Takeaway: In today's Macro Playbook, we detail our bullish-to-bearish fundamental reversal on Chinese equities. This is both new and worth your time.


Long Ideas/Overweight Recommendations

  1. Utilities Select Sector SPDR Fund (XLU)
  2. iShares 20+ Year Treasury Bond ETF (TLT)
  3. SPDR Gold Shares (GLD)
  4. Consumer Staples Select Sector SPDR Fund (XLP)
  5. iShares U.S. Home Construction ETF (ITB)
  1. LONG BENCH: PowerShares DB U.S. Dollar Index Bullish Fund (UUP), Vanguard REIT ETF (VNQ), Vanguard Extended Duration Treasury ETF (EDV), Healthcare Select Sector SPDR Fund (XLV)

Short Ideas/Underweight Recommendations

  1. SPDR Barclays High Yield Bond ETF (JNK)
  2. SPDR S&P Regional Banking ETF (KRE)
  3. Industrial Select Sector SPDR Fund (XLI)
  4. iShares MSCI Emerging Markets ETF (EEM)
  1. iPath S&P GSCI Crude Oil Total Return ETN (OIL)
  1. SHORT BENCH: SPDR Oil & Gas Exploration & Production ETF (XOP), CurrencyShares Euro Trust (FXE), WisdomTree Emerging Currency Fund (CEW)


***Please note we are dropping the DXY from our top-5 long ideas for the time being. Refer to our scenario analysis for the next 4-6 weeks in yesterday’s Macro Playbook for more details. In lieu of the dollar, we are “upgrading” our bullish bias on Utes in light of our bearish outlook for Treasury bond yields from here.***



“We Will Sell China”: Today we are removing our bullish bias on Chinese equities and view this asset class as one to “short on strength” rather than a “buy on weakness”. Since we outlined our bullish bias in our 1/13 edition of the Macro Playbook, the Morgan Stanley China-A Share Fund (CAF) has declined -245bps.


Our decision to not let a small loss turn into a larger one is threefold:


  1. Momentum is breaking down as the market responds poorly to a lack of sufficient liquidity provision by policymakers.
  2. The PBoC is not inclined to deliver a sufficient amount of liquidity provision while the State Council is inclined to stand pat on sovereign fiscal policy – effectively forcing cash-strapped local governments to bear the brunt of any fiscal stimulus.
  3. This is because a large provision of liquidity is likely to put incremental pressure on the Chinese yuan against the backdrop of a preference for exchange rate stability in Beijing.


Regarding point #1:


  • Today the Shanghai Composite Index confirmed a breakdown through what had been intermediate-term TREND support of 3,202.
  • The market is down -3.1% over the past two days – following Wednesday’s post-close announcement of a system-wide -50bps RRR cut out of the PBoC – the first system-wide cut since May of 2012.
  • According to our calculations, that frees up about ~570B CNY into the financial system, which pales in comparison to the estimated 2.05T CNY lockup ahead of 24 IPOs next week or the cumulative 1.98T CNY of capital that has left the country since the steady trend of outflows began in June.
  • Such capital outflows have perpetuated a +155bps back-up in China’s benchmark 7-day repo rate since the start of the fourth quarter.




THE HEDGEYE MACRO PLAYBOOK - China Benchmark Interest Rates



Source: Bloomberg L.P.



Source: Bloomberg L.P.



Regarding point #2:


  • While the PBoC has added a 195 CNY into the banking system via reverse repos over the past three weeks, it has neither lowered rates on those repos nor signaled that such injections are designed for anything more than liquidity provision ahead of the always-tight Lunar New Year holiday.
  • In fact, Lu Lei, head of the PBoC’s research bureau confirmed that to be case – as well as stating firmly that the aforementioned RRR cut shouldn’t be taken as a sign of the start of a broader, stronger monetary easing cycle.
  • On the fiscal policy side of the ledger, growth in central government expenditures continues to slow on both a sequential and trending basis – effectively leaving the “heavy lifting” to the provincial governments.
  • That sounds fine in the context of China’s fragmented political economy – as well as the announced 15T CNY in planned infrastructure investment across 14 provinces  in recent weeks/months – but not in the context of land sales declining -14% YoY and broad credit growth slowing on both a sequential and trending basis, begging the question: how will such projects be financed?
  • Central government fiscal revenue slowed to +8.6% YoY in 2014 – the slowest pace since 1991 – which implies China has limited options besides levering up the sovereign balance sheet to finance such lofty development targets.






