“Didn’t I ever tell you? Bumbles Bounce!”
Bounce that bumble! Oh yeah. I am going to go all Cornelius Yukon on you this morning! “The greatest stock picker (prospector) in the world!” VIDEO: https://www.youtube.com/watch?v=nsY2EeUuLj8#t=17
GenX kids like me loved this guy (so did our baby booming parents – just stick us in front of the TV and they were all set). For those of you who didn’t see Rudolph The Red Nosed Reindeer (initially released in 1964), Cornelius is a beauty.
After a rough week of dancing with the bear, here are some “high-conviction” Cornelius “picks”, I mean quotes:
“Terrible weather we’re havin’!”
“Open up! It isn’t a fit night out for man or beast”
“This is my land. And you know it’s rich with gold. Gooooollldddd!”
Back to the Global Macro Grind…
Ok. Maybe Captain Stock Picker didn’t think that was funny. Getting caught long in “the land” of levered bullish market beta wasn’t funny either. “So”, on this Bumble Bounce, do me a favor and recognize that the oncoming red light isn’t Rudolph – it’s a train.
Yep, open it up! Let this bounce rip to the high heavens of hope and sell-the-bumble-bounce #STBB. Because hope (that “everyone is bearish now”) is not a risk management process.
Neither is calling tops and bottoms. Remember, both are processes, not points. We’ll review the #process that got us bearish on both growth and inflation in the first place (before October’s “terrible weather”), on a Flash Call today at 1PM EST (email if you’d like access).
I’ll keep the call to 15 mins, then take the most important part of the call (your questions). Here are some levels to consider selling into as you “observe the bumbles one weakness (the bumble sinks! Ha ha!)”:
- UST 10yr Yield – immediate-term TRADE resistance zone of 2.22-2.31%
- Russell 2000 – immediate-term TRADE resistance = 1105
- SP500 – immediate-term TRADE resistance = 1889
*Note: I am not using the 200-day moving monkey as “resistance” – our #process is built to front-run that.
Don’t worry, I get it. You get it too. We are both allowed to change our minds in real-time. This is a dynamic and non-linear system of risk we are dealing with. Being wed to a chart, ice pick, and a moving monkey isn’t the answer.
While yesterday’s gap down open in both the Russell and SP500 recovered faster than I would have thought it could. Who cares what I thought? Mr. Market certainly doesn’t.
What we need to care about is where marked-to-market risk is right here and now. Then make the best risk management decisions we can make on the bounce. Chase or sell?
That’s why I show every move I’d be making if I was back in your seat (Real-Time Alerts). If you can think of a better way for me to show what I really think in the moment, let me know. But I’m thinking the #timestamp is the best I can do.
No, that doesn’t mean my #timestamps are always right. They’re not always wrong either. But I have been arguably dumber than Cornelius in showing you, literally, every move I’d have made (over 2,800 of them, long and short) since 2008.
Back to risk managing the bounce – some of the more interesting ones will come within risk ranges that are #crashing:
- Including this morning’s bounce to 2.18%, the 10yr UST Yield is still crashing, -28% YTD
- Including this morning’s whopping +0.5% bounce to $82.89, WTI Crude Oil is still crashing, -25% since June
- Including Europe’s bounce, both Greek and Portguese stocks are still crashing, -21-22% YTD
And why are these ex-ebola items #crashing?
- Bond Yields crash when growth expectations do
- Oil crashes in #Quad4, when both global growth and inflation expectations do
- Illiquid European stocks crash, well, every time they remind you the central plan didn’t work
Oh, then there’s the crash within the Russell itself. Over 62% of stocks in the Russell 2000 have crashed (-20% peak to trough drawdowns). By my math, that is a lot of pain that was not proactively prepared for.
But everyone is going to strike it rich with their small cap peppermint stock “picks”, on the bounce, right? “Peppermint! What I’ve been searching for all my life! I’ve struck it rich! I’ve got peppermint! Wahooooo!” (Cornelius again, sorry – couldn’t resist).
Right. Right. After very few prepared for the avalanche of small cap beta risk, everyone is going to triple-down on the bounce, and the bumbles will never sink again.
