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Replay Podcast and Slides: Where Does Europe Go From Here?

On Tuesday June 11th we hosted a conference call titled "Where Does Europe Go From Here?". On the call we highlighted the best investment opportunities in Europe and assessed the overall economy of the region.  

 

 

Summary Conclusions:

  • Fundamentals in Europe remain challenged due to structural headwinds and we should expect long-term below-mean growth
  • There is no risk to any country leaving the Eurozone or the Euro being disbanded, so another Cyprus flare-up is unlikely
  • European bifurcation will remain, with clear winners and losers:

–      Fundamentally Bullish: Germany and UK

–      Fundamentally Bearish: France, Italy and Spain

  • Establishing a fiscal and monetary union will be very challenging
  • ECB unlikely to shift policy anytime soon due to continued stress in peripheries
  • In the intermediate term, EUR/USD range-bound with a negative bias

 

To access the replay podcast and accompanying presentation, please click on the following links:

 

Podcast: CLICK HERE 

Presentation: CLICK HERE

 

 

As always, if there are any questions please shoot us an email and we’ll be sure to get back to you with a reply.

 

Thank you for being a client; we are grateful for your support.

 

The Hedgeye Macro Team


CONFERENCE CALL e-Cigs: The Untapped Market for Electronic Cigarettes

CONFERENCE CALL e-Cigs: The Untapped Market for Electronic Cigarettes - ecigsDialInFInal 06.19.13

Is the Electronic Cigarette (e-Cig) Market A 10-bagger From Here?

 

We will be hosting an expert call on the market for electronic cigarettes titled e-Cigs: The Untapped Market for Electronic Cigarettes, featuring  John J. Wiesehan, CEO of the Charlotte based company, Ballantyne Brands, LLC. The conference call will be held on Wednesday, June 19th at 11:00am EDT.

 

 

CALL OBJECTIVE 

To assess the emerging market opportunities surrounding electronic cigarettes.

 

 

KEY TOPICS WILL INCLUDE

  • An overview and history of e-Cigs
  • Presentation of the market opportunity for e-Cigs’ and current growth rates (over 50% annually)
  • Discussion of the key companies and regulatory agencies involved in the industry
  • Role of big tobacco in the e-Cig industry
  • Analysis of the perceived and real health risks according to public studies

 

KEY TICKERS

AOI, MO, BTI, LO, PM, RAI, UVV, VGR, WMT, ORXE, NVTP, VPCO

 

 

ABOUT John J. Wiesehan

John J. Wiesehan is currently the CEO of Ballantyne Brands, LLC. A graduate of Lindenwood University in Saint Charles, Missouri, John spent time at General Electric as the Worldwide Operations Manager. From General Electric, he moved to Woods Industries as Vice President in the Sales and Marketing sector.  In October 2012, John joined Ballantyne Brands, LLC located in North Carolina and became CEO.

 

Ballantyne Brands, LLC has made the news recently by pushing for state law change in North Carolina aimed at redefining electronic cigarettes as a vapor product instead of a tobacco product. John has also made a public statement in favor of prohibiting the sale of e-Cigs to minors.

 

Ballantyne Brands have two e-Cig companies, Neo and Mistic. Mistic e-Cigs are being sold in all Wal-Mart’s as of April 18, 2013. 

  

 

CALL DETAILS

  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 548729#
  • Materials: CLICK HERE (Slides will download one hour prior to the start of the call)

 

For more information please email

 


#EMERGINGOUTFLOWS ACCELERATE

Takeaway: Value traps are sprouting up across the EM space; don’t get sucked in... We remain the bears on emerging market asset prices.

SUMMARY BULLETS:

 

  • Per Bank of America Merrill Lynch data, redemptions from EM debt and equity funds totaled $8.9 billion last week, which the third largest week ever for aggregate outflows (bested only by outflows during MAR ’07 and JAN ’08).
  • We remain the bulls on the US Dollar with respect to the long-term TAIL and our analysis shows that a sustained bout of dollar appreciation (and its ancillary effects) tends to be a major headwind for EM capital markets and currencies.
  • All told, we remain the bears on emerging market asset prices. And while many EM asset classes are oversold on our quantitative risk management signals, we would be inclined to fade any dead-cat bounces in this space.

 

Per Bank of America Merrill Lynch data, redemptions from EM debt and equity funds totaled $8.9 billion last week, which the third largest week ever for aggregate outflows (bested only by outflows during MAR ’07 and JAN ’08). The $2.5 billion in outflows from EM debt funds was the second largest weekly outflow on record and the $6.4 billion in outflows from EM equity funds was the largest weekly outflow since AUG ’11.

