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Eating Monkey Returns

“You can’t eat risk adjusted returns.”

-Old Wall

 

Actually, was it the Old Wall or its clients who said that first? Good question given that the brokerage statement has bad risk management premise. This is an important topic that Lasse Heje Pedersen delves into in Chapter 2 of Efficiently Inefficient.

 

“Suppose for instance that a hedge fund beats the risk free rate by 3% at a tiny risk of 2%, realizing an SR (Sharpe Ratio) of 1.5. Some investors might say ‘well it’s still just 3% - I was hoping for more return.’ (pg 31)

 

What people need, want, or “hope” for in terms of returns has nothing to do with what they are going to get. Hope is not a risk management process. Neither is levering up a portfolio that is no “smarter” than an unlevered one in a bear market.

 

Eating Monkey Returns - trust my gut cartoon 10.14.2015  2

 

Back to the Global Macro Grind

 

Bear market underway? Big time. And forget the obvious ones that even the most consensus US-Equity only perma bull is now forced to acknowledge (the ones in FX, Commodities, EM, etc.) – look at the one you already have in the US stock market!

 

On slide 31 of our Q1 Global Macro Themes presentation yesterday, we showed how bad the internals of the US stock market are by looking at the Russell 3000 (i.e. 98% of stocks you could be long or short):

 

  1. The median draw-down for stocks from their respective 52-week highs in the Russell 3000 is -22.5%
  2. The mean (average) draw-down is a nasty -27.7%
  3. And 76.8% of stocks in the Russell 3000 are currently trading below their 50-Day Moving Monkey

 

Don’t be the monkey.

 

As long-time readers of my daily rant know, I used to be a monkey. And I spend a lot of time trying to teach both me and you how not to be a monkey. Chasing 1-factor (price momentum) moving averages will eventually eviscerate your hoped-for returns.

 

What we do is different. And we do not apologize for that.

 

The most basic quantitative risk management tool I have that keeps me away from being consensus is my 3-factor model (PRICE, VOLUME, VOLATILITY) to measure a security’s risk, and I do that across 3-core risk management durations:

 

  1. Immediate-term TRADEs
  2. Intermediate-term TRENDs
  3. Long-term TAIL risks

 

In our Daily Trading Ranges (and TREND signal) product, you can see that we’ve been highlighting widely held US stocks that have been signaling bearish TREND (our best back-test duration) now for 3-6 months:

 

  1. Apple (AAPL)
  2. Priceline (PCLN)
  3. Disney (DIS)
  4. Valeant (VRX)
  5. Netflix (NFLX)

 

Since I only have time for 1 wife and 4 kids, I don’t fall in love with “stocks.” They are all just tickers to me. Sometimes I like them (like McDonald’s, MCD, right now). Sometimes I don’t like them (Gap, GPS, which I told you to short again in Real-Time Alerts yesterday).

 

While I shall not love (or hate) stocks, one thing I thoroughly enjoy is fading what has become an epic “Hedge Fund” consensus. As you can see in today’s Chart of The Day (slide 18 in the Macro Deck), there is a raging #Recession in Contrarian Thinking.

 

Trailing Hedge Fund Correlation to Beta held above 0.90 for a 2nd year in a row in 2015. Beta Chasing (chasing charts) breaks down when A) the “charts” do and B) Sector Variance breaks out (like it did last year).

 

When S&P Sector Variance is low, a brain dead monkey can make money. Maybe that’s why I nailed being bullish on US “stocks” in 2013! Low-variance means everything does the same thing – and almost every sector went straight up in 2013.

 

When Sector Variance breaks out (some sectors crash, some go up), then a large population of monkeys chasing charts dies and 2 smaller populations of them emerge:

 

  1. The “Value” Guy/Gal
  2. The Momentum Guy/Gal

 

Value guys in particular got killed in 2015 – that’s mainly because they started buying what they thought were “cheap” Energy and Basic Materials stocks using the wrong macro assumptions for #Deflation and #GrowthSlowing. And … cheap got cheaper.

 

All the while, momentum guys killed it in 2015 – and that’s mainly because they just stayed with charts and stories that weren’t breaking down like mainline (cyclical) growth and inflation assumptions were.

 

So far in 2016, neither value nor momentum guys/gals are getting paid. And that has been a consistent leading indicator for a US #Recession (see the years 2000 and 2008 for details) i.e. the 20-30% of stocks that are still working, stop working.

 

When most things stop working, you can only eat what you harvested. Our profession would have much higher credibility if we taught people that the time to harvest is as the economic and profit cycle begins to slow. The time to “invest” is when a recession is abating.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.16-2.31%

SPX 1
RUT 1094-1140

VIX 17.28-22.65
USD 98.01-99.77
Oil (WTI) 35.04-38.11

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Eating Monkey Returns - 01.06.16 EL chart


Less Good is Bad - 2016 Outlook | Call Invite

Takeaway: We will be hosting a conference call on Wednesday, January 13th at 11:00am EST to update our outlook for Housing in 2016.

