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Devaluation Nation: Thoughts on China’s Currency Move

Editor’s Note: Below is a transcript of Hedgeye CEO Keith McCullough’s remarks on The Macro Show yesterday morning following the big news out of Beijing. If you would like to subscribe to our live, interactive show where we take subscriber questions click here.

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Devaluation Nation: Thoughts on China’s Currency Move - z china


Today’s top three things:


  1. China
  2. China
  3. China


You wake up to these non-linear, central-planning surprises, but you also wake up to something that is proactively predictable within the non-linearity. What do I mean by that? It’s non-linear because it’s a surprise. This of course is the biggest move in 20 years by the Chinese. But it’s a 2% move, so some will say, “Oh ho-hum. It’s not that much on an absolute basis.” But again, history will tell you that when a country starts to move down the slippery slope of an ideological path which is the proactively predictable point, it’s the first of many.


It’s the first of many.


So the Chinese have done effectively, they’ve tried almost everything that America has taught them… and Japan has taught them… and Europe has taught them… But now they are going to go to the wood and going to start to devalue their currency.


Every country in modern human history has tried this. You’ll note that it hasn’t worked. Maybe they don’t have to be beholden to that reality because they are a communist country? But again, it is what it is this morning.


The Chinese stock market—get this—is down one basis point on the news. One basis point on the news. So they’re centrally puppeteering this whole thing at this point.


It’s also telling you that the GDP number that they had allegedly in the second quarter (which they reported within a week of the second quarter ending, which was just magnificent) is not a 7.0. The 7.0 is just not a 7.0. With exports down -9%, what they’re doing now is panicking. They’re panicking. They’re making moves that they didn’t think they’d have to make this quickly. Again, trying to centrally plan a stock market and at this point devalue the currency should sound very familiar to countries that have panicked in the past.


It is what it is.


Devaluation Nation: Thoughts on China’s Currency Move - China cartoon 08.11.2015


The regional fallout on that—Thailand, Taiwan, Indonesia, Singapore—big, big places, at least in terms of what has mattered historically to Asian asset allocation, Asian foreign currency asset allocations, equity markets. These markets are down 4-6% in the last month. If you didn’t know why, now you know.


The Chinese are going to start to compete with not only their customers, but with their people. With their people, they lose purchasing power. When you devalue a currency of a person, you can try it at home. You can take a Canadian loonie and just cut it in half, and you will say, “Wow that is worth less than what it was worth yesterday.” It used to be illegal in the US to do that, its called clipping coins.


So again, this is what it is. This is going to have much more unintended consequences than any of us could possibly think of right here. 

How Many Market Generals Get Shot Before the Army Crumbles?


During this recent edition of RTA Live, Hedgeye CEO Keith McCullough pulls no punches as he walks though the rising risks in the market with macro analyst Darius Dale.



Subscribe to Real-Time Alerts today for access to this and all other editions of RTA Live. 


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LEISURE LETTER (08/12/2015) - MPEL, 880.HK, CCL, NCLH





August 28: 10:00am: PENN - Meeting with Management at Plainridge Park  


MPEL - Studio City International Holdings Ltd, a joint venture in which Melco Crown Entertainment Ltd owns a 60 percent interest, said on Tuesday it is preparing  a “contingency plan” ahead of any gaming table allocation decision by the Macau government for its Studio City casino resort.  “Because of the possibility that the table allocation for Studio City’s gaming area may be lower than anticipated, Studio City International Holdings Ltd has engaged Kirkland and Ellis LLP as its counsel and Moelis and Co LLC as its investment banker to assist it with contingency planning ahead of any table allocation decision for Studio City,” the Melco Crown majority-owned unit said in its Tuesday press release. 


Takeaway: It's pretty clear Studio City will not get 400 tables - 150-200 is more likely.  


1680.HK - Construction of casino operator Macau Legend Development Ltd’s Legendale Hotel in Macau Fisherman’s Wharf may be hindered by controversy over the height of the building, according to company executive vice-president Frederick Yip Wing Fat. “We may possibly see a delay. But definitely we’re building it,” Mr Yip told reporters.



