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Idea Alert: Buying BUNL

Takeaway: Tactically buying German bonds in a very uncertain environment.

Positions in Europe: Long German Bunds (BUNL); Short EUR/USD (FXE); Short Spain (EWP)


Keith bought German Bunds via the etf BUNL in the Hedgeye Virtual Portfolio today. The etf is in a bullish formation, meaning the current price is above its intermediate term TREND and long term TAIL levels (see chart below).


Idea Alert: Buying BUNL - cc. bunl


Aware that there is no “safe haven” play in Europe, we like the risk/reward set-up of German fixed income at the right price. Germany’s “messaging” has not been completely of one mind in recent months.  Bundesbank President Weidmann continues to reiterate his opposition to ECB purchases of peripheral sovereign debt, warning that “central bank financing can become addictive like a drug.” He is also opposed to the sharing of risk via Eurobonds. Meanwhile, Chancellor Merkel has voiced support for Weidmann but has stopped short of endorsing his views outright, and continues to suggest that she will continue to pull out all stops to save Greece (and other peripherals as necessary) and has not completely ruled out Eurobonds.


Certainly German fundamentals in recent months have not provided a hook to hang one’s hat. Despite a marginal improvement in Manufacturing PMI for August (44.7 vs 43.0 in JULY); the unemployment rate has been locked in at 6.8%; CPI increased 30bps to 2.2% in August Y/Y; Retail Sales fell -1% in JULY Y/Y vs +3.7% JUNE; and IFO, ZEW, and GfK consumer and business confidence surveys largely continue to decelerate or show little material inflection. 


Idea Alert: Buying BUNL - cc. ifo


Idea Alert: Buying BUNL - cc. zew


Idea Alert: Buying BUNL - cc. factory orders



Matthew Hedrick

Senior Analyst


Takeaway: We see no reason to back away from our long-term bearish bias on international commodity prices.



  • We continue hold a counter-consensus, long-term bearish view of both international commodity prices and capital expenditures in the basic materials and energy industries.
  • The key drivers we expect to perpetuate these secular outcomes are, first and foremost, a generational inflection in US monetary and fiscal policy, followed by a structural rebalancing and cooling of Chinese economic growth.
  • The day-to-day noise speculating on further iterations of easing out of the Fed, ECB and/or PBOC are crowding out the fact that the aforementioned shifts are already well underway.  
  • While we recognize that incremental Policies to Inflate out of the Fed or ECB are likely to reflate commodity markets, we anticipate that any reflation will be to lower long-term highs and that the rallies will be shorter in duration relative to previous iterations.


In the context of our daily research output, which generally aims to help investors manage immediate-term Global Macro risks (both positive and negative), we consistently allude to several big-picture themes that we see emerging and are likely to continue over the long-term TAIL. Over the past 12-18 months, one of those themes has been our non-consensus view on global commodity markets – specifically that:


  1. We think the USD and the fiscal and monetary policies that back it are the key drivers of commodity prices, trumping the role of more traditional supply/demand dynamics in price formation;
  2. We continue to think liquid commodity markets and, subsequently, the capital expenditures of certain companies along the international commodity supply chain are poised to decline over the long term; and
  3. A secular reduction in investment is likely to be a meaningful headwind for rates of economic growth and balance of payment dynamics across various commodity-oriented economies (namely Australia and the bulk of Latin America’s largest countries).


To point #2, we’ve indexed the US Dollar Index, CRB All-Commodities Index, CRB Raw Industrials Index and CRB Food Index to APR 15, 2011, which is the day we initially outlined the aforementioned conclusions on our 2Q11 Macro Themes presentation via our Deflating the Inflation theme. As the chart suggests, structural deflation across various commodities markets has already commenced. Moreover, the amount of intellectual pushback we received on point #1 has receded substantially along with commodity prices over this time frame, suggesting to us that investors are broadly beginning to understand and explore the linkages between the USD and international liquid asset prices.




Below we compiled a list of recent data points from our weekly roundup of Asia and Lain America to support the conclusions laid out above regarding capital expenditures throughout the international commodity supply chain; email us if you’d like to be added to that distribution list:


9/4: Australia, China

  • What Happened: With Iron Ore prices down -29.7% over the past month (mirroring price declines across the Chinese steel market), Fortescue cut its full-year CapEx spending forecast by -26%.
  • Why This Matters: Fortescue’s negative CapEx guidance mirrors recent maneuvers out of other international industrial companies such as BHP Billiton, Joy Global, Komatsu, Caterpillar, Sany Heavy Industry Co. and Vale. In true interconnected fashion, we continue to highlight how slowing Chinese growth is weighing heavily on multiple points of the international industrials supply chain. Moreover, we continue to hold our counter-consensus view that a broad-based Chinese stimulus package – if any – is likely to surprise elevated expectations to the downside with respect to the intermediate-term TREND. Anything Chinese policymakers do will be far less than spectacular, merely in support of protecting the +7.5% growth target, rather than attempting to reflate the Chinese and global economy in a meaningful way (i.e. no repeat of 2009-10). Refer to our AUG 24 note titled, “IS THE CHINESE ECONOMY ABOUT TO GO DARK?” for more of our thoughts on this topic.

