"Life is a series of natural and spontaneous changes. Don't resist them; that only creates sorrow. Let reality be reality. Let things flow naturally forward in whatever way they like."
-Lao Tzu

In the hockey world (a world in which Hedgeye has some familiarity) flow is the word that describes your hair. If your flow is really bad, it will likely be called a "mullet." The best (or worst) flow in hockey is commonly attributed to the ageless wonder Jaromir Jagr, who is still playing in the NHL at 45-years old.

Setting hockey hair aside, the use of flow in terms of bringing on change in the quote above from Lao Tzu is quite apt. We can’t fight change in life and we most certainly can’t fight change in the financial markets. Rather, we need to be positioned appropriately and flow naturally with the changing reality before us. 

At Hedgeye, we are hyper-focused on the quantitative nature of markets, which often means adapting to our factors when looking for Best Ideas in the equity markets.  If high debt, high short interest, and slowing EPS growth companies are outperforming (admittedly an unlikely scenario), we will scour stocks in that category to determine what “names” might be worth digging deeper on.

This idea of combining a portfolio manager’s perspective of what is working from a top-down perspective with what the analyst likes from a bottoms-up perspective is certainly nothing new.  Many of you do it daily. We have too for almost 10 years (back when I had flow!) at @Hedgeye. 

Next week, we will be showing you another part of this internal decision making process with the launch of our Top 10 Ideas call.  Keith, in conjunction with the research team, have isolated 10 ideas that combine his quantitative view with their fundamental view for a list of stocks that you should own, or be short, right now.  Speaking of shorting, 7 of the 10 names are actually short ideas!

The ideas, with associated slides, will be presented Wednesday December 6th at 11am.  If you’d like to be dial in to this call, please email for dial in info.

The Flow - 12 1 17 EL image 

Back to the Global Macro Grind… 

In terms of the domestic economy, taxes are one significant change that seems to be flowing our way.  Of course, like any major piece of legislation in this political environment, that path to change is hardly linear.  The view from our policy team has been consistent that major tax reform will pass, much to the chagrin of many of our competitors who have been more cautious. But another wrinkle has emerged this morning. 

As my colleague J.T. Taylor wrote this morning:

"Senate Majority Leader Mitch McConnell postponed Senate votes last night, calling the session at 9:15PM so Senators and staffers would have time to work on the bill before they convene at 10AM today with the first vote expected an hour later. McConnell was forced into this position when the Senate Parliamentarian ruled against including the trigger mechanism proposed by Senators Bob Corker (R-TN) and Jeff Flake (R-AZ). Leadership is working to appease the deficit hawks who want to reduce the price tag from $1.4T to about $1T especially after the JTC score yesterday showed the deficit will still increase by $1T even with economic growth. However, that’s a big reach for only two people and could tip the balance of the carefully crafted bill. McConnell can afford to lose only two votes - and may be better off working on the third holdout - Senator Ron Johnson (R-WI) who wants to eliminate a SALT deduction for C Corps to pay for increasing the pass-through deduction from 17.4-25%."

So just when things were flowing along . . . another hiccup! Despite the postponed vote last night, we still expect to pass the bill later today or in a worst case scenario this weekend. 

In our Chart of the Day below, we have highlighted this analysis from the Joint Committee on Taxation. The good news based on their analysis is that by 2027 the impact of the currently proposed tax bill will be deficit neutral.   Unfortunately, based on this analysis, between now and then the new tax bill could add more than $1.0 trillion to the deficit.  As Shakespeare famously said: “Aye; there’s the rub.”

The Federal Reserve also threw a little cold water on the tax bill early this morning.  In a Wall Street Journal interview, NY Fed President Dudley said that he (and we are paraphrasing) sees a reasonable case for a December rate hike, but that it’s not the best time for a fiscal stimulus when the economy is at full stimulus.  While his view has some merit, like most things from the Fed as of late we don’t see these comments as having any impact on pending Senate passage of the bill.  (Incidentally, Cleveland Fed President Mester also indicated yesterday he sees a December hike as likely.)

Finally, as bitcoin makes meteoric new highs and is the topic of discussion among taxi cab drivers and shoe shiners everywhere, the wily vet and sage demographer on our team, Neil Howe, will be hosting a call on Bitcoin on Tuesday, December 5th at 10am.  This call is ever so timely given that regulators just this morning officially approved the trading of bitcoin futures.

The title of his call, Bitcoin: Don’t Look Down, gives a bit of the gist of the direction of his view.  Please email to dial in to this beauty of a conference call.

Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:

UST 10yr Yield 2.31-2.42% (bullish)
SPX 2 (bullish)
RUT 1 (bullish)
NASDAQ 6 (bullish)
Nikkei 222 (bullish)
DAX 12811-13155 (bullish)
VIX 9.06-11.94 (bearish)
USD 92.40-94.25 (neutral)
EUR/USD 1.16-1.19 (neutral)
Oil (WTI) 56.01-59.16 (bullish)
Nat Gas 2.90-3.21 (bullish)
Gold 1 (bearish)
Copper 3.03-3.12 (bullish)

Keep your head up and stick on the ice,

Daryl G. Jones
Director of Research

The Flow - 12.01.17 EL Chart