This note was originally published at 8am on August 15, 2014 for Hedgeye subscribers.
“You’ve got to know when to hold’em, know when to fold ‘em.
Know when to walk away, know when to run.
You never count your money when your sittin’ at the table,
There’ll be time enough for countin’ when the dealin’s done.”
It is hard to believe it, but the song “The Gambler," written by Don Schlitz and recorded by the legend Kenny Rogers is almost 36 years old. Some songs, poems, and books transcend time and this is certainly one of them.
In many ways, the song is also apropos for stock market operators like ourselves. Certainly, we don’t tell our clients that we are gambling, but some days it does feel like we are at the casino. And some days certain stock market operators go on unbelievable runs that seem to belie even the best of odds.
Take my colleague Howard Penney for example. Yesterday he introduced another Best Idea, which was to short HAIN. (If you’d like learn how to get access to his 70 page deck on the name, please email firstname.lastname@example.org.)
To say Howard has had a hot “hand” would be an understatement to say the least. His last five short ideas have had great returns on an absolute basis and versus the market. They are as follows:
- Del Frisco – DFRG ~+20% (still live)
- Annie’s Inc – BNNY ~+22% (still live)
- Potbelly – PBPB ~+56% (still live)
- Panera – PNRA ~+10% (closed)
- Bloomin Brands – BLMN - ~+21% (closed)
So as it relates to the restaurant and consumer staples sectors, you can gamble or if you are going to go to the stock market casino you can listen to Penney and improve your odds versus the house.
Back to the Global Macro Grind...
Speaking of casinos and gambling, former Reagan budget director David Stockman recently had a great quote saying the markets were like a branch casino of the central bank. According to Stockman:
“The Fed has destroyed the money market. It has destroyed the capital markets. They have something that you can see on the screen called an "interest rate." That isn't a market price of money or a market price of five-year debt capital. That is an administered price that the Fed has set and that every trader watches by the minute to make sure that he's still in a positive spread. And you can't have capitalism if the capital markets are dead, if the capital markets are simply a branch office – branch casino – of the central bank. That's essentially what we have today.”
Now, casinos are great when the odds are lined up in your favor, but when the odds shift or are not aligned with your bets, it doesn’t matter how many red bulls and vodka you drink, the casino is a very frustrating place to spend the evening.
This morning, by and large, the ball has landed on green across the global markets. This comes despite, particularly in Europe, some fairly despondent growth data points over the last couple of weeks.
On the good news front, the U.K. continues to outperform as evidenced by its GDP report last night. On a year-over-year basis, GDP in the U.K. expanded by +3.2% and was up +0.8% sequentially. Interestingly, U.K. policy makers seem to get that a strong currency helps. Even the manic media is getting the point, as Reuters wrote this morning:
“The strong Pound policy from Carney seems to be a tailwind for the U.K. economy.” (Note that we bought the British Pound (via the etf FXB) on 8/13 in our Real-Time alert products.)
Hopefully, Dr. Yellen gets the memo!
Ironically, Dr. Yellen and her colleagues will actually have decent cover to become incrementally dovish (read: push out the dots) given the anemic situation in the U.S. housing market. In the Chart of the Day today, we’ve included a table from our housing team that summarizes the recent data points in housing. Of the 22 housing data points we track regularly, 18 of them are worse in the most recent period.
As my colleague Christian Drake wrote yesterday:
“The Mortgage Bankers Association today released its weekly mortgage applications survey data for the week ended August 8th.
The Composite index fell -2.7% WoW as refi activity was weaker by -4.0% on the week and purchase demand slid -1.0% sequentially.
The anemia extends to August as purchase apps hold the 160 level for a 5th consecutive week and are now running -5.3% QoQ and at the lowest quarterly ave reading since 2Q 1995.
- Lower Lows in Purchase Demand: The Purchase Index slid yet again to 164.8 on the index, down from 166.5 last week - marking a second week of decline and the 5th consecutive week at the 160-level. As it stands, purchase demand continues to sit just above the 10Y lows recorded during the peak weather distortion trough in February while average purchase demand for 3Q to-date is currently tracking at its lowest level since 2Q of 1995.
- Refi & Rates: Refinance activity declined -4% WoW with rates on the 30Y FRM contract static at 4.35% in the latest week. Refi activity remains down -38.4% YoY and continues to improve as we traverse through the easiest 2013 comps.
Summarily, the high frequency housing data continues to corroborate the sea of red currently blanketing our housing compendium. As we’ve highlighted repeatedly, we’re inclined to remain bearish on the housing complex until the slope of HPI deceleration inflects.”
Not surprisingly then, we recently shorted Toll Brothers (TOL) in our real-time alert products. There is nothing like fundamentals to put the odds on your favor!
Good “luck” out there today.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.38-2.48%
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research