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Big Eyes

“The only thing worse than being blind is having sight and no vision.”

-Helen Keller

 

Earlier this week I made my annual visit to my eye doctor.   As per usual for someone that has just eclipsed their 40th year, my eyes were a little worse this year compared to last.  The doctor also had an interesting diagnosis, he told me I’m the perfect example of someone with environmental myopia.

 

Luckily enough this “problem” is not just mine and in some respects Darwin should be proud.  According to Freakonomics.com:

 

“It has long been thought that nearsightedness is mostly a hereditary problem, but researchers led by Ian Morgan of Australian National University say the data suggest that environment has a lot more to do with it.

 

Reporting in the journal Lancet, the authors note that up to 90% of young adults in major East Asian countries, including China, Taiwan, Japan, Singapore and South Korea, are nearsighted. The overall rate of myopia in the U.K., by contrast, is about 20% to 30%.”

 

According to the aforementioned study, and others, there is an increasing prevalence of near sightedness globally and it is primarily the result of people spending too much time inside focused on small screens.   Specifically, the bright indoor light stimulates the retinal transmitter dopamine, which is the structural basis of myopia and, for all intents and purposes, makes the eyes grow too big.

 

In the world in which many of us live working indoors and focusing on computer screens, this idea of environmental myopia is fine.  That said, to the extent Armageddon actually arrives and our lives change meaningfully, long haul truck drivers would have a real advantage over many of us in a hunter gather world.

 

Back to the Global Macro Grind...

 

As the stock market year of 2014 winds down, environmentally caused near sightedness is really a good topic to contemplate as we head into 2015.  It is actually, whether clinically diagnosed or not, an ailment that already effects many stock operators.  Specifically, that is the over focus on short-term trends when thinking about and contemplating the future.

 

Big Eyes - Crazy bull cartoon 08.19.2014

 

According to a summary from about a year ago, the venerable investment bank Goldman Sachs (and no offense to Goldman, as we probably could have picked on any major firm) made a number of key predictions for 2014, which included the following:

 

1)     Oil – Oil will remain stable at current prices due to falling supply in some areas and political uncertainty in others;

 

2)     China – Stable growth in China of 7.5% will be enough and give investors enough confidence to propel China higher in 2014;

 

3)     Emerging markets – Expectation of rate hikes in emerging market as growth continues to accelerate.

 

Now to be fair, one area in which Goldman nailed it, at least according to this article, is that the Fed would remain on hold.

 

But in aggregate it reinforces the point, which is that the biggest challenge many stock operators face is actually themselves.  Whether we call it environmental myopia or short termism, the risk is that we put too much credence in the recent past and project it forward.  The classic example of this is probably oil.

 

While signs were emerging at the start of 2014 of an emerging production glut and strong U.S. dollar environment, very few, if any, prognosticators, predicted a total collapse in global energy prices.   But as outlined in the Chart of the Day, this is exactly what happened.

 

So as we look forward into the stock market year of 2015, this biggest mistake we can make is likely to project the most recent past into the future.   So does that mean that utilities are going to crash, oil is going to rally, and the ruble is set to become a safe haven?  Likely not, but it does mean that if we all have one resolution in 2015 it is that we should become more aware of our person fallibilities.

 

As one of Hedgeye’s favorite academics Daniel Kahneman said about short termism:

 

“If owning stocks is a long-term project for you, following their changes constantly is a very, very bad idea. It's the worst possible thing you can do, because people are so sensitive to short-term losses. If you count your money every day, you'll be miserable.”

 

Despite the stress of short-term performance that many of you have to endure by the nature of the fund management business, Kahneman is definitely spot on as it relates to the emotional impact of focusing on short-term results in investing.  This is the exact emotion, in fact, that causes many investors to sell low and buy high.

 

On a closing note, we’d like to thank all of your for continuing to support Hedgeye and our efforts to recreate Wall Street research in an accountable and transparent way.  It’s been almost seven years since we started the firm and without the support of all of you it wouldn’t have been possible.

