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Shaping Buffett's House

This note was originally published at 8am on March 03, 2015 for Hedgeye subscribers.

“You shape your houses and then your house shape you.”

-Winston Churchill

 

William Thorndike introduces Warren Buffett in chapter 8 of The Outsiders (pg167) as “The Investor CEO.” He uses the aforementioned (and ironic) Churchill quote then cites Berkshire’s sculptor himself: “being a CEO made me a better investor, and vice versa.”

 

Although I’ve only been a CEO for 7 years (and, at 40 years old, I’m a very young one at that!), I definitely agree. Running a company is a lot different than generating a hedge fund P&L. Both experiences have taught me invaluable lessons about life and investing.

 

While Buffett’s former #1 Rule in Investing was “don’t lose money”, he doesn’t really say that anymore when promoting his positions and politics on CNBC. To be clear though, Buffett became Buffett by selling high and buying low.

 

By 1987, in advance of the October market crash, Buffett had sold all of the stocks in his portfolios, except for his 3 core positions. After his Capital Cities transaction, he did not make another public market investment until 1989” (pg175), when he bought Coke (KO).

 

The house that shapes Buffett’s commentary today is not the See’s Candies he bought in 1972 for $25 million. Buffett, due largely to his brilliant performance and compounded returns, is now the stock market. His #1 Rule now is to protect that house.

 

Shaping Buffett's House - b9

 

Back to the Global Macro Grind

 

I’m calling that out as there’s plenty of video circulating on CNBC’s backslapping network this morning, replaying a fawning Becky Quick with Mr. Chuckles. If you were able to play the mainstream media to your advantage like this, you’d be chuckling too!

 

Here’s my 1 minute video on the matter: https://www.youtube.com/watch?v=60zMHvjybZI

 

Another reason to callout the chart-chasing buy-high-and-hope-to-sell-higher strategy (commonly called momentum and/or performance chasing) is that the US stock market closed at its all-time high of 2117 (+2.8% YTD) yesterday.

 

All-time, as I like to remind time-series fans, is a long time. And you generally don’t want to have the all-time high as your invested cost basis. You can ask some of the private equity firms who bought upstream and/or MLP Energy assets with a $105-120 price deck about that.

 

While it might be nice to avoid Buffett’s advice about having no shorts on “when the tide rolls” out, I did have 3 of them on in Real-Time Alerts yesterday, so it’s worth calling all 3 of them out as things that didn’t work for me, in that product, yesterday:

 

  1. Copper (JJC)
  2. J P Morgan (JPM)
  3. Foot Locker (FL)

 

Yep, while all 3 of these securities have sucked in 2015 YTD (i.e. they have negative returns), I guess I was the one who sucked having them on the short side yesterday. If you’re not sucking sometimes, you don’t have mirrors in your house either.

 

To review why I kept these “SELL” ideas on versus others:

 

  1. Copper – down -1.6% this a.m. (-6.4% YTD) remains one of the most obvious ways to play our top theme, Global #Deflation
  2. JPM – down -1.3% YTD is in 1 of the 2 US Equity Sector Styles I like the least (Financials – sector ETF -0.8% YTD in an up tape)
  3. FL – down 2 cents YTD is on our Best Ideas SELL list (Brian McGough is the analyst, ask our team for his deck for details)

 

The other thing that went wrong for me yesterday was another one of these counter-TREND moves in US (and global) interest rates. While many might quibble with the simple calculation of +10% move in German Bund and Japanese Government Bond Yields (when you devalue to zero, that is the math), the move on the long-end of the US rates curve is where I seem to have the most lovers and loathers.

 

After dropping -12 basis points last week, the 10yr US Treasury Yield bounced +9 beeps (basis points) on the day yesterday. That brought back a whole host of tweeters who have been shorting the Long Bond via TLT for, well, the last 25% of the up move (since January of 2014).

