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ANTI-DATA MINING IN CHINA: IS IT TIME TO RELOAD ON THE SHORT SIDE?

Takeaway: It looks like a good time to start reloading on the short side of Chinese equities, as the recent dead-cat bounce appears to be fading.

SUMMARY BULLETS:

 

  • While the anticipated dead-cat bounce in the Shanghai Composite Index off the aforementioned lows has lasted longer (i.e. in duration) than we expected, we are encouraged as short-sellers of China to see that the index failed at its intermediate-term TREND line of resistance this week.
  • That explicit quantitative signal is supportive of our fundamental research view that [largely] policy-induced banking sector headwinds will weigh on Chinese economic growth with respect to the intermediate-term TREND and the long-term TAIL (click HERE for the initial presentation of that thesis; click HERE for the latest update).
  • Simply put, while Chinese economic growth has indeed stabilized at these historically-low rates [for now], we don’t see any degree of upside that would be supportive of any long-term bullish bias in Chinese stocks; nor do we expect Chinese fiscal and monetary policy to be supportive of meaningful speculation on the long side of Chinese equities from here.
  • Lastly, in the section below titled, “WHERE TO FROM HERE”, we walk through precisely why Chinese growth data may not be as marginally healthy as it has [generally] appeared recently. In fact, our in-depth analysis of China’s financial sector lends credence to the view that China’s mini-growth rebound may be short-lived.

 

WHERE WE’VE BEEN

We’ve been on the right side of the wild cyclical swings that investors have become accustomed to in the Chinese equity market for well over a year now:

 

 

The caveat to that opening statement is that, as overt bears on China, we’ve been right squeezed by the +8% rally in the Shanghai Composite Index off of its late-JUN (6/27) lows to its 8/13 cycle peak. Hopefully you took our explicit advice to reduce your short exposure to China right around the index's YTD lows (when we openly proclaimed that our bearish thesis had been priced in on an immediate-term basis), but that’s neither here nor there.

 

What is both “here and there” is the fact that while the anticipated dead-cat bounce in the Shanghai Composite Index off the aforementioned lows has lasted longer (i.e. in duration) than we expected, we are encouraged as [rhetorical] short-sellers of China to see that the index failed at its intermediate-term TREND line of resistance this week.

 

ANTI-DATA MINING IN CHINA: IS IT TIME TO RELOAD ON THE SHORT SIDE? - China SHCOMP

 

That explicit quantitative signal is supportive of our fundamental research view that [largely] policy-induced banking sector headwinds will weigh on Chinese economic growth with respect to the intermediate-term TREND and the long-term TAIL (click HERE for the initial presentation of that thesis; click HERE for the latest update).

 

Simply put, while Chinese economic growth has indeed stabilized at these historically-low rates [for now], we don’t see any degree of upside that would be supportive of any long-term bullish bias in Chinese stocks; nor do we expect Chinese fiscal and monetary policy to be supportive of meaningful speculation on the long side of Chinese equities from here.

 

MERE STABILIZATION IS BULLISH WHEN BARRONS’ FLAGS CHINA’S “LOOMING CREDIT CRISIS”

On the same day when we were making the call that the bear case had been priced in on an immediate-term perspective, Barron’s (a publication we have a great deal of respect for) published this beauty:

 

ANTI-DATA MINING IN CHINA: IS IT TIME TO RELOAD ON THE SHORT SIDE? - Barron s China Credit Crisis JUN  13

 

Needless to say, the consensus attitude among investors had become that China was fast-approaching its much bandied about “hard landing” – a research view we’ve never bought into. Such hysteria prompted various officials to come out and affirm that Chinese growth would indeed stabilize at/around current levels:

 

  • First, Chinese Finance Minister Lou Jiwei proclaimed at the JUL US/China Summit that 6.5% real GDP growth in 2013 “may be tolerable”;
  • Then, the official state-run Xinhua News Agency subsequently proclaimed that what Jiwei really meant to say was that he has “no doubt” that +7.5% target would be achieved; and
  • Finally, Chinese Premier Li Keqiang stated plainly that +7% real GDP growth is the “bottom line” for 2013.

