THE MACAU METRO MONITOR, JANUARY 16, 2014
GOVT KNOWS OF NO CHANGES TO INDIVIDUAL VISA SCHEME Macau Business
According to a spokesperson, the Macau government is unaware of any changes to the individual visa scheme for mainlanders visiting Macau. The spokesperson said so after the Hong Kong government announced a freeze on expansion of the scheme. The scheme gives citizens of 49 mainland cities visas to travel to Macau or Hong Kong as individuals rather than as members of tour groups, who travel on collective visas. Hong Kong chief executive Leung Chun-ying said the central government had agreed on a temporary freeze on the number of cities covered by the scheme.
TODAY’S S&P 500 SET-UP – January 16, 2014
As we look at today's setup for the S&P 500, the range is 17 points or 0.72% downside to 1835 and 0.20% upside to 1852.
CREDIT/ECONOMIC MARKET LOOK:
MACRO DATA POINTS (Bloomberg Estimates):
WHAT TO WATCH:
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
The Hedgeye Macro Team
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This note was originally published at 8am on January 02, 2014 for Hedgeye subscribers.
“If any man seeks for greatness, let him forget greatness, and ask for the truth – and he will find both.”
There’s a blizzard rolling in on the East Coast this morning and they’ll be legally selling pot in Colorado today. Welcome to 2014.
Last year I had a well known pundit tell me I wasn’t being “truthful” about US #GrowthAccelerating. The truth is US growth accelerated from +0.14% in Q412 to +4.12% by Q313. So I thought I’d start with the weather this morning. It’s tougher to obfuscate.
One thought I’ll share with our team in this morning’s New Year’s meeting will be to Breathe and Be Yourself. That’s a subtitle to a solid chapter in Unusually Excellent titled “Being Authentic” where John Hamm reminds us that “authenticity is the first step of leadership… because it is the basis for the kinds of trusting relationships with followers…” (pg 27). Ask yourself for the truth, every day.
Back to the Global Macro Grind…
While we may not always be positioned for it, in this game last price is truth. We can argue with it, twist it, call it names – but that won’t change what it is. It’s the score.
Check out some of this morning’s Day 1 of 2014 scores:
#Fun. We call this a big macro day of #Divergence in Global Equities.
In commodity land, there are some interesting price % moves as well:
In other words, 3 of the commodities that experienced the biggest crashes in their 2013 prices are up more than mostly every commodity and stock market in the world today. We call this a nice bounce (to lower-highs).
Then alongside the #PotShops thing in Denver, you have some other social truths to consider in Japan this morning:
But don’t worry, after opting for the Burning of The People’s Purchasing Power (their hard earned currency was -17% in 2013), the Japanese stock market was +59.3%. So some people crushed it in Japan; some people got crushed.
What do all these truths mean? And are they in fact truths? What if the birth/death calculation in Japan is as suspect as it is here in the US? However suspect the data, our working assumption here @Hedgeye is it’s apples to apples, suspect vs suspect.
Accepting the last market price as truth is a lot easier than taking conflicted and compromised government data at face value. The aforementioned 8 price moves in global equities and commodities, combined with what was already starting to move COUNTER-TREND in December, leads my macro craw to the same potential Global Macro Theme: Inflation Expectations Rising.
Stay tuned for our Q1 2014 Global Macro Themes call in the coming weeks where we’ll try our best to contextualize a developing truth (last price vs. market history) and what it could mean for your asset allocation and positioning.
Our immediate-term Global Macro Risk Ranges are now as follows (bullish or bearish TREND duration in brackets):
UST 10yr yield 2.97-3.07% (bullish)
SPX 1830-1858 (bullish)
Gold 1180-1223 (bearish)
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
Takeaway: Our LONG “New China” vs. SHORT “Old China” theme is working and should continue to deliver alpha over the intermediate term.
Today, China released its DEC credit data. Headline total social financing figures were solid sequentially, but all was far from well underneath the hood:
The demonstrable ramp in non-traditional (a.k.a. “shadow”) financing speaks volumes to our long-held view that perpetually rising NPLs have clogged traditional credit channels in China – forcing both corporations and lenders to find creative (and often convoluted) ways to maintain financial lubrication throughout the economy.
