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NOTABLE CHANGES TO OUR BEST IDEAS LIST

Takeaway: Quantitative and fundamental factors no longer support being short CHIX and EEM.

SUMMARY BULLETS:

 

  • While we are removing the iShares MSCI Emerging Markets ETF (EEM) from our Best Ideas list on the short side, this delta does not represent a change to our broader bearish thesis on EM capital and currency markets. Rather, the geographic allocation of the index no longer makes this our preferred vehicle to express the aforementioned bearish thesis going forward.
  • Specifically, the index’s #1 and #2 country weights are South Korea (15.8%) and China (15%), respectively. This setup makes the EEM ETF a rather precarious vehicle to be short from here given that we recently adopted a bullish bias on South Korean equities and have recently shifted to a neutral (formerly bearish) bias on Chinese equities.
  • In light of the latter shift, we no longer consider it appropriate at the current juncture to wager on a negative wholesale revaluation of the Chinese banking sector in light of the structural liquidity issues we have discussed at great length over the past few months – hence the removal of the Global X China Financials ETF (CHIX) from the short side of our Best Ideas list as well.
  • All told, while we remain bearish on emerging markets from a top-down perspective and will predominantly be engaged in hunting for SHORTS in this space, we think it has become decidedly less appropriate to passively short EM capital and currency markets at the asset class, regional and country levels.
  • As such, we’ve created proprietary divergence monitors to help aid us in rotating in an out of the best places to be on the SHORT side of emerging markets. Please email us if you’d like to see these monitors more regularly – we can obviously use these tools to help you appropriately allocate assets on the LONG side as well.
  • Lastly, in section III below, we describe the aforementioned divergence monitors in great detail and specifically highlight which asset classes, regions and countries appear most attractive on both the LONG and SHORT sides of the broadly investable universe of EM capital and currency markets at the current juncture.

 

***If you are not yet familiar with our firm-wide Best Ideas list, please shoot us an email and we’ll be happy to reach out to you to discuss whether or not shifting to a coverage model makes sense for you and/or your team.***

 

 

I. REMOVING CHIX & EEM FROM OUR BEST IDEAS LIST

Today, we are formally removing the CHIX ETF and the EEM ETF from our Best Ideas list; both were selected as shorts to #TimeStamp the performance of our #EmergingOutflows thesis and our bearish bias on the Chinese financial sector, respectively.

 

From its APR 23 addition to our firm-wide Best Ideas list through today’s closing price, the EEM ETF has declined a cumulative -2.4%, inclusive of a maximum drawdown of -12.8% during the ~2M period from APR 23 to JUN 24. With respect to our proprietary quantitative factoring, the EEM ETF closed above its intermediate-term TREND line for the first time in several months today.

 

NOTABLE CHANGES TO OUR BEST IDEAS LIST - EEM

 

From its JUN 7 addition to our firm-wide Best Ideas list through today’s closing price, the CHIX ETF has appreciated a cumulative +7.1%, inclusive of a maximum drawdown of -13% during the ~2W period from JUN 7 to JUN 20. The CHIX ETF is now decisively bullish from an intermediate-term TREND perspective on our quantitative factoring.

 

NOTABLE CHANGES TO OUR BEST IDEAS LIST - CHIX

 

Obviously, we made the classic mistake of getting too greedy on the short side of both securities and it cost us in the performance category; hopefully you were able to better risk manage the aforementioned theses with respect to both security selection and market timing.

 

Pulling back the curtain a little broader, it’s clear that an investor(s) would’ve crushed it had they tactically allocated assets to EM equities right around the late-JUN lows, given that EM equity markets are up an average of +7.1% on a currency-adjusted basis since then. That, of course, would’ve more than likely required said fund to have been out of EM equities heading into those lows.

 

NOTABLE CHANGES TO OUR BEST IDEAS LIST - EM USD Denominated Equity Market Returns  6 24 13 Bottom

 

Needless to say, not a lot of funds were actually out of EM equities heading into those lows. While there was certainly some forced selling amid outflows which happened to commence shortly after the time of our APR 16 #EmergingOutflows presentation, we’re guessing most funds were and still are quite long of EM equities. It’s worth noting that the $7.5B YTD cumulative outflow from EM stock and bond funds represents a minuscule 2.3% of the $322B of cumulative fund inflows into said funds since 2009 (EPFR Global data through the month of AUG).

