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DOES THE EM RELIEF RALLY HAVE LEGS?

Takeaway: We are inclined to believe the current relief rally across EM capital and currency markets has legs w/ respect to the intermediate term.

CONCLUSIONS:

 

  1. Key resistance levels are being tested across the broad spectrum of EM capital and currency markets.
  2. Importantly, this comes as the top-down, global macro fundamentals are getting far less bearish for emerging market assets, at the margins.
  3. To the extent we receive quantitative confirmation of our fundamental views, we think the current relief rally across EM capital and currency markets has legs w/ respect to the intermediate term.

 

On FEB 27 we held a conference call on Brazil (CLICK HERE to access the replay podcast and slide deck). The key purpose of the call was three-fold:

 

  1. To alert investors of the potential for a relief rally across EM capital and currency markets in which the most embattled of countries were likely to see their markets outperform;
  2. To encourage investors to get long the Brazilian real; and
  3. To lay the groundwork for getting behind Brazilian equities on the long side – Petrobras (PBR) in particular – in preparation for any confirmed quantitative breakout.

 

To those points:

 

  1. EM assets are up an average of +1% at the asset class level since that call, with 2013 crisis countries India (EPI), Turkey (TUR) and Indonesia (EIDO) leading the way to the upside at +8.6%, +7.8% and +5%, respectively;
  2. The Brazilian real has appreciated +54bps vs. the USD in the spot market, contributing to a total return to +1.32% – good for seventh best among the 23 EM currencies tracked by Bloomberg;
  3. PBR bottomed on MAR 17 and Brazil (EWZ) put in a higher-low on MAR 14; since FEB 27, they have appreciated +4.2% and +2.1%, respectively.

 

DOES THE EM RELIEF RALLY HAVE LEGS? - EM Divergence Monitor

 

The performance of those markets surely isn’t anything to write home about as it relates to taking any sort of victory lap. That being said, the aforementioned deltas do indeed increase our conviction in our call for an intermediate-term relief rally across EM capital and currency markets.

 

We’ve written extensively in recent months on why we think domestic economic growth slowed here in 1Q14 and why we think the slope of reported growth data will remain generally negative on a 3-6M forward basis, so we’ll spare you the details in the pursuit of brevity. Just know that the following quantitative signals remain in support of our research view:

 

The US dollar, long-term US interest rates both remain bearish from an intermediate-term TREND perspective insomuch as commodities (CRB Index) remain bullish from TREND perspective. Taken in conjunction, we see that macro market participants are effectively front-running a proactively predictable reversal of now-hawkish monetary policy out of the FOMC, at the margins. In our opinion, it would represent a strong lack of fiduciary responsibility for any investor to take the Fed’s forecasts for growth and policy guidance at face value.

 

DOES THE EM RELIEF RALLY HAVE LEGS? - DXY

 

DOES THE EM RELIEF RALLY HAVE LEGS? - UST 10Y

 

DOES THE EM RELIEF RALLY HAVE LEGS? - CRB Index

 

DOES THE EM RELIEF RALLY HAVE LEGS? - 5

 

The YTD performance spread between the slow-growth Utilities sector (XLU) and the pro-growth Consumer Discretionary sector (XLY) is extremely material at 1105bps wide and is signaling a trip to Quad #3 (i.e. Growth Slows as Inflation Accelerates) on our GIP model.

 

DOES THE EM RELIEF RALLY HAVE LEGS? - 6

 

DOES THE EM RELIEF RALLY HAVE LEGS? - UNITED STATES

 

Domestic economic growth as a style factor at the Macro ETF level is broadly breaking down quantitatively on our Tactical Asset Class Rotation Model (TACRM)™ (to be fully introduced in the coming weeks), while, at the same time, emerging market assets are broadly breaking out. The chart below captures inflection points at critical thresholds of momentum after at least three months above/below the stated threshold (refer to the conclusion of this note for more details). 

