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CHART OF THE DAY: We Aren’t Suggesting You Buy Chinese Equities This Morning. That Said...

Editor's Note: The chart and excerpt below are from this morning's Early Look written by Hedgeye Director of Research, Daryl Jones. Click here for more information on how you can become a subscriber to this daily product designed to keep you a step or two ahead of consensus. 

 

CHART OF THE DAY: We Aren’t Suggesting You Buy Chinese Equities This Morning. That Said... - z Chart of the Day

 

...Well, if you want to be a true contrarian (especially with the Shanghai Composite down -3.5% this morning)  it may suggest a re-rating.  As highlighted in the Chart of the Day below, China is currently trading at 9.3x next-twelve-months earnings versus 16.1x for the MSCI World Index.  A re-rating to the World multiple implies 70%+ upside . . . .

 

We certainly aren’t suggesting you go run out and buy Chinese equities this morning.  But eventually, the time will come again to believe in The Dragon.  After all, with Donald Trump emerging as a legitimate candidate for President, we should all be well-practiced at suspending disbelief.

 


One for the Ages

“All the world’s a stage, and all the men and women merely players: they have their exits and their entrances; and one man in his time plays many parts, his acts being seven ages.”

-William Shakespeare

 

Last week, we touched on the 2016 Presidential election.  So far, it’s been a campaign characterized by two distinct outsiders in the socialist Vermont Senator Bernie Sanders and real estate (and bankruptcy) mogul Donald Trump. Both have taken a lot of mind share.  In the course of the last week, they have only taken more.

 

Trump is now consistently registering over 30+ points in the Republican polls, which features a broad field.  Another outsider, surgeon Ben Carson has now solidly surpassed second place mainstay Jeb Bush.  Collectively, the two outsiders, Carson and Trump, are polling at almost 50% of the Republican nomination voter on a combined basis.

 

Meanwhile, on the Democratic side, the venerable Hillary Clinton seems a lot less venerable these days within the Democratic Party. For the first time in over a year, she is consistently polling below 50%.  In part, this is driven by the emergence of Vice President Biden as a likely candidate.  In addition, the self-avowed socialist Sanders is maintaining his relative strength.   In fact, in the most recent New Hampshire poll Sanders was actually up on Clinton by +22 points!

 

So, how much can change between now and Election Day? The short answer is a lot. 

 

In 2011, right around this time, Governor Rick Perry of Texas was polling around 32% for the Republican nomination versus 20% for Mitt Romney.  In 2007, at roughly this time, Hillary Clinton was polling at about 40% versus now President Barack Obama at 22%.  Interestingly, on the Republican side in 2007, the eventual nominee Senator John McCain was already up by about +10 points on the field.

 

Now, while we do have a crystal ball in our possession in the @HedgeyeTV studio, we are reluctant to use it to predict the outcome of the race.  We are comfortable predicting (if you want to call it that) that on the Democratic side Clinton, Biden, or Sanders will get the nod.  On the Republican side, we see Trump, Bush, or Carson likely to prevail.

 

As investors, our job over the next year will be to prepare for the various potential outcomes and implications on policy, taxes and the markets.  Focusing on and understanding the dynamics in Washington, DC is going to become as important as ever over the next year.  Start doing your homework now.

 

Back to the Global Macro Grind...

 

One for the Ages - China cartoon 04.14.2014

In terms of global macro moves in the last 24 hours, Chinese equities are leading again on the volatility front as the Shanghai Composite is down about -3.5%. Coincidentally, we released a thorough update (more than 80 slides) on China last night.  (You can email to access the deck if you are an institutional subscriber or talk to our Asian analyst Darius Dale.)

 

The key takeaways from our report on China are as follows:

  • 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 could be left of the “Beijing Put” which has proven to be impotent of late.
  • 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.
  • 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.

If you were to summarize our key thoughts on China, it is that their secular growth outlook is likely to be lower than expected, though in the short term we expect to see some economic stabilization.  Longer term, if the Chinese are able to implement the appropriate changes in terms of a deregulated capital account and capital market, it may have very positive and lasting influence on global markets and Chinese equities.

 

So, what does that mean for Chinese equities?

 

Well, if you want to be a true contrarian (especially with the Shanghai Composite down -3.5% this morning)  it may suggest a re-rating.  As highlighted in the Chart of the Day below, China is currently trading at 9.3x next-twelve-months earnings versus 16.1x for the MSCI World Index.  A re-rating to the World multiple implies 70%+ upside . . . .

 

We certainly aren’t suggesting you go run out and buy Chinese equities this morning.  But eventually, the time will come again to believe in The Dragon.  After all, with Donald Trump emerging as a legitimate candidate for President, we should all be well-practiced at suspending disbelief.

 

Our immediate-term Global Macro Risk Ranges (with our intermediate-term TREND call in brackets)

 

SPX 1911-1980 (bearish)

VIX 21.49-31.57 (bullish)
USD 94.68-95.99 (neutral)
Oil (WTI) 43.03-47.15 (bearish)

Gold 1095-1141 (bullish)

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

One for the Ages - z Chart of the Day


SONC | FIRST MISS - EXPECT MORE TO COME

Sonic Corp (SONC) is on our Hedgeye Restaurants Best Ideas list as a SHORT.

 

On Monday September 14, 2015, SONC announced Same-Store Sales (SSS) growth for fiscal year 2015 of 7.3% as well as the date of their earnings call, which will be Monday, October 19, 2015.

 

SONC | FIRST MISS - EXPECT MORE TO COME  - CHART 1

 

The company announced that system-wide SSS for 4Q15 were 4.9% versus consensus estimates of 5.5%. For the full fiscal year 2015 as previously stated system-wide SSS were 7.3% versus consensus estimates of 7.9%. The comp reflects 6.9% SSS growth at company drive-ins and 7.3% SSS growth at franchise drive-ins. These numbers show an initial slowdown from SONC’s recent strong performance, and as MCD regains its leadership position we expect this to become more apparent.

 

SONC is facing some tough comps in fiscal year 2016 especially in the first and second quarters. Management is expecting SSS growth for the system in the range of 2% to 4% for FY16 which aligns well with consensus estimates currently at 3.2% for the FY16. The company plans to open 50 to 60 new franchise drive-ins in FY16, in addition they have initiatives in place to improve margins by 75 to 125 basis points at their drive-ins.

 

Nothing from this release makes us feel less confident about our short position on the name. We believe that comps will erode over the next 12-18 months as MCD takes back market share that it has given up over the last few years.

 

SONC | FIRST MISS - EXPECT MORE TO COME  - CHART 2

 

Please call or e-mail with any questions.

 

Howard Penney

Managing Director

 

Shayne Laidlaw

Analyst

 

 


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China and #EuropeSlowing

Client Talking Points

CHINA

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.

SPAIN

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.

OIL

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

CASH 70% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 6%
FIXED INCOME 24% INTL CURRENCIES 0%

Top Long Ideas

Company Ticker Sector Duration
MCD

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.

PENN

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.

  

TLT

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

TWEET OF THE DAY

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

@KeithMcCullough

 

QUOTE OF THE DAY

What use could the company make of an electric toy?

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

STAT OF THE DAY

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

 

BULLISH TRENDS

September 15, 2015 - Slide2

September 15, 2015 - Slide3

September 15, 2015 - Slide4

 

 

BEARISH TRENDS

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


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.28%
  • SHORT SIGNALS 78.51%
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