 

At the time, we weren’t really sure what to do with all that except to expect anything from a sequential flattening of the then-negative slopes to a modest improvement in Chinese growth data in JUL, which, for the most part (other than some noteworthy exceptions), is precisely what happened:

 

  • JUL Manufacturing PMI: 50.3 from 50.1 prior
    • The New Orders index ticked up to 50.6 from 50.4 prior
    • The New Export Orders index ticked up to 49 from 47.7 prior
    • The Employment Index ticked up to 49.1 from 48.7 prior
  • JUL HSBC Manufacturing PMI: 47.7 from 48.2 prior
    • The New Orders index fell to 46.6, which was the lowest since AUG ’12
    • The New Export Orders index contracted for a fourth-consecutive month
    • The Employment index slowed to the lowest level since MAR ’09
  • JUL Non-Manufacturing PMI: 54.1 from 53.9 prior
  • JUL HSBC Services PMI: flat at 51.3
  • JUL Industrial Production: +9.7% YoY from +8.9% prior
  • JUL Retail Sales: +13.2% YoY from +13.3% prior
  • JUL YTD Fixed Assets Investment: flat at +20.1% YoY
  • JUL M2 Money Supply: +14.5% YoY from +14% prior
  • JUL Total Social Financing: +CNY808.8B MoM from +CNY1.04T prior
    • New Loans: +CNY699.9B MoM from +CNY860.5B prior
  • JUL Electricity Consumption: +8.8% YoY from +6.3% prior
  • JUL Exports: +5.1% YoY from -3.1% prior
  • JUL Imports: +10.9% YoY from -0.7% prior
  • JUL Trade Balance: $17.8B from $27.1B prior; -$7.5B YoY from -$4.8B YoY prior
  • JUL Real Estate Climate Index: 97.4 from 97.3 prior

 

ANTI-DATA MINING IN CHINA: IS IT TIME TO RELOAD ON THE SHORT SIDE? - China PMI Table

 

WHERE TO FROM HERE?

In looking at the data, we can reasonably conclude that Chinese growth has indeed stabilized, though the sharp slowdown in credit growth (i.e. the lifeblood of the Chinese fixed-assets investment-driven economy) is cause for concern with respect to Chinese growth in 2H13. Additionally, property prices continue to accelerate and, while combating property prices is no longer a top priority for the PBoC, we are curious to see if further macroprudential tightening measures are coming down the pike – as recently hinted by Zhu Zhongyi, vice president of the China Real Estate Industry Association.

 

ANTI-DATA MINING IN CHINA: IS IT TIME TO RELOAD ON THE SHORT SIDE? - China Total Social Financing

 

ANTI-DATA MINING IN CHINA: IS IT TIME TO RELOAD ON THE SHORT SIDE? - China Real Estate Climate Index

 

On the positive side of the ledger, our favorite concurrent-to-slightly-leading (only because we get the data on a daily basis) indicators for Chinese growth auger positively for China’s AUG monthly growth data as well (they front-ran the positive inflection in JUL).

 

ANTI-DATA MINING IN CHINA: IS IT TIME TO RELOAD ON THE SHORT SIDE? - China Iron Ore  Rebar and Coal YoY

 

Additionally, money market rates on the short end of the curve continue to ease on a MoM and QoQ basis as the PBoC has become a consistent net provider of liquidity into the Chinese financial system via the issuance of reverse repos and allowing previously-issued central bank bills to expire on a net basis.

 

ANTI-DATA MINING IN CHINA: IS IT TIME TO RELOAD ON THE SHORT SIDE? - China Interbank Rates

 

ANTI-DATA MINING IN CHINA: IS IT TIME TO RELOAD ON THE SHORT SIDE? - China 7 day Repo Rate Monthly Avg

 

ANTI-DATA MINING IN CHINA: IS IT TIME TO RELOAD ON THE SHORT SIDE? - China PBoC OMO

 

But… we continue to see signs of deterioration underneath the hood. Across the maturity curve, interest rate swaps continue to trade well above the current cost of capital in China. In the past, we’ve interpreted this market signal as a sign that monetary policy tightening was increasingly probable over the intermediate term. We don’t view that scenario as likely at the current juncture; rather, we believe the market sees what we see: a prolonged erosion of financial liquidity, at the margins, will continue to apply upward pressure to money market rates over the intermediate-to-long term.

