Boy Band

“Shot everytime Janet says “Slack””.

-Hedgeye FOMC drinking game


I was trained as a research scientist, not as an economist.  Given that I’m charged with front running the flow of the domestic macro economy, that could be viewed favorably or not – and is probably most dependent on one’s particular ivory tower predilection. 


Truthfully, in a debate with an econ PhD scored on the use of technical jargon and unnecessarily complicated verbiage to describe largely pedestrian macro concepts – I’d probably bet on the other guy.


Generalize the contest to one scored on general cerebral alacrity and proficiency in information processing and contextualization – I bet on myself.  I’m cool with that tradeoff. 


The “Yin” thing about hours of toil in grad school biochem labs and research libraries is that it builds transferable analytical skills. 


The “Yang” - when comparing science with investing –  is that the conclusiveness of the output and the manner in which the research is applied is almost antithetical. 


Generally, the goal of scientific research is to arrive at a definitive, singularly right answer.  In investing, such a thing rarely exists.  Even if a hard conclusion is, in fact, reachable, bandwidth and time constraints often limit the ability to fully distill the available data.   


For someone trained as a scientist, big-time decision making based on imperfect information, data mosaics, and preponderances of evidence amounts to living in a kind of perma-purgatorial state of cognitive dissonance. 


If the Hedgeye Macro team was a Boy Band, I would probably be “the overly analytical, loveable one.


Boy Band - 11


Back to the Global Macro Grind


Hard hat utilization among the domestic construction bulls continues to run at peak capacity with the housing market throwing up nothing but bricks in 2014. 


Wednesday’s Mortgage Application data showed housing demand to start 3Q is running -3.6% QoQ with the purchase index sitting just 6% above the 10Y lows recorded during the peak weather distortion back in February. 


Yesterday’s New Home Sales data for June was equally uninspiring, declining -8.1% MoM and -12% YoY.  Notably, the June decline was on top of a -12% downward revision to the May data.


To quickly review the evolution of our housing call:   After being discretely bullish on housing for the better part of a year beginning in 4Q12, we turned increasingly negative at the beginning of 2014 and elevated #HousingSlowdown to a top Macro theme for 2Q14. 


With demand flagging, home prices in conspicuous deceleration and the ITB down -6% YTD (vs. the SPX +7.5%), that call has played out rather well. 


Does it still have legs?   We think so.


THE SECRET SAUCE:  There’s endless housing data available and enough moving parts across the industry to build as much nuance into a housing call as one would like.   Where we can, however, we prefer to keep it simple.  


Two core, empirical realities sit underneath our base contextual framework for modeling the housing market and the resultant impact on market prices


I won’t keep the sauce secret, but I will make you work for it, kinda   You’ll internalize it too if you actually go through this 2 step exercise – Pop-tarts have more directions than that!


  1. Plot housing demand (pending home sales Index)  vs. price (Case-shiller 20 City HPI Index) with demand leading price by 18-months
  2. Plot Home Price change vs. ITB (U.S. Home Construction ETF)


What you’ll observe is that demand leads price by 12-18 months and housing related equities track the 2nd derivative of price like a glove.  


In other words, current demand trends tell you what home prices will do about a year from now and, if the model holds as it has for numerous cycles, equities will follow the slope in HPI. 


“RIDING THE SHORT BUS”:   The Corelogic HPI data for June showed home prices growing +7.7% YoY – a sequential -110bps deceleration in the rate of home price change vs. the +8.8% recorded in May.  In fact, we have seen approximately 100bps of deceleration in HPI in each of the last four months since the February peak of +11.8% YoY growth.   Housing demand trends in 2H13 suggest the home price deceleration should continue over the back half of 2014 – implying there’s still some runway left on the short side.       


