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CHART OF THE DAY: The #OldWall Model vs. Hedgeye

CHART OF THE DAY: The #OldWall Model vs. Hedgeye - mcg1

 

Editor's note: The chart above and brief excerpt below is from today's Morning Newsletter written by Managing Director and Retail Sector Head Brian McGough.

 

Before understanding how we generate ideas, it is important to understand the structure that allows us to do what we do – on a repeatable basis. Consider the table below. I compared an OldWall model against Hedgeye on some key operating metrics. The #OldWall could be your typical bulge bracket ibank, a regional research firm, or pretty much anyone else who is in the business of selling research. Let’s compare and contrast…


The 3 and 0 Count

“When your enemy is making mistakes, don’t interrupt him.” – Billy Beane

 

This week I had the pleasure of presenting the state of Hedgeye’s Research engine to nearly 60 of my colleagues throughout our Firm. There were about a dozen key conclusions, followed by a spirited dialogue (which is part of our DNA). But there was one key component  of our discussion that I believe is relevant to not only our own team internally, but also to our customers, without whom Hedgeye would not have had such a banner year in 2014.  That component is how our business model is structurally different, and how it allows us to think, act, and produce money-making ideas in ways that are dramatically different from the #OldWall.

 

The 3 and 0 Count - t7

 

The Model: WallStreet2.0


Before understanding how we generate ideas, it is important to understand the structure that allows us to do what we do – on a repeatable basis. Consider the table below. I compared an OldWall model against Hedgeye on some key operating metrics. The #OldWall could be your typical bulge bracket ibank, a regional research firm, or pretty much anyone else who is in the business of selling research. Let’s compare and contrast…

 

1) Stocks Covered: A typical #OldWall analyst will have a fixed coverage universe between 12 and 18 stocks. It takes an average of one month per company to ‘initiate coverage’ on a new name (been there, done that).  If you ask that person about a name on the fringe of their coverage, they’ll likely answer “sorry, I don’t cover that”. They’re not allowed to have an opinion without an ‘official’ rating. Note: if an analyst at a Hedge Fund told his/her PM that “I don’t cover that”, they’d soon be out of a job. At Hedgeye, the typical Sector Head has about 100 names under coverage. In Retail, the sector I have the privilege of covering, there’s about 130 names I track regularly. No one at Hedgeye will ever utter the words ‘I don’t cover that’. They might say something like “I’m not familiar with it right now – can I get back to you in a day?” But “I don’t cover it” is not in our vernacular.

Does that mean that I have a ‘call’ on 130 names? Absolutely not. But I have a tremendous playing field from which to source big ideas. I hold myself responsible – as do the other Sector Heads at Hedgeye – to have a repeatable process in place to consistently fish where the fish are.  By the time a company works its way through our vetting process, we’ve checked enough risk management boxes such that it’s like a batter stepping up to the plate with a 3 and 0 count. Chances are grossly in favor of that player getting to first base – at a minimum.

 

2) Big Calls: The way I see it, if I can’t find at least three big longs and three big shorts at any given time out of a group of 130 stocks, then I don’t deserve my seat.  Plain and simple.  If I were to look at those 130 charts (which I do every weekend) I can assure you that there’s a heck of a lot more than three names that doubled last year, and three that got cut in half.

Let’s add another dimension to the concept of a Big Call. Actually, let’s add two more. Now I’m talking Keith’s language -- TRADE, TREND and TAIL. We’re asked so often why we don’t have ratings. The answer is that the concept of a ‘rating system’ is broken.  What if there is a name that we think will double in 18 months, but is going to miss the upcoming quarter by 20%? It might be a short for a more nimble investor, or a long for someone with a 3-year duration that looks through quarterly earnings oscillations (admittedly not many of those people exist, but you get the point). It’s our job to help customers navigate the duration curve.

