“Therefore since brevity is the soul of wit,
And tediousness the limbs and outward flourishes, I will be brief.
Your noble son is mad.”
It’s Friday morning, so we are going to try and keep things tight this morning. The quote above from Shakespeare means simply that a good piece of writing, or a good speech, should be short and concise.
One could say the same about an investment thesis. The shorter and simpler, the better. At Hedgeye when we present a new investment thesis, we try and keep the core thesis to three bullets.
The work behind the idea will be complex and may involve months or quarters of work. But the thesis itself should be short and measurable. Take our short thesis on Netflix as an example:
- Competition will impair Netflix’s relative value
- Domestic growth will slow faster than expected
- Nearing the end of a positive international revision strategy
- Current content strategy not sustainable
Now we got a little long winded with that fourth bullet, but you get my point. The thesis was short, to the point, and easily measurable.
The implication of our thesis playing out was (is) that we believe the multiple would be re-rated lower for slowing growth. With a down -10% day yesterday, that re-rating has begun.
For those that didn’t get a chance to Andrew Freedman review of the NFLX quarter yesterday, you can view the replay of the call here.
Back to the Global Macro Grind ....
I picked a good day to write on brevity as the there was very little new economic data reported globally. The two items of note are:
- South Africa getting into the interest rate cutting game with a 25 basis point cut; and
- German PPI coming in lower than expected at +1.20% y/y.
Not much to take away except for more evidence of global disinflation.
Yesterday saw continued dovish commentary out of the Federal Reserve:
- NY Fed President John Williams said in a speech that when you only have so much stimulus at your disposal, it pays to act quickly. He also added it is important to keep rates lower for longer; and
- Shortly after Williams’ speech, Fed Vice Chair Richard Clarida told Fox Business that inflation has been a little soft, global data is disappointing to the downside, and uncertainties have increased. He concluded by saying it might be better to take pre-emptive actions.
The implications of these comments were that the Fed funds future shifted to a 67% chance of 50 basis point cut at the July FOMC meeting (which is on July 30th / 31st). If you have been following our scribes, expectations of a July cut of 25 basis points were at around 50% just two weeks ago.
As Shakespeare also famously wrote:
“Expectations are the root of all heartache.”
If P.E. Powell and the rest of the League of Central Bankers don’t deliver the cowbell, there may well be some heartache in global macro land!
The most immediate catalyst in rate cutting land will be the ECB meeting on July 25th. 25 basis points, 50 basis points, re-starting QE, or merely a change in language to show they will cut? So many options for the European Central Bank!
In as much as all is quiet on the data front, geo-political tensions are heating up with Iran. It’s a case of did they, or didn’t they, in the Strait of Hormuz. President Trump is claiming that the USS Boxer, an amphibious assault ship, took defensive action against a drone that was flying too close to it.
The Iranians, never ones to lose face, disputed Trump’s claims and indicated that all of their unmanned aircraft returned to their bases. To back up their claim, they are planning to release surveillance footage of the USS Boxer.
The latest flareup occurred on the back of the U.S. flexing some military muscle by sending a flotilla of warships through the Strait of Hormuz. Given its proximity to major oil producing nations, the Strait is not without significance as almost 1/3 of the world’s seaborne oil is transported through it.
To get up to speed on this and other geo-political tensions, our resident geo-political expert Lieutenant General (ret.) Dan Chrisman will be providing a briefing to Hedgeye subscribers on July 31st. If you aren’t a current Hedgeye institutional subscriber and would like to learn how to gain access to this call, please email .
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND signals in brackets) are now:
UST 10yr Yield 1.98-2.15% (bearish)
UST 2yr Yield 1.74-1.92% (bearish)
SPX 2 (bullish)
RUT 1 (bearish)
NASDAQ 8061-8289 (bullish)
Utilities (XLU) 60.05-61.47 (bullish)
REITS (VNQ) 87.90-90.80 (bullish)
Financials (XLF) 27.57-28.33 (bearish)
Shanghai Comp 2 (bearish)
Nikkei 21001-21908 (bearish)
DAX 124 (bullish)
VIX 12.06-16.11 (neutral)
USD 95.86-97.39 (neutral)
Oil (WTI) 54.08-61.24 (bearish)
Gold 1 (bullish)
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research