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The Hong Kong Government Has Already Lost

“The triumphant success of Hong Kong demands - and deserves - to be maintained.”

Charles, The Prince of Wales


The crowds of tens of thousands in Hong Kong are swelling in number. Today, Chinese National Day, the numbers are likely to increase significantly. While started by students, all facets of the population are represented. One can only be in awe at how so many can demonstrate peacefully, even in the face of harsh and utterly unnecessary police tactics: Not one single shop window has been broken in 5 days of protest.


The Hong Kong Government Has Already Lost - zz. EL 2


Back to the Global Macro Grind


How did this all get started?


In the run-up to the 1997 Handover of Hong Kong, Universal Suffrage was promised under Article 45 of the Basic Law. In 2004, the National People’s Congress said this would not occur before 2012. In 2007, the NPC pushed the date to 2017. In 2014, Universal Suffrage is redefined: Everyone can vote, but only for the 2 or 3 candidates pre-selected by Beijing. The serious matter of a peoples’ freedom to elect their leaders has been made a farce by the Central Government and the current Hong Kong leadership.


Over the summer, Beijing completely misread the situation thinking that its version of a seemingly democratic process would be sufficient to keep the Hong Kong people at bay. Yet the proposal was so far off the mark and without any room for negotiation that a tipping point was reached.


While Beijing is known for digging in and using all means necessary to obtain its will, it appears the people of Hong Kong are willing to do the same this time around. There is no quick solution given Hong Kong Chief Executive CY Leung’s unwillingness to work for the Hong Kong people he supposedly represents. Leung’s administration has fantastically mismanaged this situation.


The Central Government needs this win. A loss of face isn’t the primary concern: The very survival of the Communist Regime is at stake in the eyes of China’s leaders. No progress is being made at containing unrest in Xinjiang Province where Uyghur separatist are claiming the region.


To add to Beijing’s woes, the Chinese economy is cooling quickly. Fixed assets investment is slowing both sequentially (as of AUG) and on a trending basis – as are retail sales, exports and imports. Manufacturing PMI and consumer confidence are also slowing on a trending basis as of SEP and AUG, respectively. Additionally, the property market is in dire straits, as Darius Dale details in a note yesterday titled, “DEFCON 2.5: The “China Overhang” Is Likely To Continue”.


Already, we have seen a few, albeit small, public gatherings in large cities supporting the protesters in Hong Kong. What if demonstrations spread beyond Hong Kong?


In the last few days, the world has experienced an unprecedented crack-down on social media and freedom of speech to prevent just that from happening. But we know very little about it in the United States. One would need to live in the PRC to experience it. It’s hard for us to imagine what the internet looks like when one only gets to see a carefully selected portion of it. Overnight, there are reports of a Trojan virus aimed at infiltrating the iPhones of HK protesters. Make no mistake, this is a first rate electronic communications war being played out in front of us.


How will the world react to all of this? The United Kingdom, as former colonial masters, surely has a moral responsibility. But the West is and will be reluctant to take a stand against China. Cross-strait relations also play a factor: Beijing continues to strive for a unified China, inclusive of Taiwan. The wrong action in Hong Kong could further alienate the Taiwanese people.


Unless the protesters get tired we will all be watching this for some time. There will be economic impact. But the big changes will play out in the long term.


Can democracy thrive in Hong Kong? And will this lead to a softening of the regime in Beijing?


The people of Hong Kong appear ready to find out.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.46-2.55% (bearish)

SPX 1 (neutral)

RUT 1090-1026 (bearish)

EUR/USD 1.26-1.38 (bearish)

WTIC Oil 90.16-94.42 (bearish)


Michael Blum

President and Resident of Hong Kong


The Hong Kong Government Has Already Lost - CHINA High Frequency GIP Data Monitor

October 1, 2014

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What Is Your Vision?

This note was originally published at 8am on September 17, 2014 for Hedgeye subscribers.

