“We work in the dark - we do what we can - we give what we have. Our doubt is our passion, and our passion is our task. The rest is the madness of art.”
- Henry James
Let's start with a little story about Keith today. Back in 1999 when he was interviewing for his first job on Wall Street. A interviewer asked him:
“So why should I hire you? I have a bunch of candidates sitting outside with resumes just as good as yours, or better.”
His response was (and I’m paraphrasing):
“Well, if you put us all in this room and turned off a light and threw a ball in, I’d be the one that came out with the ball. That’s why you should hire me.”
Now that answer wouldn’t have worked with all interviewers, but in this instance it did. And the Thunder Bay Bear got his first job on Wall Street.
The fact is that some of us work better in the dark. In the equity world, short sellers are probably the best example. They are constantly fighting a money management world that wants stocks to go higher, management teams that manipulate information to present the most positive narrative, and the financial media that are, at best, glorified stock market cheer leaders.
Today is the grand finale of what has been an amazing Hedgeye Investing Summit. In case you didn't know, it's online, free, and all of our discussions are available via replay.
Yesterday we had the prolific short seller, Carson Block from Muddy Waters Research in a conversation with Keith. And today we have an absolute legend of short selling, Jim Chanos, in a one hour discussion. You don’t get that from the Old Wall.
Short selling is often branded with a negative connotation. After all, what type of person or firm would want a stock to go down? Practically however, the academic literature tells us something very different. In fact, short selling is critical to markets. As the World Federation of Exchanges concluded in a paper in April of this year after short selling bans were reinstated in some parts of Europe:
“According to the literature, during periods of price decline and heightened volatility, short-sellers do not behave differently from any other traders, and contribute less to price declines than regular ‘long’ sellers. As research has shown that short-selling bans are more deleterious to markets characterized by a relatively high amount of small stocks, low levels of fragmentation, and fewer alternatives to short-selling, emerging markets should be particularly wary of bans on short-selling.”
Back to the Global Macro Grind…
So far, at least, it is a great day to be a short seller. Especially in Europe where equity markets are getting beaten like a proverbial rented mule. Currently down 2 - 3% across the board. One of the primary culprits is a re-emergence of COVID-19 with a vengeance.
Despite where you stand on the COVID-19 pandemic, you must remember: viruses are going to virus. In fact, yesterday the world reported the most daily positive tests since the start of the pandemic at just over 380,000. This is in large part being driven by the likes of Spain, Germany, Italy, France and the U.K. approaching all time highs. (In the U.S., 38 states now have a R naught, transmission rate, above 1.)
The good news is that much of this is being driven by increased testing and significant improvement in our ability to treat the virus. But as we’ve always maintained, the economic risk from virus transmission increasing again is that governments will institute curfews, travel bans, and certain business closures. On that note, Paris is implementing a curfew and London is reverting back to Phase 2 (limited travel on public transportation and no meeting with people outside your household).
As usually happens in #Quad4, ironically enough, a lot of the bad news comes at once. In the U.S. we are getting more reports that various vaccine candidates aren’t all that effective. In addition, Secretary Mnuchin has acknowledged that more stimulus is not likely to come until after the election. This is something our Washington team, led by JT Taylor, sniffed out early. And without more cowbell, we are left to earnings over the next few weeks to buoy equity markets to new all-time highs. Good luck with that!
In the short term, the signals are fairly clear this morning. The USD is up 0.5% against the Euro, Oil is down 2.5%, and bonds globally are rallying hard. The market is signaling decelerating growth and inflation. Germany, which is in #Quad4, in our models now has a 10-year Bund interest rate at -0.63%. Meaningfully negative interest in Europe’s largest economy ... zut alors!
Flipping back to the longer term, yesterday Keith spoke with Liz Ann Sonders (Chief Investment Strategist at Charles Schwab) during our Hedgeye Investing Summit about the relationship between permanent unemployment and temporary unemployment. As always, jobs leave the economy faster than they will come back. We’ve highlighted this in the Chart of the Day. Perhaps not unlike COVID-19, permanent unemployment is likely to be stickier for longer than many people expect.
This obviously has negative connotations for many banks and credit card companies, but is positive for debt collectors - like two of our best idea longs ECPG and PRAA.
But who are we to talk about longer term, structural economic constraints in the era of the 24-hour bullish narrative/sound byte investing cycle?
Immediate-term @Hedgeye Risk Range with TREND signal in brackets:
UST 10yr Yield 0.64-0.82% (bearish)
UST 2yr Yield 0.11-0.15% (bearish)
SPX 3 (bearish)
RUT 1 (bearish)
NASDAQ 10,913-12,050 (bearish)
Tech (XLK) 113.27-124.37 (bearish)
REITS (XLRE) 35.52-37.30 (bullish)
Utilities (XLU) 59.50-64.87 (bullish)
Financials (XLF) 23.96-25.61 (bearish)
Shanghai Comp 3151-3390 (bullish)
Nikkei 23082-23850 (bullish)
DAX 126 (bearish)
VIX 24.18-30.71 (bullish)
USD 92.96-94.31 (neutral)
Oil (WTI) 37.23-41.94 (bearish)
Gold 1 (bullish)
Silver 23.26-25.40 (bearish)
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research