CCL - Seabourn has revealed design renderings of the luxurious all-suite, all-veranda accommodations on Seabourn Encore, the line's newest ship set to launch late 2016.  Seabourn Encore will feature 300 spacious, well-appointed suites, all of which include a private veranda. The majority of the ship's suites range from nearly 300 square feet for the standard veranda suite, plus a veranda that is up to 74 square feet, to upwards of 1,300 square feet for the Wintergarden suites, which also feature verandas of nearly 200 square feet. 



NCHL - Port of Seattle and NCLH sign 15 year deal. Norwegian Cruise Line Holdings will continue operating out of Pier 66 until at least 2030 and split with the Port of Seattle an estimated $30 million in facility upgrades. 



Japan Gaming- Japan’s ruling Liberal Democratic Party has given up efforts to push through a bill to legalize casinos in the current extended session of the parliament, the Shingetsu News Agency reports.  Passage of the integrated resort bill in the current session had been looking increasingly unlikely in recent weeks, as the political power of some of the main backers of legalizing casinos in Japan waned, including that of Prime Minister Shinzo Abe.



Shanghai Cruise Port -  Shanghai, the destination of this year’s 10th China Cruise Shipping event, plans to expand its Shanghai Wusongkou International Cruise Terminal (SWICT) to accommodate increasing demand. It is building another two berths, which will mean fourth berths total. Two  spaces will be for Oasis-class vessels, while the remaining two berths can handle megaships up to 150,000 tons, according to the port.



River Cruises - A stranded cargo vessel has added further itinerary changes and cancellations to the list of delays and cancellations caused by low water levels on the Danube in recent weeks. 


Takeaway: It has been a tough summer for River Cruise operators. 


Nepal Gaming - The development of Nepal’s casino gaming industry potentially offers investors access to gaming assets that are not dependent on Chinese players, says a new report from Union Gaming Securities Asia Ltd.  

  • The institution added that the key target market for Nepal’s casinos is middle class Indians – many of whom are already familiar with a number of forms of gambling, and are significantly under served domestically in terms of casino venues. Union Gaming estimates India today generates as much as US$10 billion per year in gross gaming revenue (GGR). This includes legal and non-legal types of gambling, and casino and non-casino gambling, it added.
  • “We would highlight that there are more than 300 million persons living in the three Indian states immediately adjacent to Nepal and approximately 400 million when including the state of West Bengal…Granted, like most of India the majority are too poor to be considered target customers, but this still leaves many millions of individuals who are, indeed, potential casino customers,” stated the Union Gaming analyst.



Regional Gaming Revenues


Iowa - July GGR (SSS): +1.7% YoY 

Detroit - July GGR (SSS): +3.1% YoY 


China - PBoC followed up on yesterday's 1.9% yuan devaluation with a 1.6% devaluation today. 

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Purchase Apps | ↓ WoW, ↓QoQ, ↑ YoY,

Takeaway: Purchase Apps slide to start August. Retreat in Rates builds as an emergent tailwind. July Permits data (next tues) set for steep decline

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.


Purchase Apps | ↓ WoW, ↓QoQ, ↑ YoY,  - Compendium 081215


The last few weeks of high frequency purchase data have been largely uneventful with activity oscillating above and below the 200-level on the index. 


Demand Retreat:  Purchase demand retraced last week’s gain, declining -3.5% WoW while decelerating -300bps sequentially to +19.8% year-over-year.   On a quarter-over-quarter basis, 3Q is currently tracking down -1.1%.   As we highlighted last week, the rate-of-change setup for purchase demand is showing a marginal shift. 

Both sequential and year-over-year acceleration in purchase activity characterized the first half of the year, but now, with the data cresting on an absolute basis, sequential growth in 3Q is tracking negative while year-over-year growth is accelerating against trough 4Q comps.  


Rate Retreat:  Rates, which remain the lead ST swing factor, held flat at 4.13% in the latest week but should see downward pressure on a lag to the step function retreat in treasury yields over the past week.      


Lower rates, stemming mostly from OUS turmoil can provide transient benefit. 


Global Macro tumult is insidious, but usually manifests on a lag domestically so, in the nearer term, ↓rates =  ↑ affordability = ↑ room for prices to rise = ↑ housing.  It wasn’t particularly surprising to see Housing green yesterday alongside the decline in rates.


Boringness Retreat:  In contrast to the stagnant purchase demand trend, next week’s Starts and Permits data may be more interesting. 