CAPTAIN OBVIOUS:  “Everyone expects HPI to decelerate at this point, isn’t that priced in?”…we’ve heard some version of that reasoning multiple times this year and at multi-points along the recurrent housing cycle.  We get that sentiment and, intuitively, it feels more right than not, but the data argues otherwise.   We’re inclined to stick with the data.  With more downside in HPI, demand listing alongside weak income growth and regulation dragging on credit availability, we think sideways represents the bull case for housing related equities over the intermediate term.  


GOING BOTH WAYS:    A flattening and inflection in the 2nd derivative on HPI will be a key signal for us in terms of shifting off our bearish view.  Who knows….by then, maybe the labor data will have held positive, incomes will be growing at a multiple to HPI, comps will be easy, we will have annualized the implementation of the QM regulations and we can get back on the long side.        


DRINKING GAMES:  I’m on vaca with the fam next week, so I’ll miss the non-event that will be the official reporting of growth accelerating in 2Q off the easiest, non-recession comp ever. 


I will, however, try to rally the beach brigade for a ‘spirit’-ed searching of the FOMC announcement for “slack” mentions.


Back in the day, the FOMC “shot” word was “dollar”, but somewhere along the way we had to switch it’d think the man whose lone job was to control the supply of money would have mentioned “the dollar” or “currency” at least once in 8 years…


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.45-2.55%


Shanghai Comp 2091-2146

VIX 10.32-14.11

USD 80.32-81.07

Gold 1

Copper 3.20-3.29 


To Growth,


Christian B. Drake

Macro Analyst


Boy Band - Compendium 072414

Incarcerating Investors

This note was originally published at 8am on July 11, 2014 for Hedgeye subscribers.

“Who wouldn’t invest in that?”

-Matt Taibbi


That’s what Matt Taibbi (of Rolling Stone fame) asked about incarcerated Americans. I read his recent rant of a book, The Divide, while I was on vaca last week and he made an interesting point: “the very brokest people in America, Hispanic immigrants, are one of America’s last great cash crops” (pg 217).


Incarcerating Investors - taibbi thedivide c10a7d26a1bcacd568ecc9eec422a64d3df77b32


Long Big Government via the slammer? It’s actually an epic growth chart if you look at it from 1920-2014. If you don’t want to be long what’s born out of central-planning-policies-to-inflate (Slow-growth bonds, utilities, REITS, etc.), it’s just another way of being downright bullish on the bearish realities of America.


On that score, alongside my six man Jedi Macro Team, I’ll be presenting our Q314 Macro Themes of #Q3Slowing, #DollarDevaluation, and #Volatility’sAsymmetry at 11AM EST today. Ping our team if you’d like access to the slide deck and conference call. I’m inviting Ed & Nancy.


Back to the Global Macro Grind…


With Utilities (XLU) up to +13.7% YTD in a sea of mo bro red yesterday, those who are long of US domestic consumption growth (from an investment style factoring perspective) have been incarcerated by beta again. After dropping -4% this week, the Russell 2000 is down YTD. Not a bull market.


In all seriousness, I should probably have Christian Drake write the Early Looks for the rest of the year, because I’m running out of both Fed jokes and investment ideas. If I couldn’t get you to buy Gold Bond on any of its down days for the last 6 months, I’m probably not going to get you to buy it this morning.


Actually, you shouldn’t buy Gold or Bonds or anything equities that looks like a slow-growth #YieldChasing bond this morning anyway. On a relative basis to both beta (Russell 2000) and volatility (front month-VIX), the Gold Bond trade is as immediate-term TRADE overbought as the VIX is.


To review this week’s slammer move:


  1. VIX crashed to the upside (+24% in a straight line) after holding a line (10) that it’s never held below, sustainably
  2. Russell 2000 backed off like Brazilian ballers from its all-time-bubble-high of 1208 (March 4th, 2014)
  3. Gold broke out above our long-term TAIL risk line of $1324 (intermediate-term TREND support = $1272)
  4. Bond Yields resumed their bearish TAIL risk (for a US growth breakdown) after failing at 2.81% TREND resistance
  5. US Consumer (XLY) stocks moved back to flat YTD; Financials (XLF) and Industrials (XLI) broke my TRADE support lines


Sure, away from US momentum stocks getting put back in jail on Mon-Tue (i.e. the days Portugal wasn’t the latest weather excuse) there were some other things going on in the world. Japan, which has incarcerated its people with centrally-planned stagflation, was down every day this week.


