prev

TRADE OF THE DAY: WWW

Today we bought Wolverine World Wide (WWW) at $45.21 a share at 10:57 AM EDT in our Real-Time Alerts. This is Hedgeye Retail Sector Head Brian McGough's latest Best Idea and we're adding it to our Institutional Best Ideas list today. Buying it on a sloppy #OldWall downgrade.

 

TRADE OF THE DAY: WWW - image001


OIL: Down For The Count

Gold isn't the only commodity getting crushed this year; crude oil is also taking a hit as the US dollar appreciates in value. We trade oil using the iPath S&P GSCI Crude Oil TR Index ETN (OIL) and not only is it down -6.75% year-to-date, it's down nearly -20% over a one year period. Energy is taking it on the chin this year and while it might be a bane for the energy companies, lower prices at the pump are welcomed by commuters worldwide. Lower oil prices help drive consumption which in turn drives global growth. 

 

OIL: Down For The Count - OILETN


Italy At Loggerheads, Continued; Europe by the Charts

Italy’s at a political stalemate that looks to drag on for weeks. Since the election on February 24/5 there’s been no movement in either the ability of the major parties to form a coalition or determine a President. Despite an initial agreement between Bersani and Berlusconi yesterday to support the former Speaker of the Senate and former President Franco Marini as President, the Bersani camp has since split on the candidate in favor of the old Eurocrat Romano Prodi, which both Berlusconi and Grillo squarely reject.

 

After four rounds of votes for President there is still no candidate. Another vote has been scheduled for tomorrow – we’re not holding our breath on a candidate being announced.

 

So where’s Italy at?  Without a President, there is no one to appoint a Prime Minister, or dissolve the parliament and call new elections over the current PM stalemate.

 

What does it likely spell?  Many weeks, if not months, before we get some agreement on a ruling government (maybe Monti will come back in a ceremonial “technocrat” role?). Ultimately, new elections appear the only option given the inability of the major parties to compromise over a coalition. Keep in mind that the earliest elections can take place is 45 days after parliament is dissolved. Further, as summer and recess (holiday) approach the time table could be pushed out further.

 

The market is still not pricing in a lot of risk around this political uncertainty.  Why? We think the market is squarely behind the promises of ECB head Draghi and the Eurocrats in their pursuit to save the Union at all costs and prevent contagion. We, however, have a real-time short position in Italy via the etf EWI and are short the EUR/USD via FXE taking advantage of time and price.

 

Italy At Loggerheads, Continued; Europe by the Charts - vv. italy cds

 

Italy At Loggerheads, Continued; Europe by the Charts - vv. all yields

 

 

Odds and Ends


Earlier this morning German Finance Minister Wolfgang Schaeuble said that the ECB should reduce liquidity in the Eurozone. This sent equity markets falling but we want to note that this statement is either misquoted or not the intention of Schaeuble. This is after all, the same Schaeuble that has recently come around on France having an extra year to meet its deficit target because otherwise the country would plunge into recession.

 

Further, today the European Economics and Monetary Affairs Commissioner Olli Rehn said that the Eurozone will dial back on austerity measures to help reinvigorate growth.

 

Make no mistake about these doves. These Eurocrats are doing their part to keep the dream of the Union alive.

 

 

Charts That Matter


Below are four charts we wanted to call out from the week. While none of them add value shock, they support continuing themes we see playing out.

  • Eurozone CPI – Inflation fell to 1.7% in MAR Y/Y, under the ECB’s target of 2%. This is good for the consumer and rhymes with our #StrongDollar call. We think the ECB is setting up for a rate cut in 2013. While it’s likely not to come until 2H, it’s additional powder that the Bank may have to use to help revive the economy and change the tide in the negative data that’s been released.

Italy At Loggerheads, Continued; Europe by the Charts - vv. eurozone cpi

 

  • UK CPI – held steady at 2.8% in MAR Y/Y. Despite the country’s pains of austerity, we have a bullish disposition on Mark Carney joining as next BOE governor in July. From the few comments he’s given we expect him to largely stick with the current monetary stimulus program (375B GBP), but to better manage expectations around inflation and better manage confidence around a struggling economy through marginally hawkish policy.

