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IF YOU HAVEN’T YET HEARD, CHINA IS TIGHTENING MONETARY POLICY

Takeaway: The PBoC’s recent tightening of monetary policy is in-line with our call for China to take a brief trip to Quad #3 on our GIP model in 4Q13.

SUMMARY BULLETS:

 

  • By refusing to auction new reverse repo contracts, the PBoC is tightening monetary policy, on the margin, by allowing liquidity to drain from the financial system on a net basis (-102B CNY over the past 2W vs. a trailing 13W average of +29.7B CNY and +150B 3W ago).
  • Aside from increased confidence stemming from the fact that the Chinese economy is on sounder footing, there are three primary reasons why the PBoC is implementing this strategy at the current juncture:
    1. Hawkish trends in the property market;
    2. Continued excesses in credit expansion; and
    3. A hawkish outlook for CPI over the intermediate term (unlike the politically compromised Fed, which uses lagging indicators to set monetary policy, the PBoC proactively adjusts monetary policy according to its growth and inflation outlooks).
  • As such, money market rates are increasingly reflecting this shift by the PBoC. To the extent this continues, our call for Chinese growth to slow in 4Q13 is strengthened. Leading indicators for Chinese growth are starting to signal this even in the face of this morning’s solid HSBC Flash Manufacturing PMI print (50.9 for OCT vs. 50.2 for SEP).
  • The insider-dominated Shanghai Composite Index (another one of our preferred leading indicators for Chinese growth along with the 10Y-2Y spread on MoF paper) is now bearish from an immediate-term TRADE perspective. The index is also failing to recapture its late-MAY highs – something we need to see before we think it’s safe to sign off on a buy-and-hold mean reversion strategy for Chinese equities.

 

Please note: If you have yet to review our SEP 25 note titled, “THE DEVELOPING BULL CASE FOR CHINA: PROGRESSING”, we encourage you to do so. The latter half of the report wraps some numbers around why we have yet to adopt an explicitly bullish fundamental bias on China after officially dropping what had been an overtly bearish bias back on SEP 6.

 

JUST CHARTS:

 

IF YOU HAVEN’T YET HEARD, CHINA IS TIGHTENING MONETARY POLICY - China PBoC OMO

 

IF YOU HAVEN’T YET HEARD, CHINA IS TIGHTENING MONETARY POLICY - China Real Estate Climate Index

 

IF YOU HAVEN’T YET HEARD, CHINA IS TIGHTENING MONETARY POLICY - China Total Social Financing

 

IF YOU HAVEN’T YET HEARD, CHINA IS TIGHTENING MONETARY POLICY - CHINA

 

IF YOU HAVEN’T YET HEARD, CHINA IS TIGHTENING MONETARY POLICY - China Money Market   Rates Monitor

 

IF YOU HAVEN’T YET HEARD, CHINA IS TIGHTENING MONETARY POLICY - China Iron Ore  Rebar and Coal YoY

 

IF YOU HAVEN’T YET HEARD, CHINA IS TIGHTENING MONETARY POLICY - China SHCOMP

 

Feel free to ping us with any follow-up questions.

 

Darius Dale

Associate: Macro Team


[podcast] Why McCullough Wants to Puke

Hedgeye CEO Keith McCullough discusses the key market signals that matter on this morning's conference call and why he feels like he is going to puke.

 


HOT 3Q TAKEAWAYS

Please see the tables rating HOT’s Q3 performance and Q4 guidance below.  The release was typical HOT:  great quarter but low ball guidance for Q4.  We won’t review the whole quarter but here are some takeaways:

 

 

OVERALL HOT THESIS

  • We like the branded hotel business long-term – high ROIC, brands are underpenetrated overseas, asset light model, growth funded locally and not on HOT’s balance sheet
  • The transactions market really heated up in Q3 – see our Transactions note from 10/11/13 – both in terms of price per key and number of transactions
  • HOT should be more aggressive in selling assets next year
  • HOT should be returning more cash to shareholders as it moves closer (but not all the way) to the MAR model.  HOT raised its dividend, moved to quarterly dividend, and bought back a lot of stock (see chart below)
  • Company can lever up by at least a turn without jeopardizing credit rating
  • HOT’s European exposure is now a tailwind in our opinion and is likely contributing to HOT’s solid 2014 RevPAR guidance of 5-7% growth.  Our research in Europe indicates higher consumer activity.  The Hedgeye Macro Team is also bullish on the margin on the European consumer.  HOT generates the highest % of EBITDA from Europe of the branded US hotel companies.