“Leadership is the capacity to translate vision into reality.”

 -Warren Bennis


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.

What Is Your Vision? - 44

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 sales@hedgeye.com to get details on being added) :

  1. ASIA – w/ the Russell 2000 -1.2% YTD, it’s been a lot easier for small/mid cap growth investors to stay with long China, India, and Indonesia – all up again overnight to +12.5%, +27.6%, and +23.5% YTD, respectively – that’s where the real perf is and also why you’ll see a higher “International Equities” allocation in our asset allocation model than USA
  2. USD – one of the biggest overbought exhaustion signals in 15 years remains, but you saw what a downtick in USD can do yesterday; huge 1-day move in both Oil and Energy (XLE) stocks – I still think the Fed gets easier throughout Q3/Q4 as the rate of change in US economic growth data slows – consensus is hawkish
  3. UTILITIES – the Down Dollar, Down Rates move yesterday paid the slow-growth #YieldChasers – that was the 1st SPX Sector we signaled buy on alongside the SPX oversold signal at 1977; XLU +1.2% on the day yesterday to +13.1% YTD – we’ve stayed with that all year and I’m not changing my mind on it into the Fed statement either


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%

SPX 1977-2007

Shanghai Comp 2267-2357 

VIX 11.34-14.09 

Pound 1.61-1.64

WTI Oil 91.37-95.12 

Gold 1221-1273


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


What Is Your Vision? - COD 09.17


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.


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. In today’s edition, we highlight:


  1.  The degree to which Foreign Exchange is breaking down to new lows and the drivers of this move
  2. The continued buildup of negative momentum in Commodities and commodity-linked equities


Best of luck out there,


Darius Dale

Associate: Macro Team


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.                                               













  • YIELD CURVE: 1.91 from 1.92
  • VIX closed at 16.31 1 day percent change of 2.07%


MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Applications, Sept. 26 (prior -4.1%)
  • 8:15am: ADP Employment Change, Sept., est. 205k (prior 204k)
  • 9:45am: Markit US Mfg PMI, Sept. final, est. 57.9 (prior 57.9)
  • 10am: ISM Manufacturing, Sept., est. 58.5 (prior 59)
  • 10am: Construction Spending m/m, Aug., est. 0.5% (prior 1.8%)
  • 10:30am: DOE Energy Inventories



    • Senate, House out of session
    • 9:30am-1pm: Energy Sec. Moniz speaks at energy security event
    • Panel afterwards incl. IHS Vice Chair Yergin, White House counselor Podesta
    • 10:30am: Former President Bill Clinton  World Energy Engineering Congress keynote address
    • 2pm: SEC Commissioner Gallagher speaks at mkt structure conf.
    • 2:45pm FINRA CEO Richard Ketchum and SEC head of trading, Steve Luparello, also speak
    • 2:45pm: SEC Chair White speaks at panel at Intl Organization of Securities Commissions meeting in Rio De Janeiro
    • 4pm: Sec. of State Kerry to meet with Chinese counterpart Wang Yi at State Dept
    • U.S. ELECTION WRAP: Latino No-Shows; Senate Control Consensus



  • Pershing Square Raises Size of IPO to $2.73b From About $2b
  • Eurozone Sept. Manufacturing PMI 50.3; Est. 50.5
  • First Ebola Case Diagnosed in U.S. Confirmed in Dallas: CDC
  • Japan Stock Orders of $617b Scrapped in Trading Error
  • Bristol-Myers Transfers $1.4b of Pension Risk to Prudential
  • Nomura, Goldman Sachs Among Firms to Lead Japan Post IPO
  • FAA Orders New Pilot Displays for 1,300 Boeing Jets: WSJ
  • Oracle Seeks Partners in China to Expand Cloud Service Business
  • Fannie, Freddie Investors Lose Suits Over Profits Taken by U.S.
  • Wal-Mart Judge Says Retailer Must Face Mexican-Bribe Probe Suit
  • Apple Said to Add Gold Option to IPad in Effort to Boost Sales
  • BNY Mellon to Shutter Its Derivatives Sales, Trading Group
  • U.S. Said to Reach Accord With Brazil Ending Cotton Trade Fight
  • Hong Kong Leader Jeered by Protesters on China National Day
  • President Obama meets with Israeli Prime Minister Netanyahu
  • GM, Chrysler, Ford Sept. Auto sales; SAAR may drop vs Aug.



