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This note was originally published at 8am on February 25, 2014 for Hedgeye subscribers.

“To defeat the aggressors is not enough to make peace durable.  The main thing is to discard the ideology that generates war.”  

- Ludwig von Mises

Von Mises is considered by many to be one of the fathers of libertarian thought in the United States.  He wrote, lectured and taught broadly on many topics beyond economics, including sociology, philosophy, and engineering.  As his student F.A. Hayek said, he was “one of the best educated and informed men I have ever known.”


Despite von Mises massive amount of writing and incredibly influential friends and students, such as Jacques Rueff the monetary advisor to Charles de Gaulle, Italian President Luigi Einaudi, and novelist Ayn Rand to name a few, there were periods in his career in which von Mises work was largely ignored.  Nonetheless, his ideas remained durable.


Durability - 34


The animal kingdom has some profound examples of durability as well.   Three of the best examples of durability include:

  • Planarian worm – Can regenerate large portions of its body and if cut in half can become two separate functioning worms;
  • Cockroach – Has extreme radiation resistance  (likely to survive a nuclear war), can survive for weeks with its head cut off and can live for months without food; and
  • Rat – Fine swimmers, can chew through steel, can go for a couple of weeks with no food or water and can eat almost anything as a diet.

Luckily, living in the modern world doesn’t require us to go for weeks without food or chew through steel, but as stock market operators the first two months of the year have required durability.  Specifically, January started with an almost 6% dive in the SP500 and February has seen more than a hundred point positive recovery.   Obviously timing the markets is a much chagrined strategy, though an ability to do so would certainly have helped in the first two months of the year.


Back to the Global Macro Grind...


On the topic of durability, any investor that has put money into Brazil over the past four years has had to endure a halving (think Planarian worm) of the Brazilian stock market.  In part, which is highlighted in the chart of the day, this has been driven by the dramatic decline in Petrobras (PBR), the largest single component of the Bovespa.   As the chart of the day shows, from its peak PBR has lost more than 80% of its value.


This coming Thursday at 11am ET, we are going to host a conference call on Brazil with the explicit title, “Brazilian Equities Down -50% From 2011 Peak, Time to Buy?” On the call, we will review the bearish thesis, but take a more opportunistic look at getting long of Brazil.  At ~ 7.0x earnings versus a peer mean of ~12x earnings, PBR may be an interesting way to play a recovery in Brazilian equities.  If you aren’t currently a Macro subscriber, please email sales@hedgeye.com for details on how to access the call.


On the macro news flow front this morning, China is once again dominating.  While most global stock markets are either up or down small, the Shanghai Composite is down just over 2%.  There are three key factors that appear to be weighing on Chinese equities:

  • The Shanghai Property Index closed -2.2% and hit a fresh 8 month low;
  • Many of the major publicly traded developers continued to sell off, even as the major banks all said there was no change to real estate related loan policy and have not halted real estate financing operations; and
  • Finally, there was a report that an Executive Director of the Bank of China was arrested in a corruption probe.

The key benefit to Chinese investors of increasingly liquid stock markets is that they can get out of the way, and remain durable, by selling, which they did in spades in the last 24 hours.


Flipping back to the U.S. for a second, it is interesting to note that the SP500, and equities generally, have recovered nicely in February, the assets and sectors that are performing the best remain those that most embody slowing growth and accelerating inflation.  Specifically, while the SP500 is now down only -0.04% on the year, gold is up +10.9%, healthcare is up +6.9%, and utilities are up 6.5%.  So, yes, slowing growth and accelerating inflation endures!


Interestingly, from a stock perspective, the fact that lower yielding stocks outperformed last year actually benefited a number of short calls we made in the MLP sector.  Disappointing MLP fundamentals only added to the macro tailwind last year, which carried into this year when one of our Best Idea shorts Boardwalk Partners (BWP) got cut in half after reducing their distribution by 80%. 


The next big short on our horizon, and on our Best Ideas list, is Kinder Morgan (KMI).   Barron’s kindly quoted my colleague Kevin Kaiser and wrote this weekend:


“Kinder Morgan's valuation is crazy," says Kevin Kaiser, an energy analyst at Hedgeye, an independent Connecticut research firm and the company's most visible critic. "The distributable cash flow is overstated because the maintenance capital is understated." He thinks Kinder Morgan MLP units could drop below $50 and the GP below $20 -- both roughly 40% lower than the current quotes.”


Tomorrow, Kaiser will be discussing the durability of Kinder Morgan and MLP accounting in a conference call with energy accounting expert Julie Hannink from CFRA (email sales@hedgeye.com for details).   It’s not clear to any of us that MLPs or their distributions are durable enough to be starved of capital expenditures. 