3Q TAKEAWAYS

  • Non-room revenue consistently improving each of the last 3 quarters
  • CostPAR only increasing at a rate of 0.7x of RevPOR the last 2 Qs.
  • Fee growth was very good at 13% but 3% of that was termination fees
  • Owned margins were better but VOI margins were weaker than expected 
  • Excluded one-time items were actually gains and usually are - unlike casino companies that only seem to exclude bad stuff
  • Consistent with recent trend, Revpar gains are in direct order of price point – sadly, this is economic reality these days
  • Looks like only a half of a turn of leverage – this is ridiculously low, especially with likely more aggressive asset sales upcoming.  Leverage levels for Lodgers are near all-time lows.
  • Solid 2014 revpar guidance of 5-7% - likely better than expected
  • We expect them to be positive on the margin regarding Europe on the call

 HOT 3Q TAKEAWAYS - hot123

 

HOT 3Q TAKEAWAYS - hot234


real-time alerts

real edge in real-time

This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.

Beware Out There

Client Talking Points

CHINA

The Chinese government removing liquidity is definitely having an impact. Officials clearly don’t want the property market to be this hot. So, despite another #GrowthStabilizing PMI uptick print of 50.9 in October versus 50.2 in September, the Shanghai Composite was down another -0.9% overnight. China is down -2.2% in the last two  days after breaking immediate-term TRADE support of 2189.

GOLD

Newsflash: This is the first time in at least a year that I am actually considering buying Gold. Now that’s not because I have a religion about it or anything like that. It's my signal that’s stabilizing for the first time in a year. We need to see $1316 hold. A breakout over $1345 would be explicitly bullish. Bernanke should be so proud of himself. Slow-growth investors, unite!

UST 10YR

Follow the flow. Rinse and repeat. The 10-year Treasury Yield snaps our Hedgeye TREND support of 2.58% and gold is stabilizing. Nope, there's no irony in that signal. Gold loves competing with absolute returns of 0%. Watch all your long “growth” styles. They have plenty of room to correct.

Asset Allocation

CASH 58% US EQUITIES 8%
INTL EQUITIES 18% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 16%

Top Long Ideas

Company Ticker Sector Duration
DAX

In line with our #EuroBulls Q4 theme, we’re long the German DAX via the etf EWG. With European fundamentals showing improvement off low levels, we expect outperformance from Germany, and in turn for the region’s largest economy to pull the rest of the region higher. ECB policy remains highly accommodative and prepared to aid any of its sovereign members to preserve the Union. Inflation remains moderate and fundamentals are positive: confidence readings and PMIs are up since June, with factory orders trending higher and retail sales inflecting to push the trade balance higher. Finally, the unemployment rate has held steady at the low level of 6.9%, all of which signals to us that Germany’s economic climate is ramping up.

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.

TROW

Financials sector senior analyst Jonathan Casteleyn continues to carry T. Rowe Price as his highest-conviction long call, based on the long-range reallocation out of bonds with investors continuing to move into stocks.  T Rowe is one of the fastest growing equity asset managers and has consistently had the best performing stock funds over the past ten years.

Three for the Road

TWEET OF THE DAY

I'll debate anyone, anywhere, on the history of burning your currency at the stake and its growth implications @KeithMcCullough

QUOTE OF THE DAY

If you want to know how rich you really are, find out what would be left of you tomorrow if you should lose every dollar you own tonight.
-William J. H. Boetcker

STAT OF THE DAY

The U.S. dollar has declined 1.1 percent against a basket of 10 leading global currencies in the last month. (Bloomberg)


October 24, 2013

October 24, 2013 - Slide1

 

BULLISH TRENDS

October 24, 2013 - Slide2

October 24, 2013 - Slide3

October 24, 2013 - Slide4

October 24, 2013 - Slide5

 

BEARISH TRENDS

October 24, 2013 - Slide6

October 24, 2013 - Slide7

October 24, 2013 - Slide8

October 24, 2013 - Slide9

October 24, 2013 - Slide10

October 24, 2013 - Slide11

 

 


Fatal Fear

This note was originally published at 8am on October 10, 2013 for Hedgeye subscribers.

