| MRP
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McAlinden
Research Partners
| THEME TRACKER
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Active Themes
April 2016
Here are capsule summaries of MRP's current investment themes, organized by
sector plus country-specific themes and recently retired themes, which can
be reached directly through the menu bar above. Green and red dots denote
each theme's respective launch and close dates (as applicable). More detail
on any theme is available on request.
Home Improvement: Housing sales are back,
incomes are up, payrolls are strong, and household formation is up.
Moreover, furniture and home furnishings is one of the few areas where
consumer prices are rising, putting those retailers and manufacturers in a
nice sweet spot. February
10, 2015.
Housing: One of MRP's
longest-running themes, we believe the US housing recovery is still intact
and continues to be a case of "two steps forward, one step back." Overall,
pent-up demand from population growth and replacements continues to build
and is now close
to 5 million units. While the population has continued to grow, household
formations have turned up strongly. As the homebuilder stocks resume
leadership within the market, we believe they will price in the stronger
housing recovery. We also expect to see renewed strength in financials
(mortgage servicing, loan origination), paper and forest products
(lumber), and consumer durables (white appliances, carpeting, etc).
Launched November
3, 2011.
UK
Housing: The UK's overall
supply remains constrained and first-time homebuyers are having a
difficult time finding an affordable entry point, with new government
initiatives being implemented to increase housing availability.
Remarkably, the situation is much the same today as it was in May 5, 2015,
when the theme was launched: "The combination of a major public policy
push and constrained resources all but guarantees a full order book for
the UK homebuilders for a long time to come, leading MRP to recommend a
long position in a basket of those stocks." During that time,
analysts have continued to lower their average rating on those stocks,
even as the outperformance by the group has trended higher. We will look
for the analysts to begin revising their estimates higher in the quarters
ahead as a possible signal that this theme is maturing, a point that has
yet to be reached so far on that metric. Launched May
5, 2015 and updated December
31, 2015.
Food Packaging: After
surging in early 2014, grain prices plunged as global harvests come in
better than expected. That's bad news for farmers and grain exporting
countries. But it's great news for restaurants and packaged food
manufacturers, many of whom had only recently begun raising prices and now
find themselves in a pricing power sweet spot. Meanwhile, on the short
side, farm equipment suppliers are struggling as orders start to dry up.
Launched July
9, 2014.
15963
US
Energy: As oil prices have fallen, oil company share prices
have plunged as well -- down 35% since June, 2014 and almost 50%
peak-to-trough. More directly affected sectors like Oil & Gas Producers
have plunged 70%. To be sure, a recovery in product prices could lead to
some whopping gains in energy company stock prices. Indeed, we expect that
energy could be a top performing sector in the next few years. We are
already long the XLE as a hedge in our Short U.S. Refiners theme. MRP is
adding the Energy sector at this point as an active theme. Launched on April
8, 2016.
US
Refiners Short: For US refiners, the times are changing.
They were big winners – and a big winning theme for MRP – in the early
days of the fracking revolution. Now the tables have turned and margins are
being squeezed. MRP recommends shorting the US refiners in a pair trade with
a suitable offsetting long, such as a broader energy ETF. Such a pair trade
can be profitable if the refiners stocks in a short basket go up less than
the long position. As with any short position, the risk of a broad market
rally can be hedged with an offsetting long position, such as the S&P
500 Energy Index. Launched March
3, 2016.
Clean
Energy: As silicon panel costs drop, fossil fuel
prices firm, and new energy storage technologies appear on the horizon,
solar power generation is reaching a tipping point where it can compete with
traditional energy sources, even without subsides. Guggenheim's TAN Solar
Energy Index ETF provides a ready way to gain broad exposure to a global
basket of stocks. As a group, the wind stocks have been holding up and
outperforming the S&P 500 Energy Index, trends that MRP expects to
continue given the clean energy mandates of many countries and renewed lift
by the renewal of federal subsidies in the US. Launched as Solar on April
14, 2015, expanded to include Wind on December
17, 2015, and updated April
19, 2016.
Mortgage
Servicing: MRP
recommends an additional theme to capture the broadening impact of the
US housing recovery: Mortgage Servicing stocks engaged in title and
mortgage insurance along with residential brokerage stocks. Most home
sales require title insurance and most mortgages require mortgage
insurance, whether to purchase or refinance. Moreover, these stocks are
positioned for an added lift from further renewed gains in house prices,
lifting more households out of negative equity and re-opening their
lines of credit against
a broader backdrop of rising incomes, strong payrolls, and new household
formations. Launched April
27, 2015.
No active themes in this
sector.
Aerospace & Defense: The broad increase
in geopolitical instability supports a continued aggressive investment
stance in the aerospace and defense industry. In the US, further budget
cuts are increasingly unlikely in an election year. In Europe, events in
Ukraine prompted many countries to consider adding to their defense
spending. In Asia, China's territorial claims in the East China Sea and
the South China Sea have galvanized countries in the region, notably in
Japan where defense spending is being boosted. Launched November
27, 2013.
No active themes in this
sector.
Gold
Miners – Long: Gold miners have fallen over the past 4
years by twice the percentage decline of bullion. These are operating
businesses, and like other commodity-related companies, most of their costs
don’t go down when the selling price of their product does. But the same
should be true on the way back up. If miners move back to their 2011 highs,
they would rise 4 fold. Launched October
21, 2015.