Our immediate-term Macro Risk Ranges are now as follows:


SPX 1816-1853 

UST 10yr Yield 2.68-2.81% 

VIX 13.44-15.66 

USD 79.81-80.51 

Gold 1282-1345 


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Durability - chartofday


Durability - virtual

March 11, 2014

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TODAY’S S&P 500 SET-UP – March 11, 2014

As we look at today's setup for the S&P 500, the range is 27 points or 0.70% downside to 1864 and 0.74% upside to 1891.                                         










THE HEDGEYE DAILY OUTLOOK - 10                                                                                                                                                                  



  • YIELD CURVE: 2.41 from 2.41
  • VIX closed at 14.2 1 day percent change of 0.64%

MACRO DATA POINTS (Bloomberg Estimates):

  • 5:30am: Bank of England’s Carney, others speak in London
  • 7:30am: NFIB Small Business Optim, Feb., est. 94 (pr 94.1)
  • 7:45am: ICSC retail sales
  • 8:55am: Redbook weekly sales
  • 10am: JOLTs Job Openings, Jan. (prior 3.99m)
  • 10am: Wholesale Inventories, Jan., est. 0.4% (prior 0.3%)
  • 4:30pm: API weekly oil inventories


    • President Obama to attend Democratic National Cmte, Democratic Senatorial Campaign Cmte events in New York
    • Vice President Biden meets with Colombian President Juan Manuel Santos before attending inauguration of Chilean President Michelle Bachelet in Santiago
    • 12:25pm: OMB Director Burwell speaks at Economic Club of Washington on Obama’s proposed FY15 budget
    • 11am: John Brennan delivers remarks on 1st yr as CIA director
    • 4pm: Sec. Jeh Johnson before House Homeland Security panel on agency’s 2015 budget proposal
    • U.S. election wrap: Florida primary tomorrow


  • Blackstone said to plan $5.5b Gates Global bid with TPG
  • Lloyds trader said to tip off BP on $500m currency deal
  • Ackman to show internal documents in Herbalife China webcast
  • SoftBank’s Son vows "price war" if T-Mobile deal approved
  • Russia holds firm on Crimea as Ukraine bolsters its defenses
  • Malaysia widens search for missing jet to Malacca Strait
  • Microsoft’s Titanfall game is being released
  • Bank of Japan sticks to easing plan as sales-tax bump looms
  • Sean Combs is said to bid $200m for MSG’s Fuse TV network
  • Jimmy Iovine’s Beats Music is said to raise up to $100m
  • House panel to probe GM recall of vehicles on ignition switches
  • Repo fire-sale proposal said within reach
  • Insurance cos. attempt to escape U.S. bank capital requirements
  • Honda makes Acura stand-alone division to boost luxury lineup
  • Energy Future said to hold last-minute talks to ease bankruptcy
  • Blackstone buys majority stake in Accuvant for $150m: WSJ
  • Wells Fargo reverses ban on staff making P2P loans, FT reports
  • Apple said to seek exclusive iTunes releases: L.A. Times


    • American Eagle Outfitters (AEO) 8am, $0.26 - Preview
    • Arcos Dorados Holdings (ARCO) 8am, $0.16
    • Dick’s Sporting Goods (DKS) 7:30am, $1.11 - Preview
    • John Wiley & Sons (JW/A) 8am, $0.85
    • Springleaf Holdings (LEAF) 7:30am, $0.45
    • Synta Pharmaceuticals (SNTA) 6:45am, ($0.30)
    • Transcontinental (TCL/A CN) 10:30am, $0.34


    • Caesars Entertainment (CZR) 4pm, ($1.52)
    • Diamond Foods (DMND) 4:01pm, $0.08
    • Furiex Pharmaceuticals (FURX) 4:05pm, ($1.06)
    • Inter Parfums (IPAR) 4:05pm, ($0.17)
    • NCI Building Systems (NCS) 4:01pm, ($0.01)
    • VeriFone Systems (PAY) 4:01pm, $0.27