 

According to their Investment Strategy Team’s EM Flow Trading Rule, another $8-10 billion of outflows next week or $11-12 billion of outflows over the next two weeks from EM equity funds would trigger a “contrarian buy” signal, as the trailing four weeks of outflows would then equal 3% of total AUM, up from 1.9% currently.

 

#EMERGINGOUTFLOWS ACCELERATE - EM Outflows Trading Rule

 

We are obviously inclined to fade such a signal – particularly given that it doesn’t necessarily source economic history across multiple cycles. One of the most common mistakes we see analysts make is not pulling the charts back far enough – particularly with respect to any sort of mean reversion-based analysis.

 

In light of this, we’d certainly be interested to see how the aforementioned analysis held up during the 1990s (and even 1980s) emerging market crises cycles. Needless to say, we have our doubts.

 

At any rate, a “contrarian buying opportunity” is only a buying opportunity if EM equities are poised to meaningfully rally from here. Irrespective of the #WeakDollar sweet nothings Jon Hilsenrath continues “blog” about, we think our #EmergingOutflows thesis paints a pretty clear picture on why that is a low probability scenario. Moreover, we remain the bulls on the US Dollar with respect to the long-term TAIL and our analysis shows that a sustained bout of dollar appreciation (and its ancillary effects) tends to be a major headwind for EM capital markets and currencies.

 

#EMERGINGOUTFLOWS ACCELERATE - USD and EM Crises

 

#EMERGINGOUTFLOWS ACCELERATE - EO Asset Allocation Shift

 

In the event you missed our 122-slide and 61-slide presentations detailing our bearish thesis on emerging markets, please shoot us an email we’d be delighted to walk you through them.

 

All told, we remain the bears on emerging market asset prices. And while many EM asset classes are oversold on our quantitative risk management signals, we would be inclined to fade any dead-cat bounces in this space.

 

Have a great weekend,

 

Darius Dale

Senior Analyst


Early Look

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Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

Selling: SP500 Levels, Refreshed

Takeaway: The signal says sell, so I have been selling again all morning. The fundamental research view also says sell, which is very new.

The signal says sell, so I have been selling again all morning. The fundamental research view also says sell, which is very new.

 

Dollar Down, Up Oil = not good. Or at least it may not be as good as yesterday’s employment and consumption #GrowthAccelerating data (Jobless Claims and Retail Sales) was. It’s been a heck of a 6 month run, and no one ever went broke locking it in.

 

Across our core risk management durations, here are the lines that matter to me most:

 

  1. Immediate-term TRADE resistance = 1653
  2. Immediate-term TRADE support = 1601
  3. Intermediate-term TREND support = 1583

 

In other words, SPY is still signaling lower-highs in my model as front-month VIX signals higher-lows. That’s the immediate-term, and to be clear, selling up here is an immediate-term TRADE call.

 

I’ll likely gross up US Equity exposure between 1 again – but the US Dollar needs to recover it’s TREND line ($81.21) for me to buy as aggressively as I have throughout the 2013 US growth recovery.

 

Happy Father’s Day to all the Dad’s out there and enjoy your summer weekend,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Selling: SP500 Levels, Refreshed - SPX


TROUBLE BREWING IN BEIJING?

Takeaway: Recent policy developments call attention to the systemic risks facing China’s banking system. Additionally, MAY growth data came in soft.

This note was originally published June 10, 2013 at 13:54 in Macro

TROUBLE BREWING IN BEIJING? - chinabank

SUMMARY BULLETS:

 

  • The pending introduction of a nationwide deposit insurance scheme and proactive regulations for dealing with commercial bank failures calls attention to the systemic risks facing China’s banking system. When taken in context with the outlook for interest rate liberalization and a bubbly property market, we are left continuing to hold a far-less-than-sanguine view of Chinese financials.
  • As a reminder, we’ll be hosting a flash conference call this Wednesday at 11AM EST to discuss Chinese financial system risks in greater detail, having added CHIX (Global X China Financials ETF) to our Best Ideas list on the short side. We look forward to your participation and questions then.
  • The sluggish MAY growth figures are in line with what we saw out of China’s recent PMI readings on both the manufacturing and non-manufacturing fronts and we continue to warn of A) incremental tightening (macroprudential or blunt instrument, if necessary) to stem rampant property price appreciation and B) a 2H13 slowdown in Chinese growth as conditions for credit growth deteriorate.
  • While certainly hard to know for sure, it is our view that much of the equity market upside stemming from positive sentiment surrounding the various avenues for reform (economic, financial, fiscal and social) was priced in during the recent rally.
  • For our latest thoughts on the Chinese economy and its banking system, please refer to the research notes hyperlinked at the bottom of this note.

