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No Bullish Signals

Client Talking Points

EUROPE

European equities showing 0% follow through to the latest “communication tool” (read: hope); Portugal -1.1% leads losers this morning (-19.9% year-to-date) as liquidity traps remain obvious; Russian collapse remains a credible threat as the stock market continues to crash -23.7% year-to-date.

VIX

The front-month volatility went from 10.32 (July 7th when the Russell #Bubble topped) to 26.25 on Oct 15th, then back to 16.08 – yeah, that’s normal! But what is born out of that is an immediate-term risk range of 15.09-28.26 – enjoy.

S&P 500

Since implied volatility’s range is wicked wide now, so is the risk range for SPX at 1830-1947 (i.e. -4.6% downside vs +0.3% up); my dynamic (non-linear) model hasn’t seen risk ranges widen like this since NOV 2007 (when the SPX closed -6.6% on the month).

Asset Allocation

CASH 67% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 4%
FIXED INCOME 25% INTL CURRENCIES 4%

Top Long Ideas

Company Ticker Sector Duration
EDV

The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). U.S. real GDP growth is unlikely to come in anywhere in the area code of consensus projections of 3-plus percent. And it is becoming clear to us that market participants are interpreting the Fed’s dovish shift as signaling cause for concern with respect to the growth outlook. We remain on other side of Consensus Macro positions (bearish on Oil, bullish on Treasuries, bearish on SPX) and still have high conviction in our biggest macro call of 2014 - that U.S. growth would slow and bond yields fall in kind.

TLT

We continue to think long-term interest rates are headed in the direction of both reported growth and growth expectations – i.e. lower. In light of that, we encourage you to remain long of the long bond. The performance divergence between Treasuries, stocks and commodities should continue to widen over the next two to three months. As it’s done for multiple generations, the 10Y Treasury Yield continues to track the slope of domestic economic growth like a glove. We certainly hope you had the Long Bond (TLT) on versus the Russell 2000 (short side) as the performance divergence in being long #GrowthSlowing hit its widest for 2014 YTD (ex-reinvesting interest).

RH

Restoration Hardware remains our Retail Team’s highest-conviction long idea. We think that most parts of the thesis are at least acknowledged by the market (category growth, real estate expansion), but people are absolutely missing how all the pieces are coming together to drive such outsized earnings growth over an extremely long duration. The punchline of our real estate analysis is that a) RH stores could get far bigger than even the RH bulls seem to think, b) Aside from reconfiguring 66 existing markets, there’s another 19 markets we identified where the spending rate on home furnishings by people making over $100k in income suggests that RH should expand to these markets with Design Galleries, and c) the availability and economics on large properties for all these markets are far better than people think. The consensus is looking for long-term earnings growth of 28% -- we’re looking for 45%.  

 

Three for the Road

TWEET OF THE DAY

OIL: wti up small; trending weakness remains pervasive as #Quad4 deflation dominates

@KeithMcCullough

 

QUOTE OF THE DAY

“Each of us has a fire in our hearts for something. It’s our goal in life to find it and keep it lit.”

-Mary Lou Retton, winner of gold medal at 1984 Los Angeles Summer Olympic Games

STAT OF THE DAY

The share of first time homebuyers remains anemic, coming in at 29% in September. First time homebuyers have been sub-30% now for 17 of the last 18 months. The share of first time homebuyers was generally above 40% from 2001-2008 and briefly hit 50% in 2010 in response to the government's homebuyer tax credit programs.



All Boxed In

“The Italian people are tired of this corruption. Because we have too many people that steal, too many people that put the money in his pocket. We have 40% of people who don’t pay tax. Can you imagine? 40%. It’s unbelievable.”

-Renzo Rosso

 

Renzo Rosso is an Italian and founder of the Diesel jeans brand. He appeared in a 60 Minutes segment on Sunday titled “Saving Italy’s History Becomes Fashionable” that showed how he along with a number of other prominent Italian fashion houses (Tod’s, Fendi, Bulgari) were donating millions to repair and improve the country’s historical landmarks, from the Colosseum and the Spanish Steps in Rome to the 400 year old Rialto Bridge over the Grand Canal in Venice.

 

Why? Because the government is too broke to allocate funds to maintain the country’s historic treasures.

 

While the issues of deep corruption and oversized bureaucracy in Italy remain nothing new, it’s both telling and remarkable to see these individuals and companies take a stand (now), rather than pointing fingers or pushing the problem on to somebody else further down the road.

All Boxed In - z. colosseum

 

Back to the Global Macro Grind

 

If only the Italian government could take a similar stand and unilaterally agree to reform itself… NOW.