Regarding point #3:


  • In an attempt to deter incremental capital outflows, today the PBoC raised the yuan's reference rate to a level that forced appreciation back into the currency’s +/- 2% trading band.
  • Specifically, the CNY reference rate was hiked by +0.17% to 6.1261 per USD, which was +2.06% stronger than Thursday’s close. This move that perpetuated a +0.12% “short-squeeze” in the USD/CNY cross to 6.2447 (a -1.9% discount to the reference rate).
  • Recall that such capital outflows perpetuated a -2.4% decline in the CNY vis-à-vis the USD last year – the first annual decline since 2009. The non-deliverable forwards market is pricing in roughly the same degree of downside over the NTM.
  • That such speculation is occurring in an environment of rising real interest rates speaks volumes to following key economic risks that continue to weigh on Chinese GDP growth estimates:
    • A continued unwind of the fixed assets investment bubble as both demand and prices contract in the property market. Specifically, property prices in first, second and third tier cites are down -3.1% YoY, -4.3% YoY and -4.5% YoY, respectively – and growth is getting incrementally negative by the month.
    • A continued slowdown in the pace of credit intermediation as growth in China’s banking sector liabilities slows amid structural current account rebalancing.
    • A continued slowdown in the pace of credit intermediation as debt rollovers in an environment of negative industrial profit growth (down -8% YoY in DEC) broadly restrain the marginal supply of credit. China’s low-NPL ratio is arguably the root cause of its economic slowdown.


















All told, we now anticipate that Chinese shares have considerable downside risk over the intermediate term – so long as the aforementioned policy stance remains in place. And until that changes, our bias on Chinese equity ETFs – namely the CAF and FXI – will remain bearish.


Chinese stocks are now overvalued vis-à-vis other international equity markets and have been overbid with massive margin leverage (a record 778B CNY on the Shanghai Stock Exchange) relative to what now looks like a rapidly declining probability of meaningful enough monetary stimulus to combat the obvious downside to Chinese growth over the intermediate-to-long term.




THE HEDGEYE MACRO PLAYBOOK - China Iron Ore  Rebar and Coal YoY vs. GDP


***CLICK HERE to download the full TACRM presentation.***



Global #Deflation: Amidst a backdrop of secular stagnation across developed economies, we continue to think cyclical forces (namely #StrongDollar driven commodity price deflation) will drag down reported inflation readings globally over the intermediate term. That is likely to weigh heavily upon long-term interest rates in the developed world, underpinning our bullish outlook for U.S. Treasury bonds.


The Hedgeye Macro Playbook (2/5)


#Quad414: After DEC and Q4 (2014) data slows, in Q1 of 2015 we think growth in the US is likely to accelerate from 4Q, aided by base effects and a broad-based pickup in real discretionary income. We do not, however, think such a pickup is sustainable, as we foresee another #Quad4 setup for the 2nd quarter. Risk managing these turns at the sector and style factor level will be the key to generating alpha in the U.S. equity market in 1H15.


EARLY LOOK: Anchorman (2/5)


Long #Housing?: The collective impact of rising rates, severe weather, waning investor interest, decelerating HPI, and tighter credit capsized housing in 2014.  2015 is setting up as the obverse with demand improving, the credit box opening and 2nd derivative price and volume trends beginning to inflect positively against progressively easier comps. We'll review the current dynamics and discuss whether the stage is set for a transition from under to outperformance for the complex.


HOUSING: Purchase Apps | Easings & Accelerations (2/4)


Best of luck out there,




Darius Dale

Associate: Macro Team


About the Hedgeye Macro Playbook

The Hedgeye Macro Playbook aspires to present investors with the robust quantitative signals, well-researched investment themes and actionable ETF recommendations required to dynamically allocate assets and front-run regime changes across global financial markets. The securities highlighted above represent our top ten investment recommendations based on our active macro themes, which themselves stem from our proprietary four-quadrant Growth/Inflation/Policy (GIP) framework. The securities are ranked according to our calculus of the immediate-term risk/reward of going long or short at the prior closing price, which itself is based on our proprietary analysis of price, volume and volatility trends. Effectively, it is a dynamic ranking of the order in which we’d buy or sell the securities today – keeping in mind that we have equal conviction in each security from an intermediate-term absolute return perspective.                

January Sales & Traffic Strongest in 6 Years

Black Box reported January results that were the strongest in over six years.  While the majority of this strength is being attributed to a mild winter compared to a year ago, the underlying trends suggest a marked improvement across the industry.  Easy comparisons through February should keep restaurant stocks, particularly fast casual concepts, afloat barring any dismal earnings results.  But, with the data this strong, we expect management teams to have a very upbeat outlook for 2015 – despite some inflationary pressures on their cost of sales and labor lines.  All told, expectations for the year will be high, which means the opportunity to create alpha will widen when sales trends reverse (tough comparisons in 2H15).


