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McCullough: 7 Of My Favorite Long & Short Ideas

What should investors buy or Sell today?

We’ve got some answers… 

 

Each morning, Hedgeye CEO Keith McCullough reviews our asset allocation model for subscribers then breaks down the changes we made versus the prior day. As McCullough says in the video excerpt from The Macro Show above:

 

“The two big buckets of asset allocation that we’d be net long are U.S. equities and foreign currencies.”

Oil, Dollar, Pound Versus Gold, Bonds, China...

Within U.S. equities, we like oil-related ETFs like Oil & Gas stocks (XOP) and the plain-old commodity Oil (USO). “We had oil and gas on sale earlier this week so XOP is our favorite high beta way to play energy stocks in particular.”

 

Essentially, after the -2% pullback in oil and gas stocks in the past week this is an efficient way to play our view that stocks are headed higher on U.S. growth is accelerating.

 

McCullough continues:

 

“Then on our favorite currency continues to be the ETF for the bullish position on the U.S. Dollar (UUP). Our second favorite currency is still FXB or the British Pound.”

 

The simple summation on these currency bets is that growth in both the U.S. and U.K. economies is accelerating.

 

We’d also short exposures that fall when the U.S. economy is growing, like Gold (GLD) and Long Bonds (TLT). Conversely, we think China is slowing so short big cap Chinese stocks (FXI).

 

Want to dig into each of these ideas further?

Click here to watch The Macro Show from which this clip is pulled, in its entirety. Also, here’s some required reading on each of the aforementioned long and short ideas.

LONGS:

SHORTS:


Do You Doubt U.S. Growth? Business Confidence Spikes To 2004 Levels

Do You Doubt U.S. Growth? Business Confidence Spikes To 2004 Levels - bus conf

Small Business Confidence Spikes To Highest Reading Since 2004

#Trump #SmallBusiness #Confidence

 

The election of Donald Trump has everyone from consumers, homebuilders and small businesses elated. Across each of these categories, confidence readings are through the roof. Apparently, the prospect of lower taxes and the removal of bureaucratic red tape has everyone excited.

 

Who'd have thought?

 

The electricity is palpable. In case there was any remaining doubt, the latest reading of the NFIB's Small Business Confidence index smashed Wall Street's tempered expectations.

 

The index yesterday showed a spike to 105.8, a level not seen since 2004, and a massive ramp from November's print of 98.4. "Warm up your neck before trying to look straight up at the DEC Small Business Confidence Print!," Hedgeye CEO Keith McCullough wrote yesterday.

 

Just look at the Chart of the Day below (maybe consider stretching those sternocleidomastoid and trapezius muscles before you take a peek).

 

Do You Doubt U.S. Growth? Business Confidence Spikes To 2004 Levels - 01.11.17 EL Chart vF

The U.S. Economy is Accelerating: Stock Outlook

#TrumpTrade #Economy #GrowthAccelerating

 

On yesterday's small business exuberance, the Nasdaq hit it's third day of all-time closing highs in a row. It's crystal clear why. Since November, U.S. economic data has brightened significantly. Whether you're looking at Durable Goods, Retail Sales, ISM (Manufacturing or Services indexes), or Industrial Production, all have been improving over these last few months.

 

That's been a boon for the U.S. economy. The third quarter GDP report of 2016 stopped slowing, rising to 1.7% year-over-year growth from a low of 1.3% in June. That capped five consecutive quarters of deceleration from the peak of 3.3% in March 2015.

Bottom Line: The Trump Trade Continues

$GLD $TLT

 

Trumphoria rages on. We suggest buy U.S. stocks. Sell Gold (GLD) and Long Term Bonds (TLT) that perform poorly when U.S. growth is accelerating. There's no sense getting off this train just yet. 


Cartoon of the Day: Trump's Pixie Dust

Cartoon of the Day: Trump's Pixie Dust - Business confidence cartoon 01.10.2017

 

"Warm up your neck before trying to look straight up at the December Small Business Confidence Print!," writes Hedgeye CEO Keith McCullough earlier today. The NFIB's Small Business Confidence index spiked to 105.8 today versus 98.4 in November. That was the highest reading since 2004.


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PREMIUM INSIGHT

ICYMI: Clock Is Ticking On China’s $24 Trillion Debt Time Bomb

ICYMI: Clock Is Ticking On China’s $24 Trillion Debt Time Bomb - ICYMI 1 10 2017 CHINA

If you’re looking for a catalyst that could send China’s flagging economy into a tailspin, here’s one: The People’s Bank of China is pulling money out of the system in an effort to defend the yuan. But that could have ramifications for the country’s overheating debt markets too.


How Trump’s (Devastating) Trade Policies Would Impact The Retail Industry

The policies of Donald Trump could change the retail industry forever

#Trump #China #Protectionism #Trade

 

On the campaign trail, the President-elect threatened to “impose tariffs of up to 45%” on Chinese goods because under him the U.S. is “not playing games anymore.” Trump’s protectionist trade policies would, in fact, radically alter how the retail sector conducts business, by importing cheap goods from China to keep costs down.