But this sounds way too bearish for a man in a room who wants you to be right bullish on the bearishness of it all. Remember, if I am right, and US growth slows from Q2 throughout Q3, there is a ton to do on the long side:


  1. Buy Fixed Income
  2. Buy Foreign Currencies vs Burning Bucks
  3. Buy #InflationAccelerating via Gold, Oil, Energy Stocks, etc.


Heck, you can even probably think about buying Malaysian Equities (EWM) at this point! (*Emerging Markets do wonderfully when America is burning its currency credibility at the global stake – see 2011 for details)


Instead of putting me in commission jail (we don’t have a trading desk) for being bullish on bearishness, let me cherry pick some good news for you this morning instead of poking Portugal (pathetic bounce for the Portuguese PSI 20 this morning btw, still bearish TREND @Hedgeye):


  1. Malaysia was the 1st country in Southeast Asia to RAISE rates in 2014
  2. Malaysia hasn’t raised rates for their hard working Savers in 3yrs, so this is #cool for consumers
  3. Malaysia’s stock market only pulled back 0.5% on that, which looks like a buying opportunity


Newsflash to the US politicians who have incarcerated your savings and paid themselves in size with your tax dollars: when a country has the spine to raise rates, it gets ole school Ben Franklin frugality savers paid. And when we Can-Am ole school guys get paid on our savings, we can do crazy stuff like invest, hire, etc.


Yep. If you want me to get downright bearish on Gold, Bonds, etc. like I was last year – get your unelected gravity bending agency to raise rates. Dollar Up, Rates Up, Hiring Up, Capex Up – 1980s and 1990s style America. Who wouldn’t invest in that?


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.49-2.59%

SPX 1953-1985

RUT 1155-1173

BSE Sensex 25034-26170

VIX 10.32-12.67

Pound 1.70-1.72

WTI Crude 101.76-104.31

Gold 1325-1345


Best of luck out there today – and go #Argentina!



Keith R. McCullough
Chief Executive Officer


Incarcerating Investors - Chart of the Day

July 25, 2014

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July 25, 2014 - Slide11

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 80.43%
  • SHORT SIGNALS 78.34%


TODAY’S S&P 500 SET-UP – July 25, 2014

As we look at today's setup for the S&P 500, the range is 31 points or 1.21% downside to 1964 and 0.35% upside to 1995.                                         













  • YIELD CURVE: 2.01 from 2.01
  • VIX closed at 11.84 1 day percent change of 2.78%


MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Durable Goods Orders, June, est. 0.5% (prior -1%, revised -0.9%)
  • 1pm: Baker Hughes rig count



    • Prelim. ITC ruling expected in case over U.S. allegations that Chinese, Taiwan producers dumped solar products below cost
    • 9am: U.S. House Oversight/Govt. Reform Cmte hearing on campaign fundraising use in govt. offices
    • 9am: FCC Consumer Advisory Cmte mtg Lifeline, broadband, stolen mobile devices
    • 9:30am: House Science, Space/TechCmte marks up “Revitalize American Manufacturing and Innovation Act of 2013” (H.R. 2996)
    • U.S. ELECTION WRAP: Obama Cuts DNC Debt; Mont. Race Rating



