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McCullough: The Most Important Point I’ll Make Today

 

In this brief excerpt from The Macro Show this morning, Hedgeye CEO Keith McCullough explains why “S&P 500 positioning is at its most bullish point of 2016.”


Cartoon of the Day: Tough Times In Tokyo

Cartoon of the Day: Tough Times In Tokyo  - Japan cartoon 05.02.2016

 

Japan's Nikkei is down -23% from its high in July 2015.


Post Stabilization, Are You Now Too Sanguine On China?

Takeaway: It would be unwise to bet on a China-led global economic recovery from here.

There is a growing view among investor consensus that meanginful and/or lasting stimulus in China could stabilize the global demand picture and help perpetuate a reacceleration in domestic corporate profit growth, among other bullish developments. Contrary to these views, we believe China’s stimulative policies are largely in the rear-view mirror per recent changes in policy guidance (see: HERE, HERE and HERE), which itself is mostly due to Beijing’s desire to quash a burgeoning property bubble and Chinese financial markets are decidedly reflecting that.

 

Property prices in 1st Tier Cities are accelerating on a sequential, trending and quarterly average basis, up +29.5% YoY:

 

Post Stabilization, Are You Now Too Sanguine On China? - China Property Prices 1st Tier Cities

 

Nationwide property sales in both value and volume terms are both accelerating on a sequential, trending and quarterly average basis, up +54.1% and +33.1% YoY, respectively:

 

Post Stabilization, Are You Now Too Sanguine On China? - China Value of Buildings Sold 

 

Post Stabilization, Are You Now Too Sanguine On China? - China Floor Space of Buildings Sold

 

In response to the rhetorically hawkish shift from Beijing key short-term rates have based and are now accelerating on a monthly average basis:

 

Post Stabilization, Are You Now Too Sanguine On China? - China 7 day Repo Rate Monthly Average 

 

Post Stabilization, Are You Now Too Sanguine On China? - China Overnight SHIBOR Monthly Average

 

Specifically, the yield on 2Y sovereign debt has backed up +25bps MoM and the spread between 1Y OIS and the benchmark 7-day repo rate has widened +31bps MoM and is now pricing in 18bps of tightening, on balance, over the NTM months. Additionally, credit spreads throughout China’s interbank corporate bond market have widened in fairly dramatic fashion of late, with 5Y AAA notes seeing +54bps of widening vs. SHIBOR off their mid-March YTD trough:

 

Post Stabilization, Are You Now Too Sanguine On China? - China 2Y Yield

 

Post Stabilization, Are You Now Too Sanguine On China? - China 1Y OIS Spread

 

Post Stabilization, Are You Now Too Sanguine On China? - China 5Y AAA Floating Rate Corporate Bond Yield   SHIBOR Spead 

 

On the other side of the aforementioned tightening of monetary conditions, Chinese fiscal policy has been rather expansionary in recent quarters, with the year-long trend of acceleration in the growth rate of government spending firmly intact:

 

Post Stabilization, Are You Now Too Sanguine On China? - China YTD Central Government Expenditures 

 

That said, however, with the growth rate of new credit eclipsing a $1T in the first three months of the year (far and away the largest three-moth surge on record), we think there is risk that Beijing ultimately reins in fiscal policy as well:

 

Post Stabilization, Are You Now Too Sanguine On China? - China Total Social Financing MoM

 

All told, Our secular bear case on China remains firmly intact as evidenced by the lackluster Q1 GDP report and the fact that growth rates within the “C” + “I” + “NX” formula continue to decelerate on a trending basis across key high-frequency metrics. Moreover, our proprietary GIP Model is currently forecasting a stagflationary #Quad3 setup for China throughout the balance of 2016 and the accelerating inflation component of that should limit the scope of any monetary and fiscal policy response to a continued slowdown:

 

Post Stabilization, Are You Now Too Sanguine On China? - China

 

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Post Stabilization, Are You Now Too Sanguine On China? - China Inflation Model

 

All told, our analysis renders us firmly on the other side of such hope that China accelerates from here and effectively resuscitates global demand growth enough to stave off continued macroeconomic and microeconomic deterioration in the U.S. Manage this risk accordingly.

 

DD

 

Darius Dale

Director


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What About ISM Manufacturing? Still Falling

Takeaway: In case you missed it, today's ISM Manufacturing index fell yet again both from its cycle peak and month-over-month.

Here's an abridged transcript and chart on the ISM data from this morning's Real-Time Alerts Live via Hedgeye CEO Keith McCullough: 

 

"That damn data just won’t go up. The ISM data came in at 50.8. That's down versus 51.8 last month. So, to be clear, global growth and industrial growth has not bottomed. All the bottom calling was just a story.

 

A lot of people hoped that these ISM numbers were better, inasmuch as they hoped for better numbers out of Friday’s Consumer Confidence number and Chicago PMI. These indices are not just missing they’re hitting new lows."

 

Click the image below to enlarge

<chart1>


GIS: We Are Removing General Mills From Investing Ideas

Takeaway: Please note we are removing General Mills from Investing Ideas (long side) today.

This morning, Hedgeye CEO Keith McCullough wrote in Real-Time Alerts:

 

"While I like GIS from a Style Factor perspective (it did its job last week, closing up in a down tape - doing its job again this a.m. +1%), it's:

 

A) Signaling a series of lower-highs from a long-term perspective

B) Not as well loved by my analyst team (Penney and Laidlaw)

 

So I'll take it off here on the overbought signal. We can always come back to it, lower.

 

KM"

 

GIS: We Are Removing General Mills From Investing Ideas - general mills

 

Hedgeye Consumer Staples analysts Howard Penney and Shayne Laidlaw sum it up below:

 

"We added General Mills (GIS) to Investing Ideas on May 26, 2015. During that time, the stock price has risen +10% versus the S&P 500, which is down -2.6%.  While we still like the long-term story, the stock’s performance in 2016 has been nothing short of spectacular.  Year-to-date GIS is up +7.8% versus +1.3% for the S&P 500.  The company’s 3Q15 performance was mixed with the company missing on revenues and beating on EPS with the benefit of cost cutting. 

 

That being said, there are a number of one-time items impacting volume growth that should self-correct in 4Q16 and FY17.  GIS is currently trading at 13.9x EV / NTM EBITDA an all-time high for the company.

 

Looking past GIS, the entire Consumer Staples space feel like there is a Safety Trade/ZBB/M&A bid underneath the entire group.  We maintain our long-term bullish stance on GIS, but given the rapid acceleration to all-time highs in the YTD period, a correction is inevitable."


5 CHARTS: A Global #GrowthSlowing Checkup

Takeaway: Investors who avoided #GrowthSlowing equity markets nailed it in the past year.

5 CHARTS: A Global #GrowthSlowing Checkup - World Market No 12.16.14 large

 

Still don't believe U.S. growth is slowing? Nasdaq investors do...

 

 

Meanwhile in Japan, growth has been neutered for decades. Despite the best efforts of BOJ central planners, macro markets continue to crash.

 

Check out the ramp in the Yen...

 

The Nikkei is still in crash mode, even though the BOJ instituted its negative interest rate policy in January

 

 

Speaking of negative interest rates...  

 

Italy's bank-heavy FTSE MIB index remains in crash mode.

 

And finally, peeling back the onion on the recent reflation trade, take a look at a longer-term chart of much-watched Dr. Copper.

 

Does that look bullish for global growth?

 


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