Think Globally, Trade Locally
Domestic stocks may be profitable in the short-term.
This week, my firm held another tournament. If -- and this is a big if -- you believe there will be conspiring points of interest to provide a bid for the US dollar (however artificial or short-term that may be), then there may be a counter-trend trade shaping up that will allow the most unpopular idea to work.
As a fan of competition -- but not of crowds -- I therefore found myself gravitating toward domestically "doomed" stocks - stocks that popular opinion believes are bound to fail. So our teams were made up exclusively of Russell 1000 stocks for which more than 2/3 of all revenue came from inside the US - and then we eliminated all energy and materials stocks with an allergy to good green American dollar bills and whose idea of a counter-trend is a five-minute breather.
The resulting candidates are "trapped domestically" - which is exactly the opposite of where I want to be long-term. But for the short-term purposes of a trade (and with tight stops), I'm intrigued. The preliminary rounds were like watching the Washington Generals scrimmage the MV editorial staff. I have never seen such a consistently awful chartbook than the one made up of the 500 or so stocks that fit the original criteria. But after whittling them down over the course of the tournament -- using a blended scoreboard we've tweaked over the years -- we had a stand-out Final Four: BOK Financial (BOKF), CVS/Caremark (CVS), Thermo Fisher (TMO) and Trinity Industries (TRN). The first runner-up, interestingly enough, was DirecTV (DTV).
I think fundamental screens get just as crowded, if not more, than the stocks they're trying to dig up. So I'll share with you that none of our criteria are listed below - but since they're commonly judged by the rest of the market, it's nice to know how they compare.
I have to admit that officially regulated inflation numbers strike me as something like allowing my 4-year old son to regulate dessert portions among himself and his two sisters. The head of payroll for a little outfit called Social Security and Medicaid will almost certainly report the smallest cost of living adjustments possible by virtue of an understated inflation number - and my son would probably prefer to keep all three cookies to himself.
The cost-of-living allowances (COLAs) that I find most tradable are reached by the inspired - not by the retired. Backing those most capable of raising their own standard of living is my favorite trade of all-time. Despite the counter-trend described above, we continue to be reminded of the inexorable shift currently underway.
Below is an updated view from Bespoke of what we at Minyanville described for the first time two years ago, but upon which the majority of our long and long/short portfolio have been constructed for a lot longer - Kaizen vs. Complacency. Much of the angst on Wall Street and Main Street about this thin red line is not the result of a bull or bear market - it's separation anxiety, plain and simple. The change is neither good nor bad - but you do need to understand it.
I was reminded just how many more people live on the blue line just this week, when Corn Products (CPO) was purchased for a substantial premium by Bunge (BG). CPO makes the cheap sweeteners that go into packaged drinks and foods we take for granted in the US, but have yet to be tasted in other parts of the world.
My firm has shared our work on CPO in the past, including as a member of that Sweet Sixteen. After the buyout announcement, I'd imagine that the CPO deal will be forgotten by this time next week, if it hasn't been already. I would argue that it shouldn't be, because it offered us a powerful clue.
It's been described as another bet on agriculture and corn. It's not - CPO doesn't buy corn. It doesn't sell it. What it sells is capitalism, the taste of those cheap sweeteners and the promise of a few extra coins in your pocket. They are the global staple's staple. A lot of folks around the world are right where we were three decades ago. We've already seen what comes next.
I shall continue to trade accordingly in the long term; in the short term, be prepared for counter-trend opportunities.
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