  • Murdoch to sell Italy, German pay-TV stakes for $9b
  • Lloyds approaches Libor settlement with U.S.-U.K. regulators
  • Goldman, ADIA said to weigh joining Gavea in Fleury deal
  • Fed should drop reverse repurchase facility: Bair in WSJ
  • McDonald’s Japan ends sales of chicken products from China
  • Russia firing artillery across border into Ukraine, U.S. says
  • Israel, Hamas said to weigh U.S.-backed Gaza temporary truce
  • Cynk restriction on broker shr transactions set to lift today
  • Nortel U.S. unit agrees to pay bondholders $1b interest
  • House to subpoena Ex-IM employee w/time running out for bank
  • EMA’s CHMP decisions on Gilead, J&J expected
  • KLab targets game partners in China after topping Japan charts
  • Brazil’s TorreSur said to end sale as buyers balk at valuation
  • Colorado city’s fracking ban thrown out; statewide vote looms
  • U.K. overcomes record slump w/0.8% growth in 2Q
  • Fed, U.S. GDP, Jobs Data, BP, UBS: Week Ahead July 26-Aug. 2



    • Aaron’s (AAN) 7:15am, $0.35
    • AbbVie (ABBV) 7:47am, $0.76 - Preview
    • American Electric Power (AEP) 6:57am, $0.75
    • Aon (AON) 6:30am, $1.20
    • Avery Dennison (AVY) 8:30am, $0.79
    • Barnes Group (B) 6:30am, $0.59
    • Covidien (COV) 6am, $1.00 - Preview
    • DTE Energy (DTE) 7:15am, $0.75
    • First Niagara Finl (FNFG) 7:15am, $0.18
    • Idexx Laboratories (IDXX) 7am, $1.06
    • Lear (LEA) 7am, $1.97
    • Legg Mason (LM) 7am, $0.55
    • LifePoint Hospitals (LPNT) 7am, $0.55
    • LyondellBasell (LYB) 6:50am, $1.92
    • Moody’s (MCO) 7am, $1.02
    • Moog (MOG/A) 7:55am, $1.03
    • Prosperity Bancshares (PB) 6:03am, $1.02
    • Silicon Laboratories (SLAB) 6am, $0.46
    • Stanley Black & Decker (SWK) 6am, $1.36
    • TCF Financial (TCB) 8am, $0.27
    • Tyco Intl  (TYC) 6am, $0.54
    • Wabco Holdings (WBC) 6:30am, $1.46
    • Xerox (XRX) 7am, $0.26



  • French Wheat Exports in Question as Rain Spoils Crop Quality
  • El Nino Seen Weak or Delayed for Several Months by Forecasters
  • Gold Set for Second Weekly Loss as Economic Outlook Curbs Demand
  • Kudzu That Ate South Heads North as Climate Changes: Commodities
  • Arabica Coffee Rises as Rain Disrupts Brazil Crop; Sugar Falls
  • Soybean to Corn Prices Fall on Prospects for Ample U.S. Supply
  • WTI Set for Weekly Drop Amid Rising Fuel Supplies; Brent Steady
  • MORE: SK’s Refining Margins to Rise on China Economic Recovery
  • WTI Crude Seen Rising in Survey on Falling Supplies at U.S. Hub
  • Tin Shipments From Indonesia Seen Shrinking Most in Six Months
  • German Utilities Bail Out Electric Grid at Wind’s Mercy: Energy
  • Copper Traders Bearish for Third Week as Prices Seen Too High
  • Zinc Record China Discount Shows Rally May End: Chart of the Day
  • Rubber in Tokyo Pares Weekly Gain as Falling Oil Cuts Appeal


























The Hedgeye Macro Team
















TGT – Target 1.0 vs 2.0

Takeaway: If it turns out that WMT’s US CEO left to take the top job at Target, we’d look to get much heavier on the short side of TGT.

CONCLUSION: If it turns out that Bill Simon left his post as CEO of WalMart US to take the top job at Target, we’d look to get much heavier on the short side of TGT. We think that move would simply be disastrous for Target, and would set the company down a path that is simply uninvestable, and likely value-destroying.



