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THE HEDGEYE MACRO PLAYBOOK

Takeaway: The Hedgeye Macro Playbook is a daily 1-page summary of our core ETF recommendations, investment themes and noteworthy quantitative signals.

CLICK HERE to view the document.

 

Best of luck out there,

 

Darius Dale

Associate: Macro Team


Hell on Wheels

This note was originally published at 8am on September 10, 2014 for Hedgeye subscribers.

“Mr. Bohannon, Do you want to build this railroad?”

-Senator Grant in the AMC T.V. show, “Hell on Wheels”

 

Similar to our office, I’m sure most of you don’t have much time to watch T.V., but every once in a while a great show comes around that is really hard to turn off.  A popular one at Hedgeye as of late is AMC’s, “Hell on Wheels.”

 

Hell on Wheels - HOW facebook timeline 850x315

 

The show is about the epic struggle to build a trans-continental railroad. Setting aside the obvious struggles of weather, dealing with Native tribes (who felt their treaties were being violated), and limited technology, the building of the transcontinental railroad also occurred at a time when the nation was healing itself from the Civil War.  As a result many former Union and Confederate soldiers worked side-by-side on the railroad.

 

As Wikipedia describes it:

 

“The First Transcontinental Railroad (known originally as the "Pacific Railroad" and later as the "Overland Route") was a 1,907-mile (3,069 km) contiguous railroad line constructed between 1863 and 1869 across the western United States to connect the Pacific coast at San Francisco Bay with the existing Eastern U.S. rail network at Council Bluffs, Iowa, on the Missouri River.”

 

The epic struggle to connect the two sides of the continent took more than six years, but once it was completed dramatically changed the face of commerce in the United States. 

 

Who knows, perhaps the iWatch will do the same?

 

Back to the Global Macro Grind...

 

In the global macro world, the epic struggle du jour seems to be related to Scottish independence.  Simply, will the Scots decide to leave the United Kingdom, or not?  

 

A few weeks ago, no one was even considering this as a potential global macro issue, but after a recent YouGov.Com poll that showed a slight majority of Scots voting Yes (51%) to independence versus No (49%), the British pound was sold dramatically and Scottish independence became a hot topic with the manic media.

 

Hell on Wheels - dj

 

So, will the Scots vote for independence on September 18th?  If we rely strictly on the YouGov.com poll, it would seem there is a real chance of this occurring.   Practically speaking, though, as we have written often in the past it is very unwise to rely strictly on one poll.  In fact, there are a couple of key quantitative points that speak in contrast to the YouGov.com poll:

  • First, the YouGov poll that showed a 2% edge for the Yes side was literally the second poll ever (of those polls approved by the British Polling Council) to show the Yes side ahead.  The other Yes poll was taken by the Scottish National Party back in mid-2013;
  • Second, the most recent poll aggregates (though some admittedly occurred before the most recent debate in which pro-independence leader Alex Salmond was widely judged to have won) still show a lead for the No vote outside the margin of error.  Specifically, a poll aggregate issued by Strathclyde University on September 1st showed the No side ahead by 10 points and a poll aggregate from The Guardian on September 3rd showed a similar 10 point lead.
  • Finally, the online betting website, Bet Fair, shows the market for Scottish Independence at more than 2:1 for No independence.  (Incidentally, there have been almost $5 million pounds wagered on Bet Fair for this topic.)

In the Chart of the Day below, we show the impact that the series of YouGov.com polls have had on the British Pound.   While certainly there are other factors at play, the increasingly pro-Independence polls have been a defined catalyst for aggressive selling of British Pounds.