8/31: Japan, China

  • What Happened: Hitachi Construction Machinery Co., the world’s third-biggest maker of building equipment, is shutting its Chinese plant for two weeks a month until October as the nation’s economic slowdown triggers a sales slump. (Bloomberg)
  • Why This Matters: This is in-line with recent negative guidance revisions, CapEx suspensions and/or temporary plant closures at BHP Billiton, Joy Global, Komatsu, Caterpillar. With Chinese steel and global iron prices collapsing in recent months/weeks, one has to wonder how much of global GDP growth is not just Chinese demand (43.9% since ’08), but also the operations and investments of international suppliers that sell into Chinese demand. For our updated thoughts on the Chinese economy ahead of next week’s PMI data, refer to our 8/24 note titled, “IS THE CHINESE ECONOMY ABOUT TO GO DARK?”.

8/24: China

  • What Happened: Chinese heavy excavator sales fell off a cliff in JUL, following a similar plunge in demand from China’s mining industry. Per Bloomberg: “Demand for the biggest and most expensive excavators, which weigh more than 40 tons, had largely withstood the slump because of demand from miners. A slump in coal prices has dented this sector, causing sales to tumble 53 percent in July. Total fixed- asset investment in Chinese coal mining slowed to a 3 percent growth rate from 19 percent in June.”
  • Why This Matters: We continue to warn of material long-term risks to the “Weak Dollar/Long Energy, Mining, and Resource Related CapEx” trade, as we see an asymmetric setup in the market value of the US dollar. The slope of US fiscal and monetary policy could inflect materially over the next 6-24 months. In fact, a secular bull market in the USD is arguably the most asymmetric and impactful risk we can identify across global financial markets and the global economy today. For more on our thoughts here, refer to our JUN 8 note titled, “TWO SCHOOLS OF THOUGHT PART II”.

8/24: Hong Kong, China

  • What Happened: Companies listed on the Hong Kong Stock Exchange are guiding down at a historic pace. Per Bloomberg: “Such warnings have been issued by 331 companies since the start of June, the most for a three-month time frame since Hong Kong Exchanges & Clearing Ltd. started compiling the data in July 2007…. Of a record 138 companies that issued such statements last month, 79 percent derive more than half their revenue from China, while 45 percent are industrial-related or commodity producers…”
  • Why This Matters: We are inclined to view this as a leading indicator for broader negative revisions to corporate guidance across developed markets over the intermediate term. Corporate executives across the developed world are constantly getting their heads pumped full of expectations for economic “stimulus” out of the Fed, PBOC and/or ECB by their bankers and the manic media. If and when the stimulus A) doesn’t come or B) comes and is ineffective ($150 oil?), we would expect a material slowdown in global economic activity. Expectations remain the root of all heartache…

8/21: Indonesia

  • What Happened: Indonesia, which accounts for 40% of world tin exports, has just announced that it will idle 70% of it tin-smelting capacity, likely to exacerbate a what they are perpetuating as a global tin shortage. Sounds eerily similar to the bull thesis on copper, which is also not working as demand growth continues to slow…
  • Why This Matters: Tin, which is down over -27% from its YTD peak in early FEB, is a key ingredient in everything from cans to televisions and smart phones. The price action here continues to signal to the growth bulls that they need to wake up and smell the tin in their coffee.

8/15: Germany, Brazil, China

  • What Happened: Hamburger Hafen und Logistik AG and Vale SA are taking/talking down their Chinese growth expectations with respect to the TREND and TAIL durations, respectively. Per Bloomberg: “Hamburger Hafen und Logistik AG, which handles two thirds of containers in Hamburg, cut its forecast for 2012 on July 25, saying it now sees container throughput at the same level as last year, compared with an earlier 5 percent growth estimate. Such an increase would have led to volumes exceeding the record 7.3 million standard containers handled in 2008, the year before the global financial slump prompted a 33 percent drop.” Per Vale DIR Castello Branco: “We are not going to see the spectacular growth rates of 10, 12 percent per year. The golden years are gone.”
  • Why This Matters: While we continue to assign rather minimal weight to corporate guidance in our Global Macro process (companies tend to be equally as wrong as their bankers are at the turns), we do find it interesting that companies with sales exposure to China at 33% and 44%, respectively, would talk so frankly about the prospects for Chinese economic growth. More importantly, their subdued commentary is completely in-line with our TREND and TAIL expectations for the Chinese economy. Ping us for our collection of relevant notes on the subject.


