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The Global Central Planning Circus (China Edition)

The Shanghai Composite? It is up another +2.4% this morning to +36% year-to-date (a new high). My, oh my… And, get this, China is up +92% since growth and inflation really started to slow in October of 2014!

 

Meanwhile, observe the *Record* weekly gain in Chinese stock brokerage accounts opened this week. 3,250,000 accounts were opened (per Sina.com.)

 

No issues here. This will all end really well. Move along.

 

The Global Central Planning Circus (China Edition) - y77

 

Editor's Note: This is an excerpt from Hedgeye morning research today. Click here for more information and how you can become a subscriber.


China, USD and Housing

Client Talking Points

CHINA

The Shanghai Composite is up another +2.4% this morning to +36% year-to-date (new high) and, get this, +92% since growth and inflation really started to slow in Oct of 2014! A *Record* weekly gain in Chinese stock brokerage accounts opened this week (3.25M) per Sina.com.

USD

The U.S. Dollar backs off again this morning as macro markets continue to price in a Lower-For-Longer Fed (FOMC meeting is next week) - both our Foreign Currency and 10YR UST Yield risk ranges are tightening now – that implies less short-term volatility in both big macro markets if the Fed delivers on dovish (for now).

#HOUSING

We’ll see where the bears live today/tomorrow as we get both Existing and New Home Sales reports; ITB (our favorite Housing ETF) +1.4% in a down tape yesterday – that sub-sector is +8.6% year-to-date and we think for good fundamental reasons.

 

Asset Allocation

CASH 32% US EQUITIES 14%
INTL EQUITIES 16% COMMODITIES 2%
FIXED INCOME 30% INTL CURRENCIES 6%

Top Long Ideas

Company Ticker Sector Duration
MTW

MTW revised down its 2015 guidance for the Foodservice Equipment segment and preannounced a weaker than expected 1Q 2015. Sales in the quarter are a noteworthy miss, but we do not believe that the release has relevance for our sum-of-the-parts valuation thesis, and see many reasons to anticipate stronger operating results in 2H 2015.  Basically, we think investors stand to be paid for suffering through this volatility, with potential share price upside on separation ranging from the high 20s to low 40s. Near-term profit weakness is partly why the shares are ‘cheap’, and we think holders may be compensated well for the volatility. The shares are currently trading lower on a weaker than expected 1Q15, but 2Q15 should show improved Crane segment results and 2H should show better Foodservice Equipment results.

ITB

iShares U.S. Home Construction ETF (ITB) is a great way to play our long housing call. The housing data was mixed in the latest week with the April homebuilder confidence survey (NAHB HMI) putting in a strong sequential improvement, while March Housing Starts were a bit soft. The National Association of Home Builders (NAHB) released its April Housing Market Index survey (HMI) – essentially a survey of builder confidence. The print was strong as it showed a nice bounce across all three survey categories: traffic of prospective buyers, current conditions, and expectations 6 months out.  Housing Starts were up sequentially in March, but by less than the market expected. Total Starts rose by 2% to 926,000 (seasonally-adjusted annualized rate) from 908,000 in February.

TLT

On the domestic fixed income front we’re looking at lower yields for longer. Lower yields benefit those slow-growth fixed income cash flows tied to the treasury curve (yields down, bonds up). TLT sets-up nicely in a slow-growth, deflationary setting because inflation missing=expectation for even easier policy=more central-planning cowbell=lower yields for longer.

Three for the Road

TWEET OF THE DAY

On the domestic fixed income front we’re looking at lower yields for longer. Lower yields benefit those slow-growth fixed income cash flows tied to the treasury curve (yields down, bonds up). TLT sets-up nicely in a slow-growth, deflationary setting because inflation missing=expectation for even easier policy=more central-planning cowbell=lower yields for longer.

QUOTE OF THE DAY

Seize the day, and put the least possible trust in tomorrow.

Horace

STAT OF THE DAY

Purchase Applications are up +5% week-over-week and accelerating to +15.4% year-over-year.


Stimuli and Effects

This note was originally published at 8am on April 08, 2015 for Hedgeye subscribers.