 

Setting aside the polls and betting markets, the most notable reasons for Scotland to stay a part of Great Britain are related to the Scottish economy itself.  Hedgeye’s European Analyst Matt Hedrick highlighted a number of major risks to the Scottish economy should the Scots pursue independence, including:

  • Currency – UK politicians have stated that Scotland could not use Sterling. The country would have to issue its own currency
  • Central Bank – until the formation of a central bank there is no backstop for sovereign debt
  • Massive Capital Flight –investors could pull money out of Scottish banks en masse that would destabilize the financial system 
  • EU Membership – it’s unclear if an independent Scotland would be granted EU membership, which could have huge trade implications
  • Regulation – uncertainty if banks would remain regulated under the UK regulatory authority? Tax and trade regulations also uncertain
  • Economic Drag – prominent financial firms likely to move to London
  • Budget –  the Institute for Fiscal Studies pointsout that Scotland's Deficit could be 4.6% if independent. Low credit quality could negatively impact debt raises, and push the country's debt and deficit levels higher, a vicious cycle.

It is certainly possible, even if unlikely, that the most recent YouGov.com poll is the harbinger of Scottish Independence.  But for this to be accurate it would fly in the face of all other polls, the betting markets, and really any semblance of rational analysis by the Scots related to their own economy.  So our view continues to be that the No vote will prevail and the British Pound will rally accordingly.

 

That said, given the weak nature of the Scottish economy and the fact that 2 out of every 3 Scots are on some form of social welfare, over the long run a Great Britain without Scotland might actually be a stronger economy and certainly more healthy from a fiscal perspective.  So on some level, perhaps the British Pound is in a win-win situation given its recent sell off.  A No vote leads to a relief rally and a Yes votes leads currency traders to asses s United Kingdom’s much improved fiscal health without Scotland, which leads to a long term tail wind for the Pound.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.31-2.52%

SPX 1982-1999

RUT 1151-1171

Shanghai Comp 2261-2362

VIX 11.34-13.83

Brent 98.74-102.99 

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

Hell on Wheels - UK EL


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – September 24, 2014


As we look at today's setup for the S&P 500, the range is 21 points or 0.39% downside to 1975 and 0.67% upside to 1996.                                        

                                                                                       

SECTOR PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

EQUITY SENTIMENT:

 

THE HEDGEYE DAILY OUTLOOK - 10

 

CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 1.96 from 1.99
  • VIX closed at 14.93 1 day percent change of 9.06%

 

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Applications, Sept. 19 (prior 7.9%)
  • 10am: New Home Sales, Aug., est. 430k (prior 412k)
  • 10:30am: DOE Energy Inventories
  • 11:30am: U.S. to sell $13b 2Y FRN
  • 1:00pm: U.S. to sell $35b 5Y notes
  • 12:15pm: Fed’s Mester speaks in Cleveland
  • 1pm: Fed’s Evans speaks in Washington
  • 10:30pm: Reserve Bank of Australia’s Stevens speaks in Melbourne

 

GOVERNMENT:

    • President Obama, world leaders address UN General Assembly
    • 10am: Obama delivers UNGA address; then lunches w/ UN Sec. Ban Ki-Moon; chairs panel on foreign fighters in afternoon
    • 4:50pm: Sec. of State Kerry attends Syria Ministerial at UN
    • Senate, House out of session

 

WHAT TO WATCH:

  • Citizens raises $3b pricing U.S. IPO below marketed range
  • Verizon said to hire TAP advisors for tower sale by end of year
  • Starbucks to buy remainder of Japanese unit for $913.5m
  • GM forecasts 70,000 Cadillac sales in China as unit separates
  • U.S. holiday retail sales seen rising 4.5% on labor mkt gains
  • Global equities have modest upside potential, Barclays says
  • Wal-Mart partners with Green Dot for checking accounts
  • Home Depot breach said to feed card, account frauds: WSJ
  • Gross’s Pimco Total Return ETF draws SEC scrutiny, WSJ says
  • 21st Century Fox said to discuss acquisition of Starz: LA Times
  • German Business Confidence declines more than forecast
  • A month of bombs dropped in one night of U.S. strikes on Syria

 

