The Economic Data calendar for the week of the 29th of April through the 3rd of May 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.
Today we bought Anheuser-Busch InBev at $93.48 a share at 10:51 AM EDT in our Real-Time Alerts. Hedgeye Consumer Staples Sector Head Rob Campagnino will take the other side of Goldman Sachs' call on on BUD from this price. Immediate-term TRADE oversold within a bullish intermediate-term TREND. Franchise Consumption name that looks great from a Macro perspective as well.
Hedgeye Director of Research Daryl Jones appeared on CNBC's Closing Bell this afternoon to discuss the news that investor George Soros has taken a 7.9% stake in JCPenney (JCP). Daryl says that you need to consider the fact that short sellers will be covering their positions when a big investor like Soros gets involved in a stock. The company has a lot of challenges ahead of it and it's best to stay on the sideline until the company's fundamentals improve.
Skip to 1:25 in the video to watch Daryl's take on the stock.
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This morning's US GDP estimate for the first quarter of 2013 came in a 2.5%, 0.5% below expectations of 3.0%. Despite the headline being a miss, there's still plenty of positives in the report that fall in line with our economic growth expectations. For instance: Consumer Spending growth accelerated for the third consecutive quarter, growing 3.2% sequentially versus expectations for 2.5%, and contributing +2.24 to the Total GDP figure on the quarter. Investment grew 12.3% quarter-over-quarter alongside some inventory build and continued strength in residential and non-residential fixed investment. Net exports contributing -0.5 to total GDP as growth in imports outran export growth.
As evidenced by the decline in commodity prices over the last three months, the US dollar is in bullish formation and has been appreciating in value considerably since the beginning of the year. A strong US dollar ultimately helps drive consumption in the US which in turn drives growth. As Americans witness lower prices at grocery stores and gas stations, they will consume more. This is great for consumption stocks and bearish for commodity-related stocks like gold miners (FCX, GDX, etc.).
Takeaway: The risk of a Chinese financial crisis is heightened to the extent that financial sector reforms are not appropriately managed.
In yesterday’s Politburo Standing Committee (PSC) meeting, China’s executive leadership mapped out guidelines to address a slew of structural ailments that were brightly highlighted in China’s disappointing 1Q growth statistics: slowing GDP and consumption growth amid accelerating growth in credit and fixed assets investment. China’s first APR growth data point leaves much to be desired in the way of a meaningful rebound:
Indeed, a “lack of growth momentum” was identified as the most serious challenge to the Chinese economy – partly affected by slow global growth (exacerbated by “liquidity in some developed economies”) and a broad-based lack of sustained investor confidence due to Europe’s sovereign debt crises.
Ironically to us, there was hardly a mention of China’s domestic financial sector risks in the official transcript, though recent commentary by PBOC Governor Zhou Xiaochuan which highlighted his call for urgency on the reform front suggests that financial sector risks are, in fact, the elephant in the room: “China has to make economic reform its top priority,” he said.
NOTE: This is very much in line with what we have identified in our recent work on China – specifically in that the clock is ticking rather loudly for China’s unsustainable economic growth/public official wealth accumulation model…
What’s perhaps most interesting is that Chinese leaders remained committed to stringent macroprudential policies in the face of an obvious growth slowdown. As we have been saying for the past ~3 years: it’s because they architected the aforementioned growth slowdown! Indeed, they remain reluctant to hit the “go” button on large-scale stimulus, instead opting for further growth-negative policies, such as curbing the expansion of resource-intensive industries – many of which are rife with overcapacity. To this point, Chinese banks have already begun tightening loans to the iron and steel industries amid fear of rising NPLs.
All told, we continue to see elevated risk of a Chinese financial crisis – however one may materialize – and destabilizing capital outflows over the long-term TAIL (3yrs or less) – IF financial sector reforms and capital account liberalization are not appropriately managed by the powers that be (PSC, PBOC, MOF, CBRC, CSRC, NDRC, etc.). Indeed, the next round of reforms will be a sizeable team effort across all of China’s major regulatory and strategic planning agencies.
To follow up on our deep-dive presentation on this very topic from this past Tuesday’s call on the upcoming cycle of emerging market crises, we’ll be hosting a conference call on Monday morning (4/29) at 11am EST featuring Carl Walter of Stanford's Walter H. Shorenstein Asia-Pacific Research Center.
Carl is arguably the world’s preeminent expert on the Chinese financial system, having lived and worked in Beijing from 1991 to 2011, first as an investment banker involved in the earliest SOE restructurings and overseas public listings, then as chief operation officer of China's first joint venture investment bank, China International Capital Corporation. Over the last ten years he was JPMorgan's China chief operating officer as well as chief executive officer of its China banking subsidiary. Walter is also the co-author of Red Capitalism: The Fragile Financial Foundations of China's Extraordinary Rise (2012) and Privatizing China: Inside China's Stock Markets (2005).
On the call, we will examine the key risks currently embedded across China's financial system and assess the probability of a Chinese financial crisis in light of the Chinese Communist Party's financial sector reform agenda. Email if you’re interested in attending or would like to be earmarked to receive the replay materials.
Have a great weekend,
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.