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The Real Reason You Should Be Concerned By China’s Recessionary Trade Data

Dominating headlines today was China’s NOV trade data. Import growth, while still in contraction territory, improved sequentially and is now accelerating on a trending basis. Counterbalancing that was continued softness in the rate of Chinese export growth – which was essentially unchanged from OCT – as well as sequentially soft trade balance figures.

 

The Real Reason You Should Be Concerned By China’s Recessionary Trade Data - IMPORTS

 

The Real Reason You Should Be Concerned By China’s Recessionary Trade Data - China Exports YoY

 

Weighing on sentiment was the PBoC’s decision to set the USD/CNY reference rate to the second weakest level since the August 11th devaluation (6.4078 vs. 6.3985 prior). Both the spot and reference rate are now trading at/near ~four-year lows. It didn’t help sentiment that this policy adjustment came in conjunction with data that showed China’s FX reserve balance plunged -$87.2B in NOV (the third-largest decline in at least 10Y) to the lowest absolute level since FEB ‘13.

 

The Real Reason You Should Be Concerned By China’s Recessionary Trade Data - China CNY Reference Rate

 

The Real Reason You Should Be Concerned By China’s Recessionary Trade Data - China Foreign Exchange Reserves MoM

 

The Real Reason You Should Be Concerned By China’s Recessionary Trade Data - China Foreign Exchange Reserves

 

Despite the aforementioned [marginal] shift in FX policy we continue to believe the CNY is not at risk of a material one-off devaluation. The August devaluation was not intended to promote export growth as bandied about by Western financial media, but rather to correct a longstanding imbalance that had developed between the spot and reference rates. That imbalance remains corrected – for now at least.

 

The Real Reason You Should Be Concerned By China’s Recessionary Trade Data - China CNY Reference Rate Spread

 

The Chinese economy could obviously stand to benefit from a material devaluation of the CNY (CLICK HERE for more details), but instead of incremental sharp devaluation(s), we believe the PBoC is likely to guide the CNY 15-20% lower vs. the USD throughout the next Five-Year Plan.

 

Investors should expect Beijing to favor stability over destabilizing devaluations that would perpetuate an acceleration of already-rapid capital outflows. NDF spreads – while certainly still pricing in continued weakness in the CNY and CNH over the NTM – would seem to suggest as much.

 

The Real Reason You Should Be Concerned By China’s Recessionary Trade Data - China Estimated Capital Flows

 

The Real Reason You Should Be Concerned By China’s Recessionary Trade Data - China NDF Spread

 

We don’t want to belabor our thoughts on the Chinese yuan, which has become one of the top 2-3 topics de jour in our recent client discussions. For our more expansive thoughts on this topic as well as on the Chinese economy in general, please review our 11/19 note titled, “Can Beijing Maintain Exchange Rate Stability Or Is the Chinese Yuan the Next Thai Baht?”.

 

In short, with key high-frequency growth indicators continuing to consistently come in on the lower end of historical ranges and various measures of inflation continuing to decelerate on both a sequential and trending basis, it only makes sense for Western investors to anticipated increased policy support to combat this #Quad4 setup, at the margins. But with 1Y OIS pricing in a stable outlook for policy rates (-5bps  spread vs. benchmark 7-Day Repo Rate; ~flat over the past 3M) we continue to pound the table on our belief that Beijing will continue to do what we think is necessary per the structural headwinds we’ve identified throughout the Chinese economy – i.e. continue downshift GDP growth in an orderly manner.

 

The Real Reason You Should Be Concerned By China’s Recessionary Trade Data - China Economic Summary

 

Shifting the discussion back to the title of this note, China’s NOV trade data is confirmatory of a core belief we have at Hedgeye: global growth continues to decelerate on a trending basis, which implies that it did not bottom in OCT like some of our competitors claim it has.

 

I personally don’t know how one can look at the following chart of global export growth (IMF data through 3Q) or the following chart of export growth trends across each of the G20 economies and say that global growth has “bottomed”.  Admittedly, I’m never in competition for being the smartest guy in the room when Keith and I visit with clients, but still…

 

The Real Reason You Should Be Concerned By China’s Recessionary Trade Data - IMF World Exports

 

The Real Reason You Should Be Concerned By China’s Recessionary Trade Data - EXPORTS

 

Surely the key risk to the reflationist view is that global demand growth just never shows up. That is certainly is what is being implied by the current rate of global export growth. Per the following reasonably tight correlation, it is reasonable to expect that global growth decelerated to somewhere around flat YoY in 3Q15.

