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Morning Reads on Our Radar Screen

Takeaway: A quick look at some stories on Hedgeye's radar screen.

Keith McCullough – CEO

China reports weaker than expected trade data (via BBC)

Hockey Hall of Fame class announced (via ESPN)

Thailand Holds Rate as Baht Retreat Reduces Pressure to Ease (via Bloomberg)

 

Morning Reads on Our Radar Screen - earth2

 

Howard Penney – Restaurants

The Periodic Table of McDonald's (via BBW)

Wendy's Pretzel Bacon Cheeseburger Almost-Not-Quite Pretzel-y, Bacon-y (via Houston Times)

Coffee shops look to oust 'laptop hobos' (via MSN Money)

 

Josh Steiner - Financials

Consumer Bureau to Sanction Banks Over Collection Methods (via Bloomberg)

Fairholme Fund to file suits, geared to protect rights of Fannie Mae and Freddie Mac preferred shareholders (via Miami Herald)

 

Matt Hedrick – Macro

Spain's Mariano Rajoy 'implicated after publication of slush fund documents' (via The Telegraph)

 

Tom Tobin – Healthcare

Mergers not just among public hospitals Saint Vincent, Highmark deal now in effect (via GoErie)


Ripples From China

Client Talking Points

CHINA

Chinese exports were horrendous at -3.1% year-over-year in June. But don’t worry - Western style bailout begging is all over the tape. You want to buy China exposure on that? We don’t think there’s anything remotely close to Bernanke/Draghi style “stimulation” coming. Despite the Hang Seng’s positive +1% move into the close, it remains bearish TREND. For that matter, so does every other Asian Equity market with the exception of Japan.

DAX

Go ahead and ask German exporters if they care about negative year-over-year Chinese import demand. The DAX failed right at our TREND resistance of 8062. Meanwhile, the rest of European Equity markets with the exception of the FTSE all remain bearish TREND in our model. Greece? Still crashing big, down another -2.1%. It's down a whopping -29% since May 20. Troika that.

OIL

Brent Oil is back above our TAIL risk line of $108 and change this morning. That is easily the biggest threat to what has been solid US consumption aka #GrowthAccelerating for the last six months. Incidentally, oil is now back in the black year-to-date. We are watching this level very closely as it has serious implications.

Asset Allocation

CASH 57% US EQUITIES 18%
INTL EQUITIES 0% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 25%

Top Long Ideas

Company Ticker Sector Duration
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.

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. 

HCA

Health Care sector head Tom Tobin has identified a number of tailwinds in the near and longer term that act as tailwinds to the hospital industry, and HCA in particular. This includes: Utilization, Maternity Trends as well as Pent-Up Demand and Acuity. The demographic shift towards more health care – driven by a gradually improving economy, improving employment trends, and accelerating new household formation and births – is a meaningful Macro factor and likely to lead to improving revenue and volume trends moving forward.  Near-term market mayhem should not hamper this  trend, even if it means slightly higher borrowing costs for hospitals down the road. 

Three for the Road

TWEET OF THE DAY

Fundamentally, with Chinese #GrowthSlowing and Oil rising – not a good day to be buying US stocks

@KeithMcCullough

QUOTE OF THE DAY

"It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change" - Charles Darwin

STAT OF THE DAY

21%: The amount the yen has weakened against the dollar since Oct. 31, when Japanese Prime Minister Shinzo Abe started his campaign to lower the currency in an attempt to spur Japan. (Bloomberg)


July 10, 2013

July 10, 2013 - DTR

 

BULLISH TRENDS

July 10, 2013 - 10yr

July 10, 2013 - spx

July 10, 2013 - nik

July 10, 2013 - dxy

July 10, 2013 - oil

 

BEARISH TRENDS

July 10, 2013 - dax

July 10, 2013 - VIX

July 10, 2013 - euro

July 10, 2013 - yen

July 10, 2013 - natgas

July 10, 2013 - gold

July 10, 2013 - copper


investing ideas

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Uncertain China

This note was originally published at 8am on June 26, 2013 for Hedgeye subscribers.

“Nothing is certain but the unforeseen.”

-J.A. Froude

 

No stranger to intellectual debate, British author James Anthony Froude (1818-1894) was well-known for stirring the pot – perhaps even more so than @HedgeyeDJ (Daryl Jones, our no-holds-barred DoR) and @HedgeyeENERGY (Kevin Kaiser, our oft-controversial senior energy analyst).

 

Froude’s generally polemic works were often met with fierce debate and rejection among the British intellectual elite – perhaps none more so than his seminal work The Nemesis of Faith (1849), which was carefully crafted to call into question blind acceptance of the popular Christian doctrine of the time. Widespread public backlash in response to the novel ultimately cost Froude his fellowship at Oxford University.