 

As we’ve noted in previous work, Italy recently joined France as a standout in the camp of “Austerity Is Dead” in submitting 2015 budget plans that extend out its initial fiscal consolidation targets.

 

Specifically, Italian PM Matteo Renzi presented a budget last week that included cuts to labor taxes and personal income taxes worth €18 Billion, however some €11 Billion of it will be funded with extra borrowing that will raise the country’s deficit-to-GDP to 3% this year versus its previous target of 2.6% (with 2015 forecast as 2.9%).

 

And so for the first time in history, the European Commission may exercise its power to reject both Italy’s and France’s budgets and ask for new ones.  A formal resolution is expected to come on October 29th.

 

What’s clear is that the 39 year old young-gun and reform-minded Renzi has inherited a challenged position and the country is looking for leadership to pull itself out of what will be three years of negative growth:

  • He filled a power vacuum in February 2014 composed of splintered and diverse parties (that legacy continues and challenges reform)
  • Italy has a record high youth unemployment rate at 43% (3rd highest in the Eurozone behind Spain and Greece at 50%+) and an aggregate unemployment rate of 12.3% vs Eurozone 11.5%
  • Italy has put little dent in its record high debt of 133% (2nd highest to Greece’s in the Eurozone and 3rd highest of all countries in the developed world) vs Eurozone at 92% (that remains a persistent threat to raising debt/increasing interest rate costs)

Yet as we described in an Early Look note on 10/10 titled #EuropeSlowing – Austerity Is Dead? the main “rub” throughout the Eurozone is a leadership one. 

 

On one hand, we have the ECB and European Commission pointing its finger at the member states to do more country-level reforms. On the other hand, we have member states (like Italy and France) saying they’ve already done a significant level of reform and collectively pointing the finger back at the ECB for not doing more to inflect the lack of growth and deflation they’re experiencing.

 

To fuel the fire, tack on the indecision created by the fiscally conservative Germans calling into question the potential negative consequences that could result for the ECB’s newest policy toolkit, including the TLTROs, ABS and covered bond buying programs. Just in the last few days we’ve heard whispers (because the information is private) that the ECB bought French, Italian, and Spanish covered bonds, ahead of ABS purchases and the second round of the TLTRO program that are slated to begin/issued in December.

 

We’ve been clear in our research, including in our Q4 Macro theme of #EuropeSlowing, that we do not see Draghi’s Drugs arresting the low levels of inflation in the Eurozone (CPI currently is at 0.3% Y/Y) nor producing sustainable economic growth (recent programs baked in and with record low interest rates).

 

As we show in The Chart of the Day below, not only do we think that Draghi’s inflation policies will not work, but we expect deflation to hit Italy (CPI at -0.1% Y/Y) and the other countries across the periphery harder, which should only further push out growth expectations and limit business and consumer confidence. 

 

If Renzi’s Reform is to ever become a success, it will be counted in many years, not many months, and our opinion is that regaining competitiveness within the confines of the Eurozone structure is a sisyphean task.

 

Our bottom-up, qualitative analysis (e.g. our Growth/Inflation/Policy framework) indicates that the Eurozone is setting up to enter the ugly Quad4 in Q4 (equating to growth decelerates and inflation decelerates).

 

From an investment position we continue to recommend shorting Italian (EWI) and French (EWQ) equities (down -7.6% M/M and -8.1% M/M, respectively) and shorting the EUR/USD (FXE) (down -1.2% M/M).

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.09-2.24%

SPX 1

RUT 1037-1115

DAX 8

USD 84.84-86.16

EUR/USD 1.26-1.28

 

Matthew Hedrick

Associate

All Boxed In - z. neu CPI


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 80.65%
  • SHORT SIGNALS 78.64%

October 22, 2014

October 22, 2014 - 1

 

BULLISH TRENDS

October 22, 2014 - Slide2

October 22, 2014 - Slide3

October 22, 2014 - Slide4

 

BEARISH TRENDS

October 22, 2014 - Slide5

October 22, 2014 - Slide6

October 22, 2014 - Slide7

October 22, 2014 - Slide8

October 22, 2014 - Slide9

October 22, 2014 - Slide10

October 22, 2014 - Slide11
October 22, 2014 - Slide12


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – October 22, 2014


As we look at today's setup for the S&P 500, the range is 117 points or 5.73% downside to 1830 and 0.29% upside to 1947.                                              

                                                                                 

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: 1.85 from 1.86
  • VIX closed at 16.08 1 day percent change of -13.41%

 