Italy At Loggerheads, Continued; Europe by the Charts - vv. uk cpi

 

  • German Confidence – The ZEW survey came out this week and showed that 6M forward looking economic expectations fell hard in APR.  While Germany is the lead horse benefitting from the Eurozone (and a weaker EUR), it is not immune to the downturn as growth (and trade demand) from its neighbors, its main trading partners, remains muted.

Italy At Loggerheads, Continued; Europe by the Charts - vv. germany zew

 

  • Car Registrations Down – This is yet another data point we use to evaluate health and confidence from the consumer. This charts is holding steady in negative territory.

Italy At Loggerheads, Continued; Europe by the Charts - vv. eu car

 

Have a great weekend! 

 

Matthew Hedrick

Senior Analyst


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

Stocks & Commodities: We Have A Winner

It's no secret that we're bearish on commodities and bullish on US consumption-oriented stocks. Over the last year, the S&P 500 has laid the smackdown on commodity markets in general. Over a one year period, the S&P 500 is up +13.7% while the CRB Commodity Index, which measures 19 different commodities, is down -5.5%. That's what happens when you have a strong US dollar and the investing public at large pouring capital into the market.

 

Stocks & Commodities: We Have A Winner - CRBSPX1year


BEST IDEAS UPDATE: LONG CHINA (NOT); SHORT YEN

SUMMARY BULLETS:

 

China: 

  • All told, we anticipate the impact of recent and pending regulatory measures to continue weighing on both economic growth and investor sentiment across the Chinese economy (bird flu headlines don’t help either).
  • While continued CNY strength (~19-year high; trading band rumored to be widened soon) and incremental commodity deflation are supportive at the margins, the 1Q/MAR growth data (highlights below) is supportive of our view that economic rebalancing is not likely to be accelerated enough to offset the aforementioned headwinds.
  • As such, Chinese equities can no longer be considered a Best Idea at the current juncture.

 Japan:

  • As often cited in our work, a likely failure of int’l policymakers to censure and ultimately mitigate the impact of Japan’s monetary policy phase change is core to our bearish thesis on the JPY from here.
  • In that vein, Japanese Finance Minister Taro Aso confirmed that the G20 has accepted Japan's explanation that its aggressive monetary policy is aimed at beating deflation and not at a competitive devaluation of the yen.
  • Recall that in its semi-annual currency report released late last Friday, the US Treasury said that Japan should "refrain from competitive devaluation". It added that the US will continue to press Japan to adhere to the commitments agreed to with the G7 and G20.
  • In spite of these misunderstood developments, it is our view that investors would be remiss to allow the overt hypocrisy of the US government scare them out of the short yen/long Nikkei trade, which we still think has legs with respect to the intermediate term.

 

CHINESE CHICKEN INDEED

As we outlined in our recent work on China’s equity market, the Chinese economy has undergone a barrage of growth-negative regulatory reforms and macroprudential measures designed to quash speculative activity in the fixed assets investment (FAI) sector. As previously mentioned, this was not something we saw coming at the time of our 2/27 Best Ideas conference call and continues to weigh on the outlook for Chinese growth over the intermediate term.

 

  • CHINA’S IN NO MAN’S LAND (3/13): China’s fundamental outlook has become increasingly convoluted in recent weeks, posing material risk to its financial markets.
  • IS CHINA CAREENING TOWARDS FINANCIAL CRISIS? (3/28): Systemic risks are present across China’s financial sector – as is the political will and fiscal firepower needed to avert a crisis.
  • BEST IDEAS UPDATE (LONG CHINA; SHORT YEN) (4/1): That the Shanghai Composite Index closed down -0.1% on today’s positive growth figures speaks volumes to the growing concerns surrounding Chinese banking risks as regulatory overhang continues to weigh on the Chinese equity market.
  • EARLY LOOK: Chinese Chicken (4/4): In spite of fairly recent gains, the fundamental backdrop for the Chinese stock market is as convoluted as it has been in quite some time. As such, we are sticking to our process and deferring to the quant on this one.