First off, there’s nothing wrong with Simon. The guy ran a $280bn business – nearly 4x the size of Target’s revenue base. Did WMT’s US stores knock the cover of the ball during his tenure? No. But you don’t get to be CEO of the largest division of the biggest company in the world (ranked by revenue) by being incompetent. Furthermore, Simon potentially knows more about how to collect customer data and use it to generate sales than everyone in the Target organization combined.  Ultimately, for someone who thinks that the key for TGT is to be more competitive with WMT, then this would be a massive win.


But TGT Needs to Become Everything That WalMart is NOT. Trying to become WalMart is what got Target into trouble in the first place. Remember in 2008 when ‘Tarjay’ was actually inked in the Urban Dictionary to memorialize Target as a place where teens went to get trendy fashion at cheap prices? Well, management had the Branding equivalent of lightning in a bottle. Yes, WalMart envied it. So did Macy’s. So how did Target answer?

  1. It converted 65% of its stores from 2008 through 2013 to P-Fresh stores. Basically, this is a Supermarket where a Soccer Mom could get Eggs, Bread, Pop Tarts, and then grab a sweater and some bed linens.
    TGT – Target 1.0 vs 2.0 - tgt1
  2. It pushed the Red Card, which gave 5% off all purchases. Over the same 2008-2013 time period, Red Card went from 5% of purchases to just shy of 20%. We’re really not worried about the direct financial impact, which is about $833mn/yr in lower Gross Profit due to higher discounts, as that realistically was offset at least a little bit by higher purchase volume. The real problem we have is with how this, combined with P-Fresh conversion changed the shopper profile.
    TGT – Target 1.0 vs 2.0 - tgt2
  3. Mix changed accordingly, with the highest margin categories like Apparel and Home Furnishings giving way to perennially low-margin Food and Household Essentials (non-food products you buy at a grocery store).
    TGT – Target 1.0 vs 2.0 - tgt3

So think about it. TGT went from cool, edgy ‘Tarjay’ where it was the envy of most of its peers, with a relatively defendable customer and would actually compete on the fringes with the likes of H&M, to being the place where a person who cares about nothing but price, or shops there simply because they hate going to WalMart. It went from having a peer group where it had a notable competitive advantage, to putting itself right in the middle of four unique competitors – 1) WalMart, 2) Department Stores, 3) Dollar Stores, and 4) Supermarkets. As a bonus, it has hovering over its head plucking away every last sales dollar it can.


Oh, and by the way, once TGT realized this was a multi-year string of horrible decisions, it decided to look to a new venue for growth – Canada. We have a whole deck quantifying why that’s flawed. But by now that’s hardly an out-of-consensus view.


Our point is that this whole mess is why Steinhafel was fired as TGT’s CEO. It wasn’t due to the data breach. Maybe the breach was a good excuse, or a catalyst, for the Board. But it was not the reason for ousting him.


This brings us to why hiring Bill Simon as TGT’s CEO would be a very bad idea.

All of Target’s missteps over the past six years are a product of what we’d call ‘Retail 1.0’.  Simon is the zen master of Retail 1.0. Unfortunately, upgrading to Retail 2.0 is the only thing that can save Target now, and we seriously doubt that Simon could do it. Importantly, if the Board hires him, then it shows us that it is content with Retail 1.0. That’s a multiple-compressing event, over time.


We don’t think that Target 2.0 will be achieved by rolling back the clock to try and recapture the string of excellence it had in the 2000s. That’s actually borderline impossible. It would be like taking a pickle and trying to make it a cucumber again.


It really needs someone to step in and change the paradigm. Target has tremendous assets – in its store base, logistics network, and (too many) people. The Board should not be looking at McMillon’s team at WMT for a new CEO, but instead should be looking at Jeff Bezos’ team at AMZN. That’s the place/culture to look for a winner that could not only fix Target’s business, but make it a Brand that anticipates where and how consumers will shop 5-10 years down the road.


What This Means For The Stock.

