How Global Macro Investing Is Like the Rodeo

|
 |  Includes: EWC, EWZ, ORCL, SPY, XLE, XLY
by: Keith McCullough

“It’s the broncs and the blood, it’s the steers and the mud, and they call the thing rodeo.” –Garth Brooks

It’s rodeo season in Western Canada, and I’ve flown back to my hometown of Bassano, Alberta to participate in the local amateur rodeo. No, I won’t be riding bulls, or wrestling steers, but rather I’ll be participating in the Wild Cow Milking competition. Wild Cow Milking is one of the more gentlemanly sports in rodeo. As such, it involves a team of three cowboys and a wild cow. The team that fills a bottle with the cow’s milk the quickest, and runs the bottle across the finish line first, wins.

So, what exactly does either a rodeo, or wild cow milking have to do with global macro investment risk management landscape? There are two basic parallels. First, in a Wild Cow Milking competition the team with the most coordinated effort usually wins. By comparison, in the investment world, usually the team that is most effective at analyzing and tying together both the macro information and company specific data points, wins.

Second, just like the current investment landscape, rodeos are chaotic. In Alberta, when things get a little nuts, we say they are getting “western”. To say that things are little western in the investment rodeo these days is an understatement. To emphasize this, let’s look at some of the global asset class moves in the year-to-date via their representative ETFs: Russia +60% (via RSX), SP500 +2.0% (via SPY), Natural Gas -37.2% (via UNG), and high yield bonds up +6.9% (via JNK).

Our investment process, which combines both bottoms up and top down research, has uncovered a number of relevant and incremental data points this past week that support our conservative, though slightly long-biased model portfolio positioning. Some of the key callouts from the Research Edge Team this week to our clients are as follows:

1. In healthcare, Tom Tobin and his team have been analyzing the negative impact on President Obama’s approval rating as a function of aggressively taking up the gauntlet of healthcare reform. The reality is, as President Obama continues with the healthcare push, his approval rating will continue to weaken. Tobin likes hospital stocks on the short side to play this theme, along with his expectation that their bad debt will ramp with heightening unemployment.

2. Our restaurant analyst, Howard Penney, in his weekly conversations with his restaurant companies, has noted that none of his companies are providing a view that business is getting better, which obviously has implications for the broader consumer discretionary landscape. As a result, we are short the consumer discretionary ETF, XLY, in our model portfolio.

3. In technology land, Rebecca Runkle provided an update on Oracle (NASDAQ:ORCL) earnings this week, which suggests that software spending is and may continue to be better than expected. She has also been uncovering increased activity in the PC supply chain due to the pending Microsoft (NASDAQ:MSFT) upgrade cycle, which may be an investable theme heading into the back half of the year.

4. From the Gaming, Lodging and Leisure team, they are expecting a slowdown in regional gaming markets this quarter. According to Todd Jordan (who is currently in Macau):

Every 1% y-o-y change in gas prices results in an inverse 0.15% change in same store gaming revenues, holding all other factors constant. In thinking about organic growth in regional revenues, it is necessary to focus on the trend in gas prices.

Our Macro Team is bullish on oil, and Todd has his sector, and our portfolio, positioned accordingly.

5. Brian McGough, and his retail, footwear and apparel team, have zigged while the rest of the Street has zagged. While people are getting caught up in the noise around near-term earnings revisions and 2H numbers being a ‘slam dunk’ (this call mattered in March, not now after a 40% run), his team has shifted gears to focus on quantifying the impact of changes in international trade policies around apparel, as well as the cadence of cash flow in 2H and its impact of the M&A cycle. Ultimately, the team’s call is that there will be a massive bifurcation between winners and losers starting in 1Q10 based on decisions today that are misunderstood by the market.

6. In our Macro group, our research this past week was focused on the continued evidence of loose monetary policies globally, as indicated by ECB, Fed, and Chinese banking action this past week. The implication of these historically loose global monetary policies is that the reflation trade should continue, with a risk of morphing into inflation in the back half of the year. To position for this, we are long energy companies (NYSEARCA:XLE), long energy producing nations (NYSEARCA:EWC), (NYSEARCA:EWZ), and long inflation protected treasuries (TIPS).

The manifestation of these recent data points, and the work we have been doing all year, is our model portfolio structure. Our current positioning in our model portfolio supports the interpretation that things are still a little “western” out there. We currently have 20 longs and 9 shorts, for a long / short ratio of just over 2:1. In our asset allocation model, we still only have a medium allocation to equities and commodities, with cash as our largest weighting.

Ultimately, investing is a much more civilized sport than rodeo. The board room of the typical investment firm is typically classy in décor (although I hear Julian Robertson does have a stuffed tiger in his), while a rodeo arena is littered with bruised cowboys, crushed beer cans, and empty Copenhagen tins. Also, most money managers don’t routinely break bones while competing, even if they do have bruised egos at times.

But the parallels remain and the point is, if you want to win the global macro investment rodeo this year, you need to operate like cowboy. So put on those chaps, give yourself a slap, and ride the bull . . . and at the end of this year if you’ve stayed on for 8 seconds you’ll probably “hear the roar of the Sunday crowd”, and get paid for your performance.