 

The Real Reason You Should Be Concerned By China’s Recessionary Trade Data - World Exports vs. World GDP

 

The Real Reason You Should Be Concerned By China’s Recessionary Trade Data - World Exports vs. World GDP 2

 

Admittedly, however, there is upside to that forecast given the relative resilience of the U.S. consumer, but as we highlighted in our 11/25 note titled, “Can’t Sneak #GrowthSlowing Past the Goalie”, the NTM outlook for real PCE growth in the U.S. is as dour as it has been at any point in time since late-2007.

 

If the domestic consumption growth finally folds like manufacturing, exports, capex and corporate profits all have before it, a global recession in 2016 is not at all out of the realm of possibly given the current state of international economic affairs.

 

The Real Reason You Should Be Concerned By China’s Recessionary Trade Data - 12 8 2015 3 47 40 PM

Source: Bloomberg L.P.

 

Given the recent strength in domestic auto sales, it may be worth adding General Motors (GM) to your “FANG” screen. A quantitative breakdown in those stocks would likely be a harbinger of that the proverbial “music” has officially stopped.

 

Have a great evening,

 

DD

 

Darius Dale

Director


Cartoon of the Day: Meanwhile On Skid Row...

Cartoon of the Day: Meanwhile On Skid Row... - Oil cartoon 12.08.2015

 

Oil (WTI) smoked for another -5.9% drop yesterday and -0.27% today, taking its epic deflation to -43.3% year-over-year.


UNFI | IN TRANSITION

We are moving United Natural Foods (UNFI) to the Hedgeye Consumer Staples LONG bench.

 

HEDGEYE OPINION

We have ridden the wave on this name, going long at ~$49 (Black Book HERE) up to ~$55, and now down sharply to ~$37. We will be the first ones to admit that we did not time this trade correctly, misjudging the Whole Foods (WFM) effect, the overall natural and organic category going more mainstream, and the slowing center of store. At ~$49 UNFI was trading at 2008 recession levels, what we called a “generational opportunity,” at the time that was an accurate portrayal. Markets change, and we have to change with them. One may ask; why aren’t you moving it to the SHORT side? If it wasn’t a generational opportunity at $49, we definitely believe it is below $37, but we need to see a few things play out before gaining confidence in the long-term trajectory of UNFI.    

  1. Fill newly added capacity
  2. Grow within current stores
  3. Win new contracts
  4. Acquire fresh food assets

UNFI is still a great company, with a solid management team. The market is changing around them; natural and organic is now mainstream and available in more locations besides just the natural channel (WFM) and the center of store is struggling as consumer reach for more fresh items. UNFI must learn to change with this market and we are confident they are working towards that. They still maintain one of the largest portfolios of natural and organic products and provide a differentiated, value-add service that their customers appreciate and need. Bottom line is that the TAIL story is still in tacked, but there will be some near term turbulence as we are seeing today.  

 

1Q16 EARNINGS RESULTS

For all intents and purposes this was an ugly quarter, one that included a top and bottom line miss, with a full year 2016 guide down.  Net sales for 1Q16 were $2.08 billion versus consensus estimates of $2.09 billion. Operating income decreased 7.7% YoY to $53.9 million, this also missed consensus expectations of $60.5 million, was heavily impacted by a $2.8 million restructuring charge related to the loss of the Albertsons contract. Adjusted diluted EPS for the quarter was $0.63, coming short of consensus estimates of $0.68 by $0.05.

 

MANAGEMENT GUIDANCE

Management appeared especially cautious on the call, as they called 2016 a transitional year for the company. They continuously pointed out the competitive nature of the industry, and the troubles with the center of store. Management appeared wary of top line growth as they reposition the business to appeal to current consumer trends of fresh, perimeter food items and ethnic gourmet.

 

Management guided the full year down, revenue is now expected to be in the range of $8.4 to $8.6 billion versus previously announced guidance of $8.5 to $8.7 billion. Earnings per diluted share are now expected to be $2.73 to $2.84 versus previously announced guidance of $2.80 to $2.93.

 

Please call or e-mail with any questions.