Roger that. And it really is different this time. It’s Rudolph, remember (not a train on globally interconnected #GrowthSlowing and deflation risk).
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.09-2.22%
Best of luck out there today,
TODAY’S S&P 500 SET-UP – October 17, 2014
As we look at today's setup for the S&P 500, the range is 58 points or 1.70% downside to 1831 and 1.41% upside to 1889.
CREDIT/ECONOMIC MARKET LOOK:
- YIELD CURVE: 1.83 from 1.81
- VIX closed at 25.2 1 day percent change of -4.00%
MACRO DATA POINTS (Bloomberg Estimates):
- 8:30am: Fed Chairman Janet Yellen speaks at Boston Fed conf. on Inequality of Economic Opportunity in U.S.
- 8:30am: Housing Starts, Sept., est. 1.008m (prior 956k)
- 9:55am: UofMich Confidence, Oct. prelim, est. 84 (prior 84.6)
- 1pm: Baker Hughes rig count
- Senate, House out of session
- Gov. Scott Walker, R-Wis., Democrat challenger Mary Burke debate in Milwaukee
- 9am: HUD Secretary Julian Castro speaks in plenary session at National Assn of Housing and Redevelopment Officials conf.; Baltimore Convention Center
- 9:30am: Sec. of State John Kerry meets with Jordanian Foreign Minister Nasser Judeh at State Dept
- U.S. ELECTION WRAP: Megadonors; Good Signs for GOP; Debates
WHAT TO WATCH:
- Google Profit Misses Estimates on Slower Advertising Growth
- Credit Suisse Names Amine, O’Hara as Investment Bank Heads
- Obama Says He’s Open to an Ebola Czar to Coordinate Response
- Chiquita to Move on Fyffes Bid After Rejecting Sweetened Buyout
- AMD to Cut 7% of Jobs, 4Q Rev. View Trails Est.
- Apple Looks for Big Screen Boost as IPhone 6 Plus Hits China
- Delta Brings Back Bare-Bones Fares to Compete With Cheap Rivals
- Bullard Challenges Fed Colleagues to Thwart Weakening Inflation
- U.S. Video-Game Sales Climbed 2% to $1.1b in September
- Smaller China GDP Goal Seen Giving Room to Tackle Debt
- Alibaba Adds Philips, Provincial Governments as Cloud Customers
- Hong Kong Police Clear Mong Kok as Students Agree to Negotiate
- U.S. Housing Data, U.K., China GDP, Apple, Amazon: Week Ahead
- Bank of New York Mellon (BK) 6:30am, $0.61
- Comerica (CMA) 6:40am, $0.79
- First Horizon Natl (FHN) 7am, $0.17
- General Electric (GE) 6:30am, $0.37 - Preview
- Honeywell Intl (HON) 7am, $1.41 - Preview
- Huntington Bancshares (HBAN) 5:55am, $0.19
- Kansas City Southern (KSU) 8am, $1.26
- M&T Bank (MTB) 8:01am, $1.97
- Morgan Stanley (MS) 7:15am, $0.54 - Preview
- SunTrust Banks (STI) 6am, $0.79
- Synchrony Financial (SYF) Bef-mkt, $0.66
- Textron (TXT) 6am, $0.52
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- Goldman Sees No Crude Glut as Price Slump Deemed Excessive
- Codelco Seen Cutting China Copper Premium From Nine-Year High
- Brazil’s China Fever Sticks Soy Farmers With Losses: Commodities
- WTI Extends Rebound From Below $80 as Goldman Sees No Oil Glut
- Gold Is Near Five-Week High as Investors Weigh Stocks to Economy
- Nickel to Tin Rebound Amid Indications Prices Dropped Too Far
- Corn Heads for Biggest Weekly Gain in 17 Months on Harvest Delay
- Rubber Jumps Most Since March as Thailand to Buy for Reserve
- Cocoa Rises in London on Concern of Ebola Spread; Coffee Drops
- Cargill’s Black Sea Stop Is Booming 2,600-Year-Old Port: Freight
- One Firm’s $2 Mine Is Another’s Start of Global Coal Empire
- Hurricane Gonzalo Threatens Worst Bermuda Storm in 11 Years
- Gold Traders Most Bullish in 10 Weeks on Economic Growth Concern
- Steel Rebar Pares Weekly Advance on Weaker China Demand Concern
The Hedgeye Macro Team
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Takeaway: We’ve identified 17 stocks that each face significant draw-down risk to the extent our macro themes continue to play out as anticipated.
