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GROWTH & INFLATION: WHAT NEXT?

Takeaway: We continue to hold a directionally positive outlook for global growth and a dovish outlook for global inflation (TREND duration).

This note was originally published May 20, 2013 at 15:23 in Macro

 GROWTH & INFLATION: WHAT NEXT? - yum

SUMMARY BULLETS:

  • Our proprietary GIP (short for “Growth, Inflation and Policy”) model continues to signal further nirvana for global economy. Specifically, the world is projected to remain in Quad #1 – which is a state denoted by real GDP growth accelerating as CPI decelerates – for the second-straight quarter here in 2Q13E.
  • Incorrectly interpreting YTD commodity price declines – which we have repeatedly identified as a stimulus to the global economy, rather than harbinger of souring economic trends – the bears missed the turn from Quad #3 in 4Q12 to Quad #1 in 1Q13 and we think they are missing the staying power we see at the current juncture as well.
  • A counter-consensus acceleration in global growth is something we think super-sovereign bond markets are starting to focus on. If US Treasuries, German Bunds and JGBs all have one thing in common, it’s that they are allergic to economic growth (review HERE and HERE for more details).
  • Jumping over to our outlook for global inflation, we continue to view the inverse relationship between the USD and the prices of international commodities as a casual factor for the slope of reported inflation readings across the globe (on various lags, due to cross-country variance in CPI basket weightings). That relationship continues to underpin our dovish outlook for global inflation – which is perhaps the most counter-consensus economic call we have [correctly] made all year (review HERE and HERE for more details).
  • We continue to sing the praises of #StrongDollar and the associated leeway incremental commodity deflation is creating for economic growth to surprise to the upside over the intermediate term. Insomuch as #StrongDollar has been a bearish signal for regressive assets like Gold, it has become a bullish signal for pro-growth assets like equities.
  • To that tune, the US Dollar Index holds positive correlations of +0.90 and +0.80 with the S&P 500 and MSCI World Equity Index, respectively, on our immediate-term duration. That contrasts with the -0.86 and -0.61 inverse correlations it holds with Gold and the VIX, respectively, on that same duration. While these statistical relationships are more intense in recent weeks, those directional signals are consistent across the trailing six months of our cross-asset class regression analyses.

 

THE MODEL

A decade-plus of research and remodeling has helped our macro team develop a predictive tracking algorithm that keeps us 1-2 quarters ahead of the Street on any country or region’s growth and inflation trends. The model isn’t designed with the intent of playing “pin-the-tail-on-the-sell-side-donkey” from a forecasting perspective, but rather designed to proactively signal accelerations, decelerations and inflections in the rates of change (i.e. 2nd derivative) for both growth and inflation. Using the US as an example, the model backtests with an r² of 0.82 for growth and an r² of 0.69 for inflation.

 

Our macro forecasting model, which is as differentiated as anything you’ll find on the Street, has been [accurately] modeling “countries like companies” for a past ~5 years. As an aside, this practitioner’s approach to macro investing was most recently made popular by Dan Loeb at this year’s SALT conference.

 

Jumping back into it, our proprietary GIP (short for “Growth, Inflation and Policy”) model continues to signal further nirvana for global economy. Specifically, the world is projected to remain in Quad #1 – which is a state denoted by real GDP growth accelerating as CPI decelerates – for the second-straight quarter here in 2Q13E.

 

 GROWTH & INFLATION: WHAT NEXT? - dale1

 

Incorrectly interpreting YTD commodity price declines – which we have repeatedly identified as a stimulus to the global economy, rather than harbinger of souring economic trends – the bears missed the turn from Quad #3 in 4Q12 to Quad #1 in 1Q13 and we think they are missing the staying power we see at the current juncture as well.

 

 GROWTH & INFLATION: WHAT NEXT? - CRB

 

THE SEARCH FOR CONFIRMING AND DISCONFIRMING EVIDENCE

At Hedgeye, we don’t think it’s enough to just rest on the conclusions of any model(s); rather, it ultimately pays to vet any research assumptions with confirming and/or disconfirming evidence. In this vein, the evidence continues to affirm the conclusions laid out above.