 

Our immediate-term Global Macro Risk Ranges are now :

 

UST 10yr Yield = 2.10-2.23%

SPX 2015-2115

VIX 12.85-19.95

YEN 118.49-121.66

Oil (WTI) 52.96-55.91

Gold 1168-1205 

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

Big Eyes - 12.31.14 chart


December 31, 2014

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BULLISH TRENDS

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BEARISH TRENDS

 

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Hedgeye's McGough: Under Armour Scores Win Over Adidas with Andy Murray Deal | $UA

Editor's note: This is a brief excerpt from a recent research report written by Hedgeye Retail analyst Brian McGough.

 

*  *  *  *  *  *  *  *

 

Hedgeye's McGough: Under Armour Scores Win Over Adidas with Andy Murray Deal | $UA - andy

1-MINUTE TAKEAWAY from mcgough

 

At 27 years old, Andy Murray isn't quite a tennis dinosaur, but he's getting close. That said, this is still a coup for Under Armour which was able to steal him away from Adidas. The 4-year deal is just north of $5mm per year (about 2% of the company's 2014 projected marketing spend) and less than a half of a percent of total revenue. In other words, it's a drop in the bucket for UA. And it gives them a bonafide presence on the court.

 

The company's current lineup of athletes (Sloane Stephens and Robert Ginepri) don't spend a lot of time playing in front of a national TV crew. UA has been unafraid to diversify, trying its hand at everything from speed skating to supermodels, so tennis is a logical extension for the brand.

 

Bottom line: At the price that they are paying…this is a win for UA.


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Two Words

This note was originally published at 8am on December 17, 2014 for Hedgeye subscribers.

“Narrative is linear, but Action... having breadth and depth, as well as length - is solid.”

-Thomas Carlyle

 

This morning, the investing world is waiting on a critical two-word pronouncement from the Fed.  Sitting in my hotel room here in London, drinking a Red Bull (it’s 4:30am and the British don’t have any coffee ready!), it's difficult not to find the idea of many of us sitting and waiting on the edge of our seats for a small word change just a bit laughable.

 

According to Bloomberg:

 

“Sixty-eight percent of 56 economists surveyed by Bloomberg late last week said the Federal Open Market Committee will drop its pledge to keep interest rates near zero for a “considerable time” and instead adopt a word such as “patient” to describe its approach to policy. Only 23 percent said the committee will keep “considerable time.”

 

On on hand, given how bad most economists are at predicting actual economic figures, opining on language in central bank statements might actually be a better use of their time.  But regardless there you go, if the Fed keeps “considerable time” in its policy statement, this will be perceived as dovish, and if it changes its language to “patient” this will be perceived as hawkish.

Two Words - Global economy cartoon 12.16.2014

There is also a tail scenario where the Fed does something completely different, but far be it for any traditional economists to opine on something that doesn’t fit a linear narrative.   Currently, the most popular narrative out there is that the U.S. is decoupling from the global economy. While that may be true now, and to a point, it has also become fairly consensus. 

 

Back to the Global Macro Grind...

 

On the topic of the U.S. economy, it has been out-performing many major economies this year and at up +6.7% for the year-to-date the SP500 is in part reflecting this.  In addition, if it weren’t for energy (the XLE is down over -16%) the SP500’s performance would be much stronger.  That said, it is likely a narrative fallacy to believe that if the world catches an economic cold, the U.S. won’t at a minimum sneeze.

 

My colleague Darius Dale did a comprehensive presentation yesterday on emerging markets and his conclusion was somewhat dire.  While he acknowledges that many emerging markets have underperformed year-to-date, he also uses history as a guide which suggests a scenario of increasing emerging market calamity due to strong U.S. dollar in combination with emerging market illiquidity (among other things). 

 

Certainly, the case can be made, as we have, that a strong U.S. dollar is good for the U.S. economy, but the greater global risk is that it moves too far and too quickly, which puts the squeeze on emerging economies that issue debt in U.S. dollars and pay it off in local currency. 