  • Iron Ore Bear Market Deepens Amid China Credit, Surplus Concerns
  • WTI Trades Near 3-Week Low as Supplies Seen Rising; Brent Stable
  • Nickel Pioneer Shut Out as China Cuts Smokestacks: Commodities
  • Copper Rebounds as Barclays Says Worst Selling May Have Passed
  • Corn Extends Slump to One-Week Low as USDA Signals Ample Supply
  • Gold Climbs Toward Four-Month High as Ukraine Spurs Haven Demand
  • Indonesian Exchange Sets Daily Suggested Opening Bid for Tin
  • Corn Extending Rally With Wheat for CBH on Ukraine Supply Risk
  • Rebar Rises After Biggest Three-Day Decline Since October 2011
  • Japan’s Giant Tsunami Wall Fails to Stop Atomic Power Fears
  • Palm Oil Drops as Prices at 18-Month High Seen Cutting Demand
  • Ukraine Crisis Endangers Exxon’s Black Sea Gas Drilling: Energy
  • Record Bullish Oil Bets May Deepen Any Slump: Chart of the Day
  • Tin Shipment Seized by Indonesian Navy En Route to Singapore

























The Hedgeye Macro Team














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The World in 2050? Thought Leader Discussion with Professor Laurence C. Smith

The World in 2050?  Thought Leader Discussion with Professor Laurence C. Smith - 2050 details


"Prediction is very difficult.  Especially about the future"

-Niels Bohr



You are invited to join Hedgeye's Macro Team and Director of Research Daryl Jones for a special thought leadership and investing discussion with Laurence C. Smith, Professor and Chair of Geography and Professor of Earth & Space Sciences at UCLA and author of THE WORLD IN 2050.


Natural resource demand, population demographics, economic globalization and climate change will be the ascendant, global forces shaping civilization over the next half century.   


We will explore the implications of these emerging dynamics, the challenges for governments and society and prospective investment opportunities born out of a sweeping shift in the distribution of people and power.   


The call will be held on Thursday, March 13th at 1:00pm EST



  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 744597#
  • Materials: CLICK HERE (Slides will be available approximately one hour prior to the start of the call.)

Please email  for more information.




Dr. Laurence C. Smith is Professor and Chair of Geography and Professor of Earth & Space Sciences at UCLA. His research includes topics of Arctic climate change, hydrology, carbon cycles and satellite remote sensing. He has published over 70 peer-reviewed articles including in the journals Science, Nature, and PNAS and won more than $7.7M in research funding from the National Science Foundation and NASA. In 2006 he was named a Guggenheim Fellow by the John S. Guggenheim Foundation and in 2007 his work appeared prominently in the Fourth Assessment Report of the United Nations' Intergovernmental Panel on Climate Change (IPCC). He is currently serving on steering committees for the National Research Council, NASA, and the World Economic Forum. He receives frequent requests to deliver keynotes at public and private speaking events, and in 2012 and 2014 was an invited speaker to the World Economic Forum in Davos. 

His general-audience book THE WORLD IN 2050: Four Forces Shaping Civilization's Northern Future (Plume: New York, 2011; U.K. edition titled THE NEW NORTH, Profile: London, 2011 with translations in 14 languages) synthesizing cross-cutting trends in natural resource demand, population demographics, economic globalization, and climate change with particular emphasis on northern countries was winner of the Walter P. Kistler Book Award and a NATURE Editor's Pick of 2012. His work has received coverage in The Wall Street Journal, The Economist, The Los Angeles Times, The Washington Post, The Globe and Mail, The Financial Times, Discover Magazine, NPR, CBC Radio, BBC and others.




Takeaway: Negative headlines aside, China’s GIP fundamentals remain supportive of a long “New China”/short “Old China” investment strategy.



  1. Below, we offer our abbreviated thoughts on the three most thoughtful questions on China that we have received in recent days. The analysis below is for those of you who like to get into the weeds on the numbers; for those of you who prefer the 30,000-foot view, just stick w/ the long “New China”/short “Old China” investment strategy call we’ve been making since early DEC.
  2. Inclusive of today’s mini crash in the Chinese equity market (-2.9%), our strategy has performed extremely well and our analysis suggest that is likely to continue to be the case going forward.
  3. Q: Is the $14.7M default by Shanghai Chaori Solar Energy Science & Technology Co. the first of many corporate defaults in China? A: Probably. (refer to Q&A section #1 below for more details)
  4. Q: Is recent CNY weakness a sign of material capital outflows that may escalate and push the Chinese financial sector over the cliff? A: No. (refer to Q&A section #2 below for more details)
  5. Q: The PBoC continues to drain liquidity from the banking sector in the face of sharply decelerating growth data. In light of this, do you still think the PBoC is setting up to ease monetary policy over the intermediate term? A: Yes. (refer to Q&A section #3 below for more details)


From Monday through Wednesday of last week Keith, Ryan Fodor and I did about 15-20 meetings with existing and prospective customers up-and-down the West Coast; after that I was out of the office Thursday and Friday. As our China analyst, I couldn’t have picked a better period to be offline given the slew of seemingly impactful headlines that emanated from the mainland last week.