 

Howard Penney

Managing Director

;

 

Shayne Laidlaw

Analyst

 

 


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 80.64%
  • SHORT SIGNALS 78.61%

Commodities Curl Into the Fetal Position

Takeaway: The CRB Index is down -23% year-to-date.

Commodities Curl Into the Fetal Position - fetal position

 

It looks like the October “reflation” call was just as bad as the July one – global growth continues to slow. What has become clear is how largely misunderstood deflation has been over the last 18 months. We’ve entered the most painful part of a crash in inflation expectations – the capitulation.

 

The CRB Index made-lower-lows -23% YTD yesterday and Oil/Copper had only bounced +0.7% and +0.2% respectively this morning, before both headed lower. 

 

Commodities Curl Into the Fetal Position - CRB update

 

Here are a few of the components within the CRB Index that were crashing yesterday:

  1. Oil (WTIC) smoked for another -5.9% drop, taking its epic deflation to -42.9% year-over-year
  2. Natural Gas tanked another -5.2% to, taking its crash to -45.6% year-over-year
  3. Copper deflated another -1.4%, taking its epic deflation to -30.1% year-over-year
  4. Cattle prices dropped another -2.3%, taking its crash to -26.2% year-over-year
  5. Coffee prices got tagged for another -1.1% loss, taking its epic deflation to -31.5% year-over-year

 

Aren’t epic deflations and crashes fun? And don't confuse today's mixed trading as a bottom for deflation.

 

But, ex-all-of-it, “price stability” seems to be tracking right at the Fed’s target!


The X Factor: ‘Ex-Everything, Financial Markets Look Really Good’

 

In this excerpt of The Macro Show this morning, Hedgeye CEO Keith McCullough pulled up charts of crashing equity markets around the world and took Wall Street to task for its nonsensical bullish stock market thesis that “Ex-Energy the stock market looks good.”

 

Subscribe to The Macro Show today for access to this and all other episodes. 

 

Subscribe to Hedgeye on YouTube for all of our free video content.


[UNLOCKED] Fund Flow Survey | Ongoing Rotation to ETFs

Takeaway: Almost all active categories had withdrawals last week, including -$3.5 B from domestic equity funds. Meanwhile, equity ETFs gained +$8.0 B.

Investment Company Institute Mutual Fund Data and ETF Money Flow:

Fund flows in the 5-day period ending November 25th were similar to the week prior. Investors again pulled funds from almost all actively managed risk categories, as the rotation into passive products continued. Total equity mutual funds lost -$3.9 billion with total fixed income mutual funds shedding -$2.7 billion for the week. Meanwhile, investors contributed +$8.0 billion and +$670 million to equity and fixed income ETFs, respectively.

 

A broader look at the ongoing damage from passives against the active industry outlines the continued growth trajectory of ETFs. Passive ETFs have garnered 55% of cumulative investment flow since 2007 taking in over $1.4 trillion versus all long-term mutual fund products of $1.1 trillion (both stock and bond funds). The damage on the equity side specifically is most notable with international and domestic equity funds having lost -$281 billion since '07 versus the over $1.0 trillion inflow for equity ETFs over the same time frame. The divergence this year is running near another +$150 billion for passives with active equity outflows at -$39 billion (running domestic equity fund flows for '15 are -$147 billion netted against international funds with a +$107 billion contribution) and equity ETFs taking in +$109 billion in the first 11 months of the year. With only 13% total market share against total fund products, the ETF structure has plenty of additional share to gain.  

 

[UNLOCKED] Fund Flow Survey | Ongoing Rotation to ETFs - WETF chart

 

 

In the most recent 5-day period ending November 25th, total equity mutual funds put up net outflows of -$3.9 billion, trailing the year-to-date weekly average outflow of -$840 million and the 2014 average inflow of +$620 million. The outflow was composed of international stock fund withdrawals of -$369 million and domestic stock fund withdrawals of -$3.5 billion. International equity funds have had positive flows in 43 of the last 52 weeks while domestic equity funds have had only 8 weeks of positive flows over the same time period.

 

Fixed income mutual funds put up net outflows of -$2.7 billion, trailing the year-to-date weekly average inflow of +$100 million and the 2014 average inflow of +$926 million. The outflow was composed of tax-free or municipal bond funds contributions of +$642 million and taxable bond funds withdrawals of -$3.3 billion.