AM EARNS:

    • Accenture (ACN) 7:01am, $1.10 - Preview
    • AGF Management (AGF/B CN) 8am, C$0.18
    • KB Home (KBH) 8:30am, $0.41 - Preview
    • Paychex (PAYX) Bef-mkt, $0.46
    • Vail Resorts (MTN) Bef-mkt, $(1.93)

 

PM EARNS:

  • HB Fuller (FUL), 5:20pm, $0.76
  • Jabil Circuit (JBL) 4:02pm, $0.01
  • Worthington (WOR) Aft-mkt, $0.64

 

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Iron Ore Price Outlook Cut by Top Shipper as Supply Surges
  • WTI Trades Near 16-Month Low Before Stockpile Data; Brent Slips
  • Diamond Dealers Face Loan Drought After Losing Bank: Commodities
  • Rebar Closes at Record Low as Australia Cuts Iron Ore Outlook
  • No Drought Relief Seen for U.S. West Without Deep Mountain Snows
  • U.K. Winter Gas Declines in Longest Streak Since June on Ukraine
  • India Court Cancels 214 Coal Mine Permits Allocated Since 1993
  • Rubber in Tokyo Falls to 5-Year Low as China Growth Seen Slowing
  • BofA Peeks Inside Venezuela’s Gold Vault to Ease Default Concern
  • Uranium Rally Threatened by Surplus as Mine Strike Eases: Energy
  • CF-Yara Talks Show How Shale Gas Is Shaking Up Fertilizer World
  • Europe’s Biodiesel Demand to Rise 43% in 2015-2020, Neste Says
  • Europe-U.S. Oil-Product Cargo Flow Rises 21% in Broker Survey
  • Copper Falls to Lowest in Three Months on China Demand Concern

 

THE HEDGEYE DAILY OUTLOOK - 5

 

CURRENCIES


THE HEDGEYE DAILY OUTLOOK - 6

 

GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 4

 

EUROPEAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 7

 

ASIAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 8

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - 9

 

 

The Hedgeye Macro Team

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


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September 24, 2014

September 24, 2014 - Slide1

 

BULLISH TRENDS

September 24, 2014 - Slide2

September 24, 2014 - Slide3

September 24, 2014 - Slide4

September 24, 2014 - Slide5

September 24, 2014 - Slide6

 

BEARISH TRENDS

September 24, 2014 - Slide7

September 24, 2014 - Slide8

September 24, 2014 - Slide9

September 24, 2014 - Slide10

September 24, 2014 - Slide11


EMERGING MARKETS: THE EM RELIEF RALLY IS LIKELY OVER

Takeaway: Consistent with recent quantitative developments and our fundamental GIP process, we now think the risk is to the downside for EM Equities.

On September 8th, we published a note titled: “SHOULD YOU REMAIN OVERWEIGHT EMERGING MARKETS?”; the conclusion of that note was as follows:

 

We expect EM assets to continue outperforming their DM counterparts over the intermediate term.”

 

Our call which effectively bottom-ticked EM assets back in 1Q14 notwithstanding, this most recent assertion was obviously the wrong call to make from that particular time and price. In the note below, we walk through precisely why we are no longer bullish on EM assets.

 

Quant Signals: EM Equities Are Now Broken

The rapid decline in the prices of EM financial assets over the past couple of weeks has been broad based across both countries and asset classes. In light of that, our Tactical Asset Class Rotation Model (TACRM) is now generating a “high-conviction SELL” signal for EM Equities – the first of its kind since the week ended February 28th. For specific details on how this signal may impact your performance, please refer to today’s installment of the Macro Playbook, our daily one-page summary of core ETF recommendations, investment themes and noteworthy quantitative signals.