1)      We’re going to give the TGT Board the benefit of the doubt on this one. We think that it is looking for a CEO who can make sweeping changes to create considerable shareholder value 4-5 years out (i.e. Target 2.0). We also think that anyone who takes on that challenge will make sure that he/she has the Board’s buy-in to spend the considerable capital needed to change this company so dramatically. Ultimately, we think that this could lead to TGT being the best performing stock in the S&P – in about 2019. Until then, it will be extremely slow and painful, and earnings and cash flow assumptions out there will prove to be way to high. For the record, this is similar to what we said about JCP when it was at $40.  TGT could get cut in half under that scenario.

2)      Scenario 2 is a little tougher. This is the Target Board sticking with Target 1.0. That means that we could see the stock pop on the news, like with any scenario, and that the new CEO will be making tweaks to boost near-term cash flow and earnings. That might take numbers higher, but it will seriously dampen the potential for any real growth in this business. Then you’re playing for a levered, low-growth retailer in year six of a retail margin expansion cycle – something we’ve never EVER seen go into year seven.


We still like the risk-reward on this one – a lot. 

TGT – Target 1.0 vs 2.0 - tgt4


Takeaway: Both our quantitative signals and fundamental research support buying China here. This stance is in stark contrast to our previous view.


Last week, we put out a note titled “REITERATING OUR RESEARCH VIEW ON CHINA” in which the conclusion read: “Recent economic data supports renewed optimism across Chinese capital markets, but we don’t think improvement in the former is sustainable.” While we weren’t wrong on the stocks per se (fortuitously, we never developed enough conviction in our fundamental view to recommend shorting China), that was still the wrong call to make.


Specifically, our latest analysis of the many puts and takes throughout the Chinese policymaking spectrum leads us to believe the current acceleration in growth is sustainable for at least one more quarter (the jury is still out for 4Q14E).


That being said, we weren’t necessarily wrong to believe that the “mini stimulus” efforts out of Beijing in recent months would result in a marginal-at-best boost to growth. What we missed, however, is that Beijing’s spate of efforts would send a shockwave throughout the various layers of Chinese policymaking.


In particular, a rash of expansionary fiscal policy at the local government level would suggest that there is significantly more stimulus hitting the Chinese economy than meets the eye at the current juncture. This is in stark contrast to the headline guidance out of the State Council and PBoC, which continues to downplay the likelihood of a major shift in monetary or fiscal policy.


Essentially, what Chinese policymakers are doing is stimulating growth behind the scenes while protecting their credibility in light of the 2009-10 four trillion CNY stimulus package that more-or-less got them in the current mess to begin with.



Again, there are a lot of moving parts here, so we’ll do our best to summarize the many stimulus efforts introduced throughout the Chinese economy of late:


  • Early-APR: the State Council pledges to accelerate railway construction and investment in public housing
  • Late-MAY: the State Council gives the go-ahead to launch targeted RRR cuts to enhance financial support to the “real economy”
  • JUN 9: the PBoC announces a -50bps RRR cut for banks that focus on lending to the agriculture sector and SMEs, as well as for those engaged in various forms of consumer finance (e.g. automobile financing)
  • JUN 10: Premier Li pledges to “intensify fine-tuning” and make [additional] “targeted changes” in policy
  • JUN 12: following up on his recent pledge, Premier Li announces that the government will boost public investment in the Yangtze River Basin, while lowering tax rates for some utility companies
  • JUN 12: Huang Min, head of the fixed-asset investment department at the National Development and Reform Commission (NDRC) reiterates the public sector’s commitment to investing in Chinese infrastructure, while also soliciting private investment (63% of all FAI in 2013) for 80 major projects
  • JUN 30: the China Banking Association (CBA) “affirms” that the PBoC will continue with “slight loosening” of monetary policy throughout the year
  • JUN 30: the China Banking Regulatory Commission (CBRC) made some changes to its loan-to-deposit calculus in a move to free up incremental capital for traditional credit expansion
  • JUL 4: the China Securities Regulatory Commission (CSRC) announces that it will approve 100 IPOs through DEC at about ~20 per month – a move that effectively forces the PBoC to maintain relaxed liquidity conditions, as IPO gluts tend to freeze up capital across the Chinese banking system
  • Mid-JUN: Premier Li convenes eight provincial governors and majors in Beijing to discuss the current economic situation, concluding that “downward pressure [on the economy] is still considerable… we should not ignore the challenges and risks” “I took his remarks as criticism,” said Heilongjiang Governor Lu Hao
  • JUN 25 though mid-JUL: the State Council sends a total of eight inspection groups to 27 ministerial departments and 16 provinces and municipalities… determining whether or not local governments did a good job of stabilizing growth was among the top priorities for the inspectors… Yang Chuantang, head of the inspection group, subsequently states that, “Local governments should step up pro-growth efforts and strive to accomplish this year’s target and lay a solid foundation for years to come.”
  • JUL-to-date: in responding to Premier Li’s call to action, the Hebei province rolled out a series of preferential policies, including increased land supply, streamlined approval procedures and tax cuts, to support a variety of strategic emerging industries… the Heilongjiang province implemented similar measures to support its service sector