 

In fact, according to some estimates “international banks had loaned $3.1 trillion to emerging markets by the middle of this year, mainly in dollars. Such nations had also issued international debt securities totaling $2.6 trillion, of which three-quarters was in dollars.”  That, my friends, is a lot of U.S. dollar denominated debt in the hands of some potentially very weak economic hands.

 

So, to the extent that emerging economies have less access to capital because of a strong dollar (the data is already showing they do) or in a more extreme scenario, have challenges paying back U.S. dollar debt, there will be increasing economic headwinds globally and we’d be naïve to think that won’t impact U.S. growth.

 

In fact, as we show in the Chart of the Day below, this idea of emerging economies is a bit of a misnomer.  According to our analysis, on a purchasing parity basis the so called “emerging economies” comprised 56% of global GDP share in 2013.  Moreover, in the same year emerging economies comprised 73% of global growth.  So as emerging markets go, so to goes global economic growth.

 

Now to be fair to the bullish narrative on the U.S., in the last full year of 2013, only about 9.4% of U.S. GDP was from exports, so relative to many economies, the U.S. is much more self-sufficient.  The obvious caveat is that from 2009 to 2013, exports also grew by about 49%, so the increase in exports has been a notable tailwind to U.S. GDP. 

 

More critically, for those of us who are stock market operators at least, is the fact that almost a full 1/3 of SP500 corporate revenue comes from international sources.  So even if the U.S. continues to hum along alone, if the global economy does decelerate, so too will U.S. corporate profits. And while the U.S. stock market could continue to move higher in that scenario, we’d probably be hedged.

 

Inasmuch as we are disbelievers in a complete decoupling scenario, there are certainly positives in the U.S.:  a “tightish” labor market, meaningfully lower energy costs and a new one for our ledger... an improving housing market.  Incidentally, we will be outlining our housing narrative (albeit a narrative with facts and analysis) at 1pm eastern today.

 

The key components of this new thesis are as follows:

  • Progress: The same model that underpinned our long thesis in housing in 2012/13 and short position in 2014 is signaling another inflection as we head into 2015;
  • Fledgling Inflection: 2nd derivative trends matter in housing and, from a rate of change perspective, most of the data is beginning to inflect positively; and
  • Opening the Credit Box: After a discrete tightening in 2014, credit constraints should show marginal easing in 2015.

If you’d like information for the call, please email sales@hedgeye.com.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.03-2.19%

SPX 1960-2002

VIX 17.54-25.49

YEN 116.06-121.78

Oil WTI 52.83-60.73

Gold 1180-1220 

 

Keep your head up and stick to your narratives,

 

Daryl G. Jones

Director of Research

 

Two Words - 28


Excerpt: Detecting Deception

Earlier this month our Restaurants Team held a conference call for institutional investors Statement Analysis - Putting Companies Through a Linguistic Polygraph Test with former U.S. Deputy Marshall Mark McClish.

 

Mark McClish is the author of I Know You Are Lying and the creator of the Statement Analysis method. In this brief excerpt Mark explains how to identify signs of deception and dissects an excerpt from HAIN’s Q1 earnings call as an example.

 

 

Reading conference call and analyst meeting transcripts is a key part of the analyst’s job. We all use words to define our reality, and our choice of words can be revealing. The premise of Statement Analysis is that a person’s choice of specific words can reveal when there might be an attempt at deception. This Statement Analysis exercise looks exclusively at a company’s written and verbal statements. Using these hidden clues, we can dig deeper into a company’s public pronouncements for signals of potential concerns in a company’s reporting.


Cartoon of the Day: Oil Plunge!

Cartoon of the Day: Oil Plunge! - Oil cartoon 12.20.2014

Oil prices have slumped almost 50% this year, set for the biggest annual decline since 2008. "It's flat out ugly for whoever is long inflation expectations in Energy terms," says Hedgeye CEO Keith McCullough.


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