Client Talking Points
With a truly remarkable -0.97 long-term TAIL correlation trending between the Yen and the Nikkei, I need to ask a very simple question: Does anything else matter? The Yen had its first down day of consequence versus the US Dollar yesterday. Guess what happened? Of course. The Nikkei jumped +2.5% overnight. Correlation matters.
Our call here at Hedgeye remains overweight European Equities versus mostly everything else. The DAX is up +1.2% year-to-date versus the S&P 500 which is down -0.5%. Meanwhile, the alpha march forward continues this morning with Greece up +1.7% (+10.2% year-to-date), Portugal +1% (+7.2% YTD), and Austria +0.4% (+5.9% YTD). Boom.
The 10-year Treasury yield holds Hedgeye's 2.76% TREND line support like a champ this morning and bounces to 2.87%. Gold, Silver, and Platinum don’t like that (down -0.7-1.2% respectively this morning). But the risk ranges on both the 10-year and Gold are narrowing, which might make this easier to risk manage if volatility comes down. We will see.
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Top Long Ideas
Hedgeye's detailed and constructive view on the improving fundamentals in the M&A market with a longer term perspective is a contrarian idea at odds with the rest of the Street which is overly focused on short-term results. From an intermediate term perspective, M&A is poised to break out in 2014. We are witnessing record amounts of cash on corporate balance sheets, continued low borrowing costs and the first positive fund raising round for Private Equity in four years. Moreover, a VIX in secular decline (this has historically benefited M&A), recent incrementally positive data points from leading M&A firms that dialogue has improved, and an improving deal tally from Greenhill & Company (GHL) themselves coming out of the summer all bode favorably for GHL. So is a budding European economic recovery that would assist a global M&A market that has been range bound over the past three years. GHL stands out as a leading beneficiary of these developments.
We remain bullish on the British Pound versus the US Dollar, a position supported over the intermediate term TREND by prudent management of interest rate policy from Mark Carney at the BOE (oriented towards hiking rather than cutting as conditions improve) and the Bank maintaining its existing asset purchase program (QE). UK high frequency data continues to offer evidence of emergent strength in the economy, and in many cases the data is outperforming that of its western European peers, which should provide further strength to the currency. In short, we believe a strengthening UK economy coupled with the comparative hawkishness of the BOE (vs. Yellen et al.) will further perpetuate #StrongPound over the intermediate term.
WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.
Three for the Road
QUOTE OF THE DAY
"You don't get to choose how you're going to die or when. You can only decide how you're going to live." -Joan Baez
STAT OF THE DAY
Atlantic City's casino revenue fell below $3 billion last year for the first time in 22 years, as increasing competition in the northeastern U.S. continued to shrink the market. New figures showed the city's casinos won $2.86 billion in 2013, down from just over $3 billion in 2012. It marked the seventh straight year of plunging gambling revenue. (AP)
Risk Managed Long Term Investing for Pros
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.
“Come to me, that I may give your flesh to the birds…”
Allegedly, that’s what Goliath said to David, before taking a sling-shot rock to the melon – and dying, epically, in front of his fans circa 1000 BC. It probably felt something like how Captain Top Caller of the US stock market has felt now, for a year. #Boom
I got the quote from reading the 1st fifteen pages of Malcolm Gladwell’s latest pop culture book, David and Goliath. I’m only a third of the way through the book, but it gets pretty underwhelming after that. Malcolm’s bullish momentum has slowed.
“Should I play by the rules or follow my own instincts? Should I persevere or give up? Should I strike back or forgive?” (David and Goliath, pg 5). Irrespective of how the rest of his book goes, Gladwell’s opening questions spoke to me. In the arena that is Wall Street I’m a fighter, not a lover. Failing in front of my growing family and firm is not an option. I need to constantly evolve.
Back to the Global Macro Grind…
Are there hard coded rules to risk management? Or should you have none and just trade on your emotions? Should we spend our days striking back at Mr. Macro Market’s real-time signals, or embrace them?
“When he first sees David, his first reaction is to be insulted, when he should be terrified. He seems oblivious of what’s happening around him.” (David and Goliath, pg 13) So, don’t be Goliath (especially if Mr. Macro’s real name is David; he’s everywhere).
