“If you try to fail, and succeed, which have you done?”
In theory, investing is very straightforward. You buy stocks in great companies and the stock prices goes up. You short stock in bad companies and the stock prices go down. Practically, of course, that’s never really how it happens, except in fundraising power point presentations.
A real paradox of investing is that there are periods in which the stock prices of “weaker” companies actually dramatically outperform “stronger” companies. Over the last three months, stocks in the highest quartile of short interest have outperformed low short interest stocks by 240 basis points over the last three months - +5.5% vs +3.1%. In part, this is facilitated by so called short covering.
Our lives are, of course, replete with paradoxes, so a little paradoxical market action should on some level be easy to stomach, right?
Some notable paradoxes of different genres include:
- Paradox of voting - For a rational, self-interested voter the costs of voting will normally exceed the expected benefits, so why do people keep voting?
- Fenno's paradox - This is the belief that people generally disapprove of the United States Congress as a whole, but support the Congressman from their own Congressional district.
- Hedgehog's dilemma – This is the paradox that human intimacy cannot occur without substantial mutual harm (This is maybe the best philosophical defense for long term bachelors like myself!)
- Archimedes paradox – The paradox that a massive battleship can float in a few litres of water
Lastly is one of my personal favorites - the St. Petersburg paradox.
According to the St. Petersburg paradox, a casino offers a game of chance for a single player in which a fair coin is tossed at each stage. The pot starts at $2 and is doubled every time a head appears. The first time a tail appears, the game ends and the player wins the pot.
Thus the player wins $2 dollars if a tail appears on the first toss, $4 if a head appears on the first toss and a tail on the second, $8 if a head appears on the first two tosses and a tail on the third, $16 if a head appears on the first three tosses and a tail on the fourth, and so on.
What would be a fair price to pay the casino for entering the game?
Back to the Global Macro Grind...
As it relates to recent events in Russia, the term circus comes more to mind than paradox. Yesterday Russian President Putin introduced a hastily patched together seven point peace plan at a press conference. This came shortly after President Obama upped the rhetoric in terms of the U.S.’s willingness to support Ukraine (and also NATO countries in the region) and ahead of a two day NATO summit that begins today.
By some pundits, this “ceasefire” was perceived positively. But the ever thoughtful George Friedman from Stratfor (the largest non-government intelligence agency) had a more paradoxical take and wrote the following:
“This rapid turnaround on the battlefield (in reference to the recent thwarting of a Ukrainian offensive) had two main purposes. The first was to assert Russian military power and convince the West that Moscow would not be afraid to use it in spite of the economic consequences. The second was for Moscow to use its military gains to make it appear that the West was utterly irresponsible in trying to wrest Ukraine out from Moscow's shadow. Now, by dangling an ambiguous cease-fire before the Americans, Russia is essentially telling the United States that to defeat Russia it must fight Russia directly, knowing that NATO is loath to engage directly with the Russian military.
That deal goes well beyond a cease-fire. Russia wants its buffer in Ukraine recognized and respected, along with sanctions lifted so it can get on with repairing its economy. And with winter approaching, Russia also has the means to turn the screws on Europe's natural gas supply at the same time it holds a clear military advantage on the Ukrainian battlefield.”
Of course, the real news in Europe this morning are the monetary moves from the ECB and not that geo-political move from Russia yesterday. In an announcement that was a surprise to most, the ECB cut interest rates from 0.20% to 0.05%, cut the deposit rate by 10 basis points to -20 basis points, and also cut the re-fi rate and marginal lending rate by 10 basis points.
Although this isn’t necessarily monetary shock and awe, with the Euro trading down about 80 basis points, Draghi was seemingly able to get his point across with this move on some level. Practically speaking though, it is not clear that this will necessarily be a catalyst to ignite European economic activity.
Certainly a negative deposit rate incentivizes banks to lend out their money and sovereigns such as France, with a negative short term borrowing rates, have benefitted. That said, at least based on the initial foray into a negative deposit rate early this summer, this policy move has not lead to increased lending to businesses that are willing to invest in and grow the European economy.
All eyes will now be on Draghi’s press conference where he is likely to now introduce a QE type plan that also surprises to the dovish side. But the paradox of these surprises moves from such low levels is related to the answer to the St. Petersburg paradox, which is: infinity. Unfortunately infinite monetary policy moves from zero do not grow an economy.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.33-2.43%
Shanghai Comp 2
VIX 11.34-12.95 (bullish)
WTI Oil 92.51-96.53 (bearish)
Gold 1 (neutral)
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
“Contributor Call” series will be produced by HedgeyeTV.
