"Magically, the Chinese reported an alleged 7.0% GDP for Q2 after 7.0% in Q1 - not 6.8; not 7.2 - straight 7.0..." -Hedgeye CEO Keith McCullough in a tweet yesterday after China's head-scratching GDP report.
Takeaway: We are adding Hologic to Investing Ideas today.
Please note we are adding Hologic (HOLX) to Investing Ideas today. Below is a brief explanation from Hedgeye CEO Keith McCullough. Our Healthcare team led by Tom Tobin will provide additional color going forward.
Buy signals in HOLX have been hard to come by (the stock hasn't gone down much), but a sell-side firm downgraded it today so it's tapping the low-end of our immediate-term risk range. Tom Tobin remains The Bull.
On Wednesday July 22 we are hosting a conference call and live studio event for institutional subscribers to review our outlook for HOLX. We first added HOLX to the Hedgeye Best Idea List as a long in April 2014 when the stock was in the low $20s.
Since then, our original thesis has played out, with the stock doubling as we predicted, and many of the fundamental and sentiment drivers maturing on schedule. We will review the path into the $50s on our call next week ahead of HOLX earnings report July 29.
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.
The Hedgeye Macro Team
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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.
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.
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
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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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.
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%
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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.
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