“It is important to foster individuality, for only the individual can produce new ideas”
-Albert Einstein
After the sharpest single-day US stock market decline since the 1987 crash there better be some great long ideas out there. Crisis creates opportunity; creative destruction is taking hold; and after having our 3rd consecutive up day in the ‘Hedgeye Portfolio’, we’re ready to roll here this morning at Research Edge.
If you don’t like the feeling of waking up to a counterparty that is confident in this environment, my team is definitely not for you. We don’t do well hanging out in the hallways of investor conferences asking everyone else what their best ideas are – it’s hard enough to find the time to do all of the research that is required to execute on our own ideas.
Having been there for the last decade, I think there are three basic things that the “buy side” wants: speed, accuracy, and ideas. Be first and be right; rinse and repeat. That’s called “idea” generation, and Wall Street pays a premium for it. The key to building that intellectual property is to simply have your own process and your own ideas. It is critical to “foster individuality”. If you can’t stand alone, you’re probably best served to get out of the game until the next bull market begins.
Jack Bogle at Vanguard, amongst others, has proven, that it is very rare for a money manager to outperform the market across economic cycles. Investment styles come and go, and so do the faces and the names. That’s not a contrarian point. That’s just the math. The reality is that “Joe The Plumber” has just as good a shot as over 90% of us of at being right on the market when volatility is low. I love plumbers. I’m glad that Obama and McCain do to. They gave Joe at least a dozen shout outs in the final Presidential debate last night! In fact, plumbers are in relatively low supply right now, and will probably be rightly paid more in 2008 than your run of the mill “hedgie”.
Rather than watching yesterday’s market swoon recaps on CNBC, or the battle of the “who knows less” about economics in last night’s debate, Joe and his kids were probably watching the Phillies go to the World Series last night. Rather than waking up to his portfolio manager pointing fingers at him this morning, the worst thing Joe might be waking up to is something that really smells… but hey, at least he can call it for what it is. His stress isn’t in the area code of Wall Street’s right now, and it shouldn’t be. If ‘Investment Banking Inc’ owned up to what they had in their sewage system 12 months ago, we all might have less pressure on our temples. Never mind this “Level 3 Asset” stuff – if it smells like one, it usually is one… Joe calls it a liability.
The best idea I have for you this morning is to start buying stocks again, but do so patiently. The S&P 500 closed at 907, and my downside target line has moved to 854.11 this morning. You have 6% downside from here, and you should be able to leg into our or your team’s “best ideas” at a measured pace. We have an 80% position in cash that is open to buy this morning. We are accountable for every trade that we have on our sheets. If we liked it on the long side yesterday, we better like it more today, because it’s cheaper. Our gains on the short side, as always, are meant to be taken.
Our top 3 domestic stock ideas are: BMY, HSY, and PENN. All of these stocks are cheap. All of these companies have dominant market shares in their respective businesses. All of these tickers were down yesterday. Buy low.
Our top 3 global ETF ideas are: FXI, EWH, and EWG (China, Hong Kong, and Germany). All of these ETFs were down yesterday. All of the shorts that we have against them (Japan, India, and the UK) were down more. Some might actually call that “hedged” portfolio construction. Genius, I know. Sell high, buy low.
No, this business isn’t rocket science. Yes, those who told you they were are probably having a bad week. Proactively managing risk includes shunning leverage. Waking up every morning like Joe the Plumber does includes smelling the coffee before he has to deal with the smelly stuff for what it is. The story telling is over folks. The accountability cards are on the table, and the YouTube split screen on McCain & Obama last night is a metaphor for this game’s new rules. Speed and accuracy of independent and transparent ideas will win.
Best of luck out there today,
KM
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