 

Looking to global growth, APR PMI data continues to signal positive sequential growth – albeit at a slightly slower rate. Specifically, the median of our 39-index sample of PMI data from all of the key countries and economic blocks was essentially flat MoM, dropping a mere -10bps to 50.8.


 GROWTH & INFLATION: WHAT NEXT? - PMI Scatter

 

Sequential gains (i.e. positive 1st derivative growth) from larger numbers bodes well for continued acceleration in the YoY real GDP growth figures (i.e. positive 2nd derivate growth), which our model is currently predicting – especially in the context of easier 1Y comps as highlighted in the aforementioned GIP chart and in the chart below. Students of Bayesian statistics understand full well that the base rate is just as important to determining the direction and magnitude of growth figures as the most recent sequential deltas.

 

 GROWTH & INFLATION: WHAT NEXT? - JPM PMI

 

A counter-consensus acceleration in global growth is something we think super-sovereign bond markets are starting to focus on. If US Treasuries, German Bunds and JGBs all have one thing in common, it’s that they are allergic to economic growth (review HERE and HERE for more details).

 

 GROWTH & INFLATION: WHAT NEXT? - 10 2

 

Jumping over to our outlook for global inflation, we continue to view the inverse relationship between the USD and the prices of international commodities as a casual factor for the slope of reported inflation readings across the globe (on various lags, due to cross-country variance in CPI basket weightings). That relationship continues to underpin our dovish outlook for global inflation – which is perhaps the most counter-consensus economic call we have [correctly] made all year (review HERE and HERE for more details).

 

 GROWTH & INFLATION: WHAT NEXT? - DXY YoY vs. CRB YoY

 

 GROWTH & INFLATION: WHAT NEXT? - CRB YoY vs. CPI YoY

 

Our dovish outlook for global inflation continues to be both perpetuated and confirmed by our quantitative risk management signals:

 

 GROWTH & INFLATION: WHAT NEXT? - DXY

 

 GROWTH & INFLATION: WHAT NEXT? - OIL

 

 GROWTH & INFLATION: WHAT NEXT? - GOLD

 

THE INVESTMENT CONCLUSIONS

All told, 2013 has been quite a year for top-calling and anchoring on mini-crises of non-epic proportions, which tells us one thing: there are large pockets of the investment community that continue to stare at the tree(s) in lieu of the forest. This is inclusive of this latest global growth scare of the past 4-6 weeks, as indicated by plummeting economic surprise indices.

 

 GROWTH & INFLATION: WHAT NEXT? - Econ Surprise

 

That being said, however, we continue to sing the praises of #StrongDollar and the associated leeway incremental commodity deflation is creating for economic growth to surprise to the upside over the intermediate term. Insomuch as #StrongDollar has been a bearish signal for regressive assets like Gold, it has become a bullish signal for pro-growth assets like equities.

 

 GROWTH & INFLATION: WHAT NEXT? - Oil 3M

 

To that tune, the US Dollar Index holds positive correlations of +0.90 and +0.80 with the S&P 500 and MSCI World Equity Index, respectively, on our immediate-term duration. That contrasts with the -0.86 and -0.61 inverse correlations it holds with Gold and the VIX, respectively, on that same duration. While these statistical relationships are more intense in recent weeks, those directional signals are consistent across the trailing six months of our cross-asset class regression analyses.

 

Focus on the forest, not the trees.

 

Darius Dale

Senior Analyst


XRAY MEETS #EUROBULLS

Takeaway: XRAY likely to continue working on improving European trends and sentiment cycling higher.

Editor's note: Below is a brief excerpt from a report issued earlier this morning by Hedgeye Healthcare Sector Head Tom Tobin. For more information on how you can subscribe to Hedgeye research click here.