If you analyze any one of these measures in isolation, you’ll likely end up where we were prior to today: not all that impressed with China’s stimulus efforts. Analyzing them in conjunction, however, leads one to believe that there are indeed meaningful stimulus efforts being implemented across China’s state-run economy.


It’s worth remembering that mainland China has 32 provincial-level administrative units: 23 provinces, four municipalities (Beijing, Tianjin, Shanghai, Chongqing) and five autonomous regions (Guangxi, Inner Mongolia, Tibet, Ningxia, Xinjiang). In extrapolating the stimulus efforts of Hebei and Heilongjiang throughout the entire country, it’s easy to arrive at the aforementioned conclusion.


Is this trend of “mini stimulus(es) = major stimulus” sustainable enough to chase?


For now the answer is, “yes”. Real GDP growth was tracking at +7.4% YoY (i.e. only ~10bps south of the official target) when the bulk of these measures were rolled out, so perhaps policymakers want to see a meaningful acceleration in growth before they pull back on the stimulus reins. Moreover, CPI tracking well south of their official +3.5% YoY target in the YTD would seem to suggest they have plenty of scope to do so.




That being said, annualized currency weakness and easier policy should support a marginal acceleration in inflation from here.






But perhaps the real reason Chinese policymakers were content to ease monetary and fiscal policy of late was to shore up the country’s crashing property market.


Along those lines, many local governments have taken matters into their own hands by easing home purchase restrictions (27 of 46 cities did so yesterday). Moreover, last week’s statement out of the Ministry of Housing and Urban-Rural Development (MOHURD) would seem to suggest that such easing in property markets at the local level have the official blessing of Beijing as well.


This is a major positive given the dour nature of China’s property market trends. New home prices fell in 55 of the monitored 70 cities last month – the most since JAN ‘11 when the government changed the way it compiles the statistics. This data point followed earlier data which showed a continued sharp deterioration in property price trends nationwide:


  • JUN E-House Home Price Index (288 cities): 5.3% YoY from 5.8% prior
    • Prices of new homes in 288 cities fell -0.1% MoM in JUN, the third sequential decline in a row
  • JUN China Real Estate System Index (CREIS) Home Price Index (100 cities): 6.5% YoY from 7.8% prior
    • Average prices in the 100 biggest cities fell -0.5% MoM, the second consecutive sequential decline


Such targeted easing measures have indeed stabilized China’s property market – albeit at brutal levels of new investment (i.e. land areas purchased and housing starts), demand (i.e. value and volume of building sales) and confidence (i.e. CREIS Real Estate Climate Index). Supply growth (i.e. housing completions) continues unabated, but that should slow in the coming months with decelerating units under construction and contracting levels of new investment.