    • Acuity Brands (AYI) 8:56am, $1.22



  • Corn Extends Drop to Five-Year Low as U.S. Supply Tops Estimates
  • Goldman Sees Corn to Soybeans Extending Losses on U.S. Supplies
  • WTI Crude Rebounds Before U.S. Stockpile Report; Brent Climbs
  • Nickel Declines to Six-Month Low as Stockpiles Expand to Record
  • Arabica Coffee Rises on Outlook for Brazil’s Crop; Cocoa Falls
  • Platinum Drops to 5-Year Low as Palladium Declines on Car Sales
  • Top Cotton Trader Says Prices Need to Fall More to Cut Surpluses
  • U.S. Oil Exports Seen Breaking 1957 Record as Traders Dodge Ban
  • Palm Oil Declines After Posting Biggest Monthly Gain Since 2009
  • Marubeni Offloads $1 Billion Canadian Coal Mine for a Buck
  • Gas Allure in U.K. Power Poised to Extend Into Winter on Outages
  • Worst Seen Over for Global Oil Prices as Saudis Cut Output
  • Shanghai-London Parity Signals Aluminum Rally: Chart of the Day
  • Mideast Turmoil Keeps Gasoline at 45 Cents in Oil States: Energy


























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:


  • Buyers of a second home will be able to enjoy the same 30% down payment as first-time home buyers if they have fully repaid their previous mortgage.
  • This compares to the previous rules which required second homes to have a 60% down payment.
  • Second-home buyers can now get a 30% discount on their mortgage rates as well, a privilege previously limited only to first-home buyers.


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.


  • Growth in credit available for real estate development slowed sequentially in AUG and is negatively diverging from its trailing 3M, trailing 6M and trailing 12M trends, respectively. Lasting weakness in bank loan growth is weighing on the headline figure.
  • Both the value and volume (square footage) of building sales (i.e. demand) slowed sequentially in AUG and is negatively diverging from their respective trailing 3M, trailing 6M and trailing 12M trends across every category and on nearly every duration. While we tend to overly focus on 2nd derivative deltas in our analysis, the fact that demand for property in China is down 8-9% YoY is a callout in and of itself!
  • Looking to official National Bureau of Statistics figures, house price inflation slowed sequentially in AUG and is negatively diverging from its trailing 3M, trailing 6M and trailing 12M trends, respectively; similar trends are in place across all three tiers of cities. Looking to data from the China Real Estate Index System, average home prices (100 cities) contracted sequentially for the fifth consecutive month in SEP (-0.9% vs. -0.6% in AUG). On a YoY basis, CREIS data showed prices up +1.1% in SEP as 79 cities registered MoM declines; this compares to a +3.2% YoY pace in AUG, when 74 cities registered MoM declines.
  • Confidence and conditions in the real estate sector – which accounts for ~15% of Chinese GDP directly and materially affects some 40 industries – ticked down in AUG and is negatively diverging from its trailing 3M, trailing 6M and trailing 12M trends, respectively.




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:


  1. Is Chinese economic growth threatening to breach the aforementioned floor?; and
  2. Will Chinese policymakers actually implement the [meaningful] degree of stimulus investors have been clamoring for throughout this +17.9% move in the Shanghai Composite Index off its mid-June lows?