 

XRAY MEETS #EUROBULLS - dent1

Conclusion: Q313 Inline, Staying Long

Q313 came in as we expected for DENTSPLY International Inc. (XRAY), although management threw up a few warning signs for Q413, but nothing that will generate a miss. Despite closing the relative performance gap since our initial position,and a rapidly expanding multiple, we'll stick with the long here.

Thesis:  Revision Cycle

Our original thesis on XRAY shares came from confidence in our outlook for the US Dental Market.  At the time, XRAY shares were under-performing, sellside sentiment was on a multi-year low, short interest was falling, and European trends appeared to be stabilizing. 

 

Our view was that as the European region recovered economically, so to should the internal growth rates for XRAY's EU business, driving a significant part of XRAY's revenue, and subsequently, sentiment higher.  Similar to the US, growth for XRAY overseas business is driven by the changes in employment and GDP related factors.  Unlike most names in HC, sellside ratings and short interest matter to XRAY's price performance.

 

>>> CLICK HERE to watch Hedgeye's #1 Q4 Macro Theme: #EuroBulls <<<


XRAY MEETS #EUROBULLS - tobin1


Toppy? SP500 Levels, Refreshed

Takeaway: If The USD and rates fail here, this market has plenty of downside risks.

POSITION: 8 LONGS, 6 SHORTS @Hedgeye

 

I’m buying Gold and Treasuries for the 1st time in a year (today) as the SP500 signals lower-highs and the VIX signals higher-lows. If The USD and rates fail here, this market has plenty of downside risks.

 

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

 

  1. Immediate-term TRADE resistance = 1771
  2. Immediate-term TRADE support = 1744
  3. Intermediate-term TREND support = 1683

 

In other words, with the all-time closing high (1771) registering as resistance, there’s plenty of mean reversion downside. If the market stops me out of these thoughts, so be it. But sentiment (II Bull/Bear Spread) is tracking at its YTD high now too.

 

KM

 

Keith McCullough

Chief Executive Officer

 

Toppy? SP500 Levels, Refreshed - SPX


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INDIA’S “TURNAROUND STORY” CONTINUES

Takeaway: With its recent rate hike, India continues down the path towards much-needed monetary and fiscal policy reform. That’s a good thing.

This note was originally published October 29, 2013 at 15:26 in Macro

INDIA’S “TURNAROUND STORY” CONTINUES - tiger2

SUMMARY BULLETS:

  • A continued pursuit of demonstrably tighter monetary policy in India would be positive for the country’s structural GIP outlook in three ways:
    1. Inflation decelerating to levels consistent with its regional/global peers (benchmark WPI has averaged +7.6% since the Congress Party took the helm in mid-2009 vs. a GDP-weighted average of +5.1% YoY for “BRIC” economies since then);
    2. Fiscal policy stability amid lower inflation (i.e. the #1 political issue in India) and a reduction in the fiscal deficit/GDP ratio (5.8% in 2Q13) via lower subsidy expenditures (13.7% of total expenditures); and
    3. Lower domestic demand and higher real interest rates contributing to an improved domestic savings/investment ratio would tighten up the bloated current account deficit (the latest current account deficit/GDP ratio came in at 5.3% for 2Q13).
  • Additionally, India is also developing some noteworthy tailwinds with respect to its intermediate-to-long-term fiscal policy outlook that are likely to make the country’s equity and debt capital markets look increasingly attractive on the long side at the current juncture (CLICK HERE for more details).

 

In conjunction with its newfound hawkish bias, the RBI hiked its benchmark policy rates today by +25bps, taking the repo rate and reverse repo rate up to 7.75% and 6.75%, respectively. The bank, led by its new governor Raghuram Rajan, also lowered its marginal standing facility rate -25bps to 8.75% (a continued unwind of former governor Subbarao’s INR crisis measures) and held its cash reserve ratio flat at 4%.

