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Fresh Chinese PMI data shows that manufacturing activity continues to expand...

Research Edge Portfolio Position: Long CAF

Both the FLP and CLSA Purchasing Manager Indices for May registered in positive territory, with the official measure at 53.10 for the third consecutive positive reading.  The market and media reaction has been enthusiastic since these latest readings continue to confirm that the stimulus measures are working, but the slight sequential decline in the pace of production recovery serves as a reminder to our process: the stimulus itself was a response to crises and, and despite the improving picture, there are still plenty of bumps on the road ahead as the process of jump starting domestic demand continues.  

Official announcements detailing progress on infrastructure projects last week indicate that the rural improvement measures in the central regions are now very well underway, while in recent weeks we have noted the continued signals from domestic automakers and foreign electronic goods exporters showing rising consumer demand. Data released by South Korea's  International Trade Association in recent days also confirms the bullish argument, with exports to China in April increased by 8% for the month improved sequentially on a Y/Y basis to -18.99%. Good numbers, albeit with a slightly moderating pace.  

All data in aggregate continues to suggest that Beijing's stimulus measures are succeeding as planned. There are lots of factors to worry about still, with bad loans fostered by gushing credit and speculative price-inflation pockets in commodity markets being two major ones that we are focused on, but for now the positive momentum remains in place.  

We are long Chinese equities via CAF, and continue to believe that the data arriving from both China and countries that supply it with commodities and production tools confirms strengthening recovery there. We are tactical investors however, and developments on the margin inform our process as we select points of entry and exit.

We will continue change as data and price action dictate; as the pace of the recovery inevitably moderates and the full cost of the stimulus comes to bear we will manage risk accordingly.  That is our discipline -there will never be anything that we own in our virtual portfolio that we would not sell without a moment of hesitation the moment that the facts stop supporting our thesis.      

Andrew Barber


The Ox Continues To Push Forward - cpmi