While this creativity has offset some of the downward pressure on Chinese economic growth over the past 2-3Y, it has dramatically increased system-wide financial risks and has effectively tightened monetary conditions by giving less creditworthy borrowers and institutions a seat at the table (side note: SOE and government borrowers are the only entities in China with access to cheap capital via bank loans; everyone else must scramble to find capital from whatever source at whatever cost they can find).
As a result, we’ve seen a demonstrable rip in borrowing costs all throughout the Chinese economy that has weighed on economic growth amid what we believe to be rising quantities of traditional financing that are coming due without the necessary cash flows to retire the debt – essentially financing debt rollovers at the expense of net new credit growth (see: “Key Problem Loan Areas” chart below). Consider the following data points:
Perhaps most importantly, it is our view that the aforementioned phenomenon will remain a structural headwind to Chinese GDP growth. The good news is that, for whatever reason – be it policy guidance or the pervasive extrapolation of recent trends – consensus is now squarely in our camp with respect to structurally depressed expectations for Chinese GDP growth.
As such, we continue to believe that investors should not be looking to passively allocate assets to China as a play on elevated rates of economic growth – especially if expectations for the second derivative of GDP are set to remain in negative territory on a structural basis. Rather, we continue to call for investors to #GetActive with their China exposure.
One of the ways we think investors should be actively managing their China exposure is by being LONG “New China” plays and SHORT “Old China” plays. For equity investors, this equates to being exposed to Chinese technology and consumer staples names on the LONG side and exposed to Chinese financials and industrials names on the SHORT side. It’s worth noting that on an equal-weighted basis this strategy is up +2,039bps since we introduced it on 12/4/14. This is obviously net of transaction costs and we are fully aware these aren’t investable indices; still, we think the takeaway is clear.
Another way investors can play our LONG “New China” vs. SHORT “Old China” theme is by being LONG foreign companies with material exposure to the growth of the Chinese consumer and service sectors. The following table is a screen of US, German, UK and Japanese equities (i.e. the four developed markets we like on the long side of equities here) above $10B in market cap that attribute > 33% of their sales to China. Obviously not all companies break out their revenues by geographic segment, but this is a good starting place for those that do. QUALCOMM Inc. looks very interesting from a valuation perspective and, to a lesser extent, so does Murata Manufacturing Co. Ltd.
Thus far, the focus of this note has been from a strategic asset allocation perspective. In adopting a more tactical purview, we continue to think Chinese economic growth is slowing and we think it is likely to continue to slow for the next 1-2M.
From there, Chinese growth should stabilize and then accelerate throughout the balance of 1H14. A favorable base effect, easing money market conditions and seasonality are all supportive of an acceleration in Chinese GDP growth in 1H14.
It’s tough to have a strong view beyond that given the continued lack of clarity on the economic reform implementation front – though the latest signs are indeed positive. Specifically, Shanghai FTZ capital account reform is likely to come as soon as 1Q14, per the latest official commentary (click HERE, HERE and HERE for detailed explanations on why that is the most important catalyst for a positive upside surprise with respect to Chinese GDP growth over the intermediate-term TREND and long-term TAIL).
Make no mistake, however, if China can’t “comp” ridiculously easy growth compares with clear signs of #GrowthAccelerating in 1H14, we think Chinese real GDP growth has downside to the mid-to-low 6% range by year’s end. That would represent a material delta vs. current consensus estimates of +7.4% YoY real GDP growth in 4Q14 and would obviously have broad negative implications for a variety of asset classes (particularly emerging market assets and commodities).
The analytical table is now set; best of luck risk managing your China exposure(s) from here. Feel free to ping us with follow up questions.
Have a great evening,
Associate: Macro Team
Takeaway: Correlation matters.
We've been banging the Japanese gong a lot lately. For good reason.
Take a look at the -0.97 long-term TAIL correlation trending between the Yen and the Nikkei.
The Yen had its first down day of consequence versus the US Dollar yesterday. Guess what happened?
Of course. The Nikkei jumped +2.5%.
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