FOR IMMEDIATE RELEASE
STAMFORD, Conn., September 4, 2014 -- Seeking Alpha (SA) and Hedgeye Risk Management today announced a new partnership with the creation of a new video series called “Contributor Call.” Produced by HedgeyeTV, the series will feature one-on-one conversations hosted by Hedgeye CEO Keith McCullough who will speak with top SA contributors about their highest-conviction investing ideas.
Viewers can watch “Contributor Call” on SeekingAlpha.com, Hedgeye.com, HedgeyeTV’s mobile app and on Hedgeye’s YouTube channel (youtube.com/Hedgeye).
The new partnership brings together Hedgeye, a leading independent investment research and media firm, with Seeking Alpha, the Internet’s #1 crowd sourced equity research platform.
"We're thrilled to partner with Hedgeye on this extremely exciting initiative,” said Colin Lokey, Director of Contributor Success at Seeking Alpha. “This represents a new and compelling way for Seeking Alpha contributors to share their best ideas with the investing public."
The inaugural “Contributor Call” features Ben Axler, founding partner of Spruce Point Capital, a long/short hedge fund, explaining to McCullough the reasoning behind one of his top short calls.
"This marks the beginning of what we think will be a great partnership between Hedgeye and Seeking Alpha,” said Keith McCullough, CEO of Hedgeye Risk Management. “Investors are thirsting for actionable investing ideas with deep, professional analysis and insight. This new pro-to-pro format gives it to them."
HedgeyeTV was launched last year and produces daily video content, including programs such as “Real Conversations” which has featured notable guests including national bestselling “Currency Wars” author James Rickards, Jim Grant, founder of Grant’s Interest Rate Observer and Liz Ann Sonders, chief investment strategist at Charles Schwab & Co.
ABOUT SEEKING ALPHA
Seeking Alpha is a crowd-sourced investment research platform that sources equity and fixed income analysis from over 9,500 contributors. With 3.5 million registered users and 2 million real-time alert subscribers, Seeking Alpha is the web's go-to destination for actionable investing ideas."
ABOUT HEDGEYE RISK MANAGEMENT
Hedgeye Risk Management is an independent investment research and media firm. Focused exclusively on generating and delivering actionable investment ideas in a proven buy-side process, the firm combines quantitative, bottom-up and macro analysis with an emphasis on timing. The Hedgeye team features some of the world's most regarded research analysts, all with buy-side experience, covering Macro, Financials, Energy, Technology, Healthcare, Retail, Gaming, Lodging & Leisure (GLL), Restaurants, Industrials, Semiconductors, Consumer Staples, Internet & Media.
CONTACT: Dan Holland
Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.
Hedgeye CEO Keith McCullough talks to Seeking Alpha Contributor and Spruce Point Capital's Ben Axler about Axler's high conviction short idea, iRobot. It's the first video of a partnership between Hedgeye and Seeking Alpha.
(This is the opinion of Ben Axler of Spruce Point Capital and does not necessarily reflect the opinion of Hedgeye Risk Management)
Takeaway: Strong RevPAR should boost the sector and upcoming asset sales/more aggressive stock buyback may result in HOT closing the perf gap vs peers
A HOT End to 2014
the call to action
Starwood’s stock typically outperforms the market with better than expected RevPAR and earnings, and outperforms the sector with more capital return and announced asset sales. We’re optimistic on the former for most lodging companies and increasingly comfortable that investors will be favorably surprised with the amount of capital activity in 2H for HOT. Thus, the set up for HOT’s stock through 2014 looks bullish.
Similar to other hotel stocks, RevPAR, earnings, and guidance should drive HOT. Building on that fundamental backdrop, HOT maintains several catalysts that could push sector outperformance in the back half of 2014 including heightened asset sales and capital return to shareholders. As can be seen in the following chart, Starwood’s stock has been correlated to changes in investor perception in these critical areas.
Here is why we’re optimistic that the catalysts will move in favor of the HOT bulls for the rest of 2014:
1) US RevPAR guidance may be exceeded: Q3 2014 US RevPAR trends are developing nicely QTD with the Luxury segment trending toward 7.5%, Upper-Upscale segment trends exceeding 8.5% and Upscale segment trending toward 10%. As a result, when HOT reports Q3 2014 financial results, we believe the company will be at the upper-end of guidance, if not exceeding the upper end of the guidance range. Additionally, the composition of RevPAR with average daily rate increases exceeding gains in occupancy, should result in strong profitability flow through as well.
