Risk Management in the Far East

Conclusion: While Chinese equities have recently dropped like a rock on tightening speculation, careful analysis shows those concerns are overblown. Thus, we’re buyers of this dip.


Position: Long the Chinese yuan (CYB); Long Chinese Equities (CAF).


For the fifth day in a row, China’s Shanghai Composite Index closed down. Having fallen (-4.6%) from April 18 in a straight line on rising tightening fears, we welcome further weakness in Chinese equities as a buying opportunity.


As we’ve outlined in our 2Q11 Macro theme titled, “Year of the Chinese Bull”, we think the pace and magnitude of Chinese tightening has peaked and looks to slow on both fronts in the coming months. Further, we think March’s +5.4% YoY CPI reading is at or very near the cyclical top in Chinese reported inflation over the intermediate-term TREND. For the details behind our conviction in these forecasts, refer to our April 18 report titled, “Chinese Exposition” (email us if you need a copy).


It’s comforting to see that neither China’s interbank loan market, interest rate swaps market, nor its currency market are confirming this mini equity-market freak out. Shibor (a measure of interbank liquidity) and 1Y non-deliverable yuan forwards suggest further tightening is on the way, but not at an accelerated pace or increasing magnitude. Further, China’s 1Y interest rate swaps have hardly budged, suggesting that further rate hikes are not imminent (i.e. if China does tighten further, it will likely be through yuan appreciation and higher bank reserve requirement ratios).


Risk Management in the Far East - 1


We view the recent uptick in bearish sentiment surrounding China’s property market as a classic case of Duration Mismatch and the recent spate of disappointing small-cap earnings is an opportunity for market expectations to be reset. Beat or miss, we think Chinese earnings will look a lot more attractive than US earnings over the next couple of quarters – especially when US GDP growth has a 1-handle on it. If you have to be long equities, the S&P 500 at a cyclical top looks a great deal more risky than the Shanghai Composite, given that much of the bear case is priced into Chinese equities at this juncture. That is in stark contrast to the US, where less than 20% of institutional investors will admit they're bearish.


Risk Management in the Far East - 2


The major risk we see in holding Chinese equities (or any risk asset) right now is the potential for an expedited down move in the US dollar over the next 2-3 months. A crash in the global reserve currency could potentially lead to a widespread crisis across global financial markets. The overwhelming majority of global liabilities are priced in US dollars, so haircuts on such assets have ability to drive up counterparty risk across the system. To be clear, we’re certainly not calling for the next financial crisis (yet), but the risk is not one to be ignored, given the Indefinitely Dovish direction of The Bernank’s Keynesian monetary policy.


Darius Dale


GOLD: A Deep Dive on What’s Next with a Top Commodities Strategist

“If you saved in gold over the past 20 to 25 years rather than any currency anywhere in the world, gold has outperformed all these currencies,” says Stefan Wieler, Vice President of Goldmoney in this edition of Real Conversations.

read more

Exact Sciences Up +24% This Week... What's Next? | $EXAS

We remain long Exact Sciences in the Hedgeye Healthcare Position Monitor.

read more

Inside the Atlanta Fed's Flawed GDP Tracker

"The Atlanta Fed’s GDPNowcast model, while useful at amalgamating investor consensus on one singular GDP estimate for any given quarter, is certainly not the end-all-be-all of forecasting U.S. GDP," writes Hedgeye Senior Macro analyst Darius Dale.

read more

Cartoon of the Day: Acrophobia

"Most people who are making a ton of money right now are focused on growth companies seeing accelerations," Hedgeye CEO Keith McCullough wrote in today's Early Look. "That’s what happens in Quad 1."

read more

People's Bank of China Spins China’s Bad-Loan Data

PBoC Deputy Governor Yi says China's non-performing loan problem has “pretty much stabilized." "Yi is spinning. China’s bad-debt problem remains serious," write Benn Steil and Emma Smith, Council on Foreign Relations.

read more

UnderArmour: 'I Am Much More Bearish Than I Was 3 Hours Ago'

“The consumer has a short memory.” Yes, Plank actually said this," writes Hedgeye Retail analyst Brian McGough. "Last time I heard such arrogance was Ron Johnson."

read more

Buffalo Wild Wings: Complacency & Lack of Leadership (by Howard Penney)

"Buffalo Wild Wings has been plagued by complacency and a continued lack of adequate leadership," writes Hedgeye Restaurants analyst Howard Penney.

read more

Todd Jordan on Las Vegas Sands Earnings

"The quarter actually beat lowered expectations. Overall, the mass segment performed well although base mass lagging is a concern," writes Hedgeye Gaming, Lodging & Leisure analyst Todd Jordan on Las Vegas Sands.

read more

An Update on Defense Spending by Lt. Gen Emo Gardner

"Congress' FY17 omnibus appropriation will fully fund the Pentagon's original budget request plus $15B of its $30B supplemental request," writes Hedgeye Potomac Defense Policy analyst Lt. Gen Emerson "Emo" Gardner USMC Ret.

read more

Got Process? Zero Hedge Sells Fear, Not Truth

Fear sells. Always has. Look no further than Zero Hedge.

read more

REPLAY: Review of $EXAS Earnings Call (A Hedgeye Best Idea Long)

Our Healthcare Team made a monster call to be long EXAS - hear their updated thoughts.

read more

Capital Brief: 5 Things to Watch Right Now In Washington

Here's a quick look at some key issues investors should keep an eye on from Hedgeye's JT Taylor and our team of Washington Policy analysts in D.C.

read more