“Learning involves assessing relationships between stimuli and their effects.”

-Ed Hess

 

If that isn’t the truth about risk managing Global Macro markets, I don’t know what is. It’s Ed Hess’ opening volley in an excellent chapter from Learn or Die titled “Learning: How Our Mind Works.”

 

As our catalogs of stimuli and their effects grow, we develop stories that link them together so that we don’t have to remember them all individually… When we gain confidence with our stories, they become our reflexive, more automatic shorthand for interpreting the world. That is, they become our internal operating system…” (page 9)

 

Again, I think that is bang on. It’s all about the storytelling. And while we all know people who live, profitably, through plenty of lies, the fabrication of the truth eventually catches up to you in our profession. Long-term repeatable alpha is non-fiction.

 

Stimuli and Effects - 345

 

Back to the Global Macro Grind

 

The thing about the stimuli and their effects in markets is that they are constantly changing. For now, for example, you have to believe that A) Chinese growth and inflation are slowing in order to believe that B) the government is going to provide massive stimuli as a result. Then, by respecting market expectations, you are both bearish on Chinese growth/inflation and long its stock market!

 

I didn’t always think this way. I used to think that I was smarter than the market and that things like the aforementioned Chinese example couldn’t happen because the fundamental truth was that if growth was slowing, I could be short that market and eventually kill it (then I tried that more than a few times, shorted those types of markets … and got killed).

 

If you truly understand the fundamentals, the most important thing for you to solve for next is how that stimuli will be priced from a market expectations perspective. You don’t need a Ph.D. to master either expectations or your emotions. You need to check both your intellect and ego at the door, and risk manage the market you have, as opposed to the one you want.

 

Let’s apply some multi-duration, multi-factor stimuli and effect analysis to the oil market:

 

  1. Oil (WTI) is down over 47% year-over-year on #StrongDollar, Rising Supply, and Slowing Demand
  2. Oil was up +3.3% yesterday, taking it to +13% for the month-to-date on Saudi headlines  (with USD +1% on the day)

 

Ok. If my story about that isn’t 100% accurate, please email me and we’ll see if you have a better testament of what you believe is the truth (I’ll publish it on our site). I’m open to being edited! Internally, our commodities analyst, Ben Ryan, edits me all of the time.

 

Here’s the story Ryan told me about the head-fake stimuli (i.e. what the Saudi Oil Minister actually said vs. what mainstream media thought he said) yesterday:

 

  1. “I think this is very similar to what he's said all year”
  2. “He said it's not in their interest to cut production, but he'll work with other OPEC members”
  3. “They aren't in competition with shale producers and Oil prices will go up and down, adjusting for market forces”

 

One other thing Ryan noted is that the Saudi's are really the only OPEC member that has a significant amount of spare production capacity (more than half of all of OPEC). Their take is "we're already doing our part."

 

Again, to me that sounds as reasonable as any other story I read (from a credible independent research source) on the matter. So I rolled with that and sent out a SELL signal in Oil at 3:32PM EST in Real-Time Alerts. #timestamped

 

Then I got lucky as the lead supply story on Oil for the last 3-6 months (rising Oil production) hit the tape:

 

  1. The API reported domestic crude inventories increase another 12.2MM barrels week-over-week
  2. That was basically the biggest sequential increase we’ve seen through this whole downturn
  3. A DOE number in that area code (10:30AM EST today) would be the biggest sequential ramp since DEC 5th, 2014

 

But you make your own luck in this business by being able to:

 

A)     Contextualize a price/volume/volatility move within what we call our immediate-term TRADE risk range and

B)      Overlay that quantitative signal with an intermediate-term TREND research view

 

I went through this in our Q2 Global Macro Themes Call yesterday in what we’ve coined as Oil’s #DeflationDeck, which is effectively a bearish intermediate-term view of West Texas Crude Oil with an intermediate-term range of $36.11-57.54/barrel.

 

No, that’s not the “price deck” your Canadian Investment Banker is going to give you from his latest confab in Alberta. Neither is it the price your favorite “buy your own oil well” radio advertiser is going to tell your stories about from Midland, Texas.