How Did These Stocks Make the Cut?
As you are likely well aware, we continue to be the bears on domestic equities – particularly the illiquid small-to-mid cap style factor (#Bubbles), consumer discretionary stocks (#ConsumerSlowing), homebuilders (#HousingSlowdown), regional banks (#Quad4 and #HousingSlowdown), as well as commodity-linked equities (#Quad4).
And with domestic high-frequency economic data confirming our views, at the margins, we are inclined to think the market has not yet made an investable bottom – especially given that the overwhelming majority of our interactions with customers over the past week or so have centered on “where to buy” as opposed to “where to sell”.
While our gauge of buy-side consensus is obviously limited to our large (and growing) sample of clients, we think the fact that hedge funds’ correlation to beta is in excess of +90% on a traling-5Y basis speaks volumes to the fact that there isn’t a ton of differentiation out there from either a sentiment or exposure perspective.
The five key takeaways from our discussions are:
- Consensus on the buy-side is still likely positioned bullish. Cutting one’s net exposure to 60% net long from 80% net long does not constitute “getting defensive” in our playbook.
- In the absence of true downside capitulation, there is likely more downside to come for the overall equity market. Remember the upside capitulation we saw on $BABA IPO day? We do. Never in history has upside capitulation been followed so quickly by a commensurate degree of downside capitulation.
- We’ve been harping on this for months, but the illiquidity risk investors are facing out there is very real. Years of the buy-side taking on liquidity risk to keep pace with a low-variance, high return equity market is a “chicken” that is likely coming home to “roost” before our very eyes.
- Moreover, the proliferation of low-cost passive exposure to index beta during the QE era likely means there are fewer stock-pickers in the market ready to defend individual names when entire sectors or style factors are being blown out of.
- All told, we think a “short the bounce” strategy is likely to prove more profitable than the consensus “buy the dip” narrative over the intermediate term.
Our Screening Methodology
Understanding all of that, we took it upon ourselves to screen for names that fit our bearish macro themes on the short side; the criteria of our screen is as follows:
- Accessible: Traded on a US exchange: 14,064 stocks
- A known hedge fund hotel: In the top quartile of hedge fund ownership (as a percentage of float): 3,517 stocks
- Worth your/our time to analyze: Market cap > $1 billion: 1,274 stocks
- A good story that has played out to some degree: In the top quartile of Bloomberg consensus NTM revenue revisions on a YoY basis: 228 stocks
- With cracks developing in the thesis: In the bottom quartile of Bloomberg consensus NTM revenue revisions on a QoQ basis: 38 stocks
- Illiquid: The trailing 3M average daily turnover in this sample of 38 stocks is $73M; and that includes Netflix, which is actually quite liquid at $977M. These figures compare to an average trailing 3M average daily turnover for S&P 500 constituent stocks of $223M.
The 17 names highlighted in the chart below are those from the list of 38 that have at least 20% downside to their respective trailing 52-week lows. Obviously that’s an arbitrary point to anchor on in the context of the market going straight up for two straight years, but it’s at least a consistent frame of reference to gauge further downside (many of the 38 stocks in our screen have already corrected or crashed from their 52-week highs). The trailing 3M average daily turnover in these names is a “whopping” $53M.
Now that the top-down work is complete, let us know if you’d like one of our senior industry analysts to do the bottom-up work on any one of these names for you (for a fee, of course).
Associate: Macro Team
Hedgeye CEO Keith McCullough talks to Seeking Alpha Contributor and BluePac managing partner Chris Sommers about Sommers' high conviction short idea, John Deere. It's the latest from Hedgeye's video partnership with Seeking Alpha.
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