Jay Van Sciver, Hedgeye’s own Managing Director of Industrials, has also been vocal in recent months about the bubble in global mining capex, as producers have chased rising prices with attempts to secure incremental supply.




We have also been vocal calling out similar trends in the US; when overlaid with a plot of the US Dollar Index, it’s easy to see why miners have been ramping up production over the last 10-plus years. In fact, the latest ramp is reminiscent of the last time US monetary policy was overtly attempting to sustainably debauch the USD (1970s).




The obvious implication here is that the spread risk here is at an asymmetric wide. Moreover, global economic growth is likely to continue being rebalanced over the long term – particularly in economies overly exposed to international commodity markets. Refer to our AUG 10 note titled, “THINKING OUT LOUD RE: GLOBAL GROWTH” for how bumpy this secular transition could potentially be. For us, Australia and Argentina have been two countries that come to mind here:


  • 6/5: SLOWDOWN-UNDER: We see further weakness in the Australian economy over the intermediate-term TREND as well as a growing number of key questions regarding Australia’s long-term TAIL growth potential. As such, we are reiterating our TREND-duration bearish fundamental call on Australian equities and the Aussie dollar – barring incremental accommodation out of the Fed over the immediate term.
  • 4/18: ARGENTINA, IMPLODING: Keep a small space on your white board(s) for the risk of another large-scale Argentine default over the long-term TAIL. At a bare minimum, another bout with domestic hyperinflation is an elevated risk over that duration, as the country seeks to deplete the very resources it needs to maintain stability in its currency.


Regarding Australia specifically, it’s hard to watch the following YouTube video of Fortescue’s “impressive” operations and not come away with an overwhelming feeling that you’re at/near the top of a bubble in international mining capex: http://www.youtube.com/watch?v=lA0MSsd0dvQ.


All told, with the Strong Dollar message continuing to gain political influence in the US fiscal and monetary policy arena and Chinese economic growth continuing to slow to more sustainable rates and more balanced levels of composition, we see no reason to back away from our long-term bearish bias on international commodity prices. Furthermore, while we recognize that incremental Policies to Inflate out of the Fed or ECB are likely to reflate commodity markets, we anticipate that any reflation will be to lower long-term highs and that the rallies will be shorter in duration relative to previous iterations.


Darius Dale

Senior Analyst

European Banking Monitor: Draghi’s Market Tilt

Takeaway: SMP on hold for another week and markets await Draghi's next move. We expect no rate cut on Thursday from the ECB.

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .


Key Takeaways:


*European bank swaps were mixed last week, with most markets showing only small changes on the margin. Meanwhile, equity prices for European financials were mostly higher. 


*Markets are waiting and watching for Draghi’s next move. Comments from him over the weekend reiterating that bond buying is within the ECB’s mandate and that purchases of shorter term paper do not constitute monetary financing or a breach of EU rules have sent the shorter end of the interest rate curve lower across Europe, and in particular for the peripheral countries.



If you’d like to discuss recent developments in Europe, from the political to financial to social, please let me know and we can set up a call.


Matthew Hedrick

Senior Analyst





Security Market Program – For the 24th straight week the ECB's secondary sovereign bond purchasing program, the Securities Market Program (SMP), purchased no sovereign paper for the latest week ended 8/31, to take the total program to €209 Billion.


Following President Draghi’s conference call remarks on 8/2 in which he addressed rising yields in the periphery and said that the ECB “may undertake” non-standard  measures, the market continues to be disappointed – there has been no buying.


We think it’s unlikely that we’ll get definitive color on secondary peripheral buying at the ECB’s meeting and expect rates to be on hold until we get at least another month of data and after there’s clarity from the German Constitutional Court’s decision on the constitutionality of the ESM and Fiscal Compact. By a narrow margin, consensus expects a 25bp cut to the main interest rate, versus no change at all.


European Banking Monitor: Draghi’s Market Tilt - ff. smp


European Financials CDS Monitor – European bank swaps were mixed last week, with most markets showing only small changes on the margin. Meanwhile, equity prices for European financials were mostly higher.


European Banking Monitor: Draghi’s Market Tilt - ff. banks


Euribor-OIS spread – The Euribor-OIS spread tightened by 2 bps to 21 bps. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk.


European Banking Monitor: Draghi’s Market Tilt - ff. euribor


ECB Liquidity Recourse to the Deposit Facility – The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB.  Taken in conjunction with excess reserves, the ECB deposit facility measures excess liquidity in the Euro banking system.  An increase in this metric shows that banks are borrowing from the ECB.  In other words, the deposit facility measures one element of the ECB response to the crisis.  


European Banking Monitor: Draghi’s Market Tilt - ff. facility

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China: The Retail Version Of QE

Takeaway: China's VAT tax refund will double profitability for manufacturers who normally rely on a smaller refund for profits.

