Earlier this afternoon, we hosted a live conference call on China which detailed our revised outlook for the Chinese economy, our expectations for monetary and fiscal policy, as well as the associated investment implications.


Watch the video replay of the presentation below.


CLICK HERE to download the associated presentation in PDF format.




  • Section One: Correction or Collapse? (slides 4-33)
    • Summary: China’s secular growth outlook is likely more dour than the average “China bear” is willing to admit, which implies the recent margin-fueled melt-up in Chinese equities is little more than a bubble that has now popped. Conversely, the outlook for capital markets reform in China is supportive of expectations for much higher share prices over the intermediate-to-long term. While we view these conflicting forces as a fair fight, we are inclined to side with the stated reform drive of Chinese policymakers and believe the key decision an investor has to make with respect to adopting a bullish or bearish stance on Chinese equities from here is how much they believe in the efficacy of the “Beijing Put”. All told, we are happy sheep – for now at least.
  • Section Two: Asset Class “Re-Rotation” Risk (slides 34-63)
    • Summary: Our analysis is picking up on a positive inflection in the Chinese property market. To the extent this nascent recovery is sustained, we expect two things to occur: 1) mainland Chinese investors are likely flow capital back into real estate in lieu of stocks, at the margins; and 2) Chinese economic growth is likely to stabilize and potentially inflect higher from a cyclical perspective. The latter is key risk for the Chinese equity market(s) in terms of reduced expectations for fiscal and monetary stimulus.
  • Section Three: RMB Internationalization Impact (slides 64-73)
    • Summary:  Ahead of this year’s likely rebalancing, Chinese policymakers have lobbied strongly in favor of the yuan to be included in the IMF’s Special Drawing Rights (SDR) basket. Regardless of any near-term success with this initiative, we believe Chinese policymakers are serious regarding their pledge(s) to accelerate capital account reform. We believe an incrementally deregulated Chinese capital account will prove to be a positive influence upon both the Chinese and global economy.
  • Associated Investment Implications (slide 74)
    • Summary: Over the intermediate term, we think H-Shares represent an active opportunity on the long side but are cognizant of the elevated spillover risk resulting from another potential leg down in the A-Shares. Longer term, however, we think both markets are poised to trade materially higher amid the confluence of key capital markets and capital account reforms. Meanwhile, China’s secular growth outlook should continue to impart deflationary pressure upon commodity prices and the nominal exchange rates of commodity-producing nations.


As always, please feel free to follow up with any questions. There are lots of moving parts here to discuss.


Kind regards,


The Hedgeye Macro Team

Builder Confidence | Optimism Builds

Takeaway: Builder confidence in July remains at 10-year highs with Lot & Labor shortages topping the list of concerns.

Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume.


Builder Confidence | Optimism Builds - Compendium 071615


Today's Focus: July NAHB HMI (Builder Confidence Survey)

Builder Confidence in July held flat at an index reading of 60 against upwardly revised June estimates (revised from 59 to 60), marking the highest level in builder confidence since November 2005 (116 months).  With SF Starts and Pending, Existing and New Home Sales all at or near post-crisis highs in recent months, the sustained build of positive sentiment among builders comes as little surprise inclusive of the recent back-up in rates. 


Across the survey indicators the +1 pt gains in Current Sales and +2 pt gain in 6M Expectations was offset by a -1pt decline in Current Traffic of Prospective Buyers.  Geographically, the Northeast (+3), Midwest (+2) and West (+2) all showed modest gains sequentially while the -1 pt decline in the South was the first retreat in sentiment in 5 months for the region.   


On our Call with NAHB Chief Economist David Crowe (Slide Deck: HERE) back in June, he highlighted the re-emergence of Lot and Labor shortage concerns  being reported by builders – a challenge he reiterated alongside this morning’s HMI release. 


While Lot availability and affordability is, indeed, an emergent concern, we’d take an equivocal-to-positive view of the reported labor tightness.  


While the symptom of a tighter residential construction labor market in the form of upward pressure on wages could be viewed negatively, the cause (rising demand) is a fundamentally positive development for the industry and historical episodes of labor tightness have corresponded to strong periods of construction activity and equity performance.  In short, from a top-down perspective, it’s hard to take a fundamentally negative view on rising demand. 