Lastly, there are two more things to note as far as sustainability is concerned:


  1. Land sales account for nearly 60% of local government fiscal revenue, which means China’s local governments will likely need to dramatically accelerate the pace of [now-contracting] land sales to keep pace with all their spending
  2. China’s labor market remains in contraction territory from a PMI perspective; the latest reading of 48.6 compares to a TTM average of 48.7 and is supportive of the view that Chinese policymakers may need to “do more” to ensure their labor targets are being met



In our investment framework, which anchors heavily differential calculus and prospect theory, going from “absolutely horrendous” to merely “really bad” is bullish insomuch as going from “bad” to “good” is. This is especially true when the quantitative signals support it – which they now do for China in both of our proprietary risk management models.


Looking to Keith’s factoring of price, volume and volatility, the Shanghai Composite Index has now undergone a bearish-to-bullish TREND reversal and is threatening to do the same on a long-term TAIL basis as well:




Looking to our TACRM system, I’ve had the “great pleasure” of being told that “Old China” exposures (i.e. the CHIX and CHXX) were “BUYS” every day since JUL 3rd. Base metals, which remain overexposed to China from a marginal demand perspective, have been signaling “BUY” as well in recent weeks.




In spite of these signals, however, I chose to anchor on my existing fundamental research view on China, which obviously did not rhyme with what the market was signaling. Classic rookie mistake. Now, we are content to let the market dictate our interpretation of China’s macro fundamentals.


***CLICK HERE to learn more about TACRM’s world-class signaling capabilities***



Having spent my entire analytical career at Hedgeye, I have not yet had the opportunity to develop some of the more traditional skills in the sell side research toolkit, such as storytelling about “feel” and “valuation”. Instead, we’re confined to storytelling about slopes, deltas and inflections in the data – which is exactly what the following table attempts to supplement:




The key takeaways to highlight from this table are:


  • The positive % deviations from the 3M, 6M and 12M trends in the preponderance of China’s PMI data
  • The two latest (i.e. JUL) data points show flat-to-mid-single-digit improvement relative to their 3M and 6M trends
  • Specifically, the JUL flash Manufacturing PMI data came in at an 18M-high, with the New Orders, New Export Orders, Backlogs of Work, and Quantity of Purchases sub-indices all showing sequential accelerations
  • Chinese credit growth is accelerating markedly (the JUN Total Social Financing figure was the fast rate for any JUN since 2009) without capital inflows, which are now a net negative and well shy of its 3M, 6M and 12M trends
  • Growth in sovereign fiscal expenditures is accelerating materially relative to its 3M, 6M and 12M trends
  • The sovereign budget balance has now swung squarely into deficit territory, and should generally remain there given that Chinese deficit spending tends to be back-half loaded
  • While the rate of liquidity provision has come in of late, the PBoC is still pumping over 100B CNY into the Chinese banking system each month, which is in stark contrast to the 6M and 12M trends of net liquidity withdrawals
  • The aforementioned policy shift has materially tamed forward-looking expectations for Chinese money market rates, while the recently heavy IPO calendar has applied some upward pressure to near-term rates… we expect the PBoC to take note of this phenomenon and react accordingly


Indeed, Chinese economic growth has stabilized on a slew of monetary and fiscal easing measures and certain segments of the Chinese economy (e.g. trade data and credit formation… the latter of which is supported by BoP stabilization) are showing marked improvement on a trending basis.



All told, both our quantitative signals and fundamental research support buying China here. This stance is in stark contrast to our previous view, which concluded that investors would do better to stay out of China altogether.


While we’re certainly not making the case that China has turned the corner from a long-term TAIL perspective, we do see considerable upside to Chinese equities – specifically “Old China” exposures – with respect to the intermediate-term TREND. Because of the casino-like nature of the high-beta Chinese equity market, Chinese “investors” tend to extrapolate recent trends and “over-discount” in both directions.


As such, we think international equity investors should advantage of this phenomenon on the long side of Chinese equities; long-only fund managers should appropriately overweight China. Ping us with any follow-up questions.


Have a great evening,




Darius Dale

Associate: Macro Team

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