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.”
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.
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:
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)?
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:
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%
WTI Oil 44.01-49.03
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
Takeaway: Higher EPS guidance from lower fuel is very much expected. However, all eyes on yield guidance which could disappoint.
Please see our detailed note:
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.
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
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.
“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.
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