Creatively #Patient

This note was originally published at 8am on January 14, 2015 for Hedgeye subscribers.

“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 1995-2044

FTSE 6332-6580

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


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Creatively #Patient - Chart of the Day

Replay: Is The Worst Yet to Come In Russia? Top Russia Authority to Discuss

Earlier today Hedgeye’s Macro Team hosted a 1 hour conference call with Russia authority Anders Åslund to continue our special “Behind the Curtain” series to discuss Russia’s Crash.


Anders provides a number of great insights on this call – we highly encourage you to check out the Audio Replay CLICK HERE; we also offer up his key take-aways below.


Key Summary Points

  • Russia’s GDP to plunge -10% this year 
  • 3 reasons for decline:
    • bad economic policy
    • falling oil prices
    • sanctions
  • Concentration of wealth hurting economy: The total number of enterprises has actually decreased since 2009. Large state-owned companies are eating up smaller companies creating these large national conglomerates
  • Financial sanctions are 1) More stringent than many originally expected 2) Completely squeezing Russia’s access to capital markets (‘Liquidity Crisis’). Even those international banks allowed to do business are deciding not to because of compliance and credit-risk reasons, 3) Will stick (next key decision meeting to take place ahead of July 31, 2015, or one year expiration date)
  • Inflation is a huge risk (currently at 11.4% Y/Y), squeezing consumers, particularly with rising food prices, and influencing the Russian Central Bank to raise rates (currently at 17%). He says food costs increased about 70% last year, and prices are now increasing about 2x as fast as reported inflation.  He expects CPI will approach 15% by end of Q1 2015
  • Net Russian reserves have fallen by $125 Bn in 2014 and Anders expects another $100 Bn loss in 2015 (with Q3 2015 the time when things get much worse)
  • Investment will fall 30% and this will translate to 6-7% of GDP lost
  • Consumption will fall at least 6% which would mean a decline in GDP of around 8%
  • On Policy Failures: Russian government makes decisions between Putin and state enterprise managers. It’s very corrupt. They don’t discuss anything in large groups  = no policy coordination
  • Putin is making a mistake saying Russia’s situation is similar to 2008 for two reasons:
    • funding isn’t available because of the capital markets sanctions
    • oil prices will remain low for a long time, in Anders’ opinion for the coming 10 years
  • On Putin: Anders says his strength is that he’s deliberate, but works at his own independent pace and this is highly dangerous in a financial crisis... Anders says his counterparts portray an environment in Moscow in which everyone waits for something to happen [from Putin], and no one takes any initiative
  • On Weak State Banks: expects bank recapitalizations to the tune of $40-50 Bn in 2015
  • On Ukraine: Anders was in Kiev last week and met with Ukrainian PM.  Says economic policy makers are impressive and top quality (ex. 38 year old investment banker-type); expects to see massive reforms of government agencies and state enterprises; but financial side looks much worse – budget is a joke, inflation rampant, and he expects that IMF will have to come in with a heavy hand and restructure the debt
  • On the Fight over Ukraine’s Eastern Territories:  he expects Russia to show its military might, but says Crimea was the real prize. Anders assesses Putin’s strategy as neither solely focused on territory nor the structure of the government, but as one centered on showing that Ukraine cannot establish a democracy, for he fears an Orange Revolution at home
  • On Rosneft: it will be the major destabilizing factor in Russia. The USD-denominated debt will have to be restructured. Rosneft had to get a state-bond in Rubles in December, and they paid it off in dollars. This told the market a lot about corrupt Russian economic policy, and triggered the big slide in the Ruble
  • On Russia’s Liquidity Crisis: Although the Chinese state-bank said they would provide funding to Gazprom and Rosneft, they haven’t actually done it now that Russia is in much worse shape. Both companies will have to completely cut-off cap-ex because any new projects will be value-destroying
  • On Reserve Policy: Only about $175 Bn of Russian reserves are currently liquid and in the hands of Moscow. He says the Russian central bank is actually highly professional and competent, but they aren’t given much power from Moscow. They can’t do much in terms of monetary intervention because their access to reserves is so little. Nevertheless, the central bank is set on fighting inflation in 2015

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YUM: Removing Yum! Brands from Investing Ideas

Takeaway: We are removing YUM from Investing Ideas.

Please be advised that we are removing Yum! Brands from Investing Ideas today.


According to Hedgeye CEO Keith McCullough, "I don’t want to be long it for the EPS report. I’d rather put it back on after that and have the activist optionality without the event risk."


Our long-term value thesis has not changed. We still believe this is a stock to own for the long haul. YUM continues to trade at a significant discount to its intrinsic value, making it one of our favorite long-term buys in the restaurant space. 


YUM: Removing Yum! Brands from Investing Ideas  - yum logo

CAT: Removing Short CAT From Best Ideas List, Would Hold Some Short Exposure Through 10-K Release


“Skeptical of Oil & Gas Capital Spending…Energy-related capital spending looks like ‘mining capital spending-lite’”


– Hedgeye Industrials 4/21/2014 CAT: Defining Differences & The Segment Formerly Known As Power Systems




Given the convergence of 2015 guidance and our estimate range, one of the primary downside catalysts has been realized in our CAT thesis.  The pull-back in the "resources capital spending tide" is better recognized now (to see slides from earlier CAT calls, CLICK HERE, or CLICK HERE, or CLICK HERE etc).  The lower guide may be a bit of a near-term ‘cover the news event’.


We are trying to use the Best Ideas list better; we view it as a signal for where we think it is worth initiating positions and spending research time


We would stay short some CAT through the mid-February release of the firm’s 10-K.  The 10-K should update such interesting items as the SEC investigation and credit exposures at CAT Financial (Textron-lite?).  CAT really does have some dicey exposures at CAT Financial, but, as we wrote yesterday, it will take some time for those to play out.  We may add CAT back to the list, but for now we don’t want to press current relative lows.  We may be getting too cute, but its hard to control 'position size' in a research note.


CAT: Removing Short CAT From Best Ideas List, Would Hold Some Short Exposure Through 10-K Release - CAT 1


Cartoon of the Day: Earnings? U-G-L-Y

Cartoon of the Day: Earnings? U-G-L-Y - earnings cartoon 01.27.2015

"The mainstream financial media and sell-side wants to talk about anything besides earnings right now," Hedgeye CEO Keith McCullough wrote this morning. "It's the worst start to an EPS season in six years."

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