 

ANTI-DATA MINING IN CHINA: IS IT TIME TO RELOAD ON THE SHORT SIDE? - China 1Y OIS vs. PBoC Rates

 

That erosion of financial liquidity can be further identified in today’s failed bond auction by the Export-Import Bank of China – which couldn’t price 2Y or 7Y paper – and in China’s sovereign yield curve. China’s 10Y-2Y sovereign yield spread has widened modestly off its JUN mini-crisis spread lows, but it has yet to buck the trend of tightening that has been in place for just over one year now. Moreover, recent compression from the early-JUL highs is being driven by a dramatic backup in both the short end of the yield curve that is in excess of the also-noteworthy backup in the long end of the yield curve.  

 

ANTI-DATA MINING IN CHINA: IS IT TIME TO RELOAD ON THE SHORT SIDE? - China 10 2 Spread

 

The mere fact that both ends of China’s sovereign debt market is selling off should be interpreted as supportive of our view that the Chinese economy will be increasingly liquidity constrained, at the margins, as NPLs – both of the reported and unreported (i.e. debt rollovers/evergreening) genres – accelerate sustainably. A dour secular outlook for “capital” flows via the trade surplus is also supportive of our liquidity constraint thesis.

 

ANTI-DATA MINING IN CHINA: IS IT TIME TO RELOAD ON THE SHORT SIDE? - China REER

 

All told, there’s simply not enough liquidity present in the Chinese financial system currently and on a go-forward basis to consistently justify pricing bonds at yields well below what the future cost of capital will likely be for Chinese banks when the PBoC decides to liberalize deposit rates as it recently did with lending rates.

 

The aforementioned dynamic should remain a structural headwind to the overall growth rate(s) of the Chinese economy, at the margins, given the country’s overreliance on fixed assets investment as the primary engine of growth.

 

ANTI-DATA MINING IN CHINA: IS IT TIME TO RELOAD ON THE SHORT SIDE? - China GFCF   of GDP

 

Unless, of course, the Politburo plans to thread the needle with respect to their structural economic rebalancing agenda, which calls for slower overall GDP growth amid an elevation in the respective roles of the Chinese consumer and services sectors. Good luck “massaging” the data enough to get anyone to believe that!

 

Darius Dale

Senior Analyst

 

ANTI-DATA MINING IN CHINA: IS IT TIME TO RELOAD ON THE SHORT SIDE? - China GDP Expectations


PEY 2Q13 Review: Ops Remain Top Notch, but Commodity Prices Weigh

Summary Bullets:

  • Long Peyto Exploration & Development Corp. (PEY.TO) remains a Hedgeye Best Idea.
  • PEY raises YE13 exit rate production to ~70,000 boe/d, up from prior 62,000 – 67,000 boe/d, impressive in light of poor weather conditions in 2Q;
  • First look at new Deep Basin area, Brazeau, is positive, and can potentially be a new leg to the stool with already ~200 identified locations;
  • AECO natural gas, propane, and butane prices are weak and have weighed on the stock recently – but as the low cost producer, Peyto is in the best position to weather the weakness, and take advantage of low services, land, and materials costs.
  • Looking to 2014, we expect another year of record activity, capital spending, and production.  Equity deal in 4Q13 or 1Q14 to finance the growth?

 

Production guidance……Peyto raised the YE13 exit rate for production to ~70,000 boe/d, up from the prior guidance of 62,000 – 67,000 boe/d.  The back half of 2013 will be the busiest in the Company’s history, running 10 rigs and completing three infrastructure projects in October.    

