China and #EuropeSlowing

Client Talking Points


We put up a thorough update on China last night – don’t forget a big percent of the Chinese equity bubble was built on incessant expectations for incremental #cowbell – post the -3.5% drop in the Shanghai Composite overnight, the Chinese stock market is right back to its lows as growth continues to slow.


Getting uglier, one day at a time, with the IBEX flashing another negative divergence this morning -0.6% and down -11.4% in the last month vs. DAX -8% month-over-month (ZEW cut in ½ in SEP to 12.1 vs. 25 in AUG on “EM Demand”). Reminder that we signaled Spain as the 1st major European equity market to make lower-lows as 10YR Spanish Yields rise, +11 basis points month-over-month.


Got Dovish Fed expectations? Jon Hilsenrath (Wall Street Journal) was all about the hikes 3-6 months ago – now the articles are about anything but hikes and why the Fed is boxed in. Down Dollar again this morning and rates down small – still a big question mark if the Fed eases and provides realistic economic commentary on why, but Oil should like that +1% after holding $43.


**Tune into The Macro Show with Hedgeye CEO Keith McCullough at 9:00AM ET - CLICK HERE

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

MCD is one of Sector Head Howard Penney's favorite names. He thinks McDonald's is finally emerging from the doldrums and is doing everything they need to do to fix the company domestically.


Penney believes there is not only a huge inflection point coming for the profitability of the company, but also for their sales. He thinks this means Wendy’s, Jack In the Box, Sonic will suffer a bit as MCD begins to take its market share back.


Bottom Line here? September regional gaming revenue growth should accelerate meaningfully from August and provide a catalyst for the stock. Our bull thesis on PENN appears very much intact.



In a higher volatility, growth-slowing environment, you want low-beta exposure (stocks that move less than the market) and a larger allocation to long-term Treasuries.


In the recent Macro Overlay video series exclusively for Investing Ideas subscribers, Keith rank-orders our top investing ideas positions from a fundamental macro and style factor perspective (low-beta, big cap liquidity, slower growth):


  1. Treasuries (TLT)
  2.  “Something that looks like Treasuries” (EDV)
  3. Gold (GLD)
  4. Low-Beta, Big-Cap liquidity: McDonalds
  5. Low-Beta, Big Cap Liquidity: General Mills

Three for the Road


FX: if you ask the Yen (+0.5% vs USD this am), the Fed is going to be dovish on Thursday




What use could the company make of an electric toy?

Western Union, when it turned down rights to the telephone in 1878


Advertising spending on print magazines is forecasted to drop 1.8% this year to $17.4 billion.

The Macro Show Replay | September 15, 2015


September 15, 2015

September 15, 2015 - Slide1



September 15, 2015 - Slide2

September 15, 2015 - Slide3

September 15, 2015 - Slide4




September 15, 2015 - Slide5

September 15, 2015 - Slide6

September 15, 2015 - Slide7

September 15, 2015 - Slide8

September 15, 2015 - Slide9

September 15, 2015 - Slide10

September 15, 2015 - Slide11

Our Latest Thoughts On C-H-I-N-A

The hyperlinked presentation below contains a detailed update to our cyclical and secular Growth/Inflation/Policy outlook for on the Chinese economy. The key conclusions are as follows:


  • Section One – Correction or Collapse? (slides 4-32): 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 was little more than a bubble that is likely to continue popping amid reduced state-backed intervention. Conversely, the secular outlook for capital markets reform in China is supportive of expectations for much higher share prices over the intermediate-to-long term. These conflicting forces have been anything but a fair fight given how much what is left the “Beijing Put” has proven to be impotent of late.
  • Section Two – Asset Class “Re-Rotation” Risk (slides 33-61): Our analysis continues to pick 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 to continue to flow capital back into real estate in lieu of stocks, at the margins; and 2) Chinese economic growth is likely to show stabilization for at least 1-2 quarters. The former is an obvious headwind to the Chinese equity market(s) and the latter is key risk in terms of reduced expectations for fiscal and monetary stimulus.
  • Section Three – RMB Internationalization Impact (slides 62-72): Ahead of next 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 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 has the potential to be a lasting positive influence upon both the Chinese and global economy – IF spillover risks are curtailed via effective safeguards. The extent to which Chinese authorities are willing to defend the CNY from bearish speculators remains to be seen.
  • Associated Investment Implications: Over the long term, we think H-Shares represent an active opportunity on the long side but do not view the current juncture as an appropriate time to buy given the elevated spillover risk resulting from a continued and necessary meltdown 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. Please note that we do not currently have any active investment ideas in/around China, having closed all positions on 8/21 (CLICK HERE for more details).


CLICK HERE to download the associated PDF.


Please feel free to engage us with questions, comments or concerns.


Have a wonderful evening,




Darius Dale


Cartoon of the Day: Poison?

Cartoon of the Day: Poison? - rate hike poison cartoon 09 14.2015


Hedgeye CEO Keith McCullough in today's Early Look:


...And while the “dots” on a rate hike continue to be pushed out (anyone remember they were “supposed to hike” in June?), Mr. Macro Market’s most immediate-term message to the Federal Reserve (Fed Fund Futures < 30% probability of a SEP hike) is don’t do it (again).


What if they do? You know, “just to get off of zero because it’s time”, or something like that...


BABA: Stumbling into the Party (Barron's)

Takeaway: We spoke with Barron's at length on our bearish BABA thesis back in April. Thankfully, we weren't mentioned when it twisted our analysis.

Editor's note: This brief research note below was written earlier today by our Internet & Media analyst Hesham Shaaban. If you're an institutional investor interested in learning more about how you can subscribe to his research please email to

BABA: Stumbling into the Party (Barron's) - Alibaba cartoon 01.29.2015


  1. ARRIVING LATE TO THE PARTY: There isn't much that we all didn't already know.  GMV growth has slowed precipitously, the subsidiary structure is complicated, counterfeit goods are a concern, China macro is headwind, and so on and so forth.  But Barron's bear case is not so much on the above factors, but rather the implication that BABA is making up its reported metrics.  Its basis is largely driven off a quote from another BABA analyst, and a rather weak comparison of BABA's reported metrics to China demographic data.
  2. AFTER ONE TOO MANY: Barron's first takes issue with the fact that BABA's active buyers are roughly the same size as the Chinese e-commerce population reported by CNNIC (Dec 2014).  Remember that BABA has +80% market share, so this shouldn't be a surprise to any of us.  Second, Barron's twisted the demographic analysis we shared with them: that BABA's average consumer spends well in excess of what the average Chinese consumer could afford.  That doesn't mean that BABA is fudging the numbers as the article implies, it just means that China's Elite and/or Group Buying is driving BABA's GMV.  We explained this to the author, he chose to omit it.


Note that we have covered our short position in BABA, but we have included a set of notes below that covers the major themes behind our bearish thesis.  Let us know if you have any questions, or would like to discuss in more detail.  


Hesham Shaaban, CFA



BABA: What the Street is Missing
11/26/14 08:03 AM EST
[click here]


BABA: Model Facing Secular Pressure
12/04/14 09:17 AM EST
[click here]


BABA: The Mobile Debate
03/04/15 10:34 AM EST
[click here]


BABA: Solid Pushback → Same Conclusion
03/31/15 08:12 AM EDT
[click here]

the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.