 

Moreover, the Vanguard FTSE Emerging Markets ETF (VWO) has fallen -6.3% in nearly a straight line from its September 8th closing price of $45.95 and is now  broken from our intermediate-term TREND perspective:

 

EMERGING MARKETS: THE EM RELIEF RALLY IS LIKELY OVER - VWO

 

GIP Process: Quad #4 in the US Is Bad for Emerging Markets

Obviously we don’t just anchor on quant signals to make investment recommendations; rather, we rely on a dynamic combination of top-down market analysis and bottom-up fundamental analysis when generating investment ideas and themes. Additionally, our conviction in any call is always greatest when those factors are working in unison as they are now to the bearish side of the ledger for emerging markets.

 

The key fundamental factor that portends a dour outlook for EM asset prices is an increasingly probable, multi-quarter trip to Quad #4 for the US economy:

 

EMERGING MARKETS: THE EM RELIEF RALLY IS LIKELY OVER - UNITED STATES

 

Simply put, Quad #4 means that the rate of change in both real GDP growth and inflation are decelerating (i.e. the 2nd derivative is negative) and, of the four quadrants (i.e. economic scenarios) in our GIP model, Quad #4 tends to be the most unfavorable for the prices of financial assets – including EM equities and currencies:

 

EMERGING MARKETS: THE EM RELIEF RALLY IS LIKELY OVER - GIP Model Backtest

 

EMERGING MARKETS: THE EM RELIEF RALLY IS LIKELY OVER - MXEF

 

EMERGING MARKETS: THE EM RELIEF RALLY IS LIKELY OVER - EM FX

 

The defensive nature of Quad #4 makes sense to us, given that the confluence of both growth and inflation slowing roughly equates to a macro headwind for any asset with either supply & demand dynamics or a cash flow profile that’s a function of the economic cycle.

 

Our Conviction In A Domestic Quad #4 Setup Is High And Rising

So why is the US likely to remain in Quad #4 for the time being? Regarding the slowdown in domestic economic growth specifically, the following three notes highlight our latest deep-dive thoughts on this topic:

 

  1. ARE YOU POSITIONED DEFENSIVELY ENOUGH FOR QUAD #4? (9/17)
  2. HOUSING: SOFT STARTS CONTINUE TO DIVERGE FROM STRONG SENTIMENT (9/18)
  3. HOUSING: SALES FALL AS INVESTOR INTEREST RETREATS (9/22)

 

Inflation is a more difficult time series to forecast at the current moment.

 

On one hand, 4Q14 presents us with the easiest CPI compare we’ve seen since 4Q11 on an absolute basis and the easiest CPI compare we’ve seen since 3Q10 on a relative (i.e. z-score) basis:

 

EMERGING MARKETS: THE EM RELIEF RALLY IS LIKELY OVER - CPI COMPS

 

On the other hand, reported inflation actually decelerated in each of the aforementioned periods due to marginal USD strength (DXY up +2.1% QoQ and +6.1% QoQ, respectively), which dramatically reduced the inflationary impact of YoY commodity price appreciation in both periods. As the following charts show, that phenomenon is occurring once again and perpetuating a nascent trend of negative sequential momentum in reported inflation:

 

EMERGING MARKETS: THE EM RELIEF RALLY IS LIKELY OVER - US CPI vs. HRM COMMODITY PRICE SAMPLE

 

EMERGING MARKETS: THE EM RELIEF RALLY IS LIKELY OVER - US CPI vs. HRM COMMODITY PRICE SAMPLE 2013 14

 

EMERGING MARKETS: THE EM RELIEF RALLY IS LIKELY OVER - CPI

 

EMERGING MARKETS: THE EM RELIEF RALLY IS LIKELY OVER - CORE CPI

 

All told, as right as we ultimately were on our highly controversial #InflationAccelerating theme from the start of the year, we think our early-August call for reported inflation to decelerate from its mid-summer highs will continue to prove equally as prescient.