 

One mainstream economic headline that hit the tape was the ISM slowing in FEB to 52.9 versus the initially reported 53.5 for JAN (which was then revised lower). So, other than it not being the worst monthly decline since OCT 2008 (like the PMI was on Friday), I don’t see any fundamental economic reason to be selling Long-duration, low-volatility, high return bonds.

 

That said, we need to risk manage the range, and here’s some time and space to consider:

 

  1. Immediate-term TRADE risk range for the 10yr Yield has widened to 1.84-2.16%
  2. Intermediate-term TREND resistance for the 10yr Yield = 2.39%
  3. US monthly Jobs Report is due out on Friday and that will definitely move the bond market

 

On a jobs miss, I think you test the low-end of that immediate-term risk range. On a jobs beat, I think you test the high end. The house that I built alongside my teammates @Hedgeye won’t make our call any more complicated than that.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.84-2.16%
SPX 2096-2122

VIX 12.80-16.39

USD 94.63-95.81

Oil (WTI) 48.04-52.23
Copper 2.55-2.73

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Shaping Buffett's House - 03.03.15 chart


CHART OF THE DAY: Piling In For a Hike (CFTC Net Non-Commercial Futures and Options Positions)

CHART OF THE DAY: Piling In For a Hike (CFTC Net Non-Commercial Futures and Options Positions) - 03.17.15 chart

 

Editor's note: This is an excerpt from today's Morning Newsletter written by Hedgeye CEO Keith McCullough. Click here to learn more and subscribe.

 

Do I have an opinion on what the Fed should do? Of course. But that and a bus ticket will get me a swift beating at a men’s league hockey game in northern Quebec. What the Fed should and could do are two very different things.

 


I Can't See Land!

“The problem was sight.”

-Peter Zeihan

 

That quote is not alluding to the Fed’s decision tomorrow. Peter Zeihan was describing what I am sure all of your FOMC day previews are writing about this morning - 14th century macro strategy.

 

In the world before 1400, true ocean transport was a rare thing, being neither quick nor reliable nor safe… once line of sight to the land was lost, you had to more or less guess.” (The Accidental Superpower, pg 24)

 

Guess? When I was first hired on the buy-side, sometimes I’d guess. Then I’d lose lots of other people’s money and my boss, Jon Dawson, would tell me not to guess. “We don’t do open-the-envelope investing.” It was a great risk management lesson.

 

And it’s one that has stuck with me for the 14 years since he taught it to me. That’s why I’ve been taking down my asset allocation to long-term Treasuries on the recent bounce. I can’t guess what Yellen says tomorrow. I’d rather raise cash and react to it. I Can't See Land! - Yellen cartoon 09.17.2014NEW

 

Back to the Global Macro Grind

 

This is not to suggest that what super “smart” people on the Wall Street refer to as an ‘educated guess’ can’t make you a lot of money. As I implied in my intro, the smartest of those types have figured out to bet big with other people’s money!

 

Will Janet Yellen remove the word “patient” from tomorrow’s Fed policy language? Will she replace it with another scrabble word score? Will she leave the word in there and be “data dependent”? Will a ramping US Dollar find its way into the language? How about the dirtiest word she’s ever whispered publicly, #deflation?

 

You can buy-pass the whole seeing thing if you just have answers to the aforementioned questions in advance. It’s called inside information. Some pay a lot of dough for it! If you’re a little Mucker in Stamford, CT – you’re going to have to wait and watch.

 

Sorry.

 

Since we said buy both stocks and bonds before they started bouncing last week, now we can sell some of what we bought, raise some cash, and sleep soundly. Chasing beta by levering up your bets after markets bounce is no way to live.

