An EBITDA beat when excluding the impairment charge but the bad debt write off is a concern as is the cautious forward commentary.
Q & A
Takeaway: Recent commentary out of Federal Reserve policymakers solidifies our expectations that the Fed will surprise investors to the dovish side.
When I started as a junior analyst in this business, I had the fortunate experience from learning from one of the best Retail & Apparel analysts in the world, Hedgeye Sector Head Brian McGough. One of my primary responsibilities on Brian’s team was to update models during earnings season and take notes on conference calls.
It didn’t take long for me to realize that “management” knew little more about the future than even I did. In fact, listening to how bearish many of those executives sounded during what was a generational opportunity to buy domestic consumer discretionary stocks (i.e. mid-2009) sounded increasingly at odds with the Hedgeye Macro Team’s almost-giddy bullish view on the US consumer.
I learned three valuable lessons from that experience that have shaped, if not defined my analytical career:
Regarding that last point, we often joke in meetings with prospective customers that “God called us” whenever we’re asked to describe the research process that has allowed us to stay on the opposite side of both buy-side and sell-side consensus on the direction of interest rates in both 2013 and 2014 (i.e. accurate).
In reality, our process is a combination of rigorous quantitative methods, meticulous study of economic history and a willingness to incorporate relatively newer disciplines such as behavioral finance and complexity theory into our analysis. We’re certainly not always right, but over the years we’ve found that combination to be the most successful at generating a high probability of accuracy on a consistent basis.
If, however, there was a management team to call in macro, it would most likely be the Federal Reserve. Their incessant and growing interference with financial markets has certainly amplified their role in both the price discovery process and the pace of economic activity.
While we don’t have Janet Yellen’s phone number, or the numbers of any of her minions among the Federal Reserve Board of Governors, or their minions at CNBC or the WSJ, we can at least pretend to engage in a 1x1 dialogue with them by asking and responding to commentary from their recent statements. We do this below with a satirical interview that incorporates sound bites from Federal Reserve Vice Chairman Stanley Fischer’s 8/11 speech at the Swedish Ministry of Finance:
Moving along, if you aren’t yet familiar with the debate surrounding the outlook for US monetary policy we’ve been attempting to prepare investors for since JAN, we highly encourage you to review the following Reuters article: "Yellen Resolved to Avoid Raising Rates Too Soon; Fearing Downturn" (7/12).
All told, we remain the bears on US interest rates/bulls on long-term Treasuries as growth is likely to slow throughout 2H14.
Meanwhile, Consensus Macro remains out to lunch with their expectations of perpetually compounding +3% QoQ SAAR GDP growth – expectations that don’t even align with their full year view of +1.7%. Specifically, if GDP compounds at +3.1% in Q3 and Q4, full year GDP will equate to +2.1%, not the +1.7% currently expected by Bloomberg Consensus. I know it’s August, but c’mon, that’s just analytically lazy. Update those forecasts!
For those of you who are still grinding away with us, we wish you a restful night’s sleep and a very productive morning.
Associate: Macro Team
Takeaway: The untimely death of PSB candidate Eduardo Campos throws major wrench in Brazil’s presidential race that investors need to factor in.
First and foremost we offer our condolences to the family, friends and supporters of Brazilian presidential candidate Eduardo Campos, who died earlier today in a plane crash, along with six other victims. We also offer our condolences to the many victims of geopolitical violence around the world, be it in Iraq, Ukraine or in/around Gaza.
Risk happens fast; just like that, Brazilian stocks (using the iShares MSCI Brazil Capped ETF or “EWZ” as a proxy) closed down -1.5% on the day. This is a negative divergence versus the sample average of 24 country-level ETFs we track across the EM space (+0.6%) and versus the S&P 500 SPDR ETF Trust (SPY), which closed up +0.7%.
We think the market is continuing to price in the likelihood of a Rousseff reelection, which equates to:
We say “continuing to price in” because, much like we predicted back in early-JUN, the EWZ is now demonstrably underperforming on a 3M basis. It’s -2% decline over that duration compares to sample mean of +6% for the 24 country-level ETFs we track across the EM space and a gain of +2.6% for the SPY. In full disclosure, the EWZ is up +4% since our 6/3 note, but that’s lagging the aforementioned sample by -30bps; we don’t get paid to recommend crowded beta...
The call from here is simple, yet somewhat complex:
Stay tuned, this could get dicey.
Associate: Macro Team
Takeaway: We remain comfortably neutral on the “Abenomics Trade” here as domestic factors conflict with globally interconnected risks.
Gee, what a boring year it has been for the bulk of investors with capital allocated to Japan. The Nikkei 225 is trading at roughly the same level it did back in the last week of JAN – as is the USD/JPY cross. Truly, Japanese financial markets have been as boring in the YTD as BoJ monetary policy statements have been since Governor Haruhiko Kuroda got his term started with a bang in APR of last year.
Judging by speculative net length in the futures and options markets, it remains our view that many international investors dog-piled into the “Abenomics Trade” (i.e. long Japanese equities/short the JPY) at the end of last year – likely in an attempt to chase what had been one of our 2013 “moneymaker” trades alongside our #RatesRising and #GrowthAccelerating (i.e. the outperformance of the domestic growth style factors) themes.
What hasn’t been so fortunate for investors is the -6.6% YTD decline in the Nikkei 225 or the +2.8% appreciation of the Japanese yen versus the US dollar. Moreover, the outlook from here remains undecided as ever as domestic factors conflict with globally interconnected risks.