 

Nevertheless, we were definitely wrong in the context of the Shanghai Composite’s performance since that call (-3%) and, more importantly, it’s hard to justify China on the long side outside of the beneficial impact of incremental CNY strength and commodity deflation. Given the nature of the Chinese political structure (i.e. deeply entrenched interests compounded by decentralized control), it’s tough to see the Chinese Communist Party accelerating the economic rebalancing agenda fast enough to offset the impact of slower FAI growth over the intermediate term.

 

The latest development on the FAI front was the CBRC’s dramatic tightening of credit supply to the Local Gov’t Financing Vehicle (LGFV) sector. Specifically:

 

  • For LGFVs with lower than 100% cash coverage ratio (CAR) or asset-liability ratio of above 80%, their borrowings as a percentage of banks’ total issued loans must not exceed the level in the previous year;
  • Commercial banks should gradually reduce lending to such LGFVs while looking to recover loans (i.e. clamping down on refinancing/rollovers);
  • Commercial banks and regulatory bodies at all levels are to monitor LGFV loans in all forms – which include bank loans, corporate bonds, medium-term notes, short-term financing notes, trust products, and wealth management products;
  • Commercial banks should hand over the approval authority of LGFV bonds up to their head offices; and
  • Commercial banks will no longer be allowed to provide guarantees for LGFV bonds.

 

As an aside, “Local Projects” as defined by the National Bureau of Statistics account for 94% of Total Fixed Assets Investment in China (full-year 2012 figures). If enforced properly, these measures will bite. Chinese property developers are at risk – which should not come as a surprise to anyone. According to a 2012 survey conducted by the China Banking Association, nearly 70% of Chinese bankers expressed concerns over lending to the property sector (12.1 trillion yuan in total or 9% of Chinese banks’ assets).

 

Additionally, the Chinese property market remains hot from a pricing perspective (despite the recent curbs), which may mitigate any potential outlook for monetary easing over the intermediate term; average house price appreciation across the NBS’s 70-city sample was +3.6% YoY in MAR from +2.1% in FEB. Moreover, data from the Ministry of Land and Resources (MLR) shows that the average land transaction price in major Chinese cities was CNY 3,175 per square meter in 1Q13 – up +3.9% YoY (vs. +2.6% in 4Q12).

 

All told, we anticipate the impact of recent and pending regulatory measures to continue weighing on both economic growth and investor sentiment across the Chinese economy (bird flu headlines don’t help either). While continued CNY strength (~19-year high; trading band rumored to be widened soon) and incremental commodity deflation are supportive at the margins, the 1Q/MAR growth data (highlights below) is supportive of our view that economic rebalancing is not likely to be accelerated enough to offset the aforementioned headwinds. As such, Chinese equities can no longer be considered a Best Idea at the current juncture.

 

  • 1Q Real GDP: +7.7% YoY from +7.9% vs. Bloomberg consensus estimate of +8%
    • +1.6% QoQ from +2% prior
  • MAR Industrial Production: +8.9% YoY from +10.3% YoY in DEC (no JAN-FEB figures) vs. Bloomberg consensus estimate of +10.1%
    • +9.5% YoY in 1Q from +10% in 4Q
  • MAR Retail Sales: +12.6% YoY from +15.2% YoY in DEC (no JAN-FEB figures) vs. Bloomberg consensus estimate of +12.6%
    • +12.4% YoY in 1Q from +14.5% in 4Q
  • MAR Fixed Assets Investment: +20.9% YoY from YoY +21.2% in FEB vs. Bloomberg consensus estimate of +21.3%

 

BEST IDEAS UPDATE: LONG CHINA (NOT); SHORT YEN - 4

 

TARO ASO’S POKER FACE

As often cited in our work, a likely failure of int’l policymakers to censure and ultimately mitigate the impact of Japan’s monetary policy phase change is core to our bearish thesis on the JPY from here. In that vein, Japanese Finance Minister Taro Aso confirmed that the G20 has accepted Japan's explanation that its aggressive monetary policy is aimed at beating deflation and not at a competitive devaluation of the yen.

