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Creatively #Patient

“Creative minds tend to make unusual associations because they engage in divergent thinking.”

-J.P. Guilford

 

Joy Paul Guilford was one of the first credible American researchers in the field of creative thinking. He was a psychologist (born in Nebraska in 1897, moved to LA – died 1987) “best remembered for his psychometric study of human intelligence, including the distinction between convergent and divergent production.” (Wikipedia)

 

Is your portfolio converging  or diverging from consensus? When you diverge from the crowd, are you typically early – or happy to be late? Irrespective of your answers to those questions, isn’t the idea of a diversified portfolio to have creative ideas that are all of the above? After all, it’s always nice to have something working!

 

Today is Ratification Day in the USA (Treaty of Paris officially ended the American Revolution vs. European Central Planners). I love ratifying the end of broken ways. And, even if all of European markets (and US markets reacting to them) only trade on the next central planning rumor today, I’ll always love the divergent thinking that’s been embedded in American independence.

 

Back to the Global Macro Grind

 

Yep, it’s all about the love this morning. I said it on the Q1 Macro Themes Call and I’ll say it again this morning – I absolutely love this market. The Global Macro long/short market of non-consensus ideas, that is!

 

Here’s a not so creative idea. Asset price #bubbles can pop.

Creatively #Patient - bubble cartoon 09.09.2014

The US stock market #bubble has been down for 8 of the last 10 trading days, and plenty of the #bubbles within the bubble (think social media, MLP, energy, TSLA in 2020, etc. stocks) continue to pop.

 

But, there’s always a bull case to be made somewhere. And, compliments of Hedgeye, asset price #deflation becomes the creative asset of the new buyer, from lower prices. We need to cross the #Quad4 #Deflation bridge before we get to #Quad1.

 

Are you with us and bullish on #Housing? Yesterday’s macro market action typified the opportunity that is being Creatively #Patient. US equity futures were green in the a.m., then ramped on news from a US homebuilder that they had a good quarter (KBH). Then:

 

  1. KB Homes (KBH) told the Old Wall that they still have margin pressure associated with what was a bad trailing 12 months
  2. Oh, and that they do a lot of business in the state of Texas
  3. KBH went from being up nicely to -18% on the day (so we #timestamped buy there in Real-Time Alerts, #patience)

 

Texas? Jobs correlated to asset price #deflation of West Texas Crude? Pardon?

 

Yeah, really creative thought path there guys. If you didn’t know that #Deflation’s Dominoes go like this: Yens and Euros burned by central planners à Strong USD vs Yens and Euros à Crashing Oil à Shaking High Yield Debt Markets (spread risk breakout) à Levered Energy (MLP) stocks smoked à Job losses in Texas, the Dakotas, etc…

 

Well, I guess now you know.

 

So join my boy, Mr. T (as in TLT Long Bond) in commemorating another fresh new 12 month high in the best way to play global #GrowthSlowing + #Deflation. Because lower-bond yields are discounting a peak in late-cycle job adds in a late-cycle economic indicator’s (inflation) Energy states.

 

What other wild and creative thought path can we come up with in lieu of the aforementioned causal factor embedded in crashing long-term bond yields (10yr started 2015 at 2.17% don’t forget)?

 

  1. Down Long-term Treasury Yields
  2. Compressing Yield Spread (long-end minus short-rates)
  3. Short the Financials?

 

Unless you’re still thinking it’s different this time, Financials are cyclicals too. And a core driver of bank earnings is called NIM (net interest margin) which is driven by the spread between the short and long-end of the Treasury curve.

 

Not to pick on people who got plugged chasing another US equity market top on December 29th, but that was a seminal day for we revolutionaries who refused to buy into the year-end CNBC hype.

 

At the close of US trading on December 29th:

 

  1. SP500 = all time high of 2090 (it has corrected -3.2% from there)
  2. Big Cap Financials (XLF) = $25.04 close (correction = -4.7% from there)
  3. Regional Banks (KRE) = $41.18 close (correction = -8.9% from there)

 

Again, I know. If all you do is talk about the SP500 (which you can’t charge an active manager premium fee for):

 

A)     At -3.2%, it hasn’t corrected that much – and, by the way, there have been great early-cycle and consumption sectors to be long (after they deflate) on oversold signals within the SP500 too

B)      But the mistakes associated with buying either late-cycle Industrials (think global demand), #deflation risk sectors (energy), and US Regional Banks have been severe

 

It’s early in the year, and my job is to help make sure you don’t underperform. The best way to do that is to think a little more creatively than the next fund manager, and be a lot more #patient.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.85-2.01%

SPX 1

FTSE 6

VIX 17.45-21.99
WTI Oil 44.01-49.03
Copper 2.43-2.65

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Creatively #Patient - Chart of the Day


January 14, 2015

January 14, 2015 - Slide1

 

BULLISH TRENDS

January 14, 2015 - Slide2

January 14, 2015 - Slide3

January 14, 2015 - Slide4

 

 

BEARISH TRENDS

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January 14, 2015 - Slide7

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January 14, 2015 - Slide11
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Big Eyes

This note was originally published at 8am on December 31, 2014 for Hedgeye subscribers.

“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


the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

MACAU ESTIMATES: HOW LOW WILL THEY GO?

Takeaway: A rash of estimate cuts has the Street closer to us. But every day we lose more confidence in our numbers.

THE CALL TO ACTION

 

Street estimates are being lowered but there is no evidence that “the bottom is in”. Relief rally following earnings notwithstanding, significant risks remain and further downside to estimates is likely. As a Macau pure play and with the cheapest valuation, MPEL looks like the best long trade into earnings to benefit from another relief rally. Our Q4 EBITDA estimate exceeds the Street. On the other hand, WYNN may post the biggest miss in Q4 and looks to be the most at risk in 2015 as well.

 

Please see our detailed note: http://docs.hedgeye.com/HE_Macau_1.13.15.pdf


Tomorrow at 8:30AM ET - Hedgeye’s Morning Macro Call Live With CEO Keith McCullough

Excellent news for investors, traders, and everyone in between. We are streaming our Institutional Morning Macro Call with CEO Keith McCullough live on Hedgeye TV tomorrow morning at 8:30AM ET.

 

The best part? It's free.

All viewers will be able to submit questions to Keith on Twitter or on the YouTube page and he'll answer them live on the air. 

 

Stick around until the end of the call for a special announcement from Hedgeye.   

Our Morning Macro Call is an institutional product that takes place every weekday which synthesizes and prioritizes the world’s biggest market and economic risks and opportunities. 

 

 

 


Cartoon of the Day: Pass the Dramamine

Cartoon of the Day: Pass the Dramamine - boat race cartoon 01.13.2015

As the new year begins, it's a fair wind for some sectors and a perfect storm for others.


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