 

Eventually Froude’s avoidance of institutionalized groupthink won out. Froude and his wildly contentious ideas ultimately found a permanent home when he was appointed Regius Professor of Modern History at Oxford (i.e. a really big deal) in 1892 – the very institution he was driven away from nearly a half-century prior.  During his regrettably brief stint at Oxford (he died in 1894), Froude quickly earned a reputation for being among the most popular lecturers of his time.

 

If nothing else, Froude’s journey from the top to the bottom and back again is a lesson for analysts young and old to avoid the safety and comfort of groupthink. Never is this advice more important than when a time-tested, comprehensive and repeatable research process leads one to hold a counter-consensus view. Hold the LINE [short], Kaiser!

 

Back to the Global Macro Grind

 

Incorporating another one of Froude’s lessons, we call attention to the aforementioned quote in the context of China’s banking system woes – which, thanks to the recent spate of legacy media coverage, are now as obviously present as a 6’3”, 325lb left tackle in one of Froude’s 19th century lectures.

 

Specifically, anyone even tangentially following recent press will arrive at the conclusion that a growing consensus among analysts across both the buy and sell sides believes with a fair amount of certainty that China’s credit binge and alleged housing bubble are sure to cause a Western-style financial crisis.

 

We aren’t so sure. With less than 2% of all financial assets held by foreigners, strict capital controls have, thus far, prevented a mass exodus of liquidity through the capital account. Domestically speaking, the PBoC’s own words from yesterday should douse any hopes of a crisis:

 

“Financial institutions’ cash reserves stood at about 1.5 trillion yuan ($244 billion) as of June 21, compared with the 600 billion yuan or 700 billion yuan sufficient under normal circumstances to cover payment and clearing needs. The present liquidity is not insufficient.”

 

Indeed, by comparing China’s present-day banking woes to the early tremors of Bears Sterns or juxtaposing China’s property market – rife with “ghost cities” – with our own pre-crisis froth, consensus has undeniably fallen victim to the availability heuristic. We don’t think that’s a prudent call to make at the current juncture; the Chinese sovereign has the resources, political will and mobility to prevent any Western-style financial crisis.

 

We’ve become a broken record on this, but it’s critical to remember that China’s present day economic woes are actually a function of very deliberate macroprudential policies. While highly unlikely, at any given time, Chinese officials can reverse course and keep the credit bubble inflating longer than any of us short-sellers can remain solvent.

 

On the contrary [to consensus], we think the outlook for China’s banking sector is likely to resemble that of a slow bleed, rather than sudden cardiac death. We’ve published a ton of work recently backing our conclusions with detailed analyses, but for those of you who weren’t able to tune in until now, we’ll take this opportunity to rehash our views:

  • Alas, it remains our view that the headwinds facing China’s banking system are structural (i.e. NOT cyclical) in nature.

Please email us if you’re interested in reviewing the full compendium presentation materials and research notes backing these conclusions, and we’ll get them right over to you. We also have a list of ancillary securities and asset classes to underweight/sell/short if you’re interested in those as well.

 

At any rate, we urge you to embrace the uncertainty of this situation by running full speed away from anyone who tells you they know how this all ends.

 

In fact, the only certainly anyone can promise you regarding these risks is that the outcome is presently unforeseen and, quite possibly, hidden deep within the “shadows” of China’s financial sector.

 

Our immediate-term TRADE Risk Ranges are now (TREND bullish or bearish in brackets):

 

UST 10yr Yield 2.35-2.69% (bullish)

SPX 1560-1614 (bearish)

DAX 7619-8108 (bearish)

Nikkei 12,406-13,449 (bearish)

 

VIX 16.59-20.98 (bullish)

USD 82.21-83.39 (bullish)

Euro 1.30-1.32 (neutral)

Yen 96.25-99.17 (bearish)

 

Oil 99.18-103.39 (bearish)

NatGas 3.64-3.82 (bearish)

Gold 1226-1324 (bearish)

Copper 2.98-3.12 (bearish)

 

Keep your head on a swivel,

DD

 

Darius Dale

Senior Analyst

 

Uncertain China - Chart of the Day

 

Uncertain China - Virtual Portfolio



Fed Conversations

“The one who engages in conversation should not debar others from participating in it.”

-Cicero

 

That’s one of the many quotes from Stephen Greenblatt’s The Swerve (page 70) that gets the juices flowing. Whether you’re tapping into the minds of the early Greeks (Epicurus = 341-270 BCE) or the arena of debate in the Roman Republic (Cicero = 106-43 BCE), it’s all there.