 

DOES THE EM RELIEF RALLY HAVE LEGS? - 8

 

We don’t want to get above our ski tips for places like Brazil and LatAm, because our backtest data shows that the difference in breaking out above the critical threshold of 0x and +1x is literally the difference between a short-selling opportunity and a buying opportunity. That being said, we do like the composition of those ETFs that have already made it to this quantitative “promised land” (i.e. breaking out above +1x), so we’re inclined to wait in sanguine fashion as it relates to our call.

 

It’s worth noting that our proprietary risk management levels are essentially signaling the same thing across each of the four primary EM asset classes. The EEM, EMB, EMLC and CEW ETFs have all broken out above their respective TREND lines very recently. We wouldn’t chase ‘em up here, but, for the first time in several quarters, we’d be buyers of EM assets to the extent these broader indices start to make higher-lows above their respective TREND lines – thus confirming any quantitative breakout(s).

 

DOES THE EM RELIEF RALLY HAVE LEGS? - EEM

 

DOES THE EM RELIEF RALLY HAVE LEGS? - EMB

 

DOES THE EM RELIEF RALLY HAVE LEGS? - EMLC

 

DOES THE EM RELIEF RALLY HAVE LEGS? - CEW

 

Getting into idiosyncratic fundamentals, here are some brief updates on the country-specific strategy calls we’ve been making in recent months:

 

Long “New China”/Short “Old China (CLICK HERE to review our thesis): Amid headlines of a “currency crisis”, “systemic” defaults and an overhyped run on a miniscule Chinese bank, Chinese leaders continue to hold the line on GDP growth, effectively marking the mid-to-low 7% range as a floor for economic growth. With the Chinese sovereign and PBoC both well-equipped to combat any continued slowing from, we’d be buyers of “New China” outright. Shorting “Old China” exposure against that helps us sleep better at night… An equal weighted strategy of long the MSCI China Technology Index + the MSCI China Consumer Discretionary Index vs. Short the MSCI China Financial Index + the MSCI China Industrials Index has generated a cumulative +3360bps of performance since when we introduced the strategy back on DEC 4, we’d definitely stick with the game plan until the Chinese government tells us not to.

 

DOES THE EM RELIEF RALLY HAVE LEGS? - CHINA

 

Long the Brazilian real (CLICK HERE to review our thesis): It would appear that the well-telegraphed S&P downgrade of Brazilian sovereign debt to BBB- effectively marked the bottom in Brazilian equities. Classic lagging indicator. Recent polling and consumer confidence data insulate our call that both the campaign cycle and eventual election results will force fiscal policy to remain at least rhetorically tight ahead of the elections and outright tighter in the subsequent quarters. The market doesn’t think Tombini will have enough headroom on growth to keep hiking here, but our World Cup impact analysis suggests he will. That’s positive for the BRL and positive for the country’s woeful BoP dynamics – as is the World Cup… Introduced as a Best Ideas 1M ago, we’d definitely stick with the game plan here, as this idea remains far from consensus.

 

DOES THE EM RELIEF RALLY HAVE LEGS? - BRAZIL

 

Long India (CLICK HERE to review our thesis): No major updates here. The RBI, chaired by Dr. Rajan, continues to maintain a hawkish policy bias and the opposition, led by prime ministerial candidate Naredra Modi, continues to gain momentum in the eyes of investors ahead of the upcoming parliamentary elections – particularly when juxtaposed with recent empty promises of 8% GDP growth out of the “ruling” Congress party. India’s “turnaround story” continues… India (EPI) is up +9.14% since we introduced the call back on OCT 29; that’s good for the third-best return across the investable EM ETF universe (29 in total) and one of only four that have posted positive performance since then. Stick with the game plan here, as most of our positive political and GIP catalysts have yet to materialize.

 

DOES THE EM RELIEF RALLY HAVE LEGS? - INDIA

 

Long Indonesia (CLICK HERE to review our thesis): The [positive] “Jokowi Effect” was even larger than we had initially anticipated, as evidenced by the dramatic melt-up in both Indonesian equities and the IDR in  recent weeks into and through the MAR 14 announcement of ever-popular Jakarta governor Joko Widodo’s candidacy for JUL’s presidential ballot, which is only a few months after next month’s parliamentary election where Jokowi’s PDI-P party should take the largest share of seats. Amid the campaigning, Bank Indonesia has pledged to maintain its hawkish policy bias and there are talks of a meaningful economic reform package to be introduced shortly after the elections. Check. Check. Check… Indonesia (EIDO) is up +16.1% since we introduced the call back on JAN 30; that’s good for the second best performance among EM equity ETFs since then. Like India, many of the positive political and GIP catalysts have yet to materialize, so we’d stick with the game plan here as well.