 

PBOC, CBRC RAISING EYEBROWS (OURS AT LEAST)

This morning, we learned that the PBOC was out confirming that a deposit insurance system is ready to be launched after gathering much-needed political consensus. According to the central bank, the insurance system will help "increase the flexibility of commercial banks in terms of financial business innovation and risk control". Moreover, China’s regulation on the standardization of commercial bank bankruptcy – which has been deliberated on for five years – is expected to be submitted to the State Council in 2H13.

 

So let’s get this straight: Chinese authorities are A) implementing a deposit insurance scheme and B) finalizing regulations to facilitate commercial bank bankruptcies. Are we missing something or is Beijing preparing for some meaningful banking system headwinds over the intermediate-to-long-term?

 

In the context of the PBOC likely scrapping the deposit rate ceiling over the intermediate term, there have been concerns that smaller banks would be uncompetitive in a competing cost-of-funds environment. They would ultimately lose deposits and creditor faith as their ability to generate earnings growth declined amid slower or potentially negative financing growth.

 

The commensurate tightening of interbank liquidity is something we’ve been keeping an eye on; last week there was a rumor of a mid-sized bank failing to repay an interbank loan. Expect more to come on that front as we inch closer to the implementation of interest rate liberalization in China. Consensus has been celebrating/bidding up headlines on that front in the YTD, but we continue to hold a far less sanguine view:

 

  • On scrapping the lending rate floor (current minimum = 70% of the benchmark): Consensus expects this to increase the supply of credit to SMEs by lowering the cost of funds for SOEs and allowing risk-based credit allocation to flourish. We think there is risk that SOEs just demand cheaper financing from the banks and that SMEs continue to get crowded out in the absence of regulatory quotas.
  • On scrapping the deposit rate ceiling (current maximum = 110% of the benchmark): Consensus expects this to increase the return on household savings deposits (as do we), but fails to see the dangers of crowding out small-to-mid-sized lenders out of the market for deposits. Moreover, this would be an enormous blow to the systemic financial repression that underpins China’s investment economy (~46-47% of GDP) and higher real rates of return in safer, traditional savings deposits would slow the supply of yield-chasing funds to Trusts and WMPs – potentially exacerbating any liquidity constraints in those credit markets.
  • On doing both at the same time: We’re not sure what consensus thinks here, but it’s obvious to us that lowering lending rates and increasing deposit rates at the same time will inevitably result in NIM compression – something that can only be offset from an earnings perspective by accelerating credit growth. In the context of subdued GDP targets, the Party’s economic rebalancing agenda, a bubbly housing market and an inevitable and potentially dramatic rise in NPLs over the long-term, a meaningful, sustained increase in credit growth appears unlikely.

 

TROUBLE BREWING IN BEIJING? - dar1

 

 

RATTY MAY DATA

This weekend brought us some pretty ratty growth data out of China for the month of MAY. Perhaps the largest callout would be export growth slowing from +14.7% YoY in APR to +1% YoY in MAY, which is what we were calling for post the regulatory crackdown on fake invoicing. Back in line with reality, the MAY export growth figures may arouse global growth fears (exports to the US slowed to -1.6% YoY; exports to the EU slowed to -9.7% YoY).

 

TROUBLE BREWING IN BEIJING? - 2

 

In the context of slower capital flows stemming from a reduction in “fexports” (i.e. fake exports) and tighter interbank liquidity, the MAY credit growth data was also pretty subdued: total social financing growth slowed to +CNY1.19 trillion MoM from +CNY1.75 trillion prior as new loans ticked down to +CNY667.4 billion MoM from +CNY792.9 billion prior. That is unsupportive for fixed assets investment and industrial production growth, the both of which ticked down marginally.

 

TROUBLE BREWING IN BEIJING? - 3

 

TROUBLE BREWING IN BEIJING? - 4

 

TROUBLE BREWING IN BEIJING? - 5

 

All told, the sluggish MAY growth figures are in line with what we saw out of China’s recent PMI readings on both the manufacturing and non-manufacturing fronts and we continue to warn of A) incremental tightening (macroprudential or blunt instrument, if necessary) to stem rampant property price appreciation and B) a 2H13 slowdown in Chinese growth as conditions for credit growth deteriorate.