With respect to question #1, the answer is a comfortable “yes”:


  • Our GIP model has the Chinese economy mired in Quad #4 throughout 2H14. Supporting this forecast is a combination of negative high-frequency data, including but not limited to:
  • Our favorite economic indicator to watch – i.e. the rolling 2M average of the amalgamated YoY % change in monthly average prices of iron ore, rebar and coal – continues to crash (-24.3% YoY) and is negatively diverging from its trailing 3M, trailing 6M and trailing 12M trends, respectively.
  • Official Manufacturing PMI data slowing sequentially in AUG and is negatively diverging from its trailing 3M, trailing 6M and trailing 12M trends, respectively. This trend is true across the majority of sub-indices and for the SEP HSBC Manufacturing PMI figure as well.
  • The National Bureau of Statistics’ LEI, CEI, business cycle indicator and consumer confidence index all slowed sequentially in AUG and each is negatively diverging from its respective trailing 3M, trailing 6M and trailing 12M trends, with the exception of consumer confidence, which is up a measly +1% versus its TTM average.
  • More traditional high-frequency economic data like growth in fixed assets investment, industrial production, retail sales, exports and imports all slowed sequentially in AUG and each is negatively diverging from its respective trailing 3M, trailing 6M and trailing 12M trends.
  • Growth in capital flows has fallen off of a cliff (down -34% YoY) and is weighing heavily upon the marginal rate of change in credit expansion. Both indicators are negatively diverging from their respective trailing 3M, trailing 6M and trailing 12M trends.
  • Inflation has also nose-dived, with headline CPI, food CPI, non-food CPI, PPI and input prices all decelerating in AUG and each is negatively diverging from its respective trailing 3M, trailing 6M and trailing 12M trends.






With respect to question #2, we are increasingly of the view that the answer is “no”:


  • Both monetary and fiscal policy remain supportive of the “fine-tuning” message consistently echoed by Chinese government officials:
  • The sovereign budget balance has swing into deficit territory on a trailing 3M and trailing 6M basis, and the AUG deficit of -109.5B CNY is 88% wider than the trailing 3M average of -58.3B CNY.
  • Moreover, the net 44B CNY injected into Chinese money markets by the PBoC over the previous month is 50B CNY greater than the net -6B CNY withdrawal in the prior monthly period.
  • Earlier this month, Premier Li remarked that the Chinese economy is highly resilient, with plenty of potential and ample room to grow. He went on to say that China will continue leading a prudent monetary policy with focus on targeted easing measures. In line with this guidance for continued “tinkering”, the State Council announced that authorities will allow accelerated depreciation of new fixed asset investments.
  • Last week, Finance Minister Lou Jiwei said the Chinese economy had stayed within a reasonable range and employment was sound YTD. He went on to say that China will not dramatically alter its economic policy because of any one economic indicator.
  • Today, Minister of Commerce Gao Hucheng said the foundation is solid and that conditions are favorable for China to sustain medium or high economic expansion.
  • A senior PBoC official noted last week that in order to hit the government's goal of doubling GDP by 2020 the economy would only have to grow at an average annual rate of +6.7%. Consensus exceptions for Chinese real GDP growth in 2014E and 2015E is +60bps higher than that and +30bps higher than that, respectively. Expect those to get revised down if and when Beijing decides to scrap its +7.5% growth target for a more manageable figure at the end of this year.


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:


  • The iShares China Large-Cap ETF (FXI) has dropped -10% in a more-or-less straight line since peaking on September 5th; the Shanghai Composite Index has actually gained +1.6% over that same time frame. This performance divergence is not inconsistent with the divergences we seen in late-2012 and mid-2014 when the consensus macro narrative adopted by international investors decoupled from the more-informed macro narrative adopted on the mainland.
  • Our Tactical Asset Class Rotation Model (TACRM) continues to generate “high-conviction SELL” signals for both EM Equities and Commodities as primary asset classes.




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!




Darius Dale

Associate: Macro Team

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