“Failure is not fatal, but failure to change might be.”

-John Wooden

 

As I was walking from one client meeting to another yesterday in Boston, I think I changed my US stock market view at least 3 times. Government sponsored volatility does that to a simple “folk” like me. Isn’t it cool?

 

What isn’t cool is not changing your mind. Especially when the causal factor that is driving the market’s immediate-term volatility is either Congress or the Fed, the best plan is usually accepting that the plan is going to change.

 

Does Big Government Intervention in your markets A) shorten economic cycles and B) amplify market volatility? In our Q413 Global Macro Themes call tomorrow at 11AM EST, we’ll show you the trivial data that answers that question. #OldWall media “Fed” story count vs Volatility (VIX) has a positive correlation that will make Bernanke’s “price stability” fans cry.

 

Back to the Global Macro Grind

 

There’s no crying in risk management. So strap it on and keep moving out there. After watching this government gong show and changing my mind throughout the day, I ultimately opted to hit the buy/cover buttons into yesterday’s closing bell.

 

In other words, this is the first morning since Bernanke decided not to taper (September 18th) that I’ll be telling clients to buy-the-damn-dip. Unlike how I used to play this game (emotionally), this is purely a quantitative signal.

 

Other than salvation sent down to us from our overlords from upon high in D.C. (who will be saving us from themselves again), what’s changing this morning?

  1. US DOLLAR Index just v-bottomed off its long-term TAIL line of @Hedgeye $79.21 support
  2. US Equity Volatility (VIX) can easily snap @Hedgeye TREND support of 18.98
  3. US Equities (SP500) can easily recapture 1663 @Hedgeye TREND support of 1663

Yep, that’s about it. That (and US 10yr Treasury Yield holding @Hedgeye TREND support of 2.58%) is just about all this “ordinary folk” needs to see. Fading the false premise of a US “default” just puts a contrarian cherry on top.

 

But what shall I do if consensus sells the open and the VIX holds 18.98?

  1. I’ll sell

Nope, it’s not any more complicated than that. Remember, I’m just a paper trader newsletter guy who has to keep it simple as Zero Edge sells you some fear and Gold ads (gold nailed Fading Fear again btw - ZeroBid).

 

Context is always critical when making both asset allocation and net positioning decisions (I started the week net short). Don’t forget that buying US stocks here comes on the heels of a very basic pattern:

 

1.       Dollar Down

2.       Rates Down

3.       Stocks Down

 

Oh, and volatility (VIX) up +70% from its August low.

 

Government sponsored volatility crushes confidence. US stocks have been down for 11 of the last 15 days on that and the only “UP” days have come on moves like you are seeing this morning:

  1. Dollar Up (+1% in the last 48hrs)
  2. Rates Up (10yr Yield +10bps from the OCT low to 2.69%)
  3. Stocks Up (TBD from the 1-month closing low of 1655 SPY)

Again, “keep it simple stupid.” That’s what my old hockey coach used to tell me when I’d try the howdy doody on a defenseman (I had really bad moves) instead of just driving to the net and firing the puck.

 

“Again!” –Herb Brooks

 

I’m definitely not saying “this is it!” Only people that don’t timestamp would say something ridiculous like that. All I am saying is that after a 4% correction from the all-time US stock market high (1725 SP500), the reward in buying stocks is in its highest probability position (versus the risk) in 3 weeks. SP500 has +23 handles of immediate-term upside to 1679 versus 1651 support.

 

And that’s all I have to say about that.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.61-2.71%

SPX 1651-1679

DAX 8508-8714

VIX 17.65-20.98

USD 79.79-80.81

Gold 1298-1317

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Fatal Fear - Fed vs. VIX

 

Fatal Fear - Virtual Portfolio


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 78.57%
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