 

It’s our story (born out of our process) on why our call on Global #GrowthSlowing and #Deflation will perpetuate lower-Oil-for-longer and why all of the #DeflationDomino risks associated with that to both levered Energy debts and equities remain firmly intact.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.84-1.93%

SPX 2060-2089
RUT 1242-1269
DAX 11909-12164
VIX 14.06-15.93
USD 96.65-98.98
WTI Oil 46.48-53.39

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Stimuli and Effects - 04.08.15 chart


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LEISURE LETTER (04/22/2015)

TICKERS: GENS.SI, RCL

COMPANY NEWS  

Bwin - The Board of bwin.party announced that the New Jersey Division of Gaming Enforcement ('DGE') has awarded each of the Group's wholly-owned subsidiaries, bwin.party entertainment (NJ) LLC and bwin.party (USA) Inc., a Casino Service Industry Enterprise Licence under section 92(a) of the New Jersey Control Act.  

 

Norbert Teufelberger, CEO of bwin.party commented "Receipt of our full licence in New Jersey marks an important milestone for our US business. We believe that the path to regulation across the United States is inevitable and expect that other states will soon follow."

 

Genting Singapore - has rewarded president and chief operating officer Tan Hee Teck (photo) with performance shares worth an eye-popping $29 million at current prices to keep him from being poached. The vesting of these shares is subject to pre-agreed service and performance conditions. Not all the shares may be awarded if targets are not met.

ARTICLE HERE

 

RCL - Royal Caribbean brand president Michael Bayley intimated the policy of 'no last-minute discounting' was likely to be introduced in the UK. “I’m unable to make any forward statements, I can only talk about what we have done…but it’s in the US at the moment, and we’re committed to it” he said.

 

Meanwhile, Bayley hinted the UK could play host to another Quantum-class ship - even if only for its naming. “I could see a Quantum-class ship being based in the UK - not in the near future I don’t think, as we’ll have Anthem in the US and Quantum and Ovation in China, but we may build more Quantum ships,” he admitted.

 

“We’re still discussing plans for Ovation of the Seas. We haven’t decided what the itinerary will be from the yard to China, and where we’ll name it - we could do it in the UK, or maybe China,” he said.

ARTICLE HERE

Takeaway: We're skeptical RCL will be able to completely eliminate last minute discounting and sail with more empty cabins, which will adversely impact onboard spend.

 

 

INDUSTRY NEWS

 

Graft - The Macau Commission Against Corruption is investigating two staff members from the city’s Civil Engineering Laboratory for allegedly accepting bribes regarding a road next to a casino project.

 

A statement from the commission didn’t specify the road, or which casino property was adjacent to it. The inquiry is also said to be investigating the role of two people connected to an engineering firm.  There was no indication in the graft buster’s statement of any wrongdoing by the nearby casino.

ARTICLE HERE

 

Gaming tables - DICJ revised Q1 2015 table count to 5,704 from 5,630 previously due to an error. Table count in Q4 2014 was 5,711.

 

China lottery March results

LEISURE LETTER (04/22/2015) - F

Takeaway: Scratch continuing to decline in China this year

 

 

MACRO

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.


CHART OF THE DAY: Global Gong Show! China vs. Greece

CHART OF THE DAY: Global Gong Show! China vs. Greece  - 04.22.15 chart

 

Editor's Note: Please enjoy the brief excerpt below and chart from today's Morning Newsletter written by Hedgeye CEO Keith McCullough. Click here to subscribe today.

* * * * * * *

Since I haven’t had one real Institutional Investor ping me on the latest trader to sport the orange jump-suit risk for flash crashing the party (for a day), I give you a few more fun facts about Chinese and Greek stocks, instead:

 

  1. CHINA: since growth and inflation really started slowing in OCT, the Chinese stock market is +92%
  2. GREECE: since mainstream media started trumpeting “Greece Fixed” in DEC, Greek stock market -32%

Painless Starts

“The marvelous thing is that it’s painless.”

-Ernest Hemingway

 

In one of my favorite Hemingway short stories on mortality (The Snows of Kilimanjaro), that’s how a dying man explained the beginning of the end to his wife.

