“It’s not what you look at that matters, it’s what you see.”
-Henry David Thoreau
This is a squirrely business. Anyone who has spent a day working on Wall Street and took the time to observe their surroundings gets that. If you are currently working within the Berlin Walls of Investment Banking Inc. and don’t know what I am talking about – look a little closer; it’s what you see that matters.
No matter how odd (or normal) someone on Wall Street is, there is one thing that can trump all of his or her social behaviors – performance. If you can drive a P&L on a big desk, one day you’ll be called “smart” – and from that day, until you lose money, you’ll have found the elixir of a highly compensated life.
You don’t have to like every person in this business to like the rules of the game. This is America - a country built on the principles of meritocracy. No matter how screwed up our political aristocracy gets, they’ll eventually be held accountable by the performance gods. Every day that we walk down this transparency path in the modern YouTube world provides the next opportunity to expedite the process of price discovery.
Here was the score for June and Q2 of 2010 in US Equities:
1. June 2010: Dow (3.58%), SP500 (5.39%), Nasdaq (6.55%), Russell2000 (7.88%)
2. Q2 2010: Dow (9.97%), S&P (11.86%), Nasdaq (12.04%), Russell2000 (10.19%)
Whether you’ll be held accountable to the score in a public forum or not, the best part about this business is that you know the score. We all get marked-to-market every day. The most important relationships you’ll ever have in this business are with your teammates – they know the score too.
Today is July 1st, Canada Day and day 1 of keeping score for Q3. As is customary, my team and I will be introducing our Q3 Hedgeye Macro Themes. Unlike the sell side fee and commission chasing units of Investment Banking Inc, we change our investment themes as time and prices do. We aren’t paid to be dogmatic or theoretical. We get paid to get these themes right.
Rather than my giving my own paralysis of how we did with our Q2 Macro Themes, I’ll let our clients decide. Rather than give political lip service to the words “transparency” and “accountability”, every long or short position that we recommend at Hedgeye is marked-to-market, real-time, every day for all of you to see at www.hedgeye.com.
We’ll walk through a 35 slide presentation at 11AM EST explaining the following Q3 Macro Themes and how to use them from a risk management perspective:
- American Austerity
- Housing’s Headwinds
- Bear Market Macro
For anyone who puts up with reading my daily rants, these investment themes won’t have many surprises. In sharp contrast with our Sovereign Debt Dichotomy call in Q2, where we called for being short the Euro and Spain in particular, we’ll be zeroing on how the storytelling of deficit and debt problems (as a % of GDP) will find their way to the US. We already shorted the US Dollar (UUP) on June 7th, 2010, so we’ll be explaining that position’s risk/reward.
In principle, our investment themes are designed to be pragmatic. Everyone knows that they are late if they get to work at this firm after 530AM. Getting in early isn’t about face time. It’s not about what our analysts are looking at on their screens at that hour either – it’s all about synthesizing what everyone else is looking at and seeing what matters.
What matters this morning is what mattered 6 months ago when we introduced our Chinese Ox In A Box theme for Q1. If you didn’t see the Chinese forcing a slowdown in their own economic growth coming, you certainly see it happening now.
In our Q1 Macro Theme presentation we showed a slide with Chinese PMI growth putting in an intermediate term top in the 57-58 range. This morning’s Chinese PMI report for the month of June came in at 52.1 versus 53.9 in May, another sequential month-over-month slowdown. Chinese stocks closed down for the 7th day in a row, making a lower-YTD-low at -27.6%, second only to Greece in the world stock market league standings for last place.
The point of this morning’s missive isn’t to take a victory lap on China. It’s about seeing this business for what matters – it’s all about being right. Do you have a repeatable top-down global macro process to augment your stock picking and asset allocation or not? Did your risk management process work during the bear market moves of 2008? Is it working now? Who’s “smart” enough to change their positioning as prices do?
Our immediate term downside target for the SP500 remains 1018. Let the battle of Q3 2010 performance begin.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer