The Economic Data calendar for the week of the 27th of August through the 31st is full of critical releases and events. Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.
Takeaway: Chinese economic growth is at risk of taking another leg down from here.
CONCLUSION: We see two key risks to Chinese and, by default, global growth from here: 1) incremental tightening in China’s property market and 2) a QE-inspired acceleration in global commodity price inflation. More importantly, we do not anticipate that either risk is being appropriately reflected in consensus expectations – expectations that anchor on the perceived panacea of broad-based central bank easing.
Yesterday in a paper released by economists Janet Koech and Jian Wang, the Dallas Fed overtly accused China of overstating economic growth – particularly industrial production – due to recent figures being divergent from what Chinese electricity consumption patterns would reasonably imply. While there is likely some truth to their view that Chinese economic statistics are being manipulated at the highest level, we highly doubt this is new news to buysiders. In fact, Li Keqiang, China’s Vice Premier, stated publically five years ago that China’s GDP numbers were “man-made”, implying a fair degree of manipulation.
We are of the view that most governments make up the numbers to some extent – including both China and the US (via complex and aggressive seasonal adjustments, as well as the now-infamous Birth/Death Adjustment). To China’s credit, however, their National Bureau of Statistics did consolidate the collection of output, consumption and investment data back in MAR, dramatically reducing the opportunity for municipal and provincial-level manipulation.
Jumping back to the earlier point regarding Chinese energy consumption, our analysis suggests that the rate of Chinese real GDP growth is roughly in line with Chinese energy demand, as indicated in the following chart:
Taking a step back from the “he said/she said” on Chinese growth, there are many broader points to made, or, perhaps, much more pertinent questions to be asking. Arguably the most important of those is whether or not Chinese economic growth is poised to continue slowing from here. This morning’s reported slowdown to 46.6 (from 52.3) on the New Orders component of China’s MNI Flash Business PMI for the month of AUG is supportive of such deliberation.
Recall that back in MAY, we were keen to signal a measured acceleration to the downside in Chinese economic growth, which has since shown up in official statistics. Another leg down from here would obviously portend negatively for the global economy. It’s important to note China alone has accounted for 43.9% of global real GDP growth since 2008, after only accounting for 15.9% in the five years prior.
What could perpetuate another leg down from here? For one, incremental tightening in China’s property market – a critical source of Chinese demand (broadly, fixed capital formation represents 46.2% of Chinese GDP) – is a growing risk. Simply put, building buildings and building things that help build buildings represents a meaningful source of demand within the Chinese economy and incremental tightening here is not baked into consensus expectations. For two, a QE-inspired acceleration in global commodity price inflation would also portend negatively for Chinese (and global) growth.
As an aside, we still maintain that $150 oil completely crushed the global economy back in 2008, setting the stage for the global credit freeze to be much more impactful than it might’ve otherwise been, as global growth was already on life support by the time Lehman went under. In line with Hedgeye DOR Daryl Jones’ remarks in today’s Early Look, the global economy simply wasn’t “flexible enough” to withstand a major bank failure then. If a “shoe” dropped today, would it be flexible enough this time around? While the answer to that question is grounded in uncertainty, we are certain that Europe’s sovereign and banking issues remain far from resolved at the current juncture despite SPX-1400/VIX-15 contributing to a broader sense of calm among US investors.
For more details on the aforementioned inflationary risks – specifically as it pertains to Chinese growth – please refer to our JUL 25 note titled “CAT-CALLING CAT: GROWTH SLOWING’S SLOPE JUST GOT A BIT MORE SLIPPERY”.
Regarding the former risk of incremental tightening, etc. in China, we’ve opened up our notebook to you via the notes below. For reference, we send out a collection of detailed notes on Asia and Latin America each Friday afternoon in the format below to a handful of clients who care on those regions. Please email us if you’d like to be added to that distribution list.
Beyond that, have a wonderful weekend with your respective families,
From AUG 10 through today (in reverse cronological order):
Takeaway: Perhaps Louisianians are content staying at home with a bowl of gumbo. The state took a hit on SSS revenues for July as gaming declined.
