The Epic China Crash Continues

Takeaway: Chinese equities descended further into crash mode overnight on unequivocally poor economic data.

The Epic China Crash Continues - China crash cartoon 08.25.2015


A bullish cabal of investors was quick to call a bottom in China's cooling economy. Well, Chinese equity markets are getting hammered this morning on yet more unsavory economic data.


Here's analysis via Hedgeye CEO Keith McCullough in a note sent to subscribers this morning:


"China down hard overnight (Shanghai Comp down another -2.8% and -47% from 2015’s high) on terrible export (-1.8% y/y APR vs. +11.5% MAR) and import (-10.9% y/y APR vs. -7.6% MAR) data – we’re not in the everything has “bottomed” camp."



The China knock-on effect reverberated loudly throughout macro markets...


"After getting smoked for a -5.7% loss last week (Dollar Up, Chinese Demand Down), Copper is down another -1.3% this morning to $2.12/lb after failing to make a higher-high than the March “reflation” level of $2.31/lb"



What does it mean?


Despite Wall Street forecasters and Fed bureaucrats proclaiming "all is good" in the global economy, economic reality continues to prove the contrary. We're crystal clear on this...


The outlook for global growth remains decidedly bearish.

CHART OF THE DAY: Where The Big Money Is Made In Macro

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye CEO Keith McCullough. Click here to learn more.


"... With another rate-of-change #slowing in non-farm payroll (NFP) growth for the month of April at +1.9% (vs. #TheCycle peak of +2.3% in Q1 of 2015), the big money in macro that was made last week was right where it’s been made all year long:


  1. Long Bond (TLT) up another +2.1% last week to +8.2% YTD
  2. Utilities (XLU) up another +0.8% last week to +12.8% YTD
  3. Gold up another +0.3% last week to +21.9% YTD"


CHART OF THE DAY: Where The Big Money Is Made In Macro - 05.09.16 EL Chart

Doubt Has Great Value

“Doubt is not a fearful thing, but a thing of great value.”

-Richard Feynman


Feyman was one of the greatest physicists in American history. When I think about massive opportunities - how much progress our profession can make in terms of both forecasting #process and accuracy - I often think about how he once described the medical field.


Phil Tetlock reminded me of that in his recent book, Superforecasting, where he wrote that “it was the absence of doubt – and scientific rigor – that made medicine unscientific and caused it to stagnate for so long.” (pg 30)


Tetlock made that point on the heels of a classic Feynman one that it’s “of paramount importance, in order to make progress, that we recognize this ignorance and this doubt. Because when we have the doubt, we then propose looking in new directions…”


Back to the Global Macro Grind


Are we doubting the US government and its Establishment “blue chip” forecasters? Or are we hoping that their US GDP and employment forecasts for 2016 are right?


Doubt Has Great Value - consenseless 3


On Wall Street, doubt only has great value if it forces us to answer questions more accurately than prevailing and perceived wisdoms. There’s a lot of money to be made betting against those. But your timing has to be right.


With another rate-of-change #slowing in non-farm payroll (NFP) growth for the month of April at +1.9% (vs. #TheCycle peak of +2.3% in Q1 of 2015), the big money in macro that was made last week was right where it’s been made all year long:


  1. Long Bond (TLT) up another +2.1% last week to +8.2% YTD
  2. Utilities (XLU) up another +0.8% last week to +12.8% YTD
  3. Gold up another +0.3% last week to +21.9% YTD


That’s right. As growth slows, long-term bond yields fall. Despite consensus being bearishly positioned in the 10yr US Treasury (see CFTC net positioning data below), the 10yr Yield dropped another -5 basis points last week to 1.78%.


With the 10yr Yield down a healthy -49 basis points for 2016 YTD, I’m glad I didn’t get sucked into buying the Financials (XLF) because “they’re cheap.” They’re already -0.8% for the month of May and -2.9% YTD as cheap gets cheaper when using the wrong numbers.


While the SP500 was down for the 5th week in the last 7, according to one prominent bull who chased its chart in April, it was “only down -0.4%.” Isn’t that great. Not down a lot is the new up.


In other big Global Equity market down moves last week:


  1. Hong Kong’s Hang Seng was -4.5% on the week to -8.2% YTD
  2. Italy’s MIB Equity Index was -4.1% on the week to -16.7% YTD
  3. Emerging Market Equities (MSCI) were -4.1% on the week to +1.4% YTD


So far we’ve missed being long EM (which is mostly up YTD, albeit up less than what we really like in TLT, XLU, GLD) and that’s mainly due to our concern that if we’re really right on our Q2 forecast for 0.5% US GDP growth, macro markets will be in Quad4.


What’s Quad4? In our rate-of-change GIP (growth, inflation, policy) model Quad4 is when the Dollar stops going down and rates keep going down. That’s also what happened last week:


  1. US Dollar Index +0.9% on the week to -4.8% YTD
  2. CRB Commodities Index -2.7% on the week to +2.1% YTD
  3. Oil (WTI) -2.7% on the week to +9.7% YTD
  4. Energy Stocks (XLE) -3.3% on the week to +8.2% YTD
  5. Copper -5.7% on the week to +0.3% YTD


In other words, there’s a big difference between Quad4 (DEFLATION) and Quad3 (REFLATION). And while Chinese demand plummeting (exports and imports -1.8% and -10.9% y/y in April, respectively) is part of the narrative, so is what the US Dollar does.


Now that consensus has smashed Fed Funds probability of a June “rate hike” to only 8%, how much lower can the US Dollar go after registering a 16 month low in late April? Here’s consensus on