 

First look at Brazeau looks good……Peyto has built up a 55,000 net acre position at Brazeau, which is in the Deep Basin about 100 miles south of its core Sundance area.  The area is prospective for the sweet gas Wilrich, Falher, and Notikewin zones.  Peyto quietly, methodically put this contiguous block of acreage together over the last three years for under $300/acre.  So far, it has drilled 3 Wilrich wells, and the results compare favorably to the higher-pressured Wilrich areas in Sundance.  Peyto will continue to delineate Brazeau in 2H13 and 2014, and is building a 20 MMcf/d facility there to bring the newest wells on stream.  Peyto currently has 2,500 boe/d behind pipe.  The Company believes that there could be an additional 200 locations at Brazeau, and we are still early days.

 

Commodity prices weigh……The recent weakness in NYMEX gas, the blow out in the AECO basis differential, and continued pressure on the lighter ends of the NGL barrel (propane and butane) have weighed on Canadian gas stocks of late (PEY, TOU, POU, TET, etc.).  Peyto noted that many of its small working interest partners have lately gone penalty on Deep Basin wells owing to the weak gas price (Peyto is more than happy to pick up their interests).  We tend to view commodity price weakness, especially when it seems transitory like the blow out in the AECO basis differential, as an opportunity to add to core positions in high quality, low-cost producers like Peyto.

 

An early look at 2014……We believe that 2014 will again be an aggressive activity/capex/growth year for Peyto, as the low natural gas price environment has slowed down its peers, leading to cheaper services and equipment, and ultimately, low F&D costs (all-in PDP F&D ~$2.00/Mcfe).  With its counter-cyclical investment approach, this is when Peyto wants to push the pace.  We assume that Peyto runs 10 rigs in 2014 (flat from the 2H13 run rate), spending ~$650MM, producing (on average) 76,000 boe/d for 26% Y/Y growth, and generating CFPS of $3.60 (23% Y/Y growth).  With dividends and capital spending exceeding cash flow by ~$250MM in 2014, we believe that Peyto may raise $100 – 150MM of equity in 4Q13  or 1Q14.  At the current share price ($29.00), such a raise would be 2 – 3% dilutive to the share count.  With its aim of being the low cost producer, low leverage is important to the Company; in each of the last three years, Peyto raised ~$115 -125MM of equity in the fourth quarter; we think that it’s reasonable to expect a similar raise again this year.  We model that total debt/cash flow at YE14 will be at 1.7x, flat from today.

 

Kevin Kaiser

Senior Analyst


STAYCATION DEAD?

Takeaway: New Priceline survey indicates optimism on lodging and leisure industry.

This note was originally published August 15, 2013 at 10:47 in Gaming

Priceline.com's annual Summer Travel Survey showed that the number of Americans who are planning to take a "staycation" in 2013 - choosing to vacation near home - declined to 17%.  This was much lower than in the past five years when some surveys cited as high as 50% of Americans choosing to take a break close to their homes.  

 

STAYCATION DEAD? - staycation 

 

While Americans are aware of rising airfare, gasoline, and hotel rates, the survey said that some are saving some money on their vacation travels by driving nonstop to their destination and stretching their food budget.

 

We believe this is a positive trend for hotels, Las Vegas, cruiselines and online travel agencies.  Americans continue to be quite resilient on leisure spend.

 


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 80.33%
  • SHORT SIGNALS 78.49%

INITIAL CLAIMS: ANOTHER SOLID PRINT

Takeaway: The number of people filing initial jobless claims continues to drop at an accelerating rate. It's what happens on the margin that matters.

Tapering Probability Grows 


There remains no let-up in the positive data flowing from the initial jobless claims series. The most recent week saw non-seasonally adjusted claims drop by -11.7% year-over-year (YoY), an improvement vs the preceding week's change of -9.9%. The last 10 weeks of data have averaged 9.3% improvement YoY, so this week's change is strong. While the rolling 4-week average non-seasonally adjusted (NSA) data showed a modest acceleration to -7.8% from -7.6%, next week is likely to show sharp improvement as we'll be replacing the one week data point in the last 17 weeks of data with a presumably stronger number next week. 