Gaming revenues in the United States have generally been disappointing thus far in 2012 as gamers look elsewhere (Singapore, Macau) to gamble and entertain. July numbers for Riverboat gaming revenues have come out and are disappointing. Same store revenues fell -7% year-over-year in July, the worst performance since January 2010. This after the seasonally adjusted trend was predicting a drop of only -4%. Louisiana led the decline, falling a whopping -12% year-over-year for July.
Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.
Takeaway: July regional revenues disappoint
Takeaway: Qantas has cancelled an order for several aircraft from Boeing. $BA
One of the worst things that can affect an airplane manufacturer like EADS' Airbus (EAD) or Boeing (BA) are cancellations from a major airline. In this case, Australian airline operator Qantas cancelled a recent order from Boeing for 35 787 Dreamliner aircraft. Qantas is a rather small airline when compared with the US; the Australian market for commercial aircraft is about 1/10th the size of the US’s, which is only ~15% itself. Still, cancellations are not something manufacturers want experience, especially when rolling out new aircraft (in Boeing's case, the 787).
Boeing is currently in the midst of a long up cycle in commercial Aerospace, with 7 years trailing revenue in backlog. The company also has a major product cycle in the 787. In the highly consolidated airspace industry, cancellations are a major problem and in a global macro environment that’s experiencing growth slowing, this sort of thing does not bode well for the BAs and EADs of the world.
Looking at the chart below, one can see that orders and deliveries are trending upward after a decline that occurred during the financial crisis. This Qantas cancellation may be a one off situation rather than an indication of moves other airlines may make going forward.
CLIENT TALKING POINTS
We’ve got a plethora of issues to begin taking care of in this country. Dealing with everything from the fiscal cliff to the debt ceiling to the mess in Europe to slowdown in China, it’s like no matter where you go, you’re going to run into trouble. News flow regarding most of the aforementioned catalysts has been slow. Quiet isn’t necessarily a good thing, but on a Friday, I be some people are glad that the Eurocrats are on vacation and such.
THE MACAU INDUSTRY
Gaming in Macau has been on the decline for some months now, with a recent pickup in the numbers thanks to a multitude of factors. The latest numbers just came out of Macau, and average earnings per employee are up. At the end of the first half of 2012, the gaming sector had 52,800 workers, up by 11.6%. The figure doesn’t include junket promoters and junket associates. Overall, there were over 1,800 job vacancies in the gaming industry.
U.S. Equities: Flat
Int'l Equities: Flat
Fixed Income: DOWN
Int'l Currencies: UP
TOP LONG IDEAS
NIKE INC (NKE)
Nike’s challenges are well-telegraphed. But the reality is that its top line is extremely strong, and the Olympics has just given Nike all the ammo it needs to marry product with marketing and grow in the 10% range for the next 2 years. With margin pressures easing, and Cole Haan and Umbro soon to be divested, the model is getting more focused and profitable.
FIFTH & PACIFIC COMPANIES (FNP)
The former Liz Claiborne (LIZ) is on the path to prosperity. There’s a fantastic growth story with FNP. The Kate Spade brand is growing at an almost unprecedented clip. Save for Juicy Couture, the company has brands performing strongly throughout its entire portfolio. We’re bullish on FNP for all three durations: TRADE, TREND and TAIL.
LAS VEGAS SANDS (LVS)
LVS finally reached and has maintained its 20% Macau gaming share, thanks to Sands Cotai Central (SCC). With SCC continuing to ramp up, we expect that level to hold and maybe, even improve. Macau sentiment has reached a yearly low but we see improvement ahead.
THREE FOR THE ROAD
TWEET OF THE DAY
“"My mom used to tell us, Carl, put on your shoes. Oscar [Pistorius], put on your legs, so I grew up thinking I had different shoes." Fav #Olympic quote.-@LewisPugh
QUOTE OF THE DAY
“Thought is only a flash between two long nights, but this flash is everything.”–Henri Poincare
STAT OF THE DAY
0.5%. The amount the UK economy shrank between April and June.