Chinese Stocks (Shanghai Composite) closed up another +1.3% last night after China’s best PMI in 18 months.
“Why would we ever predict when we can know?”
Great question. I guess that’s why some people like to trade on inside information.
In Global Macro Risk Management, there is no inside information. Or at least not the hard core stuff like Galleon used to get. Maybe there was back in the day when someone could literally call their boy at the Bank of England and just get the next rate move prior to it being announced. But even the biggest bureaucrat on the planet is scared of orange-jump-suit-risk #accelerating at this stage of the game.
As the game changes, our #process does. We believe that the best prediction of the future is based on what we already know. I’ve spent a lot of time talking to investors about how our models work. Sometimes at least 2/3 of our forecast is based on what we already know. In other words, we use real-time data and measure its rate of change vs. historical data in order to gauge a forward looking probability.
Back to the Global Macro Grind…
Thinking in rate of change (slope) and probability terms works a heck of a lot better than the ‘I’m smart and it feels like’ this is going to happen approach. Most of that spew anchors on what already happened – not on the measurable factors underneath the hood that could cause whatever happened to undergo a phase transition.
There are those two thermodynamic risk management words again – phase transitions. To put that in the most simpleton speak I can, there are two types of phase transitions I really care about:
While always considering our intermediate-term TREND duration within the context of our other durations (TRADE and TAIL) is critical, when something undergoes a phase transition on our TREND duration, that something often ends up becoming the best calls we make.
Don’t forget that if you go both ways like I do (don’t think dirty – think hockey: back-check, fore-check, paycheck), sometimes the most important call to make is to get out of the way.
How do you do that?
If you’re a longer-term investor, just cover or sell some. Only average players take coaching personally.
If you analyze your P&L across your entire career, what you’ll realize is that your performance distribution has big tails (i.e. your biggest losers kill you). Since risk management Rule #1 is don’t lose $$, that makes getting out of stuff really important.
Who gets you out?
We know who gets you in. Every bank, broker, and buds out there is trying to get you into what they get paid on next. This is Wall Street don’t forget. But getting you out of your “best idea” (might be your marriage too!) before it’s about to go really bad, #priceless.
I didn’t know what I was going to write about this morning (I usually don’t – I have 45 minutes to write something before it gets edited), so I certainly hope you can poke holes at this. I can.
I can poke holes at every single idea we have; especially if my intermediate-term TREND signal is reversing versus the desired direction of the position. Maybe that’s why a lot of PM’s ask me to scrub their portfolios (we call it a Ticker Scrub). It’s so easy a Mucker can do it.
What looks greasy dirty out there right now? (i.e. what is signaling a bearish to bullish TREND reversal):
Greasy? Yeah, you know – like when I score a goal in men’s league hockey off my elbow. I’m getting older and slower, so I love those. And I really love seeing something breakout for fundamental reasons that neither I nor my analysts can see. Those are beauties.
Is there anything better in this business than that? When all of the super smart people in this world are all wrong, at the same time, for the wrong reasons? Most of the time no super duper slide deck can arrest gravity.
Embrace the uncertainty out there. I can guarantee you’ll be really wrong less times. And you’ll smile more often too. After all, playing this game is a lot more fun when you can know how to be right by not being really wrong. You just have to know when to get out of the way.
Our immediate-term Global Macro Risk Ranges are now as follows:
UST 10yr Yield 2.45-2.51%
Shanghai Comp 2051-2099
WTI Oil 101.75-104.15
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.
TODAY’S S&P 500 SET-UP – July 24, 2014
As we look at today's setup for the S&P 500, the range is 28 points or 1.16% downside to 1964 and 0.25% upside to 1992.
CREDIT/ECONOMIC MARKET LOOK:
MACRO DATA POINTS (Bloomberg Estimates):
WHAT TO WATCH:
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
The Hedgeye Macro Team
Controversial best-selling author James Rickards sits down with Hedgeye CEO Keith McCullough and explains why he believes 2014 is worse than 2008.
We are removing long YUM from our Investment Ideas list.
We like YUM for many reasons, including its strong management team, its asset-light model and its exposure to emerging markets. We really liked YUM, however, due to its easy same-store sales comparisons in China and its ability to deliver 40%+ operating profit growth in the region in 2014. We thought YUM was ready to turn things around in China and we made it explicitly clear that our bull thesis hinged on this. Unfortunately, we no longer believe this to be the case.
On Sunday, news hit that the Shanghai FDA launched an investigation into meat supplier Husi Food (Osi Group Inc.) after reports surfaced alleging the firm of selling expired meat products. YUM is only one of several Western food companies linked to Husi (MCD, SBUX, BKW highlight others), but it is by far the most vulnerable to this negative event, with approximately 6,400 restaurants in China. Everyone knows what happened the last time YUM had a food issue and, the fact of the matter is, Chinese consumers are still fragile. YUM had just begun regaining their trust.
All told, this is a huge blow to the company, no matter how they try to spin it. Today, the South China Morning Post published a disturbing report, featuring a Sina survey (with up to 25,000 respondents), that indicated severe damage has been done. According to the article:
"77 percent of people in the poll said they believed the affected Western fast-food restaurant brands had been aware of Husi's faulty practices. Also 69 percent said they would no longer dine at the restaurants run by the Western companies."
It is pretty clear, to us, that YUM will once again face an uphill battle in its most important region. Are we overreacting to this news? Maybe. But we don't recommend stocks, long or short, that we lack conviction in. It is now unlikely YUM will hit its numbers this year and management may have hinted at that on the 2Q14 earnings call by guiding down FY14 same-store sales estimates in China. We're much happier on the sidelines, at this point, because something tells us this won't be the last we hear of this episode.
We've previously pegged YUM shares at a fair value range of $90 to $100. This estimate assumed a full-blown recovery in China. We don't see this happening, for a while, and expect shares to muddle along similar to the way they did for the majority of 2013.
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