As counterintuitive as that may seem, I actually enjoy being away from my desk during such periods of macroeconomic entropy, as headlines almost always appear substantially more impactful than they actually wind up being on a forward-looking basis. As such, grinding through the numbers all at once tends to lead to a better understanding of the evolving mosaic – at least for me.


Below, we offer our abbreviated thoughts on the three most thoughtful questions on China that we have received in recent days. The analysis below is for those of you who like to get into the weeds on the numbers; for those of you who prefer the 30,000-foot view, just stick w/ the strategy call we’ve been making since early DEC. Inclusive of today’s mini crash in the Chinese equity market (-2.9%), our strategy has performed extremely well and our analysis suggest that is likely to continue to be the case going forward.






Q: Is the $14.7M default by Shanghai Chaori Solar Energy Science & Technology Co. the first of many corporate defaults in China?

A: Probably. The Chinese economy is very long of over-levered companies in over-supplied industries that Chinese officials continue to target for capacity reduction and general consolidation. As such, we would anticipate an acceleration of corporate defaults over the intermediate-term TREND and long-term TAIL durations. Per Bloomberg News:


  • Publicly traded non-financial companies with debt-to-equity ratios exceeding 200 percent have jumped 57 percent to 256 from 163 in 2007, according to data compiled by Bloomberg on 4,111 corporates.
  • Some 63 companies have a debt-to-equity ratio exceeding 400 percent, compared to the average of 73 percent.
  • In latest filings, 351 have negative ratios of earnings before interest, taxes, depreciation and amortization to interest expenses, while 409 have coverage of less than 1.
  • Total debt of publicly traded non-financial companies in China and Hong Kong has surged to $1.98 trillion from $607 billion at the end of 2007.
  • Data from JPMorgan showed overall corporate debt jumped to 124% of China's GDP in 2012 from 92% in 2008, which exceeds the 81% for the US and far higher than the 40-70% of other emerging economies.


While these metrics are, in fact, worrisome – especially for smaller corporations that do not have the benefit of morally hazardous bailouts – we must not overlook the fact that China’s equity market cap (and, by extension its corporate debt balances) is dominated by SOEs. For all intents and purposes, these corporations have little-to-no default risk as long as the Chinese sovereign remains solvent (which we think it does).


For argument’s sake, adding the aforementioned JPMorgan figures with IMF data on outstanding sovereign debt balances yields a ratio of 147% for China versus 187% for the US. That would suggest that the Chinese government can bail out every single domestic enterprise and still not be as indebted as the US government would be in a similar scenario. But of course, the US is a “bastion of capitalism” and we have “free markets” and “entrepreneurialism”, so investors should just sell China to buy US equities irrespective of the data… right.


As an aside, we’d be a lot less sanguine about the impact of corporate defaults accelerating over the intermediate term if credit spreads (AA-/AAA) weren’t making lower-highs versus their cycle peak of 225bps on FEB 10. Clearly this risk has been priced in – perhaps overly so…




Q: Is recent CNY weakness a sign of material capital outflows that may escalate and push the Chinese financial sector over the cliff?

A: No. We’ve said it once and we’ll say it again: the Chinese yuan is declining in value because the PBoC wants to deter speculative capital inflows at the current juncture; the reference rate has been marked down -62bps since its JAN 14 post-peg peak and investors have been reacting to the go-forward expectation of increased volatility by selling CNY (down -1.6% since JAN 14).




Recall that our initial work on EM crises cycles shows that certain EM economies tend to be the beneficiary of capital inflows as investors sort through an increasingly smaller list of places to allocate assets amid broader turmoil. We’ve held a sanguine view on China in recent months because we believe the stated economic reform agenda puts China into a great position to be a core beneficiary of said cross-country rotation – among other factors, which we detailed in our most recent strategy note on China.


A sharp uptick in capital inflows in JAN is primarily why the PBoC subsequently drained liquidly from the banking system in recent weeks via issuing repos. The FEB M0 (slowing dramatically) and M1 (accelerating) money supply growth figures confirms just that (i.e. tighter monetary policy amid rising banking sector liquidity).


