Our #EmergingOutflows Theme Accelerates Into “Liftoff”

The carnage you’re seeing across emerging market capital and currency markets is exactly what we anticipated when we first went broadly negative on this investment space back in early 2013 – a view that received a fair amount of pushback at the time.


While the path to get here was anything but linear – i.e. full of intermittent reflation rallies that we had to risk manage or take advantage of select opportunities on the long side for a trade(s) – we’ve maintained a bearish bias on EM with respect to our intermediate-term TREND and long-term TAIL  durations throughout the entirety of the move and many of our clients have benefitted tremendously from this research view over the past few years.


Given that EM is now a consensus short, we don’t necessary have much more to add to the discussion at the current juncture. That said, however, it’s important to contextualize how we got here so that we can better position ourselves for either incremental carnage or an investable bottom. As such, we think the following sampling of our work on EM/global dollar tightening from the past few years is a good place to start:



Our #EmergingOutflows Theme Accelerates Into “Liftoff” - 12 11 2015 5 04 06 PM

Source: Bloomberg L.P.


In terms of evaluating incremental data, we complied the following country capsules to: A) provide an update on the individual economies listed below, as well as B) provide our overarching thoughts on the space at this historic moment in time. Remember, the Fed has never hiked rates into an obvious #LateCycle Slowdown. The next few months could be very interesting…


Best of luck out there! Email us if we can expound upon anything; always happy to help.



In China, the month of November registered a sequential pickup in CPI, but headline inflation is still decelerating on a trending basis. Moreover, the persistent and deeply negative PPI in conjunction with the sequential deceleration in FDI speaks volumes to the ongoing deflationary pressures emanating throughout the Chinese economy. The NOV credit and money supply data was positive, on the margin, and confirms the Chinese economy is not “rolling down the hill” (as we’ve previously termed), but rather continuing to be “walked down the stairs” by policymakers. Economic data aside, the most impactful headline out of China this week has to be the PBoC’s decision to set the CNY reference rate to 6.4385 – which is the lowest value per USD since August 2011. Following this maneuver was the headline of the week in the PBoC signaling that it intends to change the way it manages the yuan’s value by potentially loosening its peg to the U.S. dollar. Specifically, the PBoC said it makes more sense to measure the yuan’s exchange rate against a basket of currencies rather than the USD alone, and that referencing the yuan against a basket of currencies would help keep its value at a reasonable equilibrium. This confirms our view that the PBoC fully intends to materially devalue the CNY vs. the USD and likely speeds up the process by which said devaluation will occur – something we did not see coming. That said, however, we still don’t think the CNY will suffer a major one-off devaluation(s) in line with what we saw in August, but rather a multi-year revaluation lower vs. the USD to improve its competitiveness against peer currencies (namely the JPY, KRW, MXN, TWD and THB). Unrelated, we find it interesting that this headline leaked just days before the FOMC meeting begins; this is not unlike the August devaluation ahead of the September  17th FOMC statement. Will China force the Fed’s hand on liftoff (or the lack thereof) for the second time in 2015? Investment conclusion: We previously held a neutral bias on China, but today’s news of the pending change to the CNY policy has us thinking more volatility is ahead over the immediate-to-intermediate term. As such, we are downshifting to underweight.


Our #EmergingOutflows Theme Accelerates Into “Liftoff” - China Economic Summary


In India, capital and currency markets are under pressure as they look through the sequentially strong OCT industrial production report and focusing on two policy catalysts – one domestic (i.e. Modi’s inability to push through GST legislation amid opposition protests to recent corruption charges) and one foreign (the December 16th FOMC statement). The INR is threatening to record a new all-time low as the country’s twin deficits in the current and fiscal accounts perpetuate capital outflows, at the margins. Investment conclusion: We reiterate our underweight bias on India.


Our #EmergingOutflows Theme Accelerates Into “Liftoff” - India Econ Summary


In South Korea, the BoK held its Benchmark 7-Day Repo rate flat at 1.5%, which marks the sixth straight month of being on hold after -50bps of cuts in 1H15. While their statement was dovish in terms of them highlighting external risks to their 2016 GDP growth and headline inflation forecasts of +3.2% and +1.7%, respectively, the South Korean economy is clearly developing a hawkish #Quad2 setup heading into 1Q16. Like many EM currencies, the KRW is getting smoked ahead of the Fed statement, but we would  expect the won to outperform on a longer duration once the dust settles. Investment conclusion: We reiterate our neutral bias on South Korea.


Our #EmergingOutflows Theme Accelerates Into “Liftoff” - South Korea Economic Summary


In Brazil, the country’s stagflationary recession and political crisis deepened again this week, with headline inflation accelerating to new highs in NOV and tensions heating up between Finance Minster Joaquim Levy (a fiscal hawk) and Planning Minister Nelson Barbosa (left of Levy) over next year’s primary budget surplus target. The BRL – which may break to a new all-time low soon – is getting blown out alongside rates amid these negative developments. Investment conclusion: We reiterate our underweight bias on Brazil. Twin deficits? Check.