Less Good is Bad - 2016 Outlook | Call Invite - housing theme cartoon 01.05.2016 FIX

 

The Hedgeye Housing Team, led by Joshua Steiner and Christian Drake, will be hosting a conference call on Wednesday, January 13th at 11:00am EST to update their outlook for Housing in 2016.  

 

KEY TOPICS WILL INCLUDE 

  • 2016: A Wall of Worry or Slope of Hope? Will housing return to stall speed growth after a solid year of acceleration? The same model that underpinned our long thesis in housing in 2012/13/15 and short position in 2014 is signaling another inflection as we head into 2016.
  • What if? – Navigating Recession Risk: What happens to housing and housing stocks when the economy stalls? Not all cycles are the same and the nature of the cycle matters for housing related equity performance.
  • Houston, We Have a Problem: The energy collapse has been a millstone around the neck of certain homebuilders. That situation looks poised to get worse. 
  • What’s the catalyst?  Domestic growth is decelerating, the energy market, labor/lot supply and interest rate volatility issues won’t resolve in the next quarter and, from a rate-of-change perspective, 2016 will be less good.
  • What's Priced In? What's priced into consensus and how do those expectations compare with the outlook for growth? Is valuation a catalyst after the recent correction in multiples?
  • Rates 180: Rates have been a primary boogeyman stalking housing for the better part of 2015.  We’ll contextualize housing’s sensitivity to rates during variant tightening cycles and discuss the implications of our outlook for the current cycle.
  • HPI Inflection: 2nd derivative HPI trends matter in housing and the slope of price growth is likely to stall. We'll detail the HPI outlook and what it means for housing related equities. 
  • Top Ideas: We'll run through the names and groups that we think are best (and worst) positioned for yet another reversal in housing.

  

CALL DETAILS

  • Toll Free Number:
  • Toll Number:
  • Conference Code: 13626823
  • Materials: CLICK HERE

 

 

Joshua Steiner, CFA

 

Christian B. Drake

 


The Macro Show Replay | January 6, 2016

 


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.64%
  • SHORT SIGNALS 78.61%

January 6, 2016

Hedgeye's Daily Trading Ranges are twenty immediate-term (TRADE) buy and sell levels, with our intermediate-term (TREND) view and the previous day's closing price for each name.  Click HERE for a video from Hedgeye CEO Keith McCullough on how to use these risk ranges.

 

  • Bullish Trend
  • Bearish Trend
  • Neutral

INDEX BUY TRADE SELL TRADE PREV. CLOSE
UST10Y
10-Year U.S. Treasury Yield
2.31 2.16 2.25
SPX
S&P 500
1,998 2,047 2,016
RUT
Russell 2000
1,094 1,140 1,110
COMPQ
NASDAQ Composite
4,870 4,990 4,891
NIKK
Nikkei 225 Index
18,099 18,811 18,374
DAX
German DAX Composite
10,126 10,584 10,310
VIX
Volatility Index
17.28 22.65 19.34
DXY
U.S. Dollar Index
98.01 99.77 99.45
EURUSD
Euro
1.07 1.10 1.08
USDJPY
Japanese Yen
118.11 120.30 119.05
WTIC
Light Crude Oil Spot Price
35.04 38.11 36.14
NATGAS
Natural Gas Spot Price
1.89 2.52 2.34
GOLD
Gold Spot Price
1,059 1,085 1,077
COPPER
Copper Spot Price
2.04 2.14 2.09
AAPL
Apple Inc.
101 106 102
AMZN
Amazon.com Inc.
618 660 633
GOOGL
Alphabet Inc.
749 791 761
DIS
Walt Disney Company, Inc.
99 105 100
NFLX
Netflix Inc.
105 113 107.66
VRX
Valeant Pharmaceuticals, Inc.
92.07 105.65 100.86


Japan, Spain and Oil

Client Talking Points

JAPAN

A big short squeeze in the Yen to kick off 2016 has the Nikkei down every day in 2016 – and this is on the heels of Kuroda saying he’ll do “whatever it takes” twice in the last 2 weeks! The Nikkei is down -1.0% overnight and down -6.7% in the last month.

SPAIN

Spain is still our favorite European short idea as the lefties are going to meet their maker economically. The IBEX is breaking down to new lows this morning and is down -7.9% in the last month now that most of Spain’s economic cycle data (including PMI) has peaked/rolled (bearish Euro).