 

INDIA’S “TURNAROUND STORY” CONTINUES - dale1

 

Today’s hike was predicted by 32 of 42 analysts surveyed by Bloomberg, a marked shift from Rajan’s first hike roughly 1M ago when we were the only firm on the Street calling for this demonstrable shift to tighter monetary policy in India. Indeed, the Indian rupee has appreciated +2.2% vs. the USD since we began to call for the currency to strengthen amid this drive to combat inflation back on SEP 20. That is the largest gain across the 21 currency markets we actively cover across Asia and Latin America over that time frame.

 

INDIA’S “TURNAROUND STORY” CONTINUES - 2

 

At the time, we thought investors would penalize India’s equity and debt capital markets for what appeared to be the start of a prolonged series of rate hikes, but with the SENSEX Index up +3.3%, 10Y INR Yields flat and 2Y INR Yields down -44bps since then, it appears investors feel very comfortable looking through this obvious near-term headwind to economic growth with an eye towards an improving structural outlook – a scenario we discussed then, but ultimately failed to sign off on at the time.

 

INDIA’S “TURNAROUND STORY” CONTINUES - 3

 

INDIA’S “TURNAROUND STORY” CONTINUES - 4

 

INDIA’S “TURNAROUND STORY” CONTINUES - 5

 

Going back to the aforementioned rate hike, accompanying commentary from the Dr. Rajan-led RBI board was undeniably hawkish:

 

  • “We can’t live with close to double-digit CPI for an extended period of time.”
  • “It is important to break the spiral of rising price pressures in order to curb the erosion of financial saving and strengthen the foundations of growth.”
  • “Wholesale-price inflation is expected to remain higher than current levels through most of the remaining part of the year, with consumer inflation probably remaining around or above 9 percent.”

 

Indeed, a continued pursuit of demonstrably tighter monetary policy in India would be positive for the country’s structural GIP outlook in three ways:

 

  1. Inflation decelerating to levels consistent with its regional/global peers (CPI has averaged +9.9% YoY since over the past 3Y vs. a GDP-weighted average of +5.3% YoY for “BRIC” economies over that same duration);
  2. Fiscal policy stability amid lower inflation (i.e. the #1 political issue in India) and a reduction in the fiscal deficit/GDP ratio (5.8% in 2Q13) via lower subsidy expenditures (13.7% of total expenditures); and
  3. Lower domestic demand and higher real interest rates contributing to an improved domestic savings/investment ratio would tighten up the bloated current account deficit (the latest current account deficit/GDP ratio came in at 5.3% for 2Q13).

 

It’s worth noting that the +90bps premium to the benchmark repo rate is a signal that participants in India’s on-shore swaps market are pricing in the equivalent of 3-4 more +25bps rate hikes over the NTM.

 

INDIA’S “TURNAROUND STORY” CONTINUES - 6

 

INDIA’S “TURNAROUND STORY” CONTINUES - 7

 

INDIA’S “TURNAROUND STORY” CONTINUES - 8

 

Indeed, this is the three-pronged “turnaround story” we think investors have begun to speculate on recently and, with Global Macro entropy at levels not seen since early 2Q, we continue to think it pays to play the long and short side of EM assets on idiosyncratic country fundamentals in the absence of a clear, co-directional trend in the USD and US interest rates.

 

On that front, India is also developing some noteworthy tailwinds with respect to its intermediate-to-long-term fiscal policy outlook that are likely to make the country’s equity and debt capital markets look increasingly attractive on the long side at the current juncture (CLICK HERE for more details).

 

Of course, a confirmed quantitative breakdown in the DXY through its long-term TAIL line of support in conjunction with a breakdown in the UST 10Y Yield through its intermediate-term TREND line of support would make us broadly bullish on emerging market assets, amongst other asset classes (CLICK HERE for more details).

 

INDIA’S “TURNAROUND STORY” CONTINUES - DXY

 

INDIA’S “TURNAROUND STORY” CONTINUES - UST 10Y

 

Our central planning overlords at the Fed convene today and tomorrow to determine which asset classes we are allowed to speculate in; we await their commands with baited breath. If the most recent fundamental and quantitative signals (CLICK HERE for more details) are correct, investors will continue getting paid to speculate in emerging market assets with respect to the intermediate-term TREND. In the context of India’s real GDP growth basing here in the fourth quarter, that bodes well for INR denominated assets.