 

“That’s how you know when it starts”, he said. “It’s painless.”

 

To be clear, I don’t mean to bug you out this morning. I just wanted to remind you that while it’s been painless to be long of Chinese, Japanese, European (and now, on the margin, American) “easing” (in bond/stock market terms), this won’t end well.

Painless Starts - bubble cartoon 09.09.2014

 

Back to the Global Macro Grind

 

‘How could you write such a thing? Et tu, brute? How can you be bullish for the last leg of this ramp and, at the same time, remind me how it all ends? I knew it Mucker… you are a perma bear! You bastard.’

 

Enough of my literary attempts to entertain you, eh. Let’s just stick with the data (and some hilarious headlines for this stage of what’s been nothing short of an epic inflation of global stock and bond market prices):

 

  1. Chinese “investors” open a record number of stock brokerage accounts week-over-week (Sina.com)
  2. Mystery Traders armed with algorithms rewrites Flash Crash story (Bloomberg.com)
  3. Greek Contagion risks may be higher than you think (cnbc.com)

 

Ok. Maybe it’s not hilarious. I was just looking for some alliteration. But it is extremely amusing (which is the definition of hilarious).

 

As you know, mainstream media (especially Financial media), chases its own tail in its perpetual quest to prove to its advertisers that yesterday’s news matters today. #RatingsAtAllTimeLows

 

The way that these headlines work is that they are pro-cyclical to price action (i.e. they chase stories/price):

 

  1. Chinese stocks (Shanghai Composite) ramped another +2.4% overnight to +36.1% YTD
  2. Storytellers have been trying to become famous writing about the Flash Crash for years
  3. Oh, and if you didn’t think Greek stock market risks were real, you’re losing money long that

 

Since I haven’t had one real Institutional Investor ping me on the latest trader to sport the orange jump-suit risk for flash crashing the party (for a day), I give you a few more fun facts about Chinese and Greek stocks, instead:

 

  1. CHINA: since growth and inflation really started slowing in OCT, the Chinese stock market is +92%
  2. GREECE: since mainstream media started trumpeting “Greece Fixed” in DEC, Greek stock market -32%

 

In Hedgeye-speak, that makes China a bullish intermediate-term TREND and Greece a bearish one. If intermediate-term (3 months or more = TREND duration) is too short-term for you, look at both of these country stock markets year-over-year:

 

  1. CHINA: Shanghai Composite Index = up +112%
  2. GREECE: Athens General Share Index = down -44%

 

“So”, what I’d really need to get bullish on Greek stocks is:

 

  1. The Greeks telling the world the half truth (like China did) about slowing growth and #Deflation
  2. The Germans confirming that they get the truth, but have no intention of letting Greece “exit”
  3. And the mother of all Greek bailouts right when CNBC/Bloomberg are as bearish as they were on China last year

 

The death of the lies is where the painless progression starts, no?

 

It worked in Ireland and Iceland (sort of). And while I completely disagree with the policy to bailout losers, my political view on that front would have rendered my research opinions useless for the last 5-6 years too.

 

Can you imagine being the “smartest” man on earth right now (per yourself) and short Chinese stocks from last year’s lows? There is nothing painless about hubris. And I’ll define that in market terms for you too – not respecting Mr. Macro Market’s message.

 

I’ve lived and learned through this entire central planning circus alongside you, writing and ranting about it, almost every day for 7 long years…

 

I’ve always thought this won’t end well. But “ends” are processes, not points. And I’ve tried to time the beginning of the end as painlessly as possible. Because realizing perpetual P&L pain is no way to live.

 

Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:

 

UST 10yr Yield 1.85-1.95% (bearish)
SPX 2082-2112 (bullish)
RUT 1 (bullish)
DAX 115 (bullish)

VIX 12.37-15.27 (bullish)
USD 97.04-98.76 (bullish)
EUR/USD 1.05-1.08 (bearish)
YEN 118.99-121.14 (bearish)

Oil (WTI) 49.35-57.69 (bearish)
Natural Gas 2.44-2.65 (bearish)
Gold 1182-1209 (neutral)

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Painless Starts - 04.22.15 chart


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