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Applications, Oct. 17 (prior 5.6%)
  • 8:30am: CPI m/m, Sept., est. 0.0% (prior -0.2%)
  • 10:30am: DOE Energy Inventories
  • 5pm: Reserve Bank of Australia’s Stevens speaks in Sydney

 

GOVERNMENT:

    • Sec. of State John Kerry visits Berlin
    • Senate, House out of session
    • 10am: SEC holds open meeting on rules relating to credit risk retention by securitizers of asset-backed securities
    • 3:30pm: Fed board holds open meeting to discuss final rulemaking requiring sponsors of securitization transactions to retain risk in those transactions
    • U.S. ELECTION WRAP: Paul’s Prediction; Terror Ads; PAC Showdown

 

WHAT TO WATCH:

  • Yahoo Pushes Back Against Activist Starboard as Sales Gain
  • Daimler Sells Stake in Tesla as Powertrain Supply Deal Continues
  • Dimon Says ‘Terrifying’ Cancer Hasn’t Changed His JPMorgan Plans
  • J&J Sees 250,000 Ebola Vaccine Doses Ready for Trials in May
  • Target CEO Eyes Holiday Turnaround With Free Shipping, Faux Fur
  • Icahn Says EBay Should Pursue PayPal Sale Now in Spin Dual Track
  • GT Advanced Allowed to Wind Down After Deal With Apple
  • Apollo to Raise $2b-$3b From New Natural Resources Fund: Reuters
  • Michigan Governor Signs Bill Securing Tesla Direct Sales Ban
  • BOE Split on Key Rate as Majority Sees Heightened Euro-Area Risk
  • Total CEO Will Contend With Production Slump as Pouyanne Tipped
  • Heineken Revenue Misses Analyst Estimates as Europe Wanes

 

AM EARNS:

    • Abbott Labs (ABT) 7:44am, $0.60 - Preview
    • Amphenol (APH) 8am, $0.57
    • Biogen Idec (BIIB) 6:45am, $3.49 - Preview
    • Boeing (BA) 7:30am, $1.97 - Preview
    • Boston Scientific (BSX) 7am, $0.20 - Preview
    • Dow Chemical (DOW) 7am, $0.67 - Preview
    • EMC (EMC) 6:53am, $0.46 - Preview
    • FNB (FNB) 8:30am, $0.21
    • General Dynamics (GD) 7am, $1.91 - Preview
    • Gentex (GNTX) 8am, $0.47
    • Hudson City Bancorp (HCBK) 8am, $0.06
    • Ingersoll-Rand (IR) 7am, $1.03
    • Interpublic Group (IPG) 7am, $0.21
    • Lumber Liquidators (LL) 7am, $0.67
    • New York Community Bancorp (NYCB) 7am, $0.26
    • Norfolk Southern (NSC) 8am, $1.83 - Preview
    • Northern Trust (NTRS) 7:30am, $0.87
    • Northrop Grumman (NOC) 7am, $2.13 - Preview
    • Owens Corning (OC) 7:28am, $0.48
    • Polaris (PII) 6am, $2.02
    • Popular (BPOP) 8am, $0.67
    • Ryder System (R) 7:55am, $1.63
    • SEI Investments (SEIC) 8:30am, $0.47
    • Simon Property (SPG) 7am, $0.84 - Preview
    • Stanley Black & Decker (SWK) 6am, $1.44
    • Thermo Fisher Scientific (TMO) 6am, $1.69 - Preview
    • Tupperware Brands (TUP) 7am, $0.91
    • UniFirst (UNF) 8am, $1.31
    • US Bancorp (USB) 7:15am, $0.78
    • Xerox (XRX) 7am, $0.26

 

PM EARNS:

    • A Schulman (SHLM) 4:10pm, $0.64
    • Albemarle (ALB) 4:03pm, $1.02
    • Angie’s List (ANGI) 4:02pm, ($0.07)
    • AT&T (T) 4:01pm, $0.64 - Preview
    • Brandywine Realty (BDN) 4:15pm, $0.02
    • CA (CA) 4:05pm, $0.62
    • Cheesecake Factory (CAKE) 4:15pm, $0.57
    • Citrix Systems (CTXS) 4:05pm, $0.73
    • Core Laboratories (CLB) 4:06pm, $1.52
    • CoreLogic (CLGX) 4:10pm, $0.39
    • Covanta Holding (CVA) 4:01pm, $0.21
    • CR Bard (BCR) 4:05pm, $2.10
    • Equifax (EFX) 4:15pm, $0.98
    • Everest Re (RE) 4:05pm, $4.99
    • Fortinet (FTNT) 4:15pm, $0.11
    • Graco (GGG) 4:15pm, $0.95
    • Lam Research (LRCX) 4:05pm, $0.93
    • Leggett & Platt (LEG) 4:05pm, $0.49
    • NXP Semiconductor (NXPI) 8pm, $1.31
    • O’Reilly Automotive (ORLY) 6:30pm, $1.95
    • Plexus (PLXS) 4pm, $0.78
    • Polycom (PLCM) 4:05pm, $0.20
    • Select Comfort (SCSS) 4:01pm, $0.40
    • ServiceNow (NOW) 4:05pm, $0.01
    • SLM (SLM) 5:15pm, $0.17
    • Susquehanna (SUSQ) 4:30pm, $0.20
    • Teradyne (TER) 5:01pm, $0.40
    • Torchmark (TMK) 4:01pm, $1.02
    • Tractor Supply (TSCO) 4:01pm, $0.50
    • Varian Medical (VAR) 4:05pm, $1.21
    • Weatherford (WFT) Aft-mkt, $0.33
    • Yelp (YELP) 4:05pm, $0.03

 

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Gold Retreats From Six-Week High on Demand Outlook to Dollar
  • Tin’s New Frontier Myanmar Threatens Indonesia: Southeast Asia
  • Zinc Rises as Inventories at Two-Month Low Support Shortage Call
  • India Eschewing Raw Sugar Output After Export Aid Withdrawn
  • WTI Oil Climbs as U.S. Fuel Supply Seen Lower; Brent Advances
  • China Sept. Nickel Ore Imports From Philippines 4.52 Mln Tons
  • Steel Rebar Falls to 2-Week Low as China Supply Exceeds Demand
  • European Gas Traders Boost Near-Term Buying to Cut Russian Need
  • UD Group Plans to Apply for Membership on London Metal Exchange
  • Cocoa Arrivals in Brazil’s Bahia Advance 3.5%, Hartmann Reports
  • Rubber Rises to 6-Week High as Thai Efforts Offset China Concern
  • Zinc Rises From 3-Month Low Before China PMI Data: LME Preview
  • Truffle Boom Brings La Dolce Vita Amid Italy’s Economic Slump
  • Nickel Surplus Was 4.7Kt in August in Second Month of Oversupply

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


CHINA REITERATES OUR CALL THAT GLOBAL GROWTH IS SLOWING

Takeaway: China’s 3Q/SEP economic data confirms our view that global growth is slowing and will likely continue to slow through at least year-end.

Contextualizing China’s 3Q GDP Print

This we know: Chinese economic data is, at best, massaged and, at worst, fabricated (as confirmed by Chinese Premier Li Keqiang years ago). In fact, we’d argue Chinese economic data is probably about as massaged as any pre-election Jobs Report is likely to be in the US!

 

Still, in the context of our process of focusing primarily on slopes, inflections and deltas when analyzing economic data, we are more than happy to compare any data point to the previous data point(s), so long as the data series itself is methodologically consistent.

 

In that light, it doesn’t matter to us if China’s “actual” real GDP growth is +7.3% YoY (NBS for 3Q14) or the +3.9% forecasted by the Conference Board’s 2020-2025 Chinese growth outlook. All we care about is any directional deviation from trend – which is what actually matters to investors, per the preponderance of Dr. Daniel Kahneman’s work in the field of behavioral economics (e.g. anchoring, prospect theory, etc.).

 

From that perspective, China’s 3Q14 real GDP growth rate of +7.3% is:

 

  • The slowest rate of change since 1Q09;
  • Is -1.1 standard deviations from its trailing 3Y average; and
  • Is in the 5th percentile of readings on a trailing 10Y basis.

 

4Q Looks Dour as Well

From a forward-looking perspective, a marginally difficult base effect, slowing sequential momentum and seasonality are all supportive of continued trend-based slowing in the preponderance of China’s reported growth data here in 4Q – whatever underlying unit demand may be.

 

CHINA REITERATES OUR CALL THAT GLOBAL GROWTH IS SLOWING - CHINA

 

CHINA REITERATES OUR CALL THAT GLOBAL GROWTH IS SLOWING - China GDP Seasonality

 

Diving deeper into the aforementioned point regarding slowing sequential momentum, our analysis of the data shows a Chinese economy continuing to lose steam without a meaningful enough change in either monetary or fiscal policy to support any semblance of a sustained inflection (i.e. 2-3 months or more).

