This note was originally published at 8am on September 17, 2014 for Hedgeye subscribers.
“Leadership is the capacity to translate vision into reality.”
We held our inaugural Hedgeye Cares Charity Golf Challenge at Great River Golf Club in Milford, CT yesterday. The group of my colleagues that banded together to form the Hedgeye Cares committee did an outstanding job translating a vision into a reality.
Like most charity events, it wouldn’t have been a success without the support of myriad sponsors. On the corporate side, we were pleased to get support from The Lincoln Motor Company, Salesforce.com, Bloomberg, D.B. Root, MBIA, Better ITS, the Arizona Coyotes, and Firefly Space Systems just to name a few. In addition, many individuals like you were kind enough to lend a helping hand by either buying a foursome or providing items for the silent auction.
Aside from being a very enjoyable day, we also raised close to $100,000 for Bridgeport Caribe Youth Leaders, which is an all-volunteer program based in Bridgeport, CT that provides “children with diverse educational, sports and community awareness programs that foster physical, intellectual and social development, while instilling pride and helping them build character and self-esteem, so that they can reach their full potential and value their role in society.”
Certainly a group more than worthy of our support. Again, we thank you.
Back to the Global Macro Grind...
Even as many of my Hedgeye colleagues were away from their screens yesterday, the global macro news flow continued. The most relevant global market over the next 24 hours is of course likely to be the Treasury market with the Federal Reserve policy meeting occurring later today. Regardless of what the Fed says today, it is likely that very few investors have “nailed” the last month of interest rate moves, except in hindsight.
As shown in the Chart of the Day below, on August 15th, the 10-year yield hit a 2.30% low. Within a month, by September 15th, the 10-year yield had tacked on 30 basis points and reached basically a three month high. This morning the 10-year yield is trading off the recent highs from a couple of days ago, albeit only marginally. Even if you didn’t nail the move, or did so in hindsight, the fact remains having a view on rates, and thus the U.S. dollar, is critical in global macro positioning.
So, what is the Fed going to say and how are we positioned?
Despite the lack of a crystal ball, we are sticking with our house view that Fed will be more dovish than expected. With reported inflation relatively benign, the housing sector seeing some cracks (arguably a lot!), and the most recent employment data points softer than expected, there seems to be little incentive for the Fed to ramp up the hawkish rhetoric.
According to his Wall Street Journal podcast from yesterday, the mighty Fed visionary Jon Hilsenrath appears to agree with us. As he noted:
“Given the economic backdrop, they don’t want to send a signal right now that rate increases are imminent.”
Indeed Mr. Hilsenreth, indeed.
So, interestingly, as we head into the main Fed event, the 10-year yield didn’t even make it into the top three things that Keith sends out to subscribers in his “Direct from KM” email every morning at 6:00am, which were as follows (if you aren’t on "Direct" from KM please email email@example.com to get details on being added) :
Speaking of vision, it seems the Scottish vision of independence will be tested today. According to the most recent three polls, the "No" for Independence voters are maintaining a narrow lead of some four points.
As we have often written, polls in the aggregate matter and in the aggregate the polls continue to imply that the No votes will prevail. Interestingly, as well, online betting site Betfair has already started paying out No votes as they consider the No majority win a foregone conclusion. That all said, until the mighty Jon Hilsenreth opines nothing is truly a foregone conclusion!
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.40-2.62%
Shanghai Comp 2267-2357
WTI Oil 91.37-95.12
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
Takeaway: The Hedgeye Macro Playbook is a daily 1-page summary of our core ETF recommendations, investment themes and noteworthy quantitative signals.
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Best of luck out there,
Associate: Macro Team
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TODAY’S S&P 500 SET-UP – October 1, 2014
As we look at today's setup for the S&P 500, the range is 29 points or 0.78% downside to 1957 and 0.70% upside to 1986.
CREDIT/ECONOMIC MARKET LOOK:
MACRO DATA POINTS (Bloomberg Estimates):
WHAT TO WATCH:
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
The Hedgeye Macro Team
Takeaway: We believe prospects are rising for another leg down in consensus expectations for Chinese growth.
Per the fine folks at Wikipedia: “The defense readiness condition (DEFCON) is an alert state used by the United States Armed Forces. The DEFCON system was developed by the Joint Chiefs of Staff and unified and specified combatant commands. It prescribes five graduated levels of readiness (or states of alert) for the U.S. military, [with an] increase in severity from DEFCON 5 (least severe) to DEFCON 1 (most severe) to match varying military situations.”
China’s Property Market Is In Dire Straits
Prior to today, we estimated the state of the Chinese property market to fall somewhere between DEFCON 4 and DEFCON 5; this is not to say that trends didn’t warrant further attention, but it appeared policymakers were content to let a bit more air out of the [widely perceived] property bubble at the current juncture.
With the latest batch of easing measures out of Beijing, however, we think Chinese policymakers are now officially worried about the state of the country’s real estate sector and have elevated it to somewhere between DEFCON 2 and DEFCON 3 in their own minds.
To recap those measures:
The announcement of these measures marks the first official nationwide loosening of property policies since 2008 – a time when both Chinese and global growth were falling off a cliff – and signals real concern on behalf of Chinese policymakers that we don’t believe is currently factored into many investors’ handicapping of key global macro risks.
Beyond these headlines, the trend of localized easing measures continued in recent days with both Nanjing, the capital of Jiangsu, and Shijiazhuang scrapping their housing curbs while also pledging to increase the supply of small and medium-sized apartments and/or low-income housing units. As a result of this multi-quarter trend of policy loosening at the municipal and provincial government levels, only six cities remain with home purchase restrictions in place, including the big four first-tier cities of Beijing, Shanghai, Guangzhou, and Shenzhen.
The key takeaway here is that Chinese officials have now embarked on something just shy of “whatever it takes” in order to stem the tide of deterioration in the country’s real estate sector. This is a tacit admission out of Beijing that existing measures were not sufficient and that larger stimulus is required to prevent incremental deceleration.
China Is Likely To Remain An Overhang On Global Financial Markets
Recall the conclusion our September 12th note titled, “THE “BEIJING PUT”: IS BAD NEWS IS STILL GOOD NEWS IN CHINA?”:
“Obviously really bad data would not be supportive of “investor” sentiment – which we’d argue is the primary directional driver of the Chinese stock market – but we doubt policymakers would allow growth data to slip much further from here, given that the property sector is the primary culprit for China’s current growth slowdown.
Specifically, the autocorrelated nature of property markets means that once a trend develops, actors and investors respond in kind by perpetuating the trend. This would effectively reduce Chinese policymakers’ ability to counter a deeper slowdown in property investment with more stimulus.
Net-net, while we don’t see a tremendous amount of upside to Chinese growth from here, we think there is a floor at/near the current level of economic activity and any threat of breaching that level should continue to be met with expectations of incremental stimulus from the marketplace.”
The logical progression of questions in response those assertions is two-fold:
With respect to question #1, the answer is a comfortable “yes”:
With respect to question #2, we are increasingly of the view that the answer is “no”:
Ultimately, the confluence of those responses – assuming our assumptions are indeed correct – should begin to perpetuate incremental fears of another leg down in Chinese economic growth over the intermediate term.
While that might not be bearish for the A-Shares market, it’s likely to continue to weigh on asset prices across the emerging markets space and across various commodity markets – which is a research conclusion supported by our quantitative analysis as well:
All told, rising prospects for another step down in Chinese growth expectations is yet another bearish factor in a growing list of bearish factors for you to consider this evening.
Sleep tight; don’t let the bedbugs bite!
Associate: Macro Team
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