Our #EmergingOutflows Theme Accelerates Into “Liftoff” - Brazil Economic Summary


In Mexico, both headline and core inflation ticked down in NOV, which perpetuated a sequential improvement in real wage growth. Despite that, same-store sales growth decelerated sharply in the same month, which is indicative of the loss of purchasing power associated with the MXN’s -6.4% plunge over the past three weeks to new all-time lows. The Mexican economy is currently in an obvious #Quad4 state and short rates are pricing in the risk is that it slides over into stagflationary #Quad3 in fairly short order – an outcome that would inhibit Banxico from responding with easier monetary policy. Investment conclusion: We reiterate our underweight bias on Mexico. Twin deficits? Check.


Our #EmergingOutflows Theme Accelerates Into “Liftoff” - Mexico Economic Summary


In Russia, it was an uneventful week in terms of reported sequential deltas, with 3Q real GDP coming in unchanged vs. 2Q at -4.1% YoY and with the Central Bank of Russia holding its Benchmark Key Rate steady at 11%. The Russian economy had completed its transition from stagflationary #Quad3 to deflationary #Quad4, but the -8% plunge in the RUB over the past three weeks (threatening a new all-time low vs. the USD) threatens to perpetuate a hawkish inflection in headline inflation over the near term, which would keep CBoR in its box (it hasn’t cut rates since July after cutting them -600bps in the YTD. Investment conclusion: We reiterate our underweight bias on Russia.


Our #EmergingOutflows Theme Accelerates Into “Liftoff” - Russia Economic Summary


In South Africa, recent economic data has come in in fairly mixed – which is a good thing, on the margin – as accelerating headline CPI in NOV and decelerating consumer confidence in 4Q contrasts with decelerating core inflation (NOV) and accelerating retail sales in OCT. From a trending perspective, the South African economy is still mired in stagflationary #Quad3, which is being perpetuated at the margins by the flaming ZAR (down -11.9% over the past three weeks to new all-time lows). Also weighing on the ZAR is a sharp increase in political consternation, as President Zuma’s recent decision to fire Finance Minister Nhlanhla Nene (a fiscal hawk) comes after a very public disagreement between the two regarding the path for government spending. Nene was replaced by little-known David van Rooyen, who is unlikely to oppose the president’s plans to move forward with proposals to build a nuclear-power industry, bailout the state-owned airline and push other spending before local government elections next year. Investment conclusion: We reiterate our underweight bias on South Africa. Twin deficits? Check.


Our #EmergingOutflows Theme Accelerates Into “Liftoff” - South Africa Econ Summary


In Turkey, real GDP accelerated in +20bps in 3Q to +4% YoY in line with the recent and material positive inflections registered across the preponderance of Turkey’s key high-frequency growth indicators. With various measures of Turkish inflation also accelerating on both a sequential and trending basis, the Turkish economy has clearly moved into #Quad2. So why are the Borsa Istanbul 100 Index (down -14% MoM) and the TRY (down -5% vs. the USD over the past three weeks) getting tattooed ahead of next week’s FOMC statement? The answer is simple: twin deficits have a tendency to perpetuate capital outflows amid global dollar tightening episodes. Turkey’s equity and rates markets are signaling that CBT will have to get serious about defending the currency – which is threating a new all-time low – in short order. Unfortunately for global capital allocators and Turkish consumers, the political situation may prevent them from implementing meaningful measures. Investment conclusion: We reiterate our underweight bias on Turkey.


Our #EmergingOutflows Theme Accelerates Into “Liftoff” - Turkey Economic Summary


Japan is obviously not an Emerging Market, but our long-held structural bearish bias on the Japanese yen (yes, we authored the Japan reflation thesis too) is partially why we are so bullish on the USD and bearish on EM. As such, Japan deserves an update as well… The latest batch of NOV/4Q growth data came in soft, with machine orders and PPI ticking up but remaining in negative territory and the 4Q MoF Survey declining sharply QoQ. Additionally, a Japan Center for Economic Research survey that showed economists’ estimates for CPI over the long run (i.e. FY17-FY21) ticking down -10bps vs. the prior survey (1.3% vs. 1.4%) – the first such decline since the BoJ launched its QQE program in April 2013. We still think QQE expansion is months away largely based on the BoJ’s guidance, but, on the margin, these latest developments pull that catalyst forward to a noteworthy extent. Investment  conclusion: We reiterate our overweight bias on Japan.


Our #EmergingOutflows Theme Accelerates Into “Liftoff” - Japan Economic Summary


Darius Dale


Cartoon of the Day: Bubble?

Cartoon of the Day: Bubble? - 8 ball bubble 12.11.2015


"Forget what people who are in the business of marketing 'the market is flat' are telling you," Hedgeye CEO Keith McCullough wrote in today's Early Look. "Across asset classes we are in the midst of the 3rd major crash I’ve seen in my Wall Street career." 