 

DOES THE EM RELIEF RALLY HAVE LEGS? - INDONESIA

 

Short Philippines (CLICK HERE to review our thesis): Short-term rates (i.e. 2Y sovereign yields) in the Philippines are ripping (+51bps WoW) as central bank governor Amando Tetangco confirmed that his policy board favors “early, measured adjustments” in monetary policy, effectively puling forward an expectations for policy rate normalization. It’s worth noting that this commentary comes roughly six weeks after he presented a hawkish outlook for local inflation back in mid-JAN… We’ve gotten this one wrong, with Philippines (EPHE) appreciating +7.9% since our JAN 30 note. Specifically, we think the market is paying up for what is clearly one of the better secular growth and investment stories remaining in the EM universe. We’re not inclined to fight the tide here, so we’d be inclined to “book” the loss here.

 

DOES THE EM RELIEF RALLY HAVE LEGS? - PHILIPPINES

 

Short the Chilean peso (CLICK HERE to review our thesis): The central bank, led by President Rodrigo Vergara, has maintained a dovish bias in recent months, but, as of last Friday, the degree of dovishness is now under review. With headline economic growth basically getting cut in half in the most recently reported quarter, we’d take the other side of the central bank’s +4.3% 2014 forecast, which means they’ll likely be easing more dramatically and for longer than even they expect… Another solid “win” for us in the currency market to-date, with the CLP declining -1.8% vs. the USD in the spot market since our JAN 21 note. That’s good for the third-worst spot return across the 21 currencies I actively monitor within my coverage universe. That being said, near uniform testing of the aforementioned TREND lines mitigates any patience we once had on the short side of EM capital and currency markets. As such, we’re inclined to “book” the gain here. We can revist the trade later if beta once again turns negative, as the GIP fundamentals do indeed support a lower value for the Chilean peso.

 

DOES THE EM RELIEF RALLY HAVE LEGS? - CHILE

 

As always, please feel free to ping us with any questions and/or critical observations you believe we may have missed.

 

DD

 

Darius Dale

Associate: Macro Team

 

 

TACRM Volatility-Adjusted Multi-Duration Momentum Indicator (VAMDMI):

TACRM™ is specifically designed to provide tactical security selection, general global macro market color and suggested dynamic asset allocation weightings. One of the ways it does this is by providing a standardized measure of momentum across various asset classes and systematically making sense of those signals.

 

This VAMDMI score is derived by calculating three independent z-scores of closing price data on a weekly basis and then calculating the arithmetic mean of this sample.

 

  • Short-term z-score: 1-3M sample
  • Intermediate-term z-score: 3-6M sample
  • Long-term z-score: 6-12M sample

 

Each independent sample size is determined dynamically by prevailing trends in global macro volatility. Specifically, if the BofA Global Financial Stress Index is making lower-lows on an intermediate-term basis, then each of the sample sizes are larger in duration; if the BofA Global Financial Stress Index is making higher-lows on an intermediate-term basis, then each of the sample sizes are smaller in duration.


Poll of the Day Recap: Bubble Bursting In Social Media?

In today’s Morning Newsletter, "Social Bubbles," Hedgeye CEO Keith McCullough pulled no punches critiquing the growing social media bubble in light of news that Facebook bought Oculus VR (a virtual reality gaming company) for $2 billion.

 

“Imagine that – if there were only one bubble, tulip, or social media stock left in the world – what on earth would we pay for it?... I have to give it to the folks @Facebook. They’re nailing it on “scarcity value.” I didn’t know that either of their last two acquisitions existed. After spending $21 billion on WhatsApp and Oculus, FB’s stock has broken my mo-bro line of $67.52 support too.”