 

Bets? Yes, people in this profession bet. Before yesterday’s US stock and bond market ramp, here’s where consensus macro bets were leaning, from  CFTC Non-Commercial futures and options perspective:

 

  1. SP500 (Index + Emini) net SHORT position hit a YTD high of -39,891 contracts
  2. Russell 2000 net SHORT position hit a YTD high of -40,793 contracts
  3. Long-bond Bears ramped the net SHORT position in the 10yr Treasury to -173,194 contracts
  4. Crude Oil Bulls remained pervasive with a net LONG position of +294,609 contracts
  5. US Dollar Bulls hit YTD highs at +81,210 NET long contracts

 

And, guess what? Every single one of those Consensus Macro positions was wrong on the day:

 

  1. After 3 straight down weeks (yes people get bearish after corrections), SP500 popped +1.35%
  2. Russell 2000, which has been our favorite of the US major indexes, tested an all-time high
  3. 10yr UST Treasury Yield dropped to 2.07% (TLT was up +1% on the open)
  4. Oil continued to crash with WTI closing -2.3% on the day at -17.7% YTD
  5. US Dollar Index had one of its biggest down days of 2015, -0.76%

 

“So”, what does this mean?

 

  1. You should pay attention to modern day mind-maps like futures and options positioning
  2. Wall Street is begging for Janet to devalue Dollars and keep rates lower for longer
  3. If Yellen delivers #dovish tomorrow, you’ll see a lot more of Consensus Macro bets being wrong

 

I personally don’t like being wrong. That’s why, especially heading into an open-the-envelope event day like tomorrow, I lower the probability of being wrong by raising cash.

 

Do I have an opinion on what the Fed should do? Of course. But that and a bus ticket will get me a swift beating at a men’s league hockey game in northern Quebec. What the Fed should and could do are two very different things.

 

Since we’ve had a good run here in March, I’d rather cling to my cash (US Dollars) than pretend to see something I have absolutely no edge on. And I’ll let the clairvoyant vision of the Federal Reserve rule another non-free-market day.

 

Today we’ll be hosting a Macro Call on the US Employment Cycle at 11AM EST (ping for access). Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.01-2.14%

SPX 2053-2112
RUT 1

VIX 13.72-17.39
USD 98.50-101.17
Oil (WTI) 43.05-47.36
Gold 1131-1169

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

I Can't See Land! - 03.17.15 chart


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

March 17, 2015

March 17, 2015 - Slide1

 

BULLISH TRENDS

March 17, 2015 - Slide2

March 17, 2015 - Slide3

March 17, 2015 - Slide4

March 17, 2015 - Slide5

March 17, 2015 - Slide6

 

BEARISH TRENDS

March 17, 2015 - Slide7

March 17, 2015 - Slide8

March 17, 2015 - Slide9

March 17, 2015 - Slide10

March 17, 2015 - Slide11
March 17, 2015 - Slide12

March 17, 2015 - Slide13


REPLAY: The Macro Show With Keith McCullough

Today's edition of The Macro Show with Hedgeye CEO Keith McCullough features a can't-miss special appearance by Hedgeye Energy Sector Head Kevin Kaiser.

 

 

 

 

 


PENN/REGIONAL GAMING: MARCH PAUSE

Takeaway: We continue to like PENN over the intermediate and long term but negative same store revs in March could pressure regional gaming stocks

  • We’re forecasting a return to negative same store revenue in the regional gaming markets following 3 straight months of gains.  A monthly downturn would counter the recent regional gaming narrative and could hurt sentiment and the stocks: BYD, PENN, PNK, and GLPI
  • The stocks have performed very well since we went positive on the space in January, even before GLPI’s offer to buy PNK. 
  • We are removing PENN from the Hedgeye Best Ideas list even though the company’s return to growth in beginning in 2H 2015 should drive a higher stock price.  Our concern rests with the potential reversal in sentiment as March gaming revenues are released by the states in early April.
  • Early weekly revenue read from a few markets is mixed as a much weaker Pennsylvania was offset by a stronger Missouri. 

PENN/REGIONAL GAMING: MARCH PAUSE - FF


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