To Review:  The +295% YoY growth in MF permits in the Northeast ahead of the impending NYC tax exemption expiry helped augment the Total Starts figures for a second month in June and drove MF share of total up to a 42-year high.  Indeed, after rising a resounding +385% YoY in May, permits in NY state went vertical to +632% YoY in June.   A reversal of that pull forward sets the stage for a retreat in the reported July data reported next tuesday.  For context, a decline back to the TTM average in permits in the Northeast implies a -12-13% sequential decline, taking the total back below 1.2 MM from the post-crisis high of 1.34 MM recorded last month. 


We’ve highlighted this potentiality for the last month and consensus has recently ratcheted down Permit expectations to 1217K so that idiosyncratic dynamic has seen some discounting.  The risk may still to the downside but, in any case, it will be the first steep decline in housing data we’ve seen in some time.  


Purchase Apps | ↓ WoW, ↓QoQ, ↑ YoY,  - NY Permits


Purchase Apps | ↓ WoW, ↓QoQ, ↑ YoY,  - NE Permits


Purchase Apps | ↓ WoW, ↓QoQ, ↑ YoY,  - Purchase 2013v14v15


Purchase Apps | ↓ WoW, ↓QoQ, ↑ YoY,  - Purchase YoY


Purchase Apps | ↓ WoW, ↓QoQ, ↑ YoY,  - Purchase Index   YoY Qtrly


Purchase Apps | ↓ WoW, ↓QoQ, ↑ YoY,  - Purchase   Refi YoY


Purchase Apps | ↓ WoW, ↓QoQ, ↑ YoY,  - Purchase LT


Purchase Apps | ↓ WoW, ↓QoQ, ↑ YoY,  - 30Y FRM



About MBA Mortgage Applications:

The Mortgage Bankers’ Association’s mortgage applications index covers more than 75% of mortgage applications originated through retail and consumer direct channels. It does not include loans delivered through wholesale broker and correspondent channels. The MBA mortgage purchase applications index is considered a leading indicator of single-family home sales and construction. Moreover, it is the only housing index that is released on a weekly basis. 



The MBA Purchase Apps index is released every Wednesday morning at 7 am EST.



Joshua Steiner, CFA


Christian B. Drake


FINANCIALS SENTIMENT SCOREBOARD - First American (FAF) and Federated Investors (FII)

Takeaway: We are flagging First American (FAF - Score: 17) and Federated Investors (FII - Score:13) as longs on sentiment and short interest.

This morning we are publishing our updated Hedgeye Financials Sentiment Scoreboard in conjunction with the release of the latest short interest data last night. Our Scoreboard now evaluates over 300 companies across the Financials complex.


The Scoreboard combines buyside and sell-side sentiment measures. It standardizes those measures to an index of 0-100, where 100 is the best possible sentiment ranking and 0 is the worst. Our analysis shows that a contrarian strategy can be employed successfully by taking the other side of stocks with extreme readings in sentiment, either bullish or bearish. Once sentiment reaches these extreme levels, it becomes a very asymmetric setup wherein expectations become too high or too low.  


We’ve quantified the tipping points for high and low sentiment. Specifically, we've found that scores of 20 or lower have a positive, average expected return while scores of 90 or greater are more likely to underperform.


Specifically, our backtest of 10,400 observations over a 10-year period found that stocks with scores of 0-10 went on to produce an average absolute return of +23.9% over the following 12-month period. Scores of 10-20 produced an average absolute return of +11.9%. At the other end of the spectrum, stocks with sentiment scores of 90-100 produced average negative absolute returns of -10.3% over the following 12-months.


The first table below breaks the 300 companies into a few major categories and ranks all the components on a relative basis. The second table breaks the group into smaller subsectors and again gives them relative rankings within those subsectors. 


This week we're flagging First American (FAF - Score: 17) as a long as our 3Q15 call to "hide out" in Housing favors the title insurers. We are also highlighting Federated Investors (FII - Score: 13) as screening well from both a sentiment/short interest and a fundamental research standpoint (see our latest FII research HERE). FII stock is one of the few asset management stocks that is up year-to-date in 2015.


FINANCIALS SENTIMENT SCOREBOARD - First American (FAF) and Federated Investors (FII) - SI 1


FINANCIALS SENTIMENT SCOREBOARD - First American (FAF) and Federated Investors (FII) - SI 2


FINANCIALS SENTIMENT SCOREBOARD - First American (FAF) and Federated Investors (FII) - SI 3


The following is an excerpt from our 90 page black book entitled “Betting Against the Herd: Generating Alpha From Sentiment Extremes Across Financials.”