Restaurant same-store sales increased +6.1% as traffic increased +2.4% during the month.  These numbers were up 300 bps and 180 bps, respectively, on an absolute sequential basis and up 210 bps each on a two-year average sequential basis.


January Sales & Traffic Strongest in 6 Years - 1


January Sales & Traffic Strongest in 6 Years - 2


January Sales & Traffic Strongest in 6 Years - 3


A number of things (stronger traffic, lower gas prices, higher consumer confidence) has given management teams the confidence to take pricing recently and consumers the ability to increase their spend.  To that extent, average weekly sales per restaurant increased +2.5% per restaurant over December 2014.  This is important, considering the aforementioned pressures managers will face in 2015.  Beef prices are expected to be the largest headwind on the commodity front, while ACA and pressure on staffing (accelerating wage and salary growth) will be headwinds on the labor front.


January Sales & Traffic Strongest in 6 Years - 4


The extent to which restaurant sales remain strong will determine whether or not restaurants will be able to offset these pressures but, currently, there’s no denying the favorable outlook.  We expect sales to continue to remain robust throughout February given the easy comparisons. 

Keith's Macro Notebook 2/6: USD | UST 10YR | China

Hedgeye CEO Keith McCullough shares the top three things in his macro notebook this morning.


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P: Walking the Plank (4Q14)

Takeaway: P gave itself some breathing room, but likely not enough. More importantly, the much bigger risks are approaching.


  1. 4Q14 WORSE THAN IT LOOKED: P missed 4Q14 revenue estimates by 3% on a shortfall in advertising revenue from three industry groups with seasonally stronger 4Q ad spend; the question is why?  Also, P saw accelerating user growth in 4Q, but it was coming off a deflated 4Q13 comp; a quarter that we believe P experienced heightened attrition.
  2. BOUGHT SOME BREATHING ROOM, BUT: Management took the smarter route and rebased expectations, guiding to 2015 revenues of $1.16B at midpoint (vs. $1.20B for consensus).  However, management appears to be hinging part of its outlook on its expectation for mid-teens listener hour growth in 2015, a setup we believe is highly unlikely.
  3. THE BIGGER RISKS REMAIN: We continue to expect users to decline on a y/y basis in 2015 since P’s remaining TAM isn’t large enough to supports its heightened attrition issues.  Meanwhile, Webcaster IV will remain an overhang on the stock.  As a reminder, anything short of a best-case scenario for P on Webcaster IV could derail its entire business model.  Click the note links below for more detail.



P missed 4Q14 revenue estimates by 3% on a shortfall in advertising revenue; specifically from Retail, Telecom, and Consumer Electronic advertisers.  However advertising spend across these three groups is seasonally higher in the 4Q, so the question is why was P seeing pressure here? We're not sure if this is a sign of wavering demand, or a one-off instance, but a concern nonetheless. 


The bright spot from the quarter was its accelerating user growth.  However, the acceleration is coming off what we believe to be a deflated comp in 4Q13, which is when we suspect P experienced heightened level of attrition.  Back in August 2013, P altered its ad feed from 1 ad/15 minutes to 2 ads/20 minutes, and increased its max ad load at the same time.  In turn, P saw its sharpest y/y deceleration in active user growth in its reported history in 4Q13; likely a result of ad load pushing the user away.  So we wouldn't read into the 4Q14 acceleration


P: Walking the Plank (4Q14) - P   Active User Deceleration 4Q14



Management took the smarter route and rebased expectations, guiding to 2015 revenues $1.16B at midpoint (vs. $1.20B for consensus).  However, management commentary during the call suggests that the company appears to be hinging part of its outlook on its expectation for mid-teens listener hour growth in 2015, a setup we believe is highly unlikely.


As we detail in the note below, we're expecting users to decline in 2015.  P has long history of heightened attrition, and our TAM analysis suggests P's remaining TAM will not be able to compensate for much longer.  


P: New Best Idea (Short)

12/22/14 03:56 PM EST

[click here]


Our scenario analysis below suggests that P would require a sharp acceleration in Ad RPMs to hit revenue guidance if it can't produce double-digit listener hour growth as management expects.  However, accelerating Ad RPMs would likely mean increasing sell-through on idle inventory (i.e. increasing ad load), which we believe would exasperate its retention issues further.  In short, P's core growth drivers are working again each other.


P: Walking the Plank (4Q14) - P   Ad Business Model 

P: Walking the Plank (4Q14) - P   2015 Scenario Analysis Guidance



As we mentioned above, we continue to expect users to decline on a y/y basis during 2015 since P’s remaining TAM isn’t large enough to supports its heightened attrition issues.  We suspect that would crush investor sentiment whenever that occurs. 