 

In the meantime, continue to ignore calls from the Consensus Macro community that wages are the primary driver of inflation; wage growth has literally done nothing since the recovery began back in mid-2009. On a highly subjective government calculation that can only really go from +1% YoY to +4% YoY (barring the financial crisis), it’s all about identifying what’s occurring on the margin within that band of probable outcomes. And what’s occurring on the margin now is decidedly disinflationary.

 

EMERGING MARKETS: THE EM RELIEF RALLY IS LIKELY OVER - AHE

 

This continues to support our long-held assertion that: “If you get the US dollar right, you’ll get a lot of other things right in macro”.

 

Investment Conclusions: Sell Sell/Short/Underweight EM Equities

As you are likely well aware, we had been trumpeting a number of long ideas in the EM space in recent months and quarters. As of today, however, we are effectively removing these ideas from our active ETF recommendations. In the bullets below, we walk through our risk management thoughts around these positions:

 

  1. Sell India (EPI); Look To Buy It Back Lower: We still really like India long-term from a long-term TAIL perspective, but we are happy to risk not participating in further upside for the ability to reallocate capital at lower prices. We are not paid to willfully ignore macro risks. India is a current account deficit economy that requires a steady stream of capital inflows to sustain its economic growth and financial asset prices. Over the time frame that we’ve been actively recommending the EPI ETF on the long side, it has gained +22%, which has bested the MSCI All Country World Index’s +4.8% advance by 1724bps.
  2. Sell “Old China” (FXI); Look To Short It On the Bounce(s): We no longer like China here. As long as EM Equity beta is set to remain negative for a sustained period, we think investor sentiment around policy fine-tuning and the Shanghai/Hong Kong exchange linkage that has effectively buoyed Chinese equities in the face of deteriorating economic growth is set to wane. Over the time frame that we’ve been actively recommending the FXI ETF on the long side, it has dropped -2.6%, which has trailed the MSCI All Country World Index’s -2.2% decline by -36bps.
  3. Indonesia (EIDO); Look To Buy It Back Lower: We like Indonesia from a long-term TAIL perspective as well, but, like India, Indonesia is a current account deficit economy that requires a steady stream of capital inflows to sustain its economic growth and financial asset prices. Over the time frame that we’ve been actively recommending the EIDO ETF on the long side, it has gained +20.5%, which has bested the MSCI All Country World Index’s +7.8 % advance by 1270bps.
  4. Sell EM USD Debt (EMB): Tons of spread risk throughout the investment grade universe, as most recently highlighted by BlackRock’s latest commentary regarding the state of bond market liquidity: http://www.bloomberg.com/news/2014-09-22/blackrock-urges-changes-in-broken-market-for-corporate-bonds.html. Over the time frame that we’ve been actively recommending the EMB ETF on the long side, it has gained +3.1%, which has bested the iShares Barclays Aggregate Bond Index’s +0.9% advance by 220bps.
  5. Sell/Short A Broad EM Equity Index (VWO): Both Keith’s quant model and TACRM say, “SELL”, so we sell. In fact, we are now comfortable recommending this ETF on the short side. The best shorts are almost always former long ideas, but many investors find it difficult to make the switch with any conviction. Over the time frame that we’ve been actively recommending the VWO ETF on the long side, it has dropped -6.3%, which has trailed the MSCI All Country World Index’s -1.3% decline by -498bps. To our credit, however, we were merely swapping out EEM for VWO due to the former’s overallocation to Korean equities; the EEM ETF gained +13.6% over the time frame we were actively recommending it on the long side, which bested the MSCI All Country World Index’s +5.8% advance by 775bps. Net-net, we’re looking at a net +7.2% gain that would’ve produced a net +278bps of alpha for investors. Not terrible…

 

EMERGING MARKETS: THE EM RELIEF RALLY IS LIKELY OVER - Idea Flow Monitor

 

We’ll be back in the coming weeks with more country-specific EM short ideas as well. At first glance, both China and Brazil jump off the top of our heads as obvious places to begin the search.