 

If you work within an investment culture that demands both constant questioning and collaboration, it’s all there too. Is there any other way to find the truth? Those who put their political pride over the market’s truths have never made good Portfolio Managers, fyi.

 

Sadly, politicians have provided the Fed, ECB, and BOJ closed forums where un-elected bureaucrats call the shots. While that may have been normal in Stalin’s Russia, it’s not in the area code of what America’s Founding Fathers envisioned. Who really cares about today’s Fed “minutes”? Until the Fed opens itself up to the Dalios and Druckenmillers of the world, they’re not even having a conversation.

 

Back to the Global Macro Grind

 

China’s economic data was horrendous overnight. So let’s not talk about the implications of Asian #GrowthSlowing, copper demand collapsing, mining capex bubbles, etc. Let’s start begging for a Bernanke-style bailout for the Chinese economy!

 

Yeah baby, that’ll do it – look at how well things turned out for every other Asian government that levered itself up since the Ming dynasty. I am hearing the Chinese are really into the whole Krugmanomics idea of turning China’s balance sheet into Japan’s too. Shhh.

 

To be crystal clear on this, we do not think China will “stimulate” you. Here are Darius Dale’s Top 3 reasons why:

 

1.   Property Bubble – they are trying to pop it before they get popped like we did (imagine that, learning from US history); property price growth continues to accelerate (+7.4% YoY in JUN; 13 consecutive months of sequential gains)

 

2.   Rebalancing, Not Levered Growth - Politburo's economic rebalancing agenda (quality of growth now more important than quantity of growth), which they've supported with recent rhetoric and (in)action during the recent credit crunch

 

3.   Psychology – despite the intermediate-term TREND slowing Chinese growth is still trending in-line to above long-term targets; if growth doesn’t fall off a cliff, new leaders will be reluctant to appear weak in the context of their long-term plan

 

Unlike team Obama, Geithner, and Bernanke (or Abe, Aso, and Kuroda in Japan), Xi and Li will be in charge for another 10 years. Why on earth would they implement short-term Western-style “stimulation”, when their ultimate goal is for history to respect them long-time?

 

I know, I know – whatever you do, do not engage in rational discussions about this when you can always defer to trading on the latest Chinese, Eurocrat, of Fed horse whispering rumor. That’s where the vig is at, bros.

 

The vig?

 

Yeah, you know – “also known as the juice, the cut or the take…” (Wikipedia definition). Or the amount a Washington “consultant” gets paid for his super secret inside info on what the Fed Minutes are actually going to say today (or what Bernanke is going to whisper next).

 

Just like Jefferson envisioned, for sure.

 

In other #StrongDollar, Strong America news, US stocks closed up for the 4th day in a row yesterday, taking the Russell 2000 to yet another all-time closing high of 1,018. For those of you who are still into keeping score for the 2013 bears, that’s +20% YTD.

 

All-time is also a very long-time, so why not sell some up here? You know, lather yourself up with some booked gains. As our Financials guru (and birthday boy), Josh Steiner, always reminds me, ‘no one ever went broke booking a profit.’

 

From our process’ perspective, making some sales up here in US Equities is your short-term, high probability, bet because:

  1. PRICE – SP500 is immediate-term TRADE overbought in the 1 range
  2. VOLATILITY – front-month VIX is immediate-term TRADE oversold around 14.02
  3. VOLUME – has been nowhere to be found on this no-volume meltup (down -13-27% versus our TREND avg)

What goes up on no-volume can come down on no-volume. So, as consensus is forced to chase price again, and again, and again in 2013, just take a deep breath and focus on proactively managing the risk of a very trade-able range (SPY range = 1, for now).

 

Despite the “rumors” of being “stimulated” by some Chinese dudes, both the Shanghai Composite and the Hang Seng closed well below their bearish TREND lines of 2,190 and 21,991, respectively overnight.

 

Oh, and Oil is testing a breakout above our long-term TAIL risk line of $108.36/barrel this morning too. So, Bernanke, before you think about devaluing the Dollar again with a closed network “communication tool”, think about the rest of us who are engaged in open discussions about you while we’re taking your Policy To Inflate in the pump.  

 

Our immediate-term Risk Ranges are now (we have 12 Macro Ranges in our new Daily Trading Range product too, fyi):

 

UST 10yr 2.56-2.73%

SPX 1

Hang Seng 20,124-20,991

VIX 14.02-16.21

USD 83.89-85.09

Oil 105.06-109.39

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Fed Conversations - Chart of the Day

 

Fed Conversations - Virtual Portfolio


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