 

NOTABLE CHANGES TO OUR BEST IDEAS LIST - EM USD Denominated Equity Market Returns

 

II. THE “WHY” DOES NOT ALTER OUR POSITION OF BEING THE BEARS ON EMERGING MARKETS

While we are removing the iShares MSCI Emerging Markets ETF (EEM) from our Best Ideas list on the short side, this delta does not represent a change to our broader bearish thesis on EM capital and currency markets. Rather, the geographic allocation of the index no longer makes this our preferred vehicle to express the aforementioned bearish thesis going forward.

 

Specifically, the index’s #1 and #2 country weights are South Korea (15.8%) and China (15%), respectively. This setup makes the EEM ETF a rather precarious vehicle to be short from here given that we recently adopted a bullish bias on South Korean equities and have recently shifted to a neutral (formerly bearish) bias on Chinese equities.

 

In light of the latter shift, we no longer consider it appropriate at the current juncture to wager on a negative wholesale revaluation of the Chinese banking sector in light of the structural liquidity issues we have discussed at great length over the past few months – hence the removal of the Global X China Financials ETF (CHIX) from the short side of our Best Ideas list as well.

 

III. SO THEN, HOW DO ONE PLAY SAID THESIS FROM HERE?

To help clients get a better grasp of all the moving parts across EM capital and currency markets, we have created two dashboards to systematically monitor performance divergences with the intent on flagging developing, existing, and dissipating trends in the marketplace. One of the dashboards is programmed to highlight divergences in excess of [1] standard deviation relative to their respective sample mean and the other is programmed to highlight divergences based upon the max/min values within the respective sample.

 

Each dashboard is symmetrically grouped into three distinct buckets (i.e. samples): Asset Classes, Regions and Countries. Realizing that we could and should do better than implementing an all-or-nothing strategy in emerging markets, this multi-tiered setup will allow us to spot the development and dissipation of said trends at the level most appropriate for any given investor.

 

Lastly, we thought it would be best to use actual ETFs, rather than the benchmark indices themselves to track said divergences because: A) the universe of liquid ETFs most likely accurately reflects the universe of broadly investable emerging market securities and asset classes; B) the ETFs are all both un-hedged and priced in US dollars, which means they automatically adjust for deltas in the currency markets; and C) ETFs have an underlying fund flow element to them that influences price trends – which is precisely what we’re trying to capture with our #EmergingOutflows thesis.

 

It’s also worth noting that whenever there was a collection of ETFs that represented a particular asset class, region and/or country, we selected the specific ETF in our sample based on a combo score of size (AUM) and liquidity (average daily trading volume).

 

MAX/MIN Divergence Monitor:

 

NOTABLE CHANGES TO OUR BEST IDEAS LIST - EM Divergence Monitor  MAX MIN

 

STDEV Divergence Monitor:

 

NOTABLE CHANGES TO OUR BEST IDEAS LIST - EM Divergence Monitor

 

Below we analyze and interpret the signals being generated by the developing, existing and dissipating trends that are currently being highlighted by our divergence monitors:

 

At the asset class level: We think it pays to rotate out of being short EM equities here in favor of being short EM debt – both dollar-denominated and local currency paper. EM FX is not flashing anything meaningful in terms of developing price signals, but the mere fact that it hasn’t outperformed recently after having been such a long-term laggard (-10.8% on a 3Y duration) suggest a continuation of the slow bleed.

 

As always, it’s worth noting that the risk management setups per our quantitative factoring models support the aforementioned conclusions:

 

NOTABLE CHANGES TO OUR BEST IDEAS LIST - EMB

 

NOTABLE CHANGES TO OUR BEST IDEAS LIST - EMLC

 

NOTABLE CHANGES TO OUR BEST IDEAS LIST - CEW

 

At the regional level: The one meaningful signal we see starting to develop is the outperformance of Latin American equities; this is likely a dead-cat bounce in the context of severe underperformance and absolute declines over longer durations, but to the extent recent outperformance starts to trend, short-covering and [perceived] value-buying could perpetuate higher-lows on an intermediate-term basis.

 

At the country level: Indonesia still looks like death… as does Turkey… Peru’s dead-cat bounce appears fleeting… both China and Russia have recently developed a trend of outperformance… Thailand looks like it wants to resume its secular outperformance… Mexico does not… Brazil could begin to look more interesting on the long side from fund flow front-running perspective if it can turn its WoW outperformance into something more lasting (i.e. MoM).