 

The 3 and 0 Count - mcg1

 

3) Percent Short: Roughly half of our calls are short. And I’m not just talking about TRADE positions. Each of our Sector Heads has about half of their respective calls on the short side. Heck, our Energy and Internet Analysts have nothing BUT shorts – and they have an enviable track record (check out Kaiser’s call on LINE). The reason why I note in the table above that 0% of Sell-Side calls are Short is that I have yet to see an #OldWall report that actually uses the word ‘short’. About 10% of ratings in an informal check were either Sell or Underweight. But none made an outright short call, and the average price decline was only 5% (which is hardly shortable in today's liquidity environment).

 

4) Expected Return:  The average expected upside for Buy ratings on the Sell side is about 12% for Retailers.  If I’m investing real money, I’m probably not going to get too excited about something that gives me a 12% return, unless there is zero potential for downside (which is impossible).  In my little world, I’d point out Restoration Hardware, which is a name we’ve liked since $32 (it’s $84 today), and we still think it’s a winner. For those that like it on the sell side, the debate seems to be whether it will be a $90 stock or a $100 stock.  From where I sit, the bigger question is whether it is a $200 vs $300 stock. Will it get there tomorrow? No. But by 2018 I think RH will earn $11/share. The consensus is at about $6. It looks expensive today if you believe the Street. But it’s extremely cheap if I’m right.  I can guarantee you that if I were at my former (sell side) employer, I literally would not have been allowed to go out with estimates and a resulting equity value that was so far outside of the mean.

 

One of the inherent challenges to having such a broad coverage approach is that we’ll miss some big moves. With a list of 130 stocks, I can guarantee I’ll miss some big longs and shorts in 2015. I’m not happy about that one bit, but as long as I’m right on the names I pick and help our customers make money, then that’s a win from where I sit.  As long as we stick to our process and keep stepping up to the plate with a 3-0 count, I’m downright excited about what 2015 has in store.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.16-2.30%

SPX 2037-2079

RUT 1148-1190

Nikkei 16,098-17,930

VIX 11.71-14.38

WTI Oil 62.99-70.64

 

Get on base,

 

Brian McGough

Managing Director and Retail Sector Head


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – December 5, 2014


As we look at today's setup for the S&P 500, the range is 42 points or 1.69% downside to 2037 and 0.34% upside to 2079.                                                                                                                             

SECTOR PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

EQUITY SENTIMENT:

 

THE HEDGEYE DAILY OUTLOOK - 10

 

CREDIT/ECONOMIC MARKET LOOK:

 

  • YIELD CURVE: 1.71 from 1.70
  • VIX closed at 12.38 1 day percent change of -0.72%

 

MACRO DATA POINTS (Bloomberg Estimates):

 

  • 8:30am: Change in Nonfarm Payrolls, Nov., est. 230k (pr 214k)
  • Unemployment Rate, Nov., est. 5.8% (prior 5.8%)
  • 8:30am: Trade Balance, Oct., est. -$41.2b (prior -$43b)
  • 8:45am: Fed’s Mester speaks in Washington
  • 10am: Factory Orders, Oct., est. -0.0% (prior -0.6%)
  • 2:45pm: Fed’s Fischer speaks via video to IMF event
  • 3pm: Consumer Credit, Oct., est. $16.5b (prior $15.924b)

 

GOVERNMENT:

    • House, Senate out of session
    • Obama to nominate his pick for next Defense Secretary; Bloomberg, other news outlets report fmr Deputy Defense Secretary Ashton Carter as choice

 

WHAT TO WATCH:

  • JOBS-DAY GUIDE: Payrolls Seen Climbing Median 230k Workers
  • JPMorgan Said to Put Mortgage-Bond Trader on Leave
  • Starz Said to Consider New Options as No Buyer Found
  • CBS Stays on Dish Satellite TV While Parties Negotiate
  • Apple IPod Judge Says Trial Threatened by Lack of Plaintiff
  • Elliott Said to Bet on Caesars Default Amid Bankruptcy Talks
  • Hartford Unit Faces Racketeering Suit on Sandy Claim Denials
  • Bundesbank Sees Weaker German Eco as Euro Area Struggles
  • China Home Prices to Rebound Amid Strong Demand: Jones Lang
  • China Auto Sales Slow in Nov. as Dealer Inventories Rise
  • President Obama to announce defense sec. nominee Carter
  • Grammy nominations to be announced throughout day
  • Retail Sales, Congress Deadline, Japan GDP: Wk Ahead Dec. 6-13