 

Equity ETFs had net subscriptions of +$8.0 billion, outpacing the year-to-date weekly average inflow of +$2.3 billion and the 2014 average inflow of +$3.2 billion. Fixed income ETFs had net inflows of +$670 million, trailing the year-to-date weekly average inflow of +$1.1 billion and the 2014 average inflow of +$1.0 billion.

 

[UNLOCKED] Fund Flow Survey | Ongoing Rotation to ETFs - ICI1 large 12 8

  

Mutual fund flow data is collected weekly from the Investment Company Institute (ICI) and represents a survey of 95% of the investment management industry's mutual fund assets. Mutual fund data largely reflects the actions of retail investors. Exchange traded fund (ETF) information is extracted from Bloomberg and is matched to the same weekly reporting schedule as the ICI mutual fund data. According to industry leader Blackrock (BLK), U.S. ETF participation is 60% institutional investors and 40% retail investors.



Most Recent 12 Week Flow in Millions by Mutual Fund Product: Chart data is the most recent 12 weeks from the ICI mutual fund survey and includes the weekly average for 2014 and the weekly year-to-date average for 2015:

 

[UNLOCKED] Fund Flow Survey | Ongoing Rotation to ETFs - ICI2

 

[UNLOCKED] Fund Flow Survey | Ongoing Rotation to ETFs - ICI3

 

[UNLOCKED] Fund Flow Survey | Ongoing Rotation to ETFs - ICI4

 

[UNLOCKED] Fund Flow Survey | Ongoing Rotation to ETFs - ICI5

 

[UNLOCKED] Fund Flow Survey | Ongoing Rotation to ETFs - ICI6



Cumulative Annual Flow in Millions by Mutual Fund Product: Chart data is the cumulative fund flow from the ICI mutual fund survey for each year starting with 2008.

 

[UNLOCKED] Fund Flow Survey | Ongoing Rotation to ETFs - ICI12

 

[UNLOCKED] Fund Flow Survey | Ongoing Rotation to ETFs - ICI13

 

[UNLOCKED] Fund Flow Survey | Ongoing Rotation to ETFs - ICI14

 

[UNLOCKED] Fund Flow Survey | Ongoing Rotation to ETFs - ICI15

 

[UNLOCKED] Fund Flow Survey | Ongoing Rotation to ETFs - ICI16



Most Recent 12 Week Flow within Equity and Fixed Income Exchange Traded Funds: Chart data is the most recent 12 weeks from Bloomberg's ETF database (matched to the Wednesday to Wednesday reporting format of the ICI), the weekly average for 2014, and the weekly year-to-date average for 2015. In the third table are the results of the weekly flows into and out of the major market and sector SPDRs:

 

[UNLOCKED] Fund Flow Survey | Ongoing Rotation to ETFs - ICI7

 

[UNLOCKED] Fund Flow Survey | Ongoing Rotation to ETFs - ICI8



Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR callouts, investors contributed +$135 million or +6% to the materials XLB ETF, more than replacing the prior week's -$94 million withdrawal.

 

[UNLOCKED] Fund Flow Survey | Ongoing Rotation to ETFs - ICI9



Cumulative Annual Flow in Millions within Equity and Fixed Income Exchange Traded Funds: Chart data is the cumulative fund flow from Bloomberg's ETF database for each year starting with 2013.

 

[UNLOCKED] Fund Flow Survey | Ongoing Rotation to ETFs - ICI17

 

[UNLOCKED] Fund Flow Survey | Ongoing Rotation to ETFs - ICI18



Net Results:

The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a positive +$6.2 billion spread for the week (+$4.2 billion of total equity inflow net of the -$2.0 billion outflow from fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52-week moving average is +$968 million (more positive money flow to equities) with a 52-week high of +$27.9 billion (more positive money flow to equities) and a 52-week low of -$19.0 billion (negative numbers imply more positive money flow to bonds for the week.)

  

[UNLOCKED] Fund Flow Survey | Ongoing Rotation to ETFs - ICI10

 


Exposures:
The weekly data herein is important for the public asset managers with trends in mutual funds and ETFs impacting the companies with the following estimated revenue impact:

 

[UNLOCKED] Fund Flow Survey | Ongoing Rotation to ETFs - ICI11 


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