OODA: Avoiding Landmines

WATCH OUT FOR CRAP

March 2014


SITUATION:       MACRO MONITORING DETECTS CURRENCY IMPACTS
Market focused on USD, EUR, JPY, CNY and nothing else because those were the largest exposures, missing the cumulative potential impact of deterioration in secondary currencies.

ACTION:           WATCH OUT for CRAP!
Executed deep dive analysis on the sales exposure and asset / revenue mismatches of over 45 key global industrials (many without cooperation particularly with regard to Russia exposure) to determine single country and total exposure to four commodity driven currencies prior to investors, or market, realizing the coming headwind:                    

Canada:    BBD.B wins if CAD down.  Headwind for WCC, URI, GWW, PCAR
Russia:      4% each for ATCOB, SDVKF, SIE, CFX and 3% for FLS, SU.FP, EMR.
Australia:   VMI 15%, PNR 10%, CAT 8% (US Cos.), ATCOB 13%, SDVKF 10%.
LatAm:       We used “P” for Peru so we could say “CRAP” but really focused on the Brazilian Real.  CAT 21%, MMM 12% and a bunch at 8-11% including FLS, PCAR, ABB, DE, ATCOB, TEX, ETN, CFX, ROK, ALO.FP

TOP 5:       CAT   36%, ATCOB 32%, WCC 25%, SDVKF 25%, PCAR 24%.

          
RESULT:           HUGE CALL    

Four of top five risks (3 of 3 in U.S.) declined in value while sector rose and beat market.
A PM leveraging our work on CAT, PCAR or WCC may have saved their job.
                                                                                                                     vs.               vs.
TOP 5 EXPOSURES           3/13/14        3/14/15        CHG. %         XLI            S&P

CAT                                        $95.61         $79.23          (17%)        (3,900)        (2,800)
ATCOB                                  166.90          242.20           45%           2,300          3,400
WCC                                      $82.46         $68.19           (17%)        (3,900)       (2,800)
PCAR                                     $65.30         $61.73           (  5%)        (2,700)       (1,600)
SDVKF                                   $13.95         $10.21           (27%)        (4,900)       (3,800)

S&P Industrial Sector ETF     $41.97         $51.35             22%
S&P 500 Index                    1,846.34       2,053.40            11%
                        


HOUSTON, WE HAVE A PROBLEM

November 2014

SITUATION:        OIL PRICE DOWNTURN
WTI had fallen (25%) from $100ish trading range w/no response, or concern, from stocks, analysts or managements.  

ACTION:             HOUSTON, WE HAVE A PROBLEM
We advised clients (and published) that geopolitics was beginning to exert pressure on oil price.  We argued this was the “Putin’s Zipper” trade as Saudi Arabia sought to use its strongest weapon against Russian influence in the Middle East.  Others argued later it was an attack on North American fracking and which proved to be true.
            
2014.11.21      Houston, We Have A Problem
2015.02.17      Oil Slick, Currency Headwinds Challenge Growth
2015.03.16    Oil Slick, Currency Headwinds Worsen
2015.05.15    Slow Growth Ahead, Farm belt Can’t Help
2015.09.08    Game Changer
2015.10.05    Weathering the Storm
2015.11.06    Oil Slick Cascading

Nobody else in the sector got the new joke before middle of 2015 at the earliest.
                    
THE RESULT:     WE LED STREET IN CUTTING ESTIMATES AND SIDESTEPPING
1.  Led analysts in cutting estimates on “oily” names like DOV and avoid commodity levered stocks like DE.
2.  Remained ahead of the macro curve all of 2015 – Saudi Arabia continues to pump, Manufacturing sluggish, China market meltdown their problem, not our problem.
3.  Stock calls included avoiding DE ($87 to $75) and DOV ($75 to $63).


BATTEN DOWN THE HATCHES!

JAN 3, 2016

 

SITUATION:        VIRTUAL REALITY

(10-15%)     Industrial CEO guidance (GE, DOV, others) on Oil & Gas end markets in December.
     (40%)     Oil price drop from 2015 high of $60 per barrel (trading around $35 to $38).
     (65%)     Oil price drop from $100ish level pre Saudi’s opening the spigot.
     (60%)     Conoco, Marathon announced capital spending cuts.
    

ACTION:            BATTEN DOWN THE HATCHES (1/3/16)
1.  Translated oil view into lower estimates, selected targets and ratings.  Downgraded DOV at $61.31.
2.  Macro sucks, micro only pockets of strength.  Market flat to up 5% for full year.
3.  No oil driven recession.
4.  Fed policy error – raising rates too much, too soon?  It’s Janet Yellen.  Let’s be serious.
5.  Black Swan – Russia, U.S. shooting live rounds in same freakin’ geographic area.

THE RESULT:    SUCCESS!    
1.  Our oil view was absorbed into the market with the S&P falling (11%) prior to rallying.   DOV troughed at $52 on January 21, 2016.      
2.  Market – up 9.5% for the year (up 5% ex Trump rally).                         
3.  No oil driven recession.                                     
4.  Janet did what we expected.  Very, very little.                             

Documented, noteworthy stock Calls off January/February lows:

Stocks             Date           Price            Date              Price                Chg. %    
OSK           1/28/16        $32.93          May16         $50.00                  +52%
WCC         1/28/16        $39.89          May16          $60.00                  +50%    
CAT           1/28/16        $61.20         7/26/16         $83.00                  +35%   Fade > $80 pre-Trump
ROK          2/01/16        $93.92         4/27/16       $115.69                  +23%    Downgrade
ETN          2/03/16        $54.10         52 Week        $46-70   (15%) to +30%
UTX          1/27/16        $87.69         52 Week      $83-112     (5%) to +28%
EMR          2/02/16        $45.86         52 Week        $41-58   (11%) to +26%
S&P 500    2/08/16          1,864         52 Week           2,274                    22%
AME          2/05/16        $45.75         52 Week        $43-53      (6%) to +15%
MMM       1/26/16      $144.78          3/14/16       $161.81                   +12%    Downgrade