 

As an aside, we have done and continue to do a ton of work on which countries look good and which countries do not. Email us if you’re interested in discussing any country from an intermediate-term TREND GIP (i.e. GROWTH/INFLATION/POLICY) perspective – or from the perspective of our proprietary, four-pillared EM Crisis Risk Model, which is naturally better suited for managing long-term TAIL risk.

 

NOTABLE CHANGES TO OUR BEST IDEAS LIST - EXPLANATION TABLE

 

NOTABLE CHANGES TO OUR BEST IDEAS LIST - PILLAR I

 

NOTABLE CHANGES TO OUR BEST IDEAS LIST - PILLAR II

 

NOTABLE CHANGES TO OUR BEST IDEAS LIST - PILLAR III

 

NOTABLE CHANGES TO OUR BEST IDEAS LIST - PILLAR IV

 

NOTABLE CHANGES TO OUR BEST IDEAS LIST - AGGREGATED RISK

 

NOTABLE CHANGES TO OUR BEST IDEAS LIST - SUMMARY TABLE

 

All told, while we remain bearish on emerging markets from a top-down perspective and will predominantly be engaged in hunting for shorts in this space, we think it has become decidedly less appropriate to passively short EM capital and currency markets at the asset class, regional and country levels.

 

As such, we’ve created proprietary divergence monitors to help aid us in rotating in an out of the best places to be on the SHORT side of emerging markets. Please email us if you’d like to see these monitors more regularly – we can obviously use these tools to help you appropriately allocate assets on the LONG side as well.

 

Darius Dale

Senior Analyst


YUM: CHINA SALES TO REBOUND SOON

Yum! Brands released its August sales for the China Division last Friday.  The company reported a -10% decline in same-store sales versus a -7.7% estimate.  This estimate included a decline of -12% and increase of +5% at KFC and Pizza Hut, respectively.  KFC sales were likely weakened by the lingering effects of negative publicity regarding the December poultry supply incident and, to a lesser extent, concerns over unsanitary practices.

 

The company expects same-store sales to turn positive in the fourth quarter.  Consensus is modeling for same-store sales of -5.4% in September.  For 4Q, the street estimates same-store sales will be -2.2%, +3.8% and +7.7% for October, November and December, respectively.  We believe same-store sales will rebound sooner than consensus expects, as we are looking for a positive print in October.

 

YUM continues to be our favorite LONG in the big cap QSR landscape.  The company will release September sales on Oct. 8th, when it reports 3Q13 earnings.

 

YUM: CHINA SALES TO REBOUND SOON - YUMMU

 

 

 

 

Howard Penney

Managing Director

 


European Banking Monitor: Portuguese Risk Rises

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .

 

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European Financial CDS - European bank swaps were broadly tighter again last week, declining by an average and median of 5 bps. One of the few outliers was Banco Espirito Santo of Portugal where swaps rose 10 bps W/W and are up 69 bps M/M, currently at 569 bps. This reflects the overall deterioration in the Portuguese sovereign market. 

 

European Banking Monitor: Portuguese Risk Rises - z. banks

 

Sovereign CDS – Portuguese sovereign swaps should be monitored closely as they have risen 95 bps in the past month, to 533 bps. In the last week, Italian, Spanish and Portuguese sovereign swaps widened by 6, 2 and 22 bps, respectively. Meanwhile, French, Irish and Japanese swaps tightened 1, 3 and 3 bps, respectively. The US and Germany were unchanged. All the countries we track now have swaps higher on a M/M basis.

 

European Banking Monitor: Portuguese Risk Rises - z.sov1

 

European Banking Monitor: Portuguese Risk Rises - z. sov2

 

European Banking Monitor: Portuguese Risk Rises - z.sov3

 

Euribor-OIS Spread – The Euribor-OIS spread was unchanged last week at 13 bps. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. 

 

European Banking Monitor: Portuguese Risk Rises - z. euribor


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CASUAL DINING TRENDS REMAIN WEAK

Takeaway: We’ve been bearish on the casual dining sector since early June, and the latest data doesn't change our opinion.

This note was originally published September 09, 2013 at 11:36 in Restaurants

We’ve been bearish on the casual dining sector since early June and, on Friday, Black Box gave us a look at August sales trends which showed little improvement from an ugly July.