 

If Trump gets his way and imposes aggressive tariffs (i.e. taxes on imports) or quotas (that limit on the number of imports of a particular good that can legally come into the States) it could have a devastating effect on retailers who have long benefited from importing cheap Chinese goods.

a bit of history: 1990's quotas phased out = Great for Retailers

#WarrenBuffet #Retail 

 

Before 1994, there were import quotas that limited the quantity of apparel the U.S. could import from non-World Trade Organization countries (China didn’t become a member until 2001). These measures were basically lobbied for by legendary investor Warren Buffet and others who, after acquiring North Carolina-based apparel manufacturing plants, which were threatened by cheap Chinese labor.

 

Those quotas began to be phased out in 1994. Seizing an opportunity, Chinese apparel manufacturers cut deals with U.S. manufacturers to pour Chinese made goods into the states.

 

That’s precisely what happened, says Hedgeye Retail analyst Brian McGough in the video above. “China’s share of total U.S. apparel imports, troughed at 8% [in 2001] and went up to 39% over a decade,” he says, pulling up a chart. At the same time, import costs plunged. During the 1990s, we saw the cost of apparel come down by 5-10% per year – every year for two decades.

Winners & Losers

$XRT $KSS $JCP

 

This has been a boon for the weakest brands in the space, like Kohl’s (KSS) and JCPenney (JCP), McGough says, which probably wouldn’t exist today were it not for cheap Chinese imports.

 

As we’ve pointed out before, there’s reason to worry about Trump's potential trade policy changes. In a foreboding sign of the protectionism to come, President-elect Trump named Peter Navarro as Director of Trade and Industrial Policy. This guy literally wrote the book Death by China, describing the threat that China’s form of capitalism and militarism poses to the future of the U.S.

 

In short, the probability that Trump’s protectionist policies get passed isn’t zero. There is historical precedence that suggests this retail risk is serious and worth monitoring (and not the ramblings of some deranged liberal).


A Brief Primer on Volatility: Is the Nasdaq Overbought?

A Brief Primer on Volatility: Is the Nasdaq Overbought? - rollercoaster 22

Is it time to book gains in U.S. equities?

 

It's worth pondering. The Nasdaq is up 9.6% and +5.3% from its November and December lows. The real money in macro markets is obviously made by selling things that are overbought and buying things that are oversold. On that score, checking in on the investor's expectations of future volatility in equity markets is deeply instructive. It provides a nice read-through on consensus.

FIRST, SOME BASIC DEFINITIONS:

 

  • Realized Volatility = Historical Volatility (the market fluctuation of an asset over a given time period)
  • Implied Volatility = Future Volatility (the volatility that investors expect in the future based on current options market positioning)

 

Applying these principles helps understand whether prevailing investor sentiment is one of complacency or an outlook that is overly pessimistic. 

 

Basically, investors fearful of future fluctuations pay up for downside protection. In this instance, you would see higher implied volatility versus realized volatility. This is called the volatility premium (where implied volatility exceeds realized volatility). Conversely, a volatility discount happens when implied (future) volatility is below realized (historical) volatility.

How to Trade when the premium or discount stretches to extremes 

This is typically a kneejerk reaction that suggests a move is most likely overdone. Consider the Chart of the Day below. It shows implied versus realized volatility for the Nasdaq over the past sixteen months.

 

As you can see, before the presidential election in November, investors were uncertain about a Clinton or Trump win and piled into options contracts that offered downside protection. The implied volatility premium stretched to almost 70% above realized. 

 

But then, in the wake of Trump's win, exhuberance set in. Expectations of future volatility started moving down and the volatility premium normalized. (Note: This is why we got bullish on the Nasdaq towards the end of November).

 

What happened? Formerly fearful investors capitulated and bought stocks. Since Election Day, the Nasdaq is up +7.1%. The volatility premium is now +9.1% versus the 3-month average premium of +15.3%.

 

A Brief Primer on Volatility: Is the Nasdaq Overbought? - 01.10.17 El Chart

Interpreting Investor's Volatility Expectations

Here are three questions (and our answers) to think about from Hedgeye CEO Keith McCullough (in today's Early Look):

 

  1. Do you consider rising implied volatility premiums (i.e. pre-Election Day rise in Nasdaq options contracts) a bullish or bearish indicator? I think rising implied volatility premiums are encouraging me to believe that being bullish is not consensus
  2. Do you consider falling implied volatility premiums (i.e. post-Election Day move in Nasdaq options contracts) a bullish or bearish indicator? I think falling implied volatility premiums mean I’m getting paid on the long side and should book some gains
  3. And when you flip to implied volatility discounts, do you think rates of change matter as well? I think that when implied volatility falls and trades at a relative discount, I have no business calling my longs contrarian 

 

In other words, as investors get more fearful of future volatility, at the right level, that's when you get long. As implied volatility falls and formerly skittish investors capitulate (i.e. pile into equities), you cover your long position and book gains. When volatility is at a discount, investor complacency has set in once again (so don't get long, stay out of the way!). 

What to do now: The Current Setup in U.S. Equities

At the current volatility premium of +9.1% on the Nasdaq, here's some advice on specific levels from Hedgeye CEO Keith McCullough:

 

"I’d much rather buy the Nasdaq when implied volatility premiums (on 30-60 day durations) are running +15-30% than here."

 

There you have it. Book gains in the Nasdaq and wait for a consensus freak-out once again to get long. That’s what makes the S&P 500 a more interesting “BUY” now on pullbacks. Its 30 and 60 day implied volatility premiums are +16-24%.


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Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

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