 

For example:

 

  • As of mid-OCT, the 2M moving average of the arithmetic mean of the YoY % change in monthly average iron ore, rebar and coal prices – our favorite real-time indicator for the slope of Chinese growth – continues to crash on a YoY basis and is decelerating versus its trailing 3M, 6M and 12M trends.
  • As of SEP, China’s headline PMI data and each of its 10 sub-indices are decelerating versus their respective trailing 3M trends. China’s trade balance tells a similar tale; it too is decelerating both sequentially and versus its trailing 3M and 6M trends.
  • As of SEP, various measures of “hot money” capital flows are decelerating both sequentially and versus their respective trailing 3M, 6M and 12M trends.
  • The NBS’s Business Cycle Signal Index, Coincident Economic Indicator, Consumer Confidence Index and Leading Economic Indicator each decelerated sequentially in SEP.
  • As of SEP, growth in retail sales has decelerated both sequentially and versus its trailing 3M, 6M and 12M trends. This is especially troubling considering the fact that household consumption has overtaken investment amid structural rebalancing efforts (“C” = 48.5% of GDP in the YTD vs. 41.5% for “I”).
  • In the YTD through SEP, growth in fixed assets investment decelerated both sequentially and versus its trailing 3M, 6M and 12M trends.
  • On the positive side of the ledger, growth in exports, FDI, imports, industrial production and total social financing has accelerated both sequentially (in SEP) and versus their respective trailing 3M trends.

 

CHINA REITERATES OUR CALL THAT GLOBAL GROWTH IS SLOWING - China Iron Ore  Rebar and Coal YoY vs. GDP

 

CHINA REITERATES OUR CALL THAT GLOBAL GROWTH IS SLOWING - CHINA High Frequency GIP Data Monitor

 

Looking to the Chinese property market – which accounts for ~15% of Chinese GDP directly and materially affects some 40 industries – our analysis shows continues weakness there as well:

 

  • As of SEP, growth in the availability of funding in the real estate sector decelerated both sequentially and versus its trailing 3M, 6M and 12M trends.
  • As of SEP, growth in both the nominal value and square footage of property purchases decelerated sequentially and versus their respective trailing 3M, 6M and 12M trends.
  • Contrast this with growth in both starts and completions having accelerated sequentially in SEP and versus their respective trailing 3M and 6M trends, and it’s easy to assume a dour outlook for Chinese property prices.
  • Speaking of, growth in Chinese property prices across all tiers of cites decelerated both sequentially in AUG and versus their respective trailing  3M, 6M and 12M trends. Data from the China Real Estate Index System confirms a continued slowdown in SEP where average home prices across the 100 largest cities decelerated to +1.2% YoY from a gain of +3.2% in AUG. The -0.9% MoM decline recorded in SEP ‘14 is the steepest drop since the survey began back in 2010.
  • All of this rhymes with the latest Real Estate Climate Index reading of 94.8 in AUG, which represented a deceleration from both a sequential perspective and versus its trailing 3M, 6M and 12M trends.

 

CHINA REITERATES OUR CALL THAT GLOBAL GROWTH IS SLOWING - CHINA Property Market Monitor

 

Again, it’s important to note that our daily analysis of official rhetoric via mainland press continues to suggest that no major stimulus initiatives are coming down the pike. Mortgage policy continues to ease, at the margins, but not in a material enough way to inflect the broader growth outlook; oversupply, rather than a lack of demand, is actually the key issue facing China’s housing market going forward.

 

For an even deeper dive into China’s Growth/Inflation/Policy outlook, please review our 9/30 note titled, “DEFCON 2.5: THE “CHINA OVERHANG” IS LIKELY TO CONTINUE”.

 

Parting Thoughts

All told, the inclusion of today’s growth data and its associated policy rhetoric (the NBS actually talked up the 3Q GDP figure, saying it fell within their so-called “reasonable range”) is just more of the same as Chinese policymakers attempt to gradually walk the mainland economy “down the ledge” of overcapacity and systemic indebtedness, as opposed to allowing it to “fall off a cliff”.

 

It’s worth noting that our views on the Chinese economy and the policy that drives it haven’t changed all that much since we correctly forecasted the aforementioned approach over three years ago. As such, we continue to think that estimates of marginal Chinese demand should continue to decline for the foreseeable future.

 

With #ChinaSlowing (15% of marginal global demand in 2013), #JapanSlowing (5% of marginal global demand in 2013), #EuropeSlowing (18% of marginal global demand in 2013), and #USSlowing (17% of marginal global demand in 2013) all at once, what could possibly go wrong?

 

DD

 

Darius Dale

Associate: Macro Team


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