 

Best of luck out there,

 

DD

 

Darius Dale

Associate: Macro Team


SHORT COPPER: Fundamentals Riding The Quant Set-UP

Takeaway: After sending the "Reduce EM Exposure" message via the “MACRO PLAYBOOK,” fundamental headwinds pressuring copper prices have a catalyst.

Earlier today, we sent out the EM sell signals in our MACRO PLAYBOOK one pager with the following conclusions:

  • VWO (Vanguard Emerging Markets ETF) broke @Hedgeye TREND support yesterday
  • TACRM generating a high-conviction “SELL” for EM equities with major downside given the crowd-chasing out-performance over the last 6-months
  • SELL: China (ETF: FXI), India (ETF: EPI), and Copper (ETF: JJC)
  • BUY: Muni-Bonds (ETF: MUB) and Domestic Mega Caps (OEF)

With regards to our copper position, the bearish fundamental thesis now has a catalyst:

  1. The recent turn in emerging market equities fueled by:
  2. deflationary pressure on USD denominated commodities in a QUAD 4 set-up in our internal GIP model (GROWTH AND INFLATION SLOWING)

Copper has gone through a BULLISH TO BEARISH TREND REVERSAL, and the fundamental supply/demand outlook over the longer-term supports the short copper thesis.

While a slowdown in the commodity fueled credit financing bubble in China and the expectation for a steady increase in global supply coming onto the market over the next two years have suggested lower prices for quite some time now, a 1) A BULLISH Quant set-up in Chinese equities fueled by the positive effects of monetary stimulus at the regional and local government level from Beijing; AND 2) a BULLISH quant set-up in copper, likely fueled by the Chinese catalyst (SEE BELOW), helped to support prices over the summer.

 

BOTH OF THESE TRENDS HAVE NOW REVERSED:

  • Reduce Exposure: EM Equities
  • SELL: Copper (BEARISH TREND)

 

Copper ($Spot):

TREND: $3.16

TAIL: $3.20

 

SHORT COPPER: Fundamentals Riding The Quant Set-UP - chart1 spot levels

 

ETF: JJC

TREND: $38.46

TAIL: $38.99

 

SHORT COPPER: Fundamentals Riding The Quant Set-UP - chart2 ETF Levels

 

With market activity working with the downside price move  to confirm the bearish set-up, market activity and current sentiment suggest  perception of the next catalyst has the ability to induce outsized moves in either direction.  

 

PRICE

  • 5-Day -3.2%
  • 1-month: -5%
  • YTD: -10.4%

VOLATILITY

  • Implied volatility vs. trailing averages:
    • -9.3% vs. 1-month
    • -1.0% vs. 1-month
    • -6.8% vs. 6-month

SENTIMENT

  • CFTC Data showing a market that is chasing price but not overextended:
    • Net Futures and Options Positions: -28% shorter week-over-week:
      • -13.5K contracts vs. -577 1-year average (z-score=-0.85x)

Data showing the net positions from money managers reveals open interest is at a 7-week high: 

  • LME Money Manager Open interest: INCREASING
  • Money Manager Longs % Open Interest: INCREASING
  • Money Manager Shorts % Open Interest: DECREASING

SHORT COPPER: Fundamentals Riding The Quant Set-UP - chart 3 money managers agg. open interest

 

The market as a whole is shorter as evidenced by the commitments of traders reports released Friday by the CFTC, but the speculative positions by large money managers is increasing. At the same time, volatility is being sold for less than its trailing averages. When this occurs, the probability increases for price movements that test critical capitulation levels compresses. The expectation for less volatility with larger, speculative size behind a market is the perfect set-up for more volatility on a catalyst. 

  1. Bigger Positions: CFTC leaning farther short and money managers increasing open interest
  2. Implied Volatility being sold for less than trailing near-term averages
  3. Realized volatility lower than trailing averages
  4. Negative correlation risk vs. the U.S. dollar

While copper is down -10% on the year, we believe a cyclical downtrend has much farther to run over the next few years.

