“Concentrate on what will produce results rather than on the results, the process rather than the prize.”
-Bill Walsh
Admittedly Hedgeye is a bit of sports shop. Many of our colleagues played sports in college. Some played in the NFL and NHL, and we even have a former Australian Olympian.
Above and beyond that, a few of us also have a stake in the Arizona Coyotes of the National Hockey League (and yes we get that hockey in the desert is the ultimate contrarian call!). So for us to use a sports analogy this morning is probably not overly surprising to any of you.
In American Football (not to be confused with soccer), the West Coast Offense is one that puts a greater emphasis on passing versus running. The system is most commonly attributed to Bill Walsh while with the Cincinnati Bengals. The system is characterized by short horizontal passing plays used to stretch out the offense.
We will be running our own West Coast Offense later today in San Francisco with the expansion of our popular Macrocosm conference series to the Left Coast. Teed up to speak later this afternoon are the following:
- Neil Howe - As many of you know Neil joined Hedgeye just over a year ago and has gained a lot of notoriety as of late due to the fact that Presidential advisor Steve Bannon oft cites Neil's books "The Fourth Turning".
- Dan Christman - Retired Lieutenant General Christman will be giving an overview of the key foreign policy challenges currently facing the U.S., with North Korea likely to figure prominently in his comments.
- John Burbank III - John is the Founder and CIO of Passport Capital and will be discussing his views on the markets.
If you haven't already RSVPed a seat, we may have a few left so please email if you are interested in joining this afternoon in San Francisco's financial district.
Back to the Global Macro Grind…
Speaking of offense, those stock market operators that have aggressively played offense on asset allocation so far this trading season have likely had a solid year. In the Chart of the Day, we've highlighted the delta between the top performing SP500 sector compared to the worst sector. The difference in performance between XLY, up +10.9% and XLE, down -10.6%, is more than 2,000 basis points. Obviously it is no coincidence that with consumer costs (energy) down, consumer spending is up.
Now of course beating benchmarks is far from easy. Even though many of you over time have been able to do just that, according to a recent study by J.B. Heaton et al only 19% of active managers have been able to do so over the last 20 years. The culprit for underperforming can almost solely be attributed to missing key sectors and large price moves in a small number of stocks.
Another interesting statistical anomaly that Heaton found was that size matters. According to his analysis, roughly 70% of stocks will do worse than T bills. The caveat to this is that in the top decile of market capitalization, the inverse occurs and 70% of these larger companies outperform.
The challenge with investing is that even if you get the sector and stock right, you can easily get the political and geo-political dynamic wrong. The goal of being more informed on these topics was part of the rational of bringing the Potomac policy research team on to our platform.
In the political realm, the topic du jour is again healthcare and our trusty Washington Managing Director JT Taylor writes this morning that despite Trump's optimism, the healthcare bill may still have an uphill battle. As JT notes:
"The new discussions focus solely around preexisting conditions which the Meadows-MacArthur amendment allows states to opt out of - with President Trump reengaging in the arm-twisting and throwing a lifeline to moderates by “guaranteeing” coverage. Republicans have proposed to create high risk pools where states would absorb some of the costs to care for these people, but that hasn’t been enough to sway moderates into backing the plan. We believe there are 20 solid “no” votes at the moment from Republicans (on the low end of the mainstream media range) and, with 22 members still undecided, House leadership can only stand to lose two of the undecideds or face another soul crushing health care loss."
On the second topic of geopolitics, our colleague Dan Christman, who will be providing more color in his briefing this afternoon, wrote on Monday that the biggest challenge in geo-political handicapping may be the inconsistency of the President.
As he wrote:
“On the one hand, for example, the president executed a Syria attack that was widely applauded for restoring a credible deterrence line on chemical weapon use; delicately hosted a critical meeting with the Chinese president; hit the right notes in greeting the NATO SECGEN; and pushed key U.S. interests in meetings with the heads of state from Egypt and Jordan.
But within weeks of these events, and just as analysts were growing somewhat comfortable that the president's ear was increasingly tuned to seasoned national security advisors in his inner circle, Mr. Trump appeared to revert to campaign form."
Balancing sector and stock selection with political and geo-political is no easy task this year. As a result, it might just be a year in which marching the proverbial ball up the field with short choppy passes by taking gains off the table could be the path to Super Bowl performance.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.21-2.37%
SPX 2
NASDAQ 6006-6140
VIX 9.28-12.40
EUR/USD 1.06-1.10
Oil (WTI) 47.21-50.29
Gold 1
Copper 2.51-2.67
Good luck out there,
Daryl G Jones
Director of Research
