Ay! Mexico’s Going to Miss

Conclusion: We are inclined to short Mexican equities on rallies in our Virtual Portfolio due to the combination of slowing domestic growth and slowing growth in its key export market (US). Fairly robust growth expectations need to be reset lower on all fronts.

 

Position: Bearish on Mexican Equities for the intermediate-term TREND.

 

Up until recently, Mexico has been boring to cover. With an economic cycle that closely tracks the US’s (lagging by about 1Q on average), there really hasn’t been much to talk about since our mid-February update. While not always the case, getting US growth story right will typically lead you to the promised land on Mexico (80% of Mexican exports go to the US in the form of automobiles, appliances, and, of course, crude oil). In fact, over the last 27 months, Mexico’s benchmark IPC Index has traded with a positive correlation of r² = 0.92 to the XLY and a positive correlation of r² = 0.91 to the XLP on a weekly closing price basis.

 

Ay! Mexico’s Going to Miss - 1

 

Ay! Mexico’s Going to Miss - 2

 

Needless to say, as the US consumer goes, so goes Mexico. And given that we authored the call on US Growth Slowing, as well as the Consumption Cannonball thesis, it would make sense for us to have a bearish bias on Mexican stocks – which we do, of course.

 

While the aforementioned factors are certainly supportive of being short/underweight Mexican equities, there is more to the thesis. As we pointed out in a report yesterday afternoon titled, “Hong Kong is Not Mainland China”, investors can indeed find themselves caught off guard as a result of playing surrogate investments based on trailing correlation studies. So in the essence of managing risk, we’ll quickly dive into the additional reasons that we are bearish on Mexican equities over the intermediate-term TREND.

 

Growth is Slowing; Expectations Need to Come Down

 

With the IPC Index down -8.2% YTD and broken from a TRADE & TREND perspective in our quantitative models alongside Mexico’s sovereign bond yields 10Y-2Y spread falling -45bps since peaking in Feb, PRICE is definitively telling us that growth is slowing south of the border. While not at all news to our Hedgeyes, we think many investors and policy makers alike will be surprised to the downside in coming quarters: 

  • Earlier this month, Mexico’s Central Bank raised its 2011 GDP forecast to +4-5% YoY from a previous range of +3.8-4.8% YoY, citing domestic consumption and private investment as reasons for the increase;
  • Last month, Mexico’s Finance Ministry increased its 2011 GDP forecast to +4.3% YoY from a previous forecast of +4% YoY, citing a “strong US growth” leading a rebound in Mexican exports;
  • Last month, the IMF raised its 2011 Mexican GDP forecast to +4.6% YoY from a previous forecast of +4.2% YoY; and
  • In the last three weeks alone, the Bloomberg Consensus forecast for Mexico’s 2011 GDP has shot up from +4% YoY to +4.4%. 

Ay! Mexico’s Going to Miss - 3

 

It seems everyone is bullish on Mexican growth except us… and the data, of course: 

  • Industrial Production growth slowed in March to +4.2% YoY vs. a prior reading of +5.2%;
  • IMEF Manufacturing Index fell in April to 53.1 vs. a prior reading of 54.1;
  • IMEF New Manufacturing Orders Index fell in April to 55.4 vs. a prior reading of 59.1;
  • Export growth slowed in April to +12.6% YoY vs. a prior reading of +20.1%;
  • Import growth slowed in April to +9.8% YoY vs. a prior reading of +16.3%;
  • Trade Balance growth slowed in April to +$665M YoY vs. +$1.1B;
  • INEGI Consumer Confidence Index ticked down to 89.7 in April vs. a prior reading of 91.7; and
  • INEGI Retail Sales growth slowed in Mar to +1% YoY vs. a prior reading of +2.7%. 

On the “glass half full” side of things, Mexico’s current +3.4% YoY CPI reading is running a near five-year low and Mexico’s Unemployment Rate ticked down to a 27-month low of 4.6% in March. In our opinion, the US rolling over from a top-down perceptive calls into question the sustainability of further improvement in Mexican employment statistics (which are a lagging indicator anyway). Our models don’t produce an overly malignant output for Mexican CPI, but we do think the probability of it bouncing off multi-year lows and surprising our “high” scenario is a risk to consider, given that Mexico’s benchmark policy rate has remained at an all-time low of 4.5% for the last two-plus years.

 

All told, we are inclined to short Mexican equities on rallies in our Virtual Portfolio due to the combination of slowing domestic growth and slowing growth in its key export market (US). Fairly robust growth expectations need to be reset lower on all fronts.

 

Darius Dale

Analyst

 

Ay! Mexico’s Going to Miss - 4 


Another French Revolution?

"Don't be complacent," writes Hedgeye Managing Director Neil Howe. "Tectonic shifts are underway in France. Is there the prospect of the new Sixth Republic? C'est vraiment possible."

read more

Cartoon of the Day: The Trend is Your Friend

"All of the key trending macro data suggests the U.S. economy is accelerating," Hedgeye CEO Keith McCullough says.

read more

A Sneak Peek At Hedgeye's 2017 GDP Estimates

Here's an inside look at our GDP estimates versus Wall Street consensus.

read more

Cartoon of the Day: Green Thumb

So far, 64 of 498 companies in the S&P 500 have reported aggregate sales and earnings growth of 6.1% and 16.8% respectively.

read more

Europe's Battles Against Apple, Google, Innovation & Jobs

"“I am very concerned the E.U. maintains a battle against the American giants while doing everything possible to sustain so-called national champions," writes economist Daniel Lacalle. "Attacking innovation doesn’t create jobs.”

read more

An Open Letter to Pandora Management...

"Please stop leaking information to the press," writes Hedgeye Internet & Media analyst Hesham Shaaban. "You are getting in your own way, and blowing up your shareholders in the process."

read more

A 'Toxic Cocktail' Brewing for A Best Idea Short

The first quarter earnings pre-announcement today is not the end of the story for Mednax (MD). Rising labor costs and slowing volume is a toxic cocktail...

read more

Energy Stocks: Time to Buy? Here's What You Need to Know

If you're heavily-invested in Energy stocks it's been a heck of a year. Energy is the worst-performing sector in the S&P 500 year-to-date and value investors are now hunting for bargains in the oil patch. Before you buy, here's what you need to know.

read more

McCullough: ‘My 1-Minute Summary of My Institutional Meetings in NYC Yesterday’

What are even some of the smartest investors in the world missing right now?

read more

Cartoon of the Day: Political Portfolio Positioning

Leave your politics out of your portfolio.

read more

Jim Rickards Answers the Hedgeye 21

Bestselling author Jim Rickards says if he could be any animal he’d be a T-Rex. He also loves bonds and hates equities. Check out all of his answers to the Hedgeye 21.

read more

Amazon's New 'Big Idea': Ignore It At Your Own Peril

"We all see another ‘big idea’ out of Amazon (or the press making one up) just about every day," writes Retail Sector Head Brian McGough. "But whatever you do, DON’T ignore this one!"

read more