Please see the links below for two previous notes outlining the fundamental headwinds that will continue pressuring copper prices over the intermediate to long-term. We’ll follow-up with additional data supporting the call in the coming weeks. At the time of publication of these two notes, copper was in a BULLISH TREND set-up making the fundamental picture look obsolete.

The first note outlines China’s share of global base metals demand and proceeds to outline how the expectation for over-extended demand growth looks unsustainable from here.

 

COPPER A SCARY SHORT: WHERE WOULD YOU PUKE?

 

Highlights from the Note:

  • CHINESE DEMAND: China consumes over 40% of the world’s industrial metals (up from 5% in 1980).
    • 2013 Consumption (% global demand):

-         Nickel: 47.4%

-         Aluminum: 46.1%

-         Zinc: 45.6%

-         Copper: 42.4%

  • INDUSTRIAL METALS TRADE ON THE OUTLOOK FOR CHINESE GROWTH: An equally weighted index of Chinese GDP and industrial production to industrial metals prices (CRB metals index) is running an r-squared of 0.50 currently, down from a December 2011 peak.
  • COMMODITY FUELED CREDIT GROWTH (ADMITEDLY VERY ELUSIVE): Goldman Sachs estimates that $160Bn has flowed into China through commodity-backed loans since 2010. Regardless, the argument that this scandal has helped fuel an unsustainable credit boom has been labeled a bearish signal for base metals. A few cracks in the investigation by the Chinese government have found cracks in the bubble recently:
    • Multiple parties using the same metal stockpiles as collateral
    • Reports emerged last week that a major Chinese trading house is on the verge of insolvency
    • Iron Ore Stockpiles at Qingdao port at lowest level since 2009
  • INVESTMENT: China’s consumption to investment ratio (consumer demand/cap-ex ) is at historical highs:
    • China: 0.7x
    • USA: 3.5x
    • UK: 4.6x
    • Eurozone: 3.3x
  • LEVERAGE:
    • Aggregate debt level has reached 251% of GDP as of June which is a 20% increase from late 2013.
    • Debt/GDP levels have increased 100% over the last five years
    • China’s $26 trillion of debt is more than the entire commercial banking system of the U.S. and Japan combined
  • DEMAND TO MEET SUPPLY FLOOD? On the supply side, an increase in late cycle mining cap-ex anchoring on steady demand from China moving forward requires an unsustainable amount of consumption from China if recent manufacturing and housing data is any indication:

In the following update at the end of August, copper was on the verge of breaking down. We highlighted Jakarta’s reversal to its copper bauxite export ban put in place in January. While Indonesia isn’t near the top of copper producing countries, China’s move to diversify supply lines elsewhere, and Indonesia’s mid-year lift on the ban will add to what we see as an excess amount of supply coming on over the next few years.

 

Is Indonesia's export Ban on Copper Bauxite Nearing a Resolution?

 

The following quote from the note highlights our conclusions:

 

“We will be watching the following factors in the coming weeks for a read-through on the supply outlook:

1)      Chinese economic outlook takes a more definitive turn positive or negative

2)      The Indonesian copper bauxite export picture reaches a long-term resolution

3)      Continued confirmation in a late-cycle mining cap-ex push from the largest miners

4)      A continued positive Trend for the USD

 

With these fundamental factors in play, copper may be interesting on the short-side if our @Hedgeye $3.16 TREND line breaks and confirms.”

 

This TREND Line of support did in fact break, and to re-iterate, copper is now BEARISH from an intermediate-term TREND perspective with $3.16 now a RESISTANCE level. With the quant now agreeing with the fundamental picture, we will look to short copper on the oversold risk management signals. 

Please reach out with any comments or questions.

 

Ben Ryan

Analyst

 


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