China is underway with what can effectively be dubbed an “export equivalent of quantitative easing.” Essentially, China is refunding its 17% value-added-tax (VAT) on exports of key products. Take a look in your closet and dresser and check out how much clothing is made in China. We’d say clothing fits into that “key product” range. China does this to keep its otherwise unprofitable manufacturing base afloat. Companies making apparel are essentially operating at a loss and generating profit on the tax rebate.


So the deal is that most manufacturers run at about a 3-5% margin – which includes a 13-14% VAT rebate. If you have a 17% rebate, that effectively doubles profitability for the apparel manufacturers and also translates to higher wages at some factories. Higher-end manufacturers like Foxconn, the company that assembles all of those fancy Apple products we know and love, will also benefit from the tax rebate. This is China playing hardball in order to prevent its profit stream of its existing factory base from being destroyed and it’s quite crafty to say the least.


The question is whether these benefits find their way down the value-add scale from iPads to things toys and underwear. 


Masking Economic Growth







Last week’s Jackson Hole non-event came and went. The Bernanke statement was released and the market popped a little (7 handles in the S&P 500). That was about it. That doesn’t seem like a vote of confidence for us. With Mario Draghi failing to show up and Bernanke giving the spiel about how the Fed is prepared to take additional measures to boost the economy if need be (i.e. more QE), it’s clear we’re going to continue to slowly move higher in the market, making lower highs while oil continues to climb towards $150 a barrel.




As we head into September, it’s time to examine the sea change that’s occurred in the markets. Let’s examine what’s going on here: volatility is up +30% since its year-to-date closing low two weeks ago, commodities are up 1.9% and US Treasury yields are down 14% this morning. Meanwhile, stocks are falling, bonds are up. Trading this market takes a hell of a good eye and diligence in risk management. Meanwhile, the US dollar continues to take hits to the stomach and is falling further still. Despite last week’s “whole lot of nothing” at Jackson Hole, it appears that people aren’t ready to give up hope in Bernanke just yet.




We’ve said it before and are certainly ready to say it again: inflation of market prices does not equate to economic growth. Gold buyers who initiated positions right before Bernanke at Jackson Hole are now enjoying their short-lived gains, but look what you get in return: higher energy prices, no hiring, no economic growth and a lower US dollar. Growth continues to slow and it’s clear that Ben Bernanke has no intention of fixing the economy; he’d much rather placate market participants in the short-term.






Cash:                  DOWN


U.S. Equities:   UP


Int'l Equities:   Flat   


Commodities: Flat


Fixed Income:  Flat


Int'l Currencies: UP  








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.

  • TAIL:      LONG            



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.

  • TAIL:      LONG



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.

  • TAIL:      NEUTRAL







“Facebook Has Lost More than $50 BILLION in Value. The Man to Hold Responsible: nyti.ms/OSHqpd--jjc” -@andrewrsorkin




“The United States is a nation of laws: badly written and randomly enforced.” –Frank Zappa




$6 billion. The amount of capital Spain’s Treasury will inject into a rescue fund to help recapitalize failing financial institutions.







The Macau Metro Monitor, September 4, 2012



Director of the Macau Government Tourist Office (MGTO) João Manuel Costa Antunes was asked by the media about the mainland’s decision to allow non-local residents in the six cities of Beijing, Tianjin, Shanghai, Chongqing, Guangzhou and Shenzhen, to apply for Macau entry-permits in the cities they are residing instead of returning to their native hometowns for the application.  The new policy is likely to see many more mainland visitors to Macau.  Antunes was not worried about the increase in capacity for Macau’s tourism industry. 


As to the possibility of the mainland’s further relaxing of entry-permit applications and the extension of coverage of the Individual Visit Scheme, the official stressed that the decision is in the hands of the central government, but Macau has been taking measures to smoothly prepare for receiving additional visitors.  The Scheme has increased its coverage from 6 to 49 cities, and the relevant arrangements have been implemented smoothly step-by-step, so the new expected increase would not cause any problems. He said the government has been improving its carrying capacity by building new facilities to attract and accommodate more visitors and offer them a more enjoyable stay in the city.



Sands Cotai Central’s 2nd phase opening, scheduled for September 20, will add 38 new retailers to the resort. With the new store openings, Shoppes Cotai Central will offer a total of 70 retailers, with plans to expand to over 90 by early 2014.  



According to the China Real Estate Index System (CREIS), China's average home prices rose 0.2% to 8,738 yuan ($1,400) per square metre in August, moderating from July's MoM increase of 0.3%.  On a YoY basis, home prices in the 100 cities were down 1.6% in August, the fifth month of YoY declines since June 2011.  In China's top 10 cities, including Beijing and Shanghai, average home price rose 0.5% MoM, but were down 1.5% YoY.  


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.37%
  • SHORT SIGNALS 78.32%