IS THIS THE BEGINNING OF THE END FOR CHINA? - China Bank s Position for Forex Purchase






If Chinese policymakers thought for one second that systemic economic and financial market risk was accelerating in a material fashion, they would not be tightening monetary policy at the current juncture. Much like in the period of tighter monetary policy leading up to last JUN’s mini-crisis, the PBoC does not see material risks to growth, but rather material risks to financial instability born out of aggressive credit expansion. They are likely pleased with the sharp deceleration in both total social financing and shadow credit growth for the month of FEB, after JAN’s record nominal growth rates:


  • Total Social Financing: 938.7B CNY in FEB from 2,584.5B in JAN
  • New CNY Loans: 644.5B CNY in FEB from 1,320B in JAN
  • Non-traditional Financing (i.e. “shadow” banking): 17.2B in FEB from 993B in JAN
  • Ratio of Non-traditional Financing to Total Social Financing: 1.8% in FEB from 38.4% in JAN


Q: The PBoC continues to drain liquidity from the banking sector in the face of sharply decelerating growth data. In light of this, do you still think the PBoC is setting up to ease monetary policy over the intermediate term?

A: Yes. Chinese growth data sucks, as evidenced by the balance of last week’s FEB PMI figures and this weekend’s FEB trade data (which, admittedly, was impacted by Lunar New Year seasonality).


  • Official Manufacturing PMI: 50.2 in FEB from 50.5 in JAN; FEB ’14 marked an 8M-low for the index
    • New Orders declined -40bps to an 8M-low of 50.5
    • Export Orders declined -110bps to an 8M-low of 48.2
  • Official Non-Manufacturing PMI: 55 in FEB from 53.4 in JAN
  • HSBC Manufacturing PMI: 48.5 in FEB from 49.5 in JAN; FEB ’14 marked a 7M-low for the index
    • New Orders and Output both fell below 50 (i.e. contracted) for the first time 7M
    • Employment dropped to 47.2, which is its lowest reading since MAR ‘09
  • HSBC Non-Manufacturing PMI: 51 in FEB from 50.7 in JAN
  • Exports: -18.1% YoY in FEB from 10.6% in JAN vs. a Bloomberg consensus estimate of 7.5%
  • Imports: 10.1% YoY in FEB from 10% in JAN vs. a Bloomberg consensus estimate of 7.6%
  • Trade Balance NSA: -$23B in FEB from $31.9B in JAN vs. a Bloomberg consensus estimate of $14.5B; FEB ’14 marked the largest trade deficit since FEB ‘12.
  • Trade Balance YoY: -$37.8B YoY in FEB from +$3.8B YoY in JAN


In the context of the policy objectives detailed in the previous segment, it would seem rather foolish for Chinese officials to ease monetary policy in the next 3-6M. We concur. That being said, however, monetary conditions continue to soften at the margins – having already softened dramatically in the YTD. We take that as a sign that market participants are looking for some form of policy dovishness on interest rates over the intermediate term – be that manifested in RRR cuts, imposing official caps on money market rates and/or extending the timeline for deposit rate liberalization, which would be akin to the dovish forward rate guidance investors are increasingly expecting the Fed to implement.


IS THIS THE BEGINNING OF THE END FOR CHINA? - China Money Market   Rates Monitor


Moreover, the official growth and inflation targets as put forth by officials at last week’s National People’s Congress would suggest that Chinese policymakers do, in fact, have a fair amount of scope for a dovish adjustment to their monetary policy bias – particularly on the inflation front. The 2014 real GDP growth target of +7.5% is unchanged from 2013 and the 2014 CPI target of +3.5% in also unchanged from 2013. It’s worth noting that recent Chinese inflation trends are very dovish indeed.


  • CPI: 2% YoY in FEB from 2.5% in JAN; FEB ’14 marked the slowest pace in 13M
  • Food CPI: 2.7% YoY in FEB from 3.7% in JAN; FEB ’14 marked the slowest pace in 11M
  • Non-Food CPI: 1.6% YoY in FEB from 1.9% in JAN
  • PPI: -2% YoY in FEB from -1.6% in JAN; FEB ‘14 marked the 24th consecutive annual decline




Shifting back to the growth front, perhaps FEB was the trough in Chinese growth data and Chinese shares are setting rally sharply over the coming weeks and months in typical high-beta, short-cycle fashion. We won’t know until we know, but our market-based leading indicators for Chinese economic growth lend credence to that view.




But rather than play China with the expectation (or hope) for positive beta, we recommend just sticking to the hedged or overweight/underweight strategy we outlined at the start of this note.


We hope this piece helps clarify some things for you with regards to the Chinese economy. Please feel free to ping us with any further questions as you see fit.




Darius Dale

Associate: Macro Team

OC: Adding Owens Corning to Investing Ideas

Takeaway: We are adding OC to Investing Ideas.

Hedgeye Industrials Sector Head Jay Van Sciver is adding added Owens Corning to Investing Ideas. 


We will send out a full report shortly detailing our bullish case.


OC: Adding Owens Corning to Investing Ideas - pinkpanther

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