No active themes in this sector.
No active themes in this sector.
US - Long Value and Short Growth: Since May 2007 even
before the broad market peaked, growth stocks have outperformed value stocks
by a wide margin. The end of the Federal Reserve’s ZIRP policy,
however, is now imminent, which could likely mean a harsh correction
for overbought growth stocks. Historically speaking, value typically
outperforms growth during periods of interest rate hikes. We believe the
commencement of an interest rate hiking cycle beginning next month will
ignite the start of a multi-year period of superior relative strength for
Value over Growth stocks. A simple trade of a basket of value stocks and
short a basket of growth stocks should produce good returns. Launched August
28, 2015.
US – Short Bonds: As
U.S. economic growth rebounds and inflationary pressures return, we
believe bond yields are headed higher. Launched July
1, 2013.
Japan
– Long Stocks & Short Yen: Japan reached an
inflection point after the election of Shinzo Abe in late 2012 and the
subsequent launch of fiscal stimulus, monetary stimulus, and structural
reforms. While the pace and depth of reform has been uneven, the direction
has been clear and MRP continues to believe there is more to go for the
core position of the "Abe Trade" of being long stocks. Stocks also benefit
from pension fund reallocations into equities as well as the weaker yen,
the second piece of the Abe Trade, which weakened further after the Bank
of Japan's second round of monetary stimulus in late 2014 with additional
monetary stimulus a rising possibility. Government bonds, the third
part of the Abe Trade, have yet to sell off although yields turned up in
early 2015. Launched December
19, 2012. Short yen retired May
2, 2014, and reinstated September 15, 2014. Short bonds closed March
26, 2015.
India – Long Stocks: Much
like Shinzo Abe in Japan in 2012, Narendra Modi was swept into power in 2014
with a landslide victory and an ambitious agenda to reform India's sclerotic
policy-making institutions, replace the country's aging infrastructure, and
cut through decades of bureaucratic red tape. His mandate is personal – a
fourth of the BJP's supporters voted for him rather than the party – and
expectations are high. And also like Japan, sputtering economic growth is
adding pressure to open up the economy to more foreign competition. Launched
May
19, 2014.
China
– Short Yuan:
While
the yuan is allowed to trade around a +/-2% trading band, the
reference rate itself is set by the planners against a basket of
currencies. Given the dollar's strength since early 2014, a weaker
yuan is overdue and complements the other stimulus measures. While
a massive fiscal stimulus might be off the table for now, the government
is pushing more infrastructure projects and instructing banks to boost
lending, an effort recently accentuated by the central bank's interest
rate cut.
A freely floating yuan is a distant prospect, the government remains in
control, and the planners still have plenty of administrative tools to
boost growth, including a weaker yuan. Launched
November
13, 2014, and updated March
24, 2015, August
25, 2015, and December
8, 2015.
Europe
– Long Stocks:
On February 24, 2015, MRP recommended a long position in Europe stocks given
the inflection point the occurring in the EU's approach to the Greek
financial crisis which. In our view, the odds of Grexit had been materially
reduced, reducing a key source of uncertainty and thereby improving the
outlook for Europe's stock market. Instead, stocks have moved more or less
in line with the S&P 500, after adjusting for currency, and Grexit as a
primary driver in the markets has abated, at least for now. Launched February
24, 2015 and closed October
23, 2015.
Refiners:
MRP
is closing our recommendation to be Long US Refiners. When we relaunched
the theme on March
2, 2015, the oil price divergence was widening between global
prices as measured by Brent and local West Texas prices. At the time of
the recommendation, MRP noted that "While refiners everywhere face
higher input costs, US-based refiners are again enjoying a relative
price advantage, as measured by Brent's premium to West Texas.
Eventually, as rail and pipeline connections are expanded and the US
continues to ease export restrictions, North American oil production
will be re-integrated into global markets. For now, US refiners
stand to benefit from the difference between US and global oil prices,
which MRP expects to continue at least through the next two quarters." Two
quarters on, the price differential has narrowed, oil producers are
connecting to global markets through other infrastructure links as
highlighted below in today's Daily Intelligence Briefing, and US production
has slowed while imports have again turned up. The upshot is that US
refiners no longer appears to be in the pricing sweet spot they enjoyed
earlier and therefore it's time for MRP to close the theme. Launched March
2, 2015, updated July
10, 2015, and closed October
29, 2015
Food Retail: On February 26,
2015, MRP recommended a long position in US grocers in light of the
shift in price power for the group. As we wrote at the time, "The
difference between consumer prices and producer prices (the blue line in
the chart to the right), a rough measure of pricing power for grocery
stores, continues to improve and is poised to turn positive in the next
few months, helping boost profits." While pricing power as
measured by that proxy did indeed turn positive and remains
constructive, the stocks themselves have failed to break out relative to
the Consumer Staples sector. Meanwhile, as detailed in earlier editions
of the Daily Intelligence Briefing, a new threat looms: Europe-based
grocery discount chains are planning to move into the US market, a
potential game-changer that could make US grocery stores an attractive
short position. Launched February
26, 2015, and closed October
23, 2015.
Portfolio Management and Global Investment Strategy
McAlinden Research Partners
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