Meanwhile, Webcaster IV will remain an overhang on the stock.  As a reminder, anything short of a best-case scenario for P on Webcaster IV could derail its entire business model.  Click the note links below for more detail.


P: Webcaster IV = Powder Keg

01/13/15 02:49 PM EST

[click here]



Let us know if you have any questions or would like to discuss in more detail.


Hesham Shaaban, CFA



Takeaway: Carnival may not be sourcing as much from North America as previously thought

Chart Of The Day: Analysis of Carnival's revenue by source market in 2014

  • Digging into CCL's 10K, we found that sourcing from Europe actually accounted for a greater proportion of CCL's revenues in 2014 vs 2013 - 36.7% of revenues came from the European source markets in 2014, up 1.6 points from 2013.
  • Better European pricing vs poor Caribbean pricing in 2014 had some impact but this was still a surprise as it suggests sourcing inflexibility in Europe. 
  • CCL had a strong performance in Europe thanks to Costa in 2014. CCL's European capacity on an ALBD basis decreased 2% points YoY in 2014.
  • Out of the 3 major cruise lines, Carnival Corp maintains the highest exposure to the European consumer given its large fleet of ships. The chart below suggests that Carnival Corp is even more reliant on the European consumer and if demand trends deteriorate there in 2015, it could have an outsized effect.  



LEISURE LETTER (02/06/2015)




  • Feb 10: 
    • IGT extraordinary shareholder meeting vote
    • HOT 4Q CC 10:30am
      • (1866) ; pw: 67514695
  • Feb 12: 
    • MPEL 4Q CC 8:30am
      • (1866) ; pw: MPEL
    • PNK 4Q CC 10:00am
      • ; pw: 68847867
    • BYD 4Q CC 5:00pm
      • ; pw: 5378350
  • Feb 17: MGM 4Q CC 11:00am
    • ; pw: 8870181
  • Feb 18: 
    • HYATT 4Q CC 11:30am
      • ; PW: 62845475
    • MAR 4Q release 5pm
  • Feb 19:
    • HST 4Q CC 9:00am
  • Feb 25: Prestige analyst day (9:00am-12pm)


China  Hua Jingfeng, a deputy bureau chief at the Ministry of Public Security, said illegal gambling remained a problem even though the government was "forcefully keeping it in check". "Some foreign countries see our nation as an enormous market, and we have investigated a series of cases," Hua told reporters.


"A fair number of neighboring countries have casinos, and they have set up offices in China to attract and drum up interest from Chinese citizens to go abroad and gamble. This will also be an area that we will crack down on."


Casinos are not allowed to legally advertise in mainland China, but operators have skirted around the issue by promoting the resorts where the casinos are located.  Hua said the government was also seeking to crack down on a "small number" of police and government officials who are guilty of collusion in covering up gambling and providing an umbrella of protection for it.

Article HERE

Takeaway:  Manila, South Korea, Cambodia, etc. might not get the big boost expected from incoming Chinese gamblers 


Novomatic- The gaming equipment supplier says that according to preliminary data, revenue for 2014 generated by its three holding companies totaled EUR3.8 billion (US$4.4 billion), +8% YoY.  


The firm said in a statement: “During the financial year 2014, the group‘s continued growth was based on the intensification of activities in the European core markets such as the U.K., Spain, Italy and also Holland, where through acquisitions the company has achieved a position as market leader.

Article HERE


SGMS - As part of its association with global gambling operator, Scientific Games has initiated the distribution of a selected group of its online slots to the residents of New Jersey. From February 2015, the registered players of Borgata Casino and the New Jersey arm of PartyPoker will have access to SG video slots.

Article HERE


RCL - arranged financing for its fourth Oasis-class ship at STX France, which cut steel for the newbuild this week. The unsecured term loan is for an amount up to the US dollar equivalent of approximately €931m. The financing is fully guaranteed by France's export credit agency, Compagnie Française D’Assurance pour le Commerce Extérieur. The 12-year loan, to be assigned to Royal Caribbean once the ship is delivered in the second quarter of 2018, will amortize semi-annually. At the company's election, interest will accrue at a fixed rate of 3.72% or at a floating rate equal to LIBOR plus 1.1%. 

Article HERE





Japan – Japan’s government has tapped Innovation Group to aid in the study as part of a team of industry advisors led by Deloitte Touche Tohmatsu.

The research will include advice for implementing gaming regulations, practices from similar jurisdictions, background on problem gaming programs, anti-money laundering approaches and the financial impacts from competing jurisdictions.


Hedgeye Macro Team remains negative Europe, their bottom-up, qualitative analysis (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) = Europe Slowing.

Takeaway:  European pricing has been a tailwind for CCL and RCL but a negative pivot here looks increasingly likely in 2015.

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