This high-conviction directionless view is something we have been wrestling with since the end of JUN, when we detailed the economic puts and takes contributing to what we continue to see as a fiscal and, more importantly, monetary policy vacuum in Japan:
In full disclosure, this view comes after recommending investors short and subsequently cover Japanese equities back in mid-FEB and late-MAY.
It’s worth noting that from MAY 28 through JUN 30 the Nikkei 225 appreciated +3.3% in the face of a +0.5% advance in the JPY/USD cross. Since then, however, the Nikkei 225 has traded flat (i.e. +0.3%) in the face of a -1.1% decline in the JPY/USD cross. That’s a good cover followed by an even better call to move to the sidelines amid a breakdown in the well-known inverse correlation supporting the Abenomics Trade.
If you ask us, we think that inverse correlation is breaking down due to one primary factor: market participants trying to decipher whether or not the recent strength in the US Dollar Index is a harbinger of good news (i.e. a Quad #1 or Quad #2 setup in the US) or a bad news (i.e. a Quad #3 setup in the Eurozone that facilitates a Quad #4 setup in the US as our domestic #Q3Slowing theme remains in play).
For those of you who would like more details regarding the aforementioned scenario analysis, please refer to the following presentations: REPLAY: 3Q14 MACRO INVESTMENT THEMES CALL (7/9) and VIDEO & SLIDE DECK: ARE YOU PREPARED FOR QUAD #4? (8/5).
Looking to factors specific to Japan, the 2Q GDP report was yet another nonevent in the context of forcing the BoJ’s hand. The release was in line with consensus expectations and those of the Japanese government, as confirmed by Economy Minister Akira Amari following the release, which had a muted impact on the otherwise-volatile Japanese equity market (it closed up +0.4% on the day).
Importantly, LDP officials expect GDP to rebound in the third quarter (as do we), so there would appear to limited need for either fiscal or monetary policymakers to step in here to aid Japan’s recovery from the tax hike-induced weakness. It’s worth noting that the 3M trend in the preponderance of Japanese growth data is decidedly positive.
This is especially true for the BoJ; recall that while acting president of the Asian Development Bank, Kuroda was very critical of the piecemeal easing measures oft-implemented by his predecessor Masaaki Shirakawa. Rather, the current BoJ chief prefers the “big bang” stimulus – something that may not be necessary until reported inflation slows throughout 2H14, which is something our models are forecasting. That puts the timeline for an expansion of the BoJ’s QQE program in the 1H15 range.
All told, be it Yellen & Co. potentially preparing to devalue the USD (and thereby inflating the JPY) or #GrowthSlowing in the US and EU that perpetuates a meaningful reversal of #VolatilityAsymmetry, we think it’s best for investors to remain on the sidelines (i.e. not involved or a combination of low gross and tight net exposures) with respect to the Abenomics Trade.
Lastly, if you aren’t yet familiar with the debate surrounding the outlook for US monetary policy we’ve been trying to prepare investors for since JAN, we highly encourage you to review the following Reuters article: "Yellen Resolved to Avoid Raising Rates Too Soon; Fearing Downturn" (7/12).
Have a wonderful evening,
Associate: Macro Team
Takeaway: Recent economic data is supportive of our bullish bias on Chinese equities.
A meaningful helping of China’s JUL high-frequency economic data was reported overnight/over the past few days. The key takeaways are highlighted in the bullets and tables below.
First the bad news:
And now the good news:
On the flip side of the aforementioned positive developments in China’s property market, we continue to see slowing growth in both current construction and completions, contracting and slowing growth in demand, slowing home price appreciation and waning readings of general market conditions.
In light of these dour trends, it remains our view that until China’s property market has regained sound footing, Chinese policymakers will continue to ease, at the margins. From a timing perspective, that’s at least 2-3M of continued loosening which should provide a boon to 3Q GDP growth alongside decelerating inflation.
On balance, this outlook for a continued 1-2 punch of “proactive” fiscal policy and “relatively loose” monetary policy should provide a meaningful tailwind to the high-beta Chinese equity market – particularly those industries exposed to fixed asset investment (i.e. “Old China”).
Simply put, in order for the Communist Party to implement its targeted structural reforms, we think it must first show face on the low-hanging fruit (i.e. the State Council’s GDP, CPI and M2 targets). While said guidance clearly does not represent “hard” targets, any material downside deviations in the context of a widespread perception of financial instability would risk undermining the party’s credibility, in our opinion.
In that light, we continue to like the iShares China Large-Cap ETF (FXI) on the long side, which has appreciated +3.4% since our 7/24 note recommending it on the long side. This compares to a sample mean of -0.7% across the 24 country-level ETFs we track across the EM space and is demonstrably outpacing the -2.7% decline for the S&P 500 SPDR ETF Trust (SPY). Looking to our Tactical Asset Class Rotation Model (details HERE), the China style factor remains the best looking secondary asset class in the global macro universe, accounting for 11 of the top 20 VAMDMI readings.
All that being said, China has by no means turned the corner from a longer-term perspective, so we are reticent to make this a best idea until we can get the first signs of confirmation that perceived tail risk is receding. Specifically, neither valuation nor sentiment are in “layup” territory, so it’s tough to “back the truck up” on Chinese shares here:
Don’t be shy with questions if you want to dig into anything highlighted above. Have a great evening,
Associate: Macro Team
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