 

EARNINGS:

    • Bank of Nova Scotia (BNS CN) 6am, C$1.40 - Preview
    • Big Lots (BIG) 6am, ($0.05)
    • National Bank of Canada (NA CN) 7:30am, C$1.15 - Preview

 

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG

  • Brent Heads for 5-Year Low as Saudi Discounts Spur Competition
  • Billionaire Widjaja Family to Cut Stake in Indonesia Bourse
  • Deepest Saudi Oil Discount Intensifies Fight for Asia Market
  • Ending U.S. Oil Export Ban Argument Bolstered by Price Collapse
  • Super Typhoon Bearing Down on Philippines as Gusts Hit 250 Kph
  • Nickel Trades Near 10-Week High as Copper Heads for Weekly Gain
  • Wheat Declines as Black Sea Concerns Ease, Canada Outlook Raised
  • Steel Rebar Declines on Sluggish Spot Demand to Trim Weekly Gain
  • Ethanol Joins U.S. Fuels Dominating Global Export Market: Energy
  • Gold Drops a Second Day as Dollar Strengthens Before Jobs Data
  • Soybean Traders Bearish for 17th Week on Ample World Supplies
  • EU Gas Traders Divided 2nd Week Amid Cooler Weather, Oil Drop
  • Kingsman Cuts Estimate for Sugar Deficit by 60% to 600K Tons
  • Era of Lower Oil Masks Challenges for Southeast Asian Titans
  • Winter Bomb Watch Begins From New York to Ireland as Storms Brew

THE HEDGEYE DAILY OUTLOOK - 5

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - 6

 

GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 4

 

EUROPEAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 7

 

ASIAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 8

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - 9

 

 

The Hedgeye Macro Team

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


Early Look

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Ali Baba and the 40 Thieves

This note was originally published at 8am on November 21, 2014 for Hedgeye subscribers.

“We hang the petty thieves and appoint the great ones to office.”

-Aesop

 

Ali Baba and the 40 Thieves is one of the most famous of the “Arabian Nights” folk tales.  It tells the story of a poor son of a merchant, Ali Baba, who over hears a pack of thieves (40 to be exact) who are visiting their treasure store at a cave in the forest.

 

After hearing their password, “Open Sesame” (akin to using 1,2,3,4 to unlocking your iPhone no doubt), Ali Baba waits until the thieves are gone and uses the password himself to enter the cave and steal some of their gold.  Ali Baba’s brother, Cassim, realizes the secret of the cave and goes back to the cave with a donkey to try and take as much gold as possible.

 

Largely because of his greed, and lack of planning, Cassim is locked in the cave and when found by the thieves on their return is subsequently killed and quartered into four pieces.  The thieves then do their best to find Ali Baba, to little avail, and eventually the thieves meet their demise and Ali Baba is the only one left knowing the secret of the cave.

 

The one obvious parallel between the Ali Baba folk tale and the company Alibaba (BABA) is the name.  If you go deeper than that, it is also clear that for a long time the Chairman and Founder, Jack Ma, was perhaps one of a small group who knew the secret of the treasure cave.  Now that BABA is public, though, we all have the opportunity to understand the secrets of the monolithic BABA.

 

To be fair, we aren’t suggesting that Jack Ma or his colleagues are thieves, although the corporate structure of BABA and transfer of Alipay’s ownership might be construed as thievery by some, but rather that just like the Ali Baba of folklore, the modern Alibaba has limitations on the amount of “gold” it can take.

 

At 11am today, our Internet and Media Analyst Hesham Shaaban is going to be hosting a call titled: “Baba: Risks & Timing, What Others Aren’t Telling You”.  The bear case call will be focused on the following:

  • China Can't Grow Fast Enough: Top-down analysis of the key factors driving E-Commerce in China.
  • Growth Will Come at a Price: How the China growth story will pressure BABA's Business Model.
  • Timing the Short: Model Projections and the Key Metrics we're tracking to monitor our thesis.