In regards to NAHB commentary around the July data: 


NAHB Chairman Tom Woods commented: 

“The fact that builder confidence has returned to levels not seen since 2005 shows that housing continues to improve at a steady pace…As we head into the second half of 2015, we should expect a continued recovery of the housing market.”


NAHB Chief Economist David Crowe added: 

“This month’s reading is in line with recent data showing stronger sales in both the new and existing home markets as well as continued job growth….However, builders still face a number of challenges, including shortages of lots and labor.”



Bottom-line:  The cycle high in builder confidence in June/July accords with the rash of positive industry data reported for 2Q-to-date and the ongoing improvement in domestic labor/income fundamentals  – a trend which should extend at least through the reported June housing data before volume comps begin to steepen progressively into the back-half of the year. 



Builder Confidence | Optimism Builds - HMI LT


Builder Confidence | Optimism Builds - HMI Indicators


Builder Confidence | Optimism Builds - HMI Regional


Builder Confidence | Optimism Builds - HMI vs NHS


Builder Confidence | Optimism Builds - Housing Confidence HMI vs Univ Mich


Builder Confidence | Optimism Builds - HMI vs NHS


Builder Confidence | Optimism Builds - HMI Optimism Spread 



About the NAHB HMI:

The Housing Market Index (HMI) is based on a monthly survey of NAHB members designed to take the pulse of the single-family housing market. The monthly survey has been conducted for 30 years. The survey asks respondents to rate market conditions for the sale of new homes at the present time and in the next 6 months as well as the traffic of prospective buyers of new homes. The HMI is a weighted average of separate diffusion indices for these three key single-family series. The HMI can range from 0 to 100, where a value over 50 implies conditions are, on average, improving, a value below 50 implies conditions are worsening, and an index value of 50 indicates that the housing market is neither improving nor worsening.



Joshua Steiner, CFA


Christian B. Drake


Another Reminder That We're Late Cycle? Jobless Claims

Editor's Note: This is an abridged excerpt from a research note written earlier this morning by one of our analysts. For more information on how you can subscribe to Hedgeye click here.

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Another Reminder That We're Late Cycle? Jobless Claims - Slow growth snails cartoon 07.14.2015

As we foreshadowed last week, the post-auto furlough labor environment proved more even-keeled as claims retraced their prior week bounce and have settled back into their now 16-month trend at sub-330k. 


Rate of change in Y/Y improvement is beginning to converge towards zero, a not unexpected dynamic as we approach the lapping of the frictional lower bound in claims. RoC in Y/Y claims slowed to -9.2% from -11% in the prior week and will likely be at or near zero within a few months. This, in and of itself, is not a sign of deterioration in the labor market, just as the worsening rate of change in going from 3 mice to 0 mice to 0 mice in the house is not a sign of things worsening.


That said, it is yet another reminder that we're late cycle.


Once things bottom out from a RoC standpoint it becomes a "how long" until the end proposition. 


Another Reminder That We're Late Cycle? Jobless Claims - zee recessions

The Data

Prior to revision, initial jobless claims fell 16,000 to 281,000 from 297,000 week-over-week, as the prior week's number was revised down by -1K to 296,000.


The headline (unrevised) number shows claims were lower by 15k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 3.25k WoW to 282.5k.


The 4-week rolling average of NSA claims, another way of evaluating the data, was -9.2% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -11.0%


Another Reminder That We're Late Cycle? Jobless Claims - zee 55


Another Reminder That We're Late Cycle? Jobless Claims - zee77


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Van Sciver: The Impact of Lower Fuel Prices On The Airline Industry


On this morning’s edition of The Macro Show, Industrials Sector Head Jay Van Sciver discusses some of the key implications of current lower energy prices on the airline industry.


Subscribe to The Macro Show today for access to this and all other episodes. 


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ICI Fund Flow Survey | Fixed Income Flows Weakening

Takeaway: Fixed income flows remain weak in anticipation of the Fed increasing rates. Also, investors continue to flee active domestic equity.

Investment Company Institute Mutual Fund Data and ETF Money Flow:

Investors withdrew -$2.9 billion from taxable bond funds in the 5-day period ending July 8th. They also withdrew -$287 million from tax-free bond funds. Aside from a massive defensive move into fixed income in the week ending June 24th, bond fund flows have been consistently negative since early June. This is likely due to anticipation of the Federal Reserve raising rates within the next year.


