This note was originally published at 8am on August 20, 2014 for Hedgeye subscribers.
“Leadership is solving problems. The day soldiers stop bringing you their problems is the day you have stopped leading them. They have either lost confidence you can help or concluded you do not care. Either case is a failure of leadership.”
Compared to many of our Wall Street counterparts, Hedgeye is a relatively young and smallish firm. We’ve been around just over six years, have right around 60 employees, and still have our growing pains at times. If we’ve learned anything over those six plus years, it's this: leadership matters.
Leadership, of course, comes in many different stripes. It can be the proverbial “foot soldier” owning his actions and going above and beyond the call of duty. Or it can be top down leadership in which the “generals” enable the “soldiers” to do their job more effectively, through encouragement, teaching, and also making sure they are transparently held accountable to their goals and objectives.
Last week, we wrote about Kinder Morgan and even though we tend to disagree with the long term prospects for the company, we readily admitted that CEO Rich Kinder continues to show preeminent leadership in the realm of financial structuring.
As stock market operators frequently evaluating companies, a key question we ask ourselves is: what makes a good leader? In January 2004, internationally known psychologist Daniel Goleman did a groundbreaking study of some 188 companies that quantified leadership success and concluded the following:
“When I analyzed all this data, I found dramatic results. To be sure, intellect was a driver of outstanding performance. Cognitive skills such as big-picture thinking and long-term vision were particularly important. But when I calculated the ratio of technical skills, IQ, and emotional intelligence as ingredients of excellent performance, emotional intelligence proved to be twice as important as the others for jobs at all levels.”
More than ten years later, Goleman’s findings apply now more than ever.
Back to the Global Macro Grind...
Across the global macro landscape this morning, we are witnessing all sorts of leadership. Both perceived and actual.
In the "actual leadership" category, European equities are leading and so are the central bankers in England. The BOE released minutes from their most recent meeting and for the first time in more than three years, there were votes to increase interest rates. Specifically, two policymakers voted to raise interest rates by 25 basis points. Strong pound equals strong England.
In the "perceived leadership" category, we will have Fed minutes out today as well as a briefing from Jackson Hole. We’ve been decidedly contrarian in our view of bonds and rates this year. And we continue to believe that anything that comes out of Jackson will be incrementally dovish. In our quantitative model, the ten year yield has immediate term downside risk to 2.34% in advance of Yellen "pushing out the dots" this week.
Finally, in the category of "lack of leadership," the Argentine Economic Minister Alex Kicillof will hold a press conference today after announcing a sovereign debt restructuring plan. In conjunction with that, he will immediately submit a bill that will pay foreign currency bonds locally, lets overseas debt holders swap into new bonds, and create a separate account for holdouts. So much for being pulled to par!
In terms of asset price leadership this year, one of the more outstanding performers has been coffee. It's up over 64% year-to-date. Tomorrow, August 21st at 11am, our commodities macro analyst Ben Ryan will host a conference call on the outlook for coffee, which postulates, “Coffee Prices May Move Much Higher From Here.”
Joining Ben on the call will be Judith Ganes-Chase who has been following the coffee markets for more than twenty years. They will be looking at such topics as tree scarcity, weather conditions, and scarcity of grades of coffee. The call is also obviously relevant for a host of different equities, including CAFE, JO, SBUX, DNKN, MCD, MDLZ, GMCR, THI. Hopefully you will grab a cup of Joe and join us for this call with this commodities leader.
In terms of leadership on Hedgeye's Best Ideas list, our savvy retail vet and Sector Head Brian McGough has had a good run with his long pick on Restoration Hardware (RH). Given its lofty valuation, RH has become a true battle ground stock. Since being added to the Best Ideas list just under a year ago, RH is up approximately 36%. Over the last six months, the stock has mercy crushed the S&P 500 in terms of performance.
As always, though, the key is question is whether RH can continue to lead, or will the short sellers (almost 17% of the float is currently short) prevail. If we are correct, the short sellers may be grossly underestimating the real estate opportunity. As McGough wrote last week:
“We’ve spent a lot of time on the road discussing RH over the past three weeks, and most specifically, our recent 45-page deep dive on RH’s real estate. The punchline of our analysis is that a) RH stores could (and probably should) get far bigger than even the RH bulls seem to think, b) Aside from reconfiguring 66 existing markets, there’s another 19 markets we identified where the spending rate on home furnishings by people making over $100k in income suggests that RH should expand to these markets with Design Galleries, and c) the availability and economics on large properties for all these markets are far better than people think. This analysis supports our $11 earnings power in five years (double the consensus), as well as our view that that this stock is headed well above $200.”
As always, contact firstname.lastname@example.org to learn how to get access to McGough’s deep dive.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.34-2.42%
WTI Oil 94.56-96.91
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research