2) More Aggressive Share Repurchase: Following several quarters of disappointing investor expectations on this topic, the early August announcement regarding an enlarged share repurchase authorization as well as expedited timing was welcomed. We now have increased confidence HOT may exceed still muted investor expectations in 2H 2014.
3) Asset Sales Finally? We have renewed confidence that asset sale announcements are forthcoming here in 2H. Stay tuned for this important catalyst.
4) New Chief Financial Officer – We understand Thomas Mangas is an investor community friendly executive with a very strong grasp of financial accounting as well as day-to-day operations. As such, we expect Mr. Mangas to quickly acclimate into the CFO role at HOT and following strong Q3 2014 earnings, will begin meeting with investors.
As can be seen below, HOT’s stock has underperformed year to date owing to a dearth of announced asset sales, and lower than expected capital return to shareholders. While the stock has relatively recovered somewhat since Q2 earnings season, we think upside remains in the back half of 2014. RevPAR tracking at the high end of company guidance should lead to a Q3 beat and we suspect that a few asset sales could provide a further catalyst. Finally, the company appears more willing to finally purse a more aggressive buyback strategy which has historically correlated with a rebound in the share price.
This note was originally published at 8am on August 21, 2014 for Hedgeye subscribers.
“I don’t really make decisions, I go with the flow.”
For most, Academy Award-winning actress Nicole Kidman requires no introduction; in this analyst’s humble opinion, her role as Dr. Chase Meridian in Batman Forever should forever be remembered as one of cinema’s all-time great damsels in distress.
Lacking adequate contextualization for her quote above, we thought we’d spend some time this morning discussing “flow” in a more relevant context: investment ideas.
Be it the Surf Lodge in Montauk or the White Briar/Princeton combo in Avalon, NJ, I’ve done my fair share of “going with the flow” this summer. In fact, how I’ve approached social life in my late-twenties is not unlike how I’ve approached generating investment ideas – by remaining open-minded and gravitating towards those destinations that others are also likely to find most attractive.
That’s easier said than done, however, especially in the context of investing. How does any investor – fully equipped with his or her confirmation biases – remain open-minded enough to consistently and presciently spot those attractive destinations? While I’m sure asking 20 different analysts and portfolio managers will net about 19-20 different responses, my answer to that omnipotent question is simple: by doing the same thing each and every day.
Back to the Global Macro Grind...
My repeatable process commences each morning by writing down 186 unique, color-coded quantitative signals into my notebook. These signals can be anything from the MoM delta in India’s OIS spread, to the SPY’s Volatility-Adjusted Multi-Duration Momentum Indicator (VAMDMI) score per our Tactical Asset Class Rotation Model (TACRM), to the top-20 and bottom-20 VAMDMI scores across the universe of global macro ETFs. It culminates with absorbing all of the relevant economic data and policy rhetoric in my geographical coverage area and categorizing the deltas as sequential accelerations, decelerations, tightenings and/or easings.
While this process is far from perfect, it does tend to afford me a consistent opportunity to kick the tires on many developing investment themes and ideas. From there, we apply a healthy dose of “secret sauce” to determine whether or not a particular theme or idea is worthy of communicating to our subscribers.
For those of you who with the ability to invest capital internationally, we thought we’d create the table below to help synthesize and hold accountable our investment ideas across the Asia, LatAm and EM space, which is my primary coverage responsibility for the team. In addition to updating you on the active recommendations therein, we are also taking this opportunity to provide post mortem on our closed ideas over the TTM.
Active Long Ideas:
- FXI: We continue to think the shaky foundation on which the Chinese economy currently resides will force officials to ease monetary and fiscal policy, at the margins. This should be supportive of industries tethered to China’s fixed asset investment bubble. (TREND duration)
- EPI: If we could LBO a country, India would be our top choice. The country’s new “management team”, led by RBI Governor Dr. Rajan and Prime Minster Modi, is implementing the kinds of policies needed to structurally elevate India’s growth potential. (TREND and TAIL durations)
- EEM, EMB, EMLC and CEW: When we were making the opposite call ~18M ago, there were not a lot of investors who agreed with us that US monetary policy was the driving factor behind capital flows, monetary conditions and asset prices in emerging markets. Now everyone gets it and the fundamentals (i.e. US #GrowthSlowing) and quantitative signals (see slide #4 of TACRM deck above) support remaining long of EM assets here. (TREND duration)
- EIDO: Definitely long in the tooth as it relates to Jokowi hoopla, but the comps in our GIP (i.e. Growth/Inflation/Policy) model portend a favorable investing environment for at least the next 2-3M. (TREND duration)
Closed Long Ideas (TTM):
- ARGT: Booking the loss here. Loose fundamental thesis on our part with even looser results.