 

We wanted to find out what you thought. So we asked:  Are social media stocks like Facebook and Twitter in a bubble right now?


At the time of this post, 68% of respondents said YES and 32% said NO.

 

As Keith tweeted, “Social Media bulls still not putting a dent in our poll - they may have if it was March of 2000.”

 

In this particular survey, not only did a convincing majority of people vote YES, but there were several thought-provoking responses explaining why.

  • “I work for largest utility company in California and we own a nuke, NG power plants, 1000's of miles of transmission and pipelines and NG storage fields; market cap approx 20 billion. WhatsApp free messaging service is worth 19 billion. It is all fun and games until it pops.”
     
  • “This smells so similar to the dot.com bubble a decade and a half ago. If you look back, there were hundreds of internet names, yet only a few made it -- but they made it big. There’s no reason to think the same dynamics won't play out this time. A couple big winners -- and a lot of bagels.”
     
  • “MASSIVE bubble....which doesn't burst till there is a catalyst. What is ratio of (primo) Jobs/Mkt Cap of Money-Losing Companies (public & private)?  100 times what it was in 2000? 1,000 times? Policy response then was we "needed" a housing bubble to avoid deflation. What will it be this time?”
     
  • “It looks like a one-sided bubble. Facebook and Twitter are among the few that appear to have lasting value.  Others with small footprints, one-trick ponies, or non-economic business models appear to be frothing beneath the surface. When they pop, FB and TWTR will be bruised, but they will recover.  For the others... pets.com sock-puppet, anyone?”

Of those who voted NO, one commenter said “bubbles form under the belief prices cannot collapse; 70% bearish here shows not a bubble.”

 

Another noted, “Companies may be over-valued, but that doesn't indicate a bubble (that's going to ‘pop’ suddenly).  The price of some of these stocks may deflate over some period of time, with advertising spends tapering off, but it's definitely not a bubble; these companies have significant revenue, where in 1999 some, maybe most, basically didn't --- that's the main difference.”

 

One NO voter says it’s too soon to tell: “We are in early innings of the social revolution as an ongoing business model.  Not sure we can see exactly how this model with morph.”

 

If we are indeed in a social media bubble, and it does pop, watch out.

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MARCH NOT KIND TO MACAU STOCKS

Another “slow” month in April coupled with an in line earnings season could continue to keep the lid on these high fliers.

 

 

Don’t get us wrong.  We’re bullish on Macau and Asia gaming over the long term, especially LVS.  However, we think a better entry point for LVS may be forthcoming.  MPEL and WYNN are down 10% and 8%, respectively, but we think there could be more downside there as well.  What’s wrong with Macau?  Not much but when expectations get too high, even minor catalysts such as a couple months of deceleration and an upcoming earnings season that could be just “in line” could keep a lid on these high fliers.

 

The Hedgeye forecast for 2014 monthly year/year GGR growth is approximately 15% (annually year/year) which is probably in line with consensus – I hate that.  But it is likely that our monthly model correctly predicts only a high single digit/low double digit growth March following an accurate Jan/Feb growth projection of +24%.  Moreover, April is likely to again fall below the December/January/February run rate as follows.

 

MARCH NOT KIND TO MACAU STOCKS - MACAU1

 

CONSIDER THE BACKDROP

  1. Bad press about money laundering
  2. Near peak stock valuations
  3. Property prices growth slowing 
  4. Chinese stock prices lower for the year

All of these concern us to varying degrees and are not reflected in our monthly projections that you see above.  That chart is just the Math.  Given the cushion we see in terms of demand, we are less concerned with 3 and 4 as it relates to the impact on actual revenues.  No doubt, if April is another disappointing month as we expect, the macro will be part of the storytelling – rather than the Math as we see it.  What worries us is the storytelling itself combined with 2.  Despite the equity value drawdowns in March, history tells us there is more room to fall, particularly for MPEL and WYNN given that they are not likely market share gainers.