Additionally, as we continue to point out the disaster in active domestic equity flows, investors withdrew -$2.4 billion from that asset class last week. Investors have now made domestic equity withdrawals for 19 consecutive weeks, leading to -$63.7 billion of cumulative year-do-date outflows. We maintain our Short/Avoid recommendations on the most impacted domestic equity managers, T. Rowe Price (TROW) and Janus Capital (JNS).

ICI Fund Flow Survey | Fixed Income Flows Weakening - ICI1


In the most recent 5-day period ending July 8th, total equity mutual funds put up net inflows of +$2.2 billion, outpacing the year-to-date weekly average inflow of +$448 million and the 2014 average inflow of +$620 million. The inflow was composed of international stock fund contributions of +$4.6 billion and domestic stock fund withdrawals of -$2.4 billion. International equity funds have had positive flows in 48 of the last 52 weeks while domestic equity funds have had only 10 weeks of positive flows over the same time period.


Fixed income mutual funds put up net outflows of -$3.2 billion, trailing the year-to-date weekly average inflow of +$2.0 billion and the 2014 average inflow of +$929 million. The outflow was composed of tax-free or municipal bond funds withdrawals of -$287 million and taxable bond funds withdrawals of -$2.9 billion.


Equity ETFs had net subscriptions of +$9.2 billion, outpacing the year-to-date weekly average inflow of +$2.3 billion and the 2014 average inflow of +$3.2 billion. Fixed income ETFs had net inflows of +$246 million, trailing the year-to-date weekly average inflow of +$844 million and the 2014 average inflow of +$1.0 billion.


Mutual fund flow data is collected weekly from the Investment Company Institute (ICI) and represents a survey of 95% of the investment management industry's mutual fund assets. Mutual fund data largely reflects the actions of retail investors. Exchange traded fund (ETF) information is extracted from Bloomberg and is matched to the same weekly reporting schedule as the ICI mutual fund data. According to industry leader Blackrock (BLK), U.S. ETF participation is 60% institutional investors and 40% retail investors.   


Most Recent 12 Week Flow in Millions by Mutual Fund Product: Chart data is the most recent 12 weeks from the ICI mutual fund survey and includes the weekly average for 2014 and the weekly year-to-date average for 2015:


ICI Fund Flow Survey | Fixed Income Flows Weakening - ICI2


ICI Fund Flow Survey | Fixed Income Flows Weakening - ICI3


ICI Fund Flow Survey | Fixed Income Flows Weakening - ICI4


ICI Fund Flow Survey | Fixed Income Flows Weakening - ICI5


ICI Fund Flow Survey | Fixed Income Flows Weakening - ICI6



Cumulative Annual Flow in Millions by Mutual Fund Product: Chart data is the cumulative fund flow from the ICI mutual fund survey for each year starting with 2008.


ICI Fund Flow Survey | Fixed Income Flows Weakening - ICI12


ICI Fund Flow Survey | Fixed Income Flows Weakening - ICI13


ICI Fund Flow Survey | Fixed Income Flows Weakening - ICI14


ICI Fund Flow Survey | Fixed Income Flows Weakening - ICI15


ICI Fund Flow Survey | Fixed Income Flows Weakening - ICI16



Most Recent 12 Week Flow within Equity and Fixed Income Exchange Traded Funds: Chart data is the most recent 12 weeks from Bloomberg's ETF database (matched to the Wednesday to Wednesday reporting format of the ICI), the weekly average for 2014, and the weekly year-to-date average for 2015. In the third table are the results of the weekly flows into and out of the major market and sector SPDRs:


ICI Fund Flow Survey | Fixed Income Flows Weakening - ICI7


ICI Fund Flow Survey | Fixed Income Flows Weakening - ICI8



Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR callouts, the financials XLF ETF experienced strong inflows of +11% or +$2.1 billion last week. Flows to that fund are now flat for the year to date. On the other end of the spectrum, investors continued to flee the industrials XLI, withdrawing -5% or -$390 million. For the year to date, the XLI has experienced one of the worst outflows on a percentage basis of -24% or -$2.1 billion.


ICI Fund Flow Survey | Fixed Income Flows Weakening - ICI9



Cumulative Annual Flow in Millions within Equity and Fixed Income Exchange Traded Funds: Chart data is the cumulative fund flow from Bloomberg's ETF database for each year starting with 2013.