Let us know if you would like to receive a copy of our black book, which explains this system and its applications.


BUYS / LONGS: Financials with extremely low sentiment readings of 20 and below on our index (0-100) show strong average outperformance in absolute and relative terms across 3, 6 and 12 month subsequent durations.  Stocks with sentiment ratings of 20 or lower rise an average of +15.1% over the next 12 months in absolute terms.   


SELLS / SHORTS: Financials with extremely high sentiment readings of 90 and above on our proprietary sentiment index (0-100) demonstrate a marked tendency to underperform in absolute and relative terms across 3, 6 and 12 month subsequent durations.  Stocks with sentiment ratings of 90 or greater fall in value an average of -10.3% over the next 12 months in absolute terms. 



FINANCIALS SENTIMENT SCOREBOARD - First American (FAF) and Federated Investors (FII) - Absolute 12 mo



Joshua Steiner, CFA


Jonathan Casteleyn, CFA, CMT

China, Bonds and USD

Client Talking Points


The 2% Yuan devaluation may seem small, but it was a meaningful capitulation from Beijing in reaction to an awful month of economic data. Retail sales, industrial production, and fixed asset investment reported overnight all slowed and missed expectations. Fixed asset investment has grown at the slowest pace in 15 years through the first 7 months of this year and property investment slowed to +4.3% y/y in July which is the slowest pace since March 2009. You can’t centrally plan real economic growth. 


UST  10YR Yields retreated -9 basis points yesterday on the news and are seeing follow through today, trading down another -8 basis points to 2.05% with the yield curve flattening towards a new 52-week low.  German 2YR Yields at -0.29% are back on year-to-date lows as well as slower (growth) and lower (rates) for longer continues to manifest globally. 


With the U.S. pursing a divergent monetary policy pass and currency wars in re-crescendo globally, tacit acceptance of a stronger currency by domestic policy makers equates to de facto tightening. Policy makers anchor on real rates and the real cost of capital in determining policy’s impact on investment spending.  In so much as ↑ Dollar = ↓ Inflation = ↑ Real Rates, a stronger currency = tightening without explicit policy action. Jackson Hole is the next currency event catalyst and a prime platform for ECB President Mario Draghi to jawbone the Euro lower (and $USD higher).  

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

In an analysis of the demographics of the newly insured, Pap testing, HPV, and mammography were at the top of the list of products that would be positively impacted by the ACA.  As we reach the #ACATaper stage, will HOLX take a hit to their Diagnostic segment? It is possible, in our view, but so far a minor risk. As we learned last week from a lab operator, Qiagen is likely to continue to cede their 14% HPV testing share to HOLX. So while the #ACATaper appears to be finally here, there are offsets. On a disappointing note, our 3D Tomo Tracker update for July came in at 24 facilities. Down sequentially from June, and down from a peak of 54 in May. Our forecast algorithm, which is based on these updates, remains unchanged. While 20 is low, it is probably a blip in the longer term adoption cycle.  


PENN has emerged as the first domestic gaming growth story in 10 years with a new casino in Massachusetts this year and one in San Diego next year. Meanwhile, regional gaming trends have stabilized, providing near term earnings visibility and upside. Upcoming catalysts include the monthly release of State gaming revenues for July, including Massachusetts, and positive earnings revisions.


Sometimes the macro rotation and allocation playbook is relatively straightforward. As growth slows and "reflation" deflates, you want to be buying A) Long-term Bonds and B) stocks that look like bonds. Bond proxies and defensive yield consistently outperform alongside the dual deceleration in demand and prices and Utilities and REITS remain the go-to sectors for growth slowing, defensive yield exposure.  

Three for the Road


Panic! China Central Planning Style https://app.hedgeye.com/insights/45762-panic-china-central-planning-style… via @hedgeye



The most powerful weapon on earth is the human soul on fire.

Field Marshal Ferdinand Foch


Hilary Clinton is rolling out a $350 billion college affordability and student debt relief plan, which includes cutting student loan rates for ~25 million borrowers through refinancing programs for both private and federal loans and a “Borrower Bill of Rights” to increase servicer responsibilities.

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