I am just Mucker. I don’t tell the market to come to me. The market tells me where to go. And while I can be prickly and moody about it sometimes, I eventually obey.
BREAKING: “SP500 Has Year’s Biggest Gain On Retail Sales, Mergers” –Bloomberg
But, but… yesterday’s headline (the aforementioned one and it are still side by side in the “Most Popular” (most read) of Bloomberg.com) said “SP500 Falls Most Since November Amid Valuation Concern.”
So which one is it? *hint (neither)
Macro markets don’t move that way. That’s because there usually is no single factor model (like “valuation”) that saves you from having to do the real work. That’s what macro is – history, math, and behavioral – and it’s one hell of a grind.
Not to pick on one of the Goliaths of financial market “news”, but US Retail Sales actually slowed, sequentially, to 0.2% in yesterday’s report – and that’s in line with the shift we have been calling for here in the USA as:
1. US Consumption Growth Slows from its Q313 sequential highs
2. US Inflation Expectations Rise from their Q413 sequential lows
Macro is obviously multi-duration and multi-factor, but focusing on the big stuff (Growth and Inflation) matters more than someone’s qualitative view about why someone failed at Brown (Gladwell’s book) or a magic multiple for stocks (Old Wall).
That’s just #history and #math. The more you study both, the more you realize you have to learn. Especially on the Correlation Risk (#math) front, you actually have to re-learn what #history may already be able to contextualize.
From a #behavioral perspective, how many market mavens have tied everything together for you in a baby blue Tiffany box? Our team is constantly searching for clues, correlations, and causalities on human behavior. Like markets, they evolve too.
What do you think matters more to macro markets, A) confidence or B) valuation. I’ll go with A).
Without confidence in:
1. Growth Accelerating (sustainably)
2. Inflation being under control (as opposed to what the government tells you it is)
3. The strength and credibility of a government’s balance sheet, income statement, and currency
You will not have sustainably strong equity market multiple.
That’s why the greatest threat to the US stock market is a reversal of what gave the market its first taste of multiple expansion in half a decade – a #Strengthening US Dollar, #GrowthAccelerating, #DeflatingTheInflation, and #Rates Rising.
Instead of reading the Bloomberg headlines, here’s what actually happened in the last 2 trading days:
1. SP500’s Biggest Down Day since NOV 7, 2013 = Dollar Down, Rates Down, Stocks Down
2. SP500’s Biggest Up Day of 2014 = Dollar Up, Rates Up, Stocks Up
So come to me #StrongDollar, or I will re-allocate capital to countries who don’t play by the rules of the Federal Reserve and a tired Western Keynesian academia. If this time is different, and I fail to evolve my positioning – may my flesh be fed to the birds.
Our immediate-term Macro Risk Ranges are now as follows (all 12 Macro ranges are in our Daily Trading Range product):
UST 10yr Yield 2.79-2.94%
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
THE MACAU METRO MONITOR, JANUARY 15, 2014
WHERE THE RICH CHINESE ARE TRAVELING IN 2014 WSJ
Japan has emerged as the most desired destination for China’s wealthy travelers this year, according to a recent report by Travelzoo Asia-Pacific. The weak yen has made Japan a new shopping paradise for deep-pocketed Chinese travelers. Travelzoo is a mass-market player in most countries, but it targets the high-end travel market in China.
While Chinese tourists are becoming fonder of visiting foreign countries, the feeling isn’t mutual among foreign travelers visiting China. The number of people who entered mainland China fell by 2.5% YoY during the first 11 months of 2013, while their expenditure fell more by 4.4% in the same period, according to China’s Tourism Bureau.
CHINA DECEMBER NEW YUAN LOANS MISS EXPECTATIONS RTT News
Chinese banks extended CNY 482.5 billion in new yuan loans in December, less than CNY 570 billion forecast by economists. China's aggregate social financing came in at CNY 1.23 trillion in December, unchanged from November, but higher than the expected CNY 1.14 trillion.
Daily Trading Ranges
20 Proprietary Risk Ranges
Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.