Email sales@hedgeye.com if you’d like to learn how to get access to the call.

 

Ali Baba and the 40 Thieves - z DJ EL

 

Back to the Global Macro Grind

Perhaps we are being a bit too harsh on BABA.  It is after all a veritable monopoly with very high returns on capital, but at a valuation that is also priced in.  More importantly as we think of thievery and the global markets, it is probably more apropos to think of the extreme policies perpetuated by the world’s major central banks as thievery. 

 

On a basic level, the average consumer is being robbed of his return on his savings, and punished with  monetary inflation.  Recently, of course, the inflation has started to deflate, which may be beneficial eventually, but also brings about its own set of challenges and unfortunately also gives central bankers the carte blanche to manipulate monetary policy even further.

 

The mystical ECB head Mario Draghi once again opened the treasure cave of policy in a speech at a banking conference earlier today when he said:

 

“We will continue to meet our responsibility—we will do what we must to raise inflation and inflation expectations as fast as possible, as our price stability mandate requires of us.  If on its current trajectory our policy is not effective enough to achieve this, or further risks to the inflation outlook materialize, we would step up the pressure and broaden even more the channels through which we intervene, by altering accordingly the size, pace and composition of our purchases.”

 

That’s a pretty direct comment, especially for a European.

 

The Chinese central bankers took it one step further and actually walked the walk with a 25 basis point cut of the deposit rate and a 40 basis point cut of the lending rate over night.  On some level, this of course epitomizes the new currency war.  The Europeans used rhetoric, but the Chinese answer back with some monetary artillery fire.

 

Of course nothing truly compares to the shock and awe that the Japanese are capable of when it comes to monetary policy, or as my colleague Darius Dale called it “getting crazier”.  In an update note on Japan Wednesday, Dale summarized the outlook for Japanese policy moves adroitly:

 

“Japanese consumption be damned, we now know that the BoJ is completely comfortable with going “full Weimar [Republic]” with Japanese monetary policy, as most recently highlighted by today’s 8-1 vote in leaving monetary policy unchanged; recall that the board was split 5-4 when Governor Haruhiko Kuroda opted for additional easing last month.

 

What we found even more surprising is the fact that Kuroda reiterated his “upbeat” assessment of the economy. Yes, the same Japanese economy that is mired in recession and contracting -1.2% on a YoY basis!

 

What this tells us is that he is likely leaving room for a downside surprise to his targets, which would afford him scope to expand QQE sooner, rather than later. Per Bloomberg, sellside consensus expects a further expansion of QQE by June. Kuroda surprised us once; he won’t catch us off guard again!”

 

In summary there is an increasing case for Japan to ease more aggressively than consensus believes and with a negative correlation of -0.94 between the SP500 and JPY/USD, that is one really important reason for U.S. equity investors to keep Japan and its monetary policy front and center!

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.29-2.38% 

SPX 2008-2056 

RUT 1152-1187 

USD 86.99-88.06 

EUR/USD 1.23-1.25 

Gold 1135-1208 

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

Ali Baba and the 40 Thieves - JAPAN


Cartoon of the Day: Cannell Crushes Cramer

Cartoon of the Day: Cannell Crushes Cramer - cramer

CNBC host and TheStreet.com founder Jim Cramer is being taken to the woodshed by activist investor Cannell Capital. For good reason.

 

Click here to read the entire letter sent by founder Carlo Cannell.


Daily Trading Ranges, Refreshed [Unlocked]

This is a complimentary look at our proprietary buy and sell levels on major markets, commodities and currencies sent to subscribers every weekday morning by CEO Keith McCullough. These levels were originally published December 04, 2014 at 08:19.  Click here to learn more and subscribe.

BULLISH TRENDS

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BEARISH TRENDS

Daily Trading Ranges, Refreshed [Unlocked]   - Slide6 

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Daily Trading Ranges, Refreshed [Unlocked]   - Slide12

Daily Trading Ranges, Refreshed [Unlocked]   - Slide13


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This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.

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