 

INITIAL CLAIMS: ANOTHER SOLID PRINT  - josh1

 

It's worth noting that as the rate of improvement in the labor market accelerates, so too does the expectation for the Fed to taper asset purchases. Hence the sea of red on the screen today in response to such healthy labor market data. Next week, my colleague Jonathan Casteleyn is planning on putting together an analysis of the likely tapering impact on equities across different durations. Stay tuned.

 

Last week we commented that based on our analysis of the seasonality distortions shifting from headwind to tailwind from September through February, we thought the seasonally-adjusted (SA) number, with no underlying fundamental improvement, will drop from 333k to around 305-310k. Given this week's SA print of 320k, we think the seasonality distortion dynamics may actually push the series sub-300k with no further fundamental improvement, even though there is considerable fundamental improvement occurring based on the NSA data stream. For perspective on what a sub-300k claims series means, historically, since 1975 we've observed sub-300k data in 2Q06, 2H99, 4Q88, 3Q78, or less than 5% of the time. Specifically, 93 of the last 2,015 weeks have seen sub-300,000 SA IC weekly prints. 

 

Joshua Steiner, CFA

203-562-6500

jsteiner@hedgeye.com

 

Jonathan Casteleyn, CFA, CMT

203-562-6500

jcasteleyn@hedgeye.com

 


Buyem: SP500 Levels, Refreshed

Takeaway: Evidently, #RatesRising for the right reasons is the new bear case for stocks... Still, I cover shorts and buyem here.

POSITION: 11 LONGS, 3 SHORTS @Hedgeye

 

People are always asking me why about this and why about that – “if you are so bullish on US #GrowthAccelerating and #RatesRising, why aren’t you longer?” Well, the 1st answer is that I’m as imperfect as the rest of you at this, and the 2nd is I like to buyem when they’re really red.

 

What’s fascinating about today’s selloff (taking us -2.8% from the all-time closing high in SPY – I know, end of the world type stuff) is that it came on precisely the opposite reason 2013 stock market bears have been begging for (slowing growth).

 

In terms of how we score it (NSA rolling jobless claims) this was the best employment #GrowthAccelerating print of the year (see our Macro note on employment today for details). Rates ripped on that and now, evidently, #RatesRising for the right reasons is the new bear case for stocks.

 

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

 

  1. Immediate-term TRADE resistance = 1691, then 1709
  2. Immediate-term TRADE support = 1659
  3. Intermediate-term TREND support = 1631

 

In other words, I cover shorts and buyem here. And I don’t know what else to tell you other than that.

 

Enjoy your summer Thursday,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Buyem: SP500 Levels, Refreshed - SPX


CCL: IS NOW REALLY THE TIME FOR A VALUATION UPGRADE?

Goldman Sachs upgraded shares of Carnival this morning.  Here's our take on some of its points.

 

 

In what amounted to primarily a valuation upgrade, Goldman raised its investment rating from neutral to outperform today. We're generally against valuation upgrades unless there is an associated catalyst.  Unfortunately, we don't see one on the horizon for CCL.  

 

Here are some of the main points from Goldman's upgrade along with our analysis.

 

Valuation

With the potential for upside to be much more dramatic than in many of our other sectors and the EPS still meaningfully depressed, we think CCL deserves a higher multiple. We are assigning a 17.8X P/E multiple (vs. 14.25X previously) to our revised 2014E EPS to reflect this. At 17.8X this is only 10% above its long-term average of 16.1X and a 38% discount from its peak achieved in 1999. Using this multiple provides a new 6-month price target of $42 (vs. $31 previously), suggesting 14% upside from current levels.

 

Stretching the historical valuation by 10% to get to only 14% upside is not very compelling in our view.  On a relative basis, should CCL really trade at a 6x premium (P/E) to RCL and 3x premium to NCLH? In the past 5 years, RCL has traded at a 2-3x discount to CCL.  Since the Concordia incident, that premium remains at 3x on average.  Yes, CCL's EPS may be more depressed but there is also more risk to its numbers.  Moreover, Goldman is projecting 50% EPS growth for the valuation year of 2014 so he is already assuming a big recovery.