ICI Fund Flow Survey | Fixed Income Flows Weakening - ICI17


ICI Fund Flow Survey | Fixed Income Flows Weakening - ICI18



Net Results:

The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a positive +$14.3 billion spread for the week (+$11.3 billion of total equity inflow net of the -$3.0 billion outflow from fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52-week moving average is +$1.6 billion (more positive money flow to equities) with a 52-week high of +$27.9 billion (more positive money flow to equities) and a 52-week low of -$18.1 billion (negative numbers imply more positive money flow to bonds for the week.)


ICI Fund Flow Survey | Fixed Income Flows Weakening - ICI10


Exposures: The weekly data herein is important for the public asset managers with trends in mutual funds and ETFs impacting the companies with the following estimated revenue impact:


ICI Fund Flow Survey | Fixed Income Flows Weakening - ICI11 



Jonathan Casteleyn, CFA, CMT 




Joshua Steiner, CFA






M –Weighing In On MayREIT

Takeaway: We don’t dispute the M REIT math. Just bc it could happen, does not mean it should.

We want to be clear about where we stand on the whole Macy’s REIT issue.


Up front let’s just say — it makes sense. When this became a potential issue six months ago, we removed the name from our active short list.  Note that as it relates to this week, the concept of a REIT is not new. The only new component is Starboard going activist on making it happen two days after Macy’s sold off a store in Pittsburgh.


We want to be crystal clear that the way to be positioned in this space into our #growthslowing Macro call is to be short KSS. There is ZERO potential for Kohl’s to be monetized as a REIT.


There Is Zero Real Estate Play At KSS.  The same strategy that gave KSS the upper hand in a pre-Internet era is the same one that takes away any optionality on a take out. It’s real estate is worth very little. The company owns 413 out of its 1164 stores. But they are almost entirely located in strip centers. JCP, for example, has 140 stores in ‘A’ malls (the top 300 malls in the country). KSS has less than 10.  When you look at the economics, there are 1100 regional malls, and there have been maybe 5 built over the last decade. If you are a retailer who owns a piece of that real estate (the equivalent of beachfront property – there’s simply no more being made) then you’re in luck. But there are 7,000 strip centers. They’re literally a dime a dozen. Using the same metaphor, it’s like having a beach home, but being a half-mile walk to the ocean.


As it relates to Macy’s there are a few considerations.  


1) First is that we don’t think that the property values argued by Starboard are egregious. Keep in mind that Saks recently monetized its 5th Ave store for $3.7bn. When we look at Macy’s Herald Square, Chicago, and San Francisco properties, we don’t dispute that we could be looking at $6bn+ in value right there. 


2) But, and this is a HUGE but…These exceedingly valuable properties are currently a massive freebie. Macy’s pays zero rent on them. Unless you want to assume that the operating company goes away — i.e. is worth zero — then Macy’s has to pay rent back to the future landlord. The more valueable the property is, the higher the rent, and the lower the margins. A $24bn value in the analysis below suggests that Macy’s would have to pay about $1.5bn in extra rent. Do you really want to cash in the crown jewel assets of an uber-cyclical and levered business, weigh it down with rent occupancy payments, potentially buy back stock (as some are arguing to us) at the top of a growth and margin cycle — only to leave Macy’s with no levers left to pull when the environment inevitably goes the other way? Yes, you’ll have sold assets at the top, but will have locked in rent at the top too.  


3) The CEO and CFO at M are easily the most financial savvy executives in all of retail. If doing this kind of deal made sense, we think they’d probably have done it already.  That said, CEO Lundgren has maybe a year or two before retirement, and Hoguet (CFO) has maybe a couple years more. This could potentially alter their appetite for a deal as it relates to creating a legacy. We’re just not so sure that’s the legacy they want to create.


4) If a deal comes to fruition, we wonder who will be on the other end? We know for a fact that there’s a market for one-off properties — like Macy’s Pittsburgh property that it monetized earlier this week. In that instance, Macy’s sold it and exited the market. It didn’t belong there. We’ve also seen instances where several stores were sold at a time. But 446 stores worth 89mm square feet and 5% of total apparel and accessory retail space in the US? We be really interested to see how liquid the market is for that kind of space.  


M –Weighing In On MayREIT - M realestate2

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