 

We’ve often talked about demand cushion.  Mass cushion is derived from the simple fact that the visa scheme and infrastructure prevents full demand – more people want to come to Macau more often than they can.  VIP cushion resides with the junket.  It’s our belief that more of the side betting has and could continue to flow through the legal channel; that is, the casino.

 

This brings us to the underside of Macau gaming – money laundering.  Balancing the PRC’s desire to show Taiwan that the SAR system can succeed and have Macau and Hong Kong prosper, the government will save face on appearances of corruption and crackdown on junkets, if necessary.  This is always a risk and would have a negative impact on near-term junket activity.  The recent flurry of media reports on Macau money laundering are not very revealing – it’s generally accepted that it happens, a lot in Macau – but that’s not really relevant.  What is relevant is if there is the appearance of a crackdown. 

 

SENTIMENT INDICATOR

The sell-side is extremely positive on Macau and the Macau gaming operators – some investors might categorize the sell-side infatuation as “extreme” as measured by the total number of buy versus sell ratings.  Recent sell-side activity was to increase price targets based on higher multiples and not higher estimates.

 

MARCH NOT KIND TO MACAU STOCKS - macau12

 

RECENT TRADING TRENDS

The first 1000 bps of underperformance vs the S&P 500 Index by each name is now in the book.  Growth is under performing and these were the best performing names in 2013.  While we expect the sell side to rally support and reiterate their buy ratings and price target - despite slowing year/year GGR growth – it may not be enough over the near-term.

 

CONCLUSION

We see a few months of tough trading for the Macau stocks which would be exacerbated by a junket crackdown.  We’re not hearing of any and believe the risk is low but decelerating growth and an in line earnings season – albeit on higher estimates following February - should keep a lid on the momentum.  The good news is that the underlying fundamentals look good and the long-term growth outlook is very positive.  LVS would likely be the first stock we would return to on the long side.


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FXB: Removing British Pound From Investing Ideas

Takeaway: We are removing FXB from Investing Ideas.

We are removing the British Pound (FXB) from Investing Ideas.

 

FXB: Removing British Pound From Investing Ideas - british pound 12 3


While we still like the pound (and especially what the Bank of England's Mark Carney is doing) we simply do not see as much relative upside left versus new ideas we added yesterday with Legg Mason (LM) and Hologic (HOLX). 

 

We continue to believe that the health of a nation’s economy is reflected in its currency. The Pound has benefited from the UK’s fiscal discipline to embrace austerity before its regional peers during the global recession – a policy decision that is paying off through accelerating growth above its European peers. 

 


Cartoon of the Day: Social Media 'Pixie Dust'

Takeaway: Imagine that – if there were only one bubble, tulip, or social media stock left in the world – what on earth would we pay for it?

Cartoon of the Day: Social Media 'Pixie Dust' - josie

 

Connect to Hedgeye.


Bubble Up: SP500 Levels, Refreshed

Takeaway: The all-time-bubble-high of 1878 SPX is in play and if/when we tag that, the SP500 can then mean revert lower 35 handles.

POSITION: 11 LONGS, 6 SHORTS @Hedgeye

 

I’ve seen a lot in trying to trade markets for the last 16 years, but I haven’t yet seen something like this. For 3 months I feel like we’ve been watching the entire construct of consensus bang its head against the #OldWall, debating whether the US stock market is going to be -2/+2% YTD.

 

So let’s bubble this sucker right back up to the all-time-high into quarter-end and get on with it. From a #behavioral perspective, what we know is that consensus hedge funds will get net long up there (after tightening exposure on every selloff). Don’t be consensus.

 

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

 

  1. Immediate-term TRADE overbought = 1881
  2. Immediate-term TRADE support = 1844
  3. Intermediate-term TREND support = 1815

 

In other words, the all-time-bubble-high of 1878 SPX (on a closing basis) is in play and if/when we tag that, the SP500 can then mean revert (lower) for another 35 handles once consensus is leaning too long (again).

 

De-stress and keep moving out there. Fading Beta within a risk range is a good business.

 

KM

 

Keith R. McCullough
Chief Executive Officer

 

 

Bubble Up: SP500 Levels, Refreshed - Slide2


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