either!).
And while our model will score Friday’s employment for what it is (a lagging economic indicator), if it’s bullish I think it will be bearish for Gold, Bonds, Utilities, etc. relative to both growth and inflation expectations.
If I didn’t think that, I wouldn’t be re-positioning this way in real-time. That’s the beauty of the #timestamp. Whether it ultimately proves to be right or wrong, my positioning doesn’t lie to me.
UST 10yr Yield 2.96-3.05%
*all 12 macro ranges are in our Daily Trading Ranges product
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.