- EWT: Great trade. Semiconductor stocks (SOX Index) have done nothing but go straight up over the past two weeks; a failure to make a higher-high would auger negatively for the consensus storytelling about a sustained recovery in CapEx.
- ENZL: Decent timing on booking the gain. It’s been lower-highs and lower-lows for New Zealand for ~3M now amid marginally dovish monetary policy.
- EWZ, BZF and PBR: Great [near] bottom-tick back in FEB; booked the alpha too early amid fears of a growing probability of a Rousseff reelection. Silva’s entrance into the presidential race throws a wrench in the trade, but we think Brazil is setting up to be a nice short heading into 2015 if either of the female candidates emerges victorious.
- FXY: Not much to see here; we merely traded around what we saw as likely consolidation amid a fiscal and monetary policy vacuum in Japan.
- CQQQ and CHIQ: Great trade. Our long “New China”/short “Old China” theme would’ve returned +1,154bps on an equal-weighted basis.
- EPI: Booked substantial alpha ahead of the election, fearing consternation. Rotated back into it a few weeks later and haven’t looked back since.
- DXJ: Calling for Japanese equity reflation to occur concomitantly with aggressive yen debasement back in 4Q12 remains one of the hallmark calls of my analytical career.
Active Short Ideas:
- FXA: While his latest guidance on rates isn’t necessarily supportive of our view, it’s clear that RBA Governor Glenn Stevens wants a lower Aussie dollar, citing Australia’s deteriorating labor market. Just wait until Aussie CPI decelerates for the next 1-2 quarters, which is something our GIP model currently identifies as the most probable outcome.
- General commentary: You’ll note that there aren’t a ton of active short ideas here. That’s by design, as both the bottom-up fundamentals and top-down quantitative signals continue to support a long bias towards EM assets at the current juncture.
Closed Short Ideas (TTM):
- KRW: Booking the loss here. We couldn’t have been more right about South Korea’s deteriorating GIP dynamics or the aggressive spate of fiscal and monetary easing we’ve seen in recent months. Conversely, inflows from international equity investors have buoyed the won – likely well above where the BoK and Finance Ministry want it to trade.
- EWA: Booking the absolute return loss/relative return alpha here. The glass half-empty reads: we underestimated the resiliency of the Aussie housing market and the Aussie consumer. The glass-half full reads: Australia’s substantial underperformance relative to global equities highlights some of the structural headwinds we were calling for back in mid-2012.
- DXJ: Good trade. As we predicted, Japan did not participate in the rally across global equities from the early-FEB lows through our late-MAY note to stop fading consensus on the “Abenomics Trade”.
- CHIX and CHXX: See commentary above RE: CQQQ and CHIQ.
- EPHE: A bad play by us that could’ve been much worse. The EPHE ETF has appreciated +15.5% since we turned broadly positive on EM assets earlier this year – inclusive of backing away from the short side of Filipino equities.
- CLP: A decent play by us that could’ve been much better, had we stuck with it. The Chilean peso has declined an additional -5% versus the US dollar since we backed away from it on the short side.
- EWZ: Outstanding call. Not much more to be said.
- EEM, EMB, EMLC and CEW: This round of #EmergingOutflows was far less severe than the first (see below).
- FXY: This is the centerpiece of the aforementioned Abenomics Trade (i.e. short yen/long Nikkei) and one of the best calls of my analytical career. We more-or-less top-ticked the all-time lower-high in the Japanese yen. It’s been mostly straight down ever since – and by a lot!
- CHIX: Great thesis; terrible timing. Reminded us of the one thing many investors forget when they ponder Chinese tail risk: China is a state-run economy. At the drop of a dime, they can manufacture both liquidity and economic growth. While reflation policies are obviously unsustainable over the long term, they can be a lot more sustainable over the near-term than the P&L of anyone trying to short China at such favorable turns in policy.
- EEM, EMB, EMLC and CEW: Another one of the hallmark calls of my analytical career. Turning bearish on EM assets when we did was greeted with a substantial amount of disbelief and contempt from investors – until after they went down in price… by a lot!
Obviously the nuggets above are intended to be brief, so please feel free to reach out if you’d like additional color on anything you see above.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.34-2.46%
Keep your head on a swivel,
Associate: Macro Team
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