Conclusion: To be clear, we think the Chinese are neither incentivized nor inclined to devalue the CNY again – certainly not in the near term. That said, however, we believe another round of euro debasement out of the ECB is likely the next catalyst for investors to begin pricing in this risk – rightly or wrongly.
According to the [unofficial] Caixin-Markit Manufacturing PMI series, Chinese growth slowed to a 78-month low in September, with the Output sub-index dropping to a lowly 45.7 from 46.4 in August. There are two things investors should takeaway from this release:
- Contrary to the opinions of our perceived competitors, global growth continues to slow – even on their preferred metric (i.e. Manufacturing PMIs). For reference, even after its demonstrable slowdown in recent years, China alone still accounts for over a quarter of all global GDP growth.
- The aforementioned figure weighed on mainland and regional equity bourses and prompted speculation of another round of CNY debasement, which we find to be misguided – at least at the current juncture.
Per official rhetoric, the early August devaluation of the CNY wasn’t designed to stimulate exports, but rather to better align the currency with “market forces”. As such, investors should not expect another CNY devaluation to the extent the market rate and reference rate remain in synch, which has been the case since the devaluation.
We can take their word for it given that: A) said devaluation was really small in magnitude; and B) the CNY had hardly moved against the currencies of China’s two largest export markets (USD and HKD). Regarding the latter point, the CNY had actually declined -0.9% YoY vs. the USD and -1% YoY vs. the HKD on the day prior to the devaluation.
Obviously China could stand to benefit from incremental currency debasement given the deflationary pressures emanating across its economy; we discuss these dynamics is great detail on slides 7-13 of our recent presentation on China (CLICK HERE to access).
That said, however, subsequent devaluations may ultimately equate to China shooting itself in the foot, given the current degree of capital outflow pressure evident in both the data and in market prices. It may also serve to derail China’s hopes of achieving reserve currency status at/with the IMF (CLICK HERE for a thorough discussion of those dynamics).
One could make the case that if the devaluation was designed to make China more competitive vs. the Eurozone (China’s third largest single export market at 11.4%), on the margin, then the PBoC has a lot more hay to bale. The CNY is still up +10.2% YoY and +20.1% over the past 18M vs. the EUR as a result of its managed float vs. the USD.
Given that our #EuropeSlowing theme implies that we expect the ECB to officially expand its QE program by year-end, an incremental devaluation of the euro should turn investor attention back to the specter of CNY debasement – rightly or wrongly. For now, we remain in the latter camp (i.e. “wrongly”), but are certainly not of the mind to pooh-pooh the risk of another round of China-induced global financial market volatility.
Email us with any questions, comments or additional concerns.
As far as China is concerned, we have absolutely no idea how anyone can trust their economic numbers.
Making matters worse, even the numbers they are reporting are slowing – PMI 47.0 SEP vs. 47.3 AUG (that’s the lowest level since 2009).
No, not good.
In case you didn’t already know, the Shanghai Composite Casino remains in full-blown crash mode. It was down another -2.2% overnight. That brings its whopping plunge to down -40% since April.
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Takeaway: First Holiday Sales Projection Bearish, Retail Facing Tough Compares in 4Q.
First Holiday Sales Projection Bearish, Retail Facing Tough Compares in 4Q
This is the first official holiday sales projection of the year, and the outlook is markedly bearish from Alix Partners. We don't think there's much of a process behind forecasts from just about any source (NRF, Alix, you name it). The track record is a bit spotty as can be seen in the table below. In fact, not once over the past 4-years has the Actual sales growth number fallen within the 'Low/High' range.
But what we do know is that, the retail sector is facing tough revenue AND margin AND working capital compares in 4Q. In what will likely be an extremely promotional holiday – we’ll see ‘free shipping’ as the most commonly used offensive weapon. We think that retailers will opt to hold the line on market share and will view weaker margins as a customer acquisition cost while most components of the retail landscape are dropping the gloves online.
Note in the chart below that the 16.4% EPS growth for retail in 4Q14 is the highest we've seen in any quarter for the group in over two years. We think there's a far better chance of that rate going negative this 4Q than being double-digit positive. We've seen retail multiples contract by about 2 points (XRT) over the past quarter, which is twice the contraction of the overall market. So clearly, some deceleration is expected. But we still need to be very selective about what we own with the group at 19x earnings.
Long: RH, KATE, PIR, NKE, RL
Short: FL, HIBB, KSS, TIF
UA - One week after it's investor day, UA is launching a new campaign behind two of its athletes. The campaign is call "Slay Your Next Giant" and includes young soccer star Memphis Depay, and Cameron Carter-Vickers.
WMT - Wal-Mart has acquired PunchTab, a 4 year old tech startup to help with customer engagement and targeted offers at Sam's Club. Terms are undisclosed. This is the 15th acquisition for WMT in 4 years, as they continue to add young tech talent.
AMZN, ETSY - Amazon has quietly started a "Handmade" concept connecting makers of handcrafted goods with Amazon shoppers, which would be a direct competitor to ETSY. Though not officially launched, select sellers have started using it.
LULU - Chip Wilson's family's new Brand Kit and Ace is a year old. The company has 600 employees and plans to have 50 North American stores by mid 2016.
HBC, M - Saks announced a new Off 5th location in Woodland Hills, CA opening Aug 2016. While Bloomingdale's announced two new outlet stores in Philly and San Diego by November.
JCP - JC Penney promotes John Tighe to EVP and Chief Merchant, from SVP and senior general merchandise manager for men's, children's, footwear, handbags and intimate apparel.
TPX, CONN - New Tempur Sealy CEO Scott Thompson resigns as director of Conn’s. Corporate governance guidelines require directors to offer to resign when their employment status changes.
CRI - Carter's amends revolving credit facility to $500mm from $375mm.
The increased stock market volatility is overshadowing fundamentals in the Consumer Staples space. Consistent with the Hedgeye Macro Team’s view of the overall market, style factors are currently playing a big role in performance and will likely be a factor as 3Q15 comes to a close. According to the Hedgeye Macro Team, the style factors that should continue to get you paid into the quarter-end are:
- Low-Beta, Big Cap (Equities)
- Long Duration Government Bonds
- U.S. Stocks That Look Like Bonds
In the Consumer Staples space the proof is in the numbers. In the consumer staples sector large cap/low-beta names, for the most part, have been some of the best performing companies. Consistent with this thesis on the LONG side we like GIS and LNCE. Unfortunately, our WWAV long is painful, but the HAIN SHORT feels much better.
In a flight to safety environment, Consumer Staples will likely continue outperforming. Year-to-date, Consumer Staples has outperformed the S&P 500 by 260bps. Over the last five days, as you see below, the XLP has outperformed the entire market except for XLU.
While on a relative performance the XLP is outperforming the stock market as whole, stocks still look expensive. The XLP is currently trading at 11.38x EV / NTM EBITDA, well above its five year average of 9.77x.
Please call or e-mail with any questions.
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