 

INDIA’S “TURNAROUND STORY” CONTINUES - INDIA

 

Lastly, the SENSEX Index is within a half-a-percent from its all-time high; we would interpret a close above that price as a quantitative signal that India’s well-documented policy blunders (email us for “the list”) are likely/finally in the rear-view mirror. That would be HUGE for helping India finally tap into its vast growth potential. It’s worth noting that real GDP growth has decelerated to a decade-low of +5% in the most recent fiscal year and even further to +4.4% YoY in 2Q13 (-1.1x standard deviations below the trailing 3Y mean); additionally, today the RBI reduced its FY14 GDP forecast to +5%, which is -50bps below the previous estimate of +5.5%.

 

INDIA’S “TURNAROUND STORY” CONTINUES - 12

 

Please feel free to ping us with any follow-up questions.

 

Darius Dale

Associate: Macro Team


$WMT: Made in USA? Kind of.

Takeaway: Hedgeye Retail Sector Head Brian McGough tosses some cold water on Wal-Mart's "Made In USA" initiative.

Hedgeye Retail Sector Head Brian McGough tosses some cold water on Wal-Mart's "Made In USA" initiative.

 

$WMT: Made in USA? Kind of. - madus

 

From Women's Wear Daily:

  • "Bill Simon, Wal-Mart’s U.S. president and chief executive officer, revealed at an investment summit here Thursday that three of its suppliers have committed to moving production back to the U.S., or expanding existing capacity, as part of the retail giant’s longer-term commitment to buy $50 billion worth of American-made products over the next 10 years."

Takeaway: We are all about boosting U.S. production. But let's put this news into context. $50 billion over 10-years is likely $1 billion in year one, and $10 billion in year ten. But even if we want to be generous, and call it $5 billion per year, it's still only 1% of the half a trillion worth of product Wal-Mart will sell next year. Bottom line is that this is hardly Wal-Mart going all-out. It's a PR campaign more than anything else.

 


THE M3: OCT GGR; CHINA INFLUENCE; WYNN-OKADA

THE MACAU METRO MONITOR, NOVEMBER 1, 2013

 

 

OCTOBER GGR DICJ

Macau gross gaming revenues reached 36.477 BN MOP (35.415 BN HKD, 4.568 BN US$), up 31.7% YoY. 

 

INVESTING IN MACAU CASINOS FINALLY STARTS TO LOOK LIKE A GAMBLE WSJ

The risks of changing China visa policies and shifting tourism trends should also be taken into account by investors. The biggest unpredictable factor for gambling stocks in Macau is still the Chinese government, and investors seem to be underestimating the risk. 

 

Signs that Beijing could add restrictions are detectable. The government seems frustrated that Macau hasn't moved beyond gambling to offer leisure and entertainment activities that might appeal to families world-wide, not just hard-core gamblers from China.

 

One reason Macau casino stocks have thrived this year is what hasn't happened. Even amid an austerity campaign in China, Beijing has made no move to cut off the flow of Chinese gamblers to the city.  But Macau stocks deserve a discount because they effectively operate at the whim of Beijing, which can block the flow of customers at any time.

 

The peak-time minimum bet at mass-market tables has more than tripled in the past two years, to $125 from $40, much higher than at peers such as Las Vegas ($20), the Philippines ($7) and Singapore ($50).

 

WYNN-OKADA LAWSUIT HALTED SIX MONTHS FOR CRIMINAL PROBE Bloomberg 

WYNN's lawsuit against its former director Kazuo Okada was halted for six more months so the U.S. can continue to investigate possible bribery of Philippine officials by the Japanese billionaire.  Nevada state court Judge Judge Elizabeth Gonzalez in Las Vegas granted the Justice Department’s request for a second six-month stay of the civil case so that the government can pursue the criminal probe unhindered.


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