 

Underperforming other leisure/travel names

We broadened our analysis of CCL’s performance to other travel sectors beyond the cruise industry, namely the US hotel industry and the Las Vegas Strip; our review yielded the same results, which is that CCL’s performance coming out of the recession has lagged. If we look at what has happened to other travel and hospitality operations, nearly all of them are back to their peaks.

 

The reason CCL has lagged behind many other travel/hospitality names is more firm-specific; so it cannot be a fair comparison.  We would argue that from an industry perspective, gaming was hit harder.  Umm, MGM was a $90 stock in 2007.

 

Arnold Donald

Mr. Donald has already begun to demonstrate a willingness to reexamine and potentially change CCL’s prior practices. For example, he announced that he is meeting with all of the operating executives to assess strengths and weaknesses and whether certain operations should be more centralized. He also stated that he is examining CCL’s capital allocation

strategy. Although his comments have been more general than specific, as it is early in his assessment, in our view he seems genuinely engaged and open to making the changes he deems necessary.

 

While we acknowledge how new management can be a refreshing opportunity for positive change, Mr. Donald's approach as described by Goldman doesn't appear to be anywhere near ground breaking.  It remains to be seen how far removed Micky Arison will be.  We would look favorably on a more aggressive cash return to shareholders, however.


Negative news shouldn’t impact the brands forever

While these negative events will likely continue to be a dark cloud over the brands for a period of time, we don’t think it will last forever. Management has already suggested its own polling indicates an improvement in brand perception. If we look at other brands that have been damaged, ultimately they typically recover. At this point, investor sentiment is low and as long as additional negative events do not occur we think comparisons are easy for CCL to show a return to net yield growth.

 

Who knows if and when the Carnival brand can ever regain its brand stature. Carnival’s depressed pricing to fill up cabins will last in the Caribbean for a while.  The company itself is alluding to a return to normalcy in the 2H of 2014 but that's a guess and what's the rush to buy into that theory?

 

Marketing spend

We point out that CCL has allocated more marketing dollars to the Carnival brand in the back half of 2013 to improve its perception among consumers before the booking focus starts in earnest in Q1 2014. In 2014, the company also plans to spend more marketing dollars beyond just the Carnival brand. The lack of a negative event during the wave season could be a very big positive, especially if the marketing programs make consumers more receptive towards the Carnival brands.

 

It will be difficult to change customers’ perception of the Carnival brand given that it’s been ingrained in their minds as the incident-prone brand. Carnival can always shell out heavy promotional deals to ‘build brand awareness’. The result is margin decline. North America Cruise brand margins have fallen for four straight quarters.

 

Macro

We expect accelerating GDP in both the US and North America, with Europe turning from negative to positive in Q4 2013.

 

We do not disagree with this one but there are a lot of stocks to buy if one believes in an improving macro environment. However, we would like to see if the positive momentum in Europe can be sustained for the rest of the year and into 2014.

 

Free Cash Flow

While we have noted that our contrarian upgrade is based principally on catalysts and a recovery from depressed results, we would also note some other positives. First, at 2.7% CCL’s dividend yield is one of the highest in our coverage universe. With $667mn of free cash flow in 2013E and $1,540mn in 2014E the dividend seems sustainable and could even show some upside. Carnival is slowing down its ship-building program and focusing on boosting same ship returns. The net result is higher free cash flow.

 

If you want to boast about the dividend yield, you have to look at Free Cash Flow after the dividend payment.  By our estimates, FCF post dividend will be negative in FY 2013 and FY 2014.

 

Sell-side Sentiment

This call is contrarian from a sell-side perspective (only 36% of the Street ratings are “Buy” versus 64% for RCL). Over the past four years, CCL has never had such a low percentage of “Buy” ratings vs. “Neutral” or “Sell”. CCL has gone from one of the most recommended sell-side stocks within the hospitality and travel sector to one that is viewed more critically

by both investors and the press. In our view, this negative perception creates upside potential to both earnings and sentiment.

 

We like to play contrarian against the Street as well but only when we have an unrecognized catalyst.  We don't think Goldman has one either.


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