MRP   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.


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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