Hedgeye Guest Contributor | Cliggott: 'Bad, Bad Data This Week'

Editor's Note: We are pleased to present this brief Hedgeye Contributor View written by Doug Cliggott. Cliggott is a former U.S. equity strategist at Credit Suisse and chief investment strategist at J.P. Morgan. He is currently a lecturer in the Economics Department at UMass Amherst. Incidentally, he recently sat down with us here at Hedgeye for a Real Conversations interview. Click here to watch.


Hedgeye Guest Contributor | Cliggott: 'Bad, Bad Data This Week' - z doug cliggott normal


* * * 

By Doug Cliggott


The Fed released the Q3 2015 flow of funds data yesterday. Now we have a good picture of the third quarter.  


Profits of non-financial corporations were down 5% vs. Q3.2014, and their debt was up 7% vs. Q3.2014. This 1200 bps gap between debt growth and profit growth is the widest we have seen since 2007. As we talked about in September — watch "An Uncomfortably High Probability of a Significant Correction" — bad things tend to happen when debt growth a lot faster than earnings.


The Fed data also show a violent (75%) slowdown in Q3 net share buybacks.  That no doubt played a central role in the equity downdraft during Q3 ... a huge buyer went away.  


My guess is this is a central theme for 2016 — contracting corporate profits and much weaker cash flows mean very low share buyback volumes compared with the past four or five years. So U.S. equities will be "missing" a big buyer with no obvious, or less-than-obvious, cast of characters standing in the wings to step in and take their place.


And, on the earnings front, the OECD released new LEI data on December 8th. This data — VERY WEAK — plus wages & salaries growing at 5% point to further weakness in profits.


On that cheery note ... Have a good weekend!

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

McCullough: The Most Important Thing Going On Right Now


In this brief excerpt from The Macro Show Friday morning, Hedgeye CEO Keith McCullough spells out the biggest global market risk right now and why we are on the "pedestrian path to perdition."


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FHQ (Friday Housing Quant)

Takeaway: Rate fears and oil patch concerns have pushed the builders lower in the short term.

Our FHQ (Friday Housing Quant) tables present the state of the publicly traded homebuilders in a visually-friendly, quantitative format that takes about 60 seconds to consume. 



  • Performance Roundup: Housing has become a bit of a bifucated beast in the last week or two. Interestingly, ITB is +5.3% QTD, trailing only slightly the S&P 500 at +6.9%, but this is a bit of cherry pick as ITB contains only 10 stocks and its largest 3 holdings: DHI, LEN and NVR happen to be the three best performing builders. XHB is +2.3% for the QTD and the average builder we track is -1.6% with the median builder down -2.9% QTD. We think the weakness is a confluence of rate-driven concerns ahead of the Fed meeting next week, ongoing jitters around the Houston market and residual profitability angst following TOL's 4Q. Our preferred four horsemen of 4Q among builders are NVR, LEN, BZH & KBH, which are +8.9%, +3.4%, -6.9%, and -4.1%, respectively. The three best performing builders thus far this quarter are DHI (+10.2%), NVR (+8.9%) and LEN (+3.4%), while the three worst performing builders are TMHC (-13.8%), BZH (-6.9%), and MTH (-5.8%).
  • Insider Buying: Other than the Director at Hovnanian (HOV) who purchased 20k shares (~$45k) in late October, there's been no recent insider buying in the sector.
  • Beta: The highest beta names (1YR) remain HOV (1.55), KBH and BZH which are at 1.32 and 1.35, respectively. At the other end of the spectrum, the lowest beta plays are NVR (0.65), MDC (0.97) and TOL (1.00).
  • Short Interest: CAA, HOVand DHI have seen SI creep higher, rising by the most in the group in the last 2 wks. TMHC, KBH & BZH have seen SI fall by the most.
  • Sell Side Sentiment: Brokers have become marginally more bullish on TOL (+2.4%) and less bullish on NVR (-0.8%) in the latest month.
  • Valuation: The cheapest names in the group currently are BZH (6.9x), MTH (9.4x) and TMHC (8.9x), while the most expensive are NVR (15.3x), LEN (13.1x), and DHI (12.3x). Incidentally, NVR, at 5.3x TBV, is currently at 97% of its peak 5-year valuation. DHI and LEN, both at 2.0x P/TB are at 85% and 81% of their 5-year peak multiples.



FHQ (Friday Housing Quant) - BQ 1


FHQ (Friday Housing Quant) - BQ 2


FHQ (Friday Housing Quant) - BQ 3


FHQ (Friday Housing Quant) - BQ 4 


Joshua Steiner, CFA


Christian B. Drake

Hemorrhaging: America's Energy Economy

Takeaway: Jobless claims in energy-dependent states are rising much faster than the broader U.S. economy.

Hemorrhaging: America's Energy Economy - z oil


The main takeaway on the labor front this week is that while the US more broadly muddles further along, the energy economy is hemorrhaging.


The chart below shows the spread continuing to widen between our energy state basket and the rest of the US. For reference, we use 8 states: AK, LA, NM, ND, OK, TX, WV & WY to derive our energy state basket. The gap between our two indexed series widened another 4 points to 46 for the week ended November 28th.


The most recent dip in energy prices has yet to be reflected in the numbers.


Hemorrhaging: America's Energy Economy - Claims18


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