 

While certainly hard to know for sure, it is our view that much of the equity market upside stemming from positive sentiment surrounding the various avenues for reform (economic, financial, fiscal and social) was priced in during the recent rally.

 

For our latest thoughts on the Chinese economy and its banking system, please refer to the research notes hyperlinked at the bottom of this note.

 

Darius Dale

Senior Analyst

 

  • IS THE RECENT RALLY IN CHINESE EQUITIES SUSTAINABLE? (5/17): We do not think the recent strength in the Chinese equity market is sustainable, as China’s 2H13 growth outlook appears dicey at best.
  • WHY IS CHINA GOOSING ITS EXPORT FIGURES AND HOW MUCH LONGER WILL IT CONTINUE? (5/8): Chinese firms are goosing exports to drive incremental liquidity into the banking system – a phenomenon that appears set to slow from here.
  • TWO CHINAS? (5/1): Financial system headwinds continue to outweigh consumption tailwinds within the Chinese economy.
  • REPLAY: Will China Break? (4/30): The Party’s use of state owned banks to drive economic growth through fixed asset investment has left the financial system loaded with bad assets.  The bad assets mirror bad investments in the real economy.  They also can limit the ability of Chinese banks to make new loans.  Following the financial crisis, the Chinese government pushed too hard on the FAI growth lever, building infrastructure projects “for the next 10 years.” It has also left the banking sector choked with bad debts that may limit future lending.  Those factors should slow Chinese FAI growth and slower Chinese FAI growth should be negative for commodity prices and resource-related profits, all else equal.
  • CAN CHINA AVOID FINANCIAL CRISIS? (4/26): The risk of a Chinese financial crisis is heightened to the extent that financial sector reforms are not appropriately managed.
  • REPLAY: EMERGING MARKET CRISES (4/23): We currently see a pervasive level of risk across the emerging market space at the country level and have quantified which countries are most vulnerable. China is particularly vulnerable to experiencing a financial crisis.
  • 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.

GLOBAL MACRO GRIND

Client Talking Points

CHINA

We reiterated our short call earlier this week on emerging markets and China. (Ping us if you want a copy of this concise presentation.)  Our short call has played out positively and is backed by asset flows out of emerging markets funds. In the most recent week the exodus from emerging market funds was $9 billion - the third largest weekly outflow ever (after March 2007 and January 2008). Credit growth in China is slowing and the increasing likelihood that the PBOC tightens will provide an impediment to credit growth.

UNITED STATES

#GrowthAccelerating. The dreary global growth outlook we have continues to push us back to the one economy (and stock market) we remain positive on – the US. As it relates to macro data coming out today, the big one is of course Michigan Consumer Confidence. It will be a decent “tell” on how the US consumer is feeling on top of yesterday's nice retail sales number. As we look at today's setup for the S&P 500, the range is 48 points or 1.92% downside to 1605 and 1.02% upside to 1653.          

Asset Allocation

CASH 48% US EQUITIES 20%
INTL EQUITIES 20% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 12%

Top Long Ideas

Company Ticker Sector Duration
NSM

Financials sector head Josh Steiner is the Street’s head bull on residential mortgage originator/servicer Nationstar, projecting $9 in earnings for the company in 2014.  This is well above the company’s own guidance range, which tops out at around $7.50. NSM had a successful start to the year as it won servicing bids on substantial mortgage portfolios.  They also reported significant increases in their profit margins on those portfolios, and double-digit increases in their own originations.  Housing prices are ramping significantly higher, as Steiner predicted, as demand continues to exceed supply in both new and existing homes.  Steiner says this quality mortgage company could ride the crest of a sustained wave of sector improvement.

MPEL

Gaming, Leisure & Lodging sector head Todd Jordan says Melco International Entertainment stands to benefit from a major new European casino rollout.  An MPEL controlling entity, Melco International Development, is eyeing participation in a US$1 billion gaming project in Barcelona.  The new project, to be called “BCN World,” will start with a single resort with 1,100 hotel beds, a casino, and a theater.  Longer term, the objective is for BCN World to have six resorts.  The first property is scheduled to open for business in 2016.  

WWW

WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.

Three for the Road

TWEET OF THE DAY

Today the High Freaks will know before everyone else how confident Americans are in the stock market (Reuters/UMich invoice in the mail) @zerohedge

QUOTE OF THE DAY

"One of the funny things about the stock market is that every time one person buys, another sells, and both think they are astute."

- William Feather

STAT OF THE DAY

340,000,000: The # of tweets that are sent every day on Twitter.


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