 

Black Box reported that August 2013 same-restaurant sales declined -0.2%, while comparable traffic trends declined -1.9%—both metrics accelerated 70 bps and 30 bps on a sequential basis, respectively.  These estimates come against August 2012 comps of +1.0% and -1.1%, respectively.

 

Malcolm Knapp also released his August 4-week estimates this weekend.  Knapp-Track casual dining same-restaurant sales declined -1.7%, while comparable guest counts declined -3.1%.  These results come against full 5-week August 2012 comps of +1.0% and -1.2%, respectively.  Knapp will release his 5-week August estimates later this week.

 

Currently, consensus estimates for the 24 casual dining chains we track in the space are for 3Q13 same-store sales growth of +1.2% (excluding the DRI brands) versus +1.7% in 2Q13.  For the first two months of 3Q13, Black Box has reported same-store sales of -0.6%.

 

With September traditionally being a difficult sales month given the back-to-school trends, it is unlikely we will see a significant uptick in same-store sales.

 

The following companies saw SSS revised down over the past month: BWLD, CBRL, DRI, EATRT.

 

The following companies saw SSS remain unchanged over the past: BJRI, CAKE, DIN, RRGB, KONA, RUTHTXRH.

 

 

CASUAL DINING TRENDS REMAIN WEAK - BBOX chart1

 

CASUAL DINING TRENDS REMAIN WEAK - BBOX chart2

 

CASUAL DINING TRENDS REMAIN WEAK - BBOX chart3

 

 

 


MACAU OCTOBER BLOWOUT?

Takeaway: Still like LVS - the operator growing its market share

That’s the feeling on the ground.

 

 

Macau’s recent run has been outstanding – double digit YoY gross gaming revenue (GGR) increases monthly since January and accelerated growth over the summer.  September is off to a great start and we are looking for high teens growth.  What could be the next catalyst?  How about a record month in October, but not just a record?  There are some market participants who feel that Macau could grow by 30% YoY.

 

Our own forecast currently calls for 18-22% YoY growth.  However, that projection is solely based on carrying the recent monthly GGR levels forward with a seasonal adjustment.  Following some calls to Macau, we’re starting to believe our estimate could be low.

 

Strong junket and high end Mass bookings for the October holiday are fueling the optimism.  Some are suggesting GGR of HK$35.0 billion which would crush the hold-aided record month of March 2013 of HK$30.4 billion.  We’re not ready to go there yet but HK$32.0+ (+20% YoY) seems likely, +25% doable, and 30% possible.

 


CASUAL DINING TRENDS REMAIN WEAK

We’ve been bearish on the casual dining sector since early June and, on Friday, Black Box gave us a look at August sales trends which showed little improvement from an ugly July.

 

Black Box reported that August 2013 same-restaurant sales declined -0.2%, while comparable traffic trends declined -1.9%—both metrics accelerated 70 bps and 30 bps on a sequential basis, respectively.  These estimates come against August 2012 comps of +1.0% and -1.1%, respectively.

 

Malcolm Knapp also released his August 4-week estimates this weekend.  Knapp-Track casual dining same-restaurant sales declined -1.7%, while comparable guest counts declined -3.1%.  These results come against full 5-week August 2012 comps of +1.0% and -1.2%, respectively.  Knapp will release his 5-week August estimates later this week.

 

Currently, consensus estimates for the 24 casual dining chains we track in the space are for 3Q13 same-store sales growth of +1.2% (excluding the DRI brands) versus +1.7% in 2Q13.  For the first two months of 3Q13, Black Box has reported same-store sales of -0.6%.

 

With September traditionally being a difficult sales month given the back-to-school trends, it is unlikely we will see a significant uptick in same-store sales.

 

The following companies saw SSS revised down over the past month: BWLD, CBRL, DRI, EATRT.

 

The following companies saw SSS remain unchanged over the past: BJRI, CAKE, DIN, RRGB, KONA, RUTHTXRH.

 

 

CASUAL DINING TRENDS REMAIN WEAK - BBOX chart1

 

CASUAL DINING TRENDS REMAIN WEAK - BBOX chart2

 

CASUAL DINING TRENDS REMAIN WEAK - BBOX chart3

 

 

 

Howard Penney

Managing Director

 


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 80.64%
  • SHORT SIGNALS 78.61%
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