 

Additionally, BOJ Governor Haruhiko Kuroda said that the G20 is understanding of the case for Japan's unprecedented, world-beating monetary easing. Moreover, he reiterated that the BOJ is not trying to weaken the yen, rather it is designed to achieve the Abenomics-mandated +2% inflation target as soon as possible.

 

Recall that in its semi-annual currency report released late last Friday, the US Treasury said that Japan should "refrain from competitive devaluation". It added that the US will continue to press Japan to adhere to the commitments agreed to with the G7 and G20. In spite of these misunderstood developments, it is our view that investors would be remiss to allow the overt hypocrisy of the US government scare them out of the short yen/long Nikkei trade, which we still think has legs with respect to the intermediate term.

 

In short, we think the USD/JPY cross has upside to 110 as we progress through calendar 2013 and then to 125 as we progress through calendar 2014-15. NOTE: these aren’t big, round sell-side-style forecasts; rather, they represent the long-term levels of resistance on the USD/JPY cross. 100 is the first psychological barrier to overcome; from there, the aforementioned targets come into play, in that order.

 

BEST IDEAS UPDATE: LONG CHINA (NOT); SHORT YEN - 5

 

The pace of the US recovery and investor expectations of the FOMC’s next move will also determine the pace of yen depreciation from here (thus far, it’s been mostly a Japan-driven phenomenon). Is this the mid-to-late 90s all over again, however? The USD/JPY cross ripped from 80 to ~147 over a span of four years as the respective policy paths for the Fed and BOJ diverged substantially – as we believe they are poised to do once more with respect to the long-term TAIL duration.

 

BEST IDEAS UPDATE: LONG CHINA (NOT); SHORT YEN - 6

 

That’s why US housing and labor market improvement remains so critical to the US side of our thesis. The Fed has already signaled what would get them to turn off the QE spigot and FOMC leaks. A 6-handle on the US unemployment rate would really start to make yen bulls quite nervous. As we’ve penned in recent work, neither the buy-side (via CFTC net length), the sell-side (via out-year USD/JPY targets), nor Japanese corporations (via Tankan Survey USD/JPY forecasts) is Bearish Enough on the Japanese yen – all of whom having been numbed to secular yen strength over the past ~6 years.

 

The aforementioned secular policy divergence, the lack of consensus over the yen’s outlook from here and the following cyclical reminders that Japan has barely emerged from recession all combine to point to a higher dollar-yen cross and higher Nikkei/TOPIX from here – the latter of which is being underpinned by record int’l inflows.

 

  • MAR Machine Tool Orders: -21.6% YoY from -21.5%
  • MAR Goods PPI: -0.5% YoY from -0.1%
  • MAR Consumer Confidence: 44.8 from 44.2
  • MAR Exports: +5.5% YoY from +11.9%
  • MAR Imports: +1.1% YoY from -2.9%
  • MAR Trade Balance SA: -¥922B from -¥1.09T
  • MAR Economy Watchers Survey – Outlook: 57.5 from 57.7
  • Week Ended 4/12 Net Foreign Purchases of Japanese Stocks: ¥1.57 trillion from ¥868.6 billion; highest weekly total on record

 

To the extent you may have missed them come through, we encourage you to check out our recent work on this topic if you’re looking to fully comprehend the gravity of the BOJ’s monetary policy phase change:

 

 

Have a great weekend,

 

Darius Dale

Senior Analyst


Fool's Gold

This week started off with the price of gold plummeting nearly 11% intraday on Monday, followed by a small recovery in price as the week progressed. Institutional investors, including hedge funds, banks and asset management firms, fled the precious metal, selling off gold and gold-related stocks like miners.

 

The SPDR Gold Trust ETF (GLD), by far the most popular and liquid way to trade gold, is down -5.75% since Monday and is down a whopping -14.9% over a one-year period. Pundits who said gold would go to $2000 are undoubtedly in need of a stiff drink after this week. We've made our case for long consumption/short commodities since the beginning of the year and believe that gold can fall further, especially if the US dollar continues to appreciate in value.

 

Fool's Gold - GLD 1year


real-time alerts

real edge in real-time

This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.

next