OIL

Oil is down another -1.3% this morning has to be the darndest looking “transitory” thing we’ve seen in our macro lifetimes – it’s not transitory, it’s called #Deflation – and this will continue to perpetuate a credit cycle that is about to break out (credit spreads) to new cycle highs.

 

*Tune into The Macro Show with Hedgeye CEO Keith McCullough live in the studio at 9:00AM ET - CLICK HERE

Asset Allocation

CASH 68% US EQUITIES 2%
INTL EQUITIES 0% COMMODITIES 0%
FIXED INCOME 20% INTL CURRENCIES 10%

Top Long Ideas

Company Ticker Sector Duration
FII

With the Fed's 25 basis point hike in interest rates, in the financial sector, FII stands to benefit most from even this marginal change.

 

In essence, Federated Investors (FII) has a stable business for what we think will be a volatile 2016. 2015 finished with slight positive inflows into the firm's main business line, money market or cash products. This is reminiscent of the start of cash builds in 1999 and 2006 ahead of the negative returns in risk assets in 2000 and 2007.

RH

RH is our top long idea in all of retail, and we view the recent weakness in the stock as a buying opportunity. All in we think the company will build to $5bn in sales at mid-teens operating margin which equates to $11 in earnings power. This growth and profitability comes from...

  •  ~30% Square footage growth with new full line design galleries.
  • New businesses, like Modern and Teen, that can be easily layered over its low cost infrastructure.
  • Leveraging occupancy from the "sweet heart" real estate deals the company is getting as a high end traffic driving tenant willing to take anchor size leases. 
TLT

The yield spread (10Y’s -2Y’s) compressed to a 52-week low of 120 basis points last week.  AGAIN, that’s a 52-week low in growth expectations right after “lift-off”. Into year-end, the bond market continues to price in what it has all year long: #Slower-and-lower-for-longer.

 

We continue to believe deflation will pressure the policy-fueled leverage embedded in junk and high yield bond markets. The cheap money, corporate credit boom inflated asset prices and it has more room to deflate. This deflationary run started in the second half of 2014, with the introduction of our #Deflation theme. Back then, was also the low in cross-asset volatility and the high in outstanding corporate credit (commodity producers chasing inflation expectations were the largest contributor).

Three for the Road

TWEET OF THE DAY

5 Must-See Cartoons That Sum Up The Macro Environment https://app.hedgeye.com/insights/48383-5-must-see-cartoons-for-the-current-macro-environment

@KeithMcCullough

QUOTE OF THE DAY

A stumbling block to a pessimist is a stepping stone to an optimist.

Eleanor Roosevelt              

STAT OF THE DAY

General Motors said it will invest $500 million in Lyft Inc and laid out plans to develop an on-demand network of self-driving cars with the ride-sharing service. GM’s investment accounts for half of Lyft's latest $1 billion fundraising round.


REPLAY | 1Q16 MACRO INVESTMENT THEMES CALL

Yesterday the Hedgeye Macro Team, led by CEO Keith McCullough, hosted its quarterly Macro Themes conference call in which it detailed the THREE MOST IMPORTANT MACRO TRENDS it has identified for 1Q16 and the associated investment implications.

 

We encourage you to check out the Video Replay (below); the Audio Replay and Presentation Materials can be accessed via the links underneath.

 

For the audio replay CLICK HERE 

To access the presentation materials CLICK HERE

 

 

Q1 2016 MACRO THEMES OVERVIEW:

 

  • U.S. #Recession?: Industrial activity and corporate profitability are already trending at recessionary levels. Meanwhile, domestic employment, consumption and income growth are all past peak and policy-driven deflationary pressures should persist in perpetuating soft external demand, EM distress, weak import pricing, HY credit risk and further flagging in corporate capex. We’ll contextualize the current macro data and handicap the probability of recession as the late-cycle U.S. economy traverses its steepest GDP base effects of the cycle.
  • #CreditCycle: An extended breakout in corporate credit spreads has preceded recessionary periods in prior cycles, and since we introduced our deflation theme in 2H14, both high yield and investment grade spreads have marched higher off all-time lows in cross-asset volatility and all-time highs in corporate credit outstanding. In effect, we are loudly reiterating our call that the unwind of ZIRP and QE will continue to deflate the easy money credit boom it fabricated in the form of continued recessionary earnings growth as the business cycle gets dangerously long in the tooth.
  • #CurrencyWar: Historically, Fed tightening cycles, #LateCycle slowdowns and #Quad3 outcomes have all been independently been bearish for the USD. As such, our expectation for a continuation of #StrongDollar commodity and asset price deflation appears misguided in the context of our dour fundamental outlook for the U.S. economy. That said, however, currencies cannot be analyzed in isolation and our proprietary analysis of the world’s top-10 economies renders the [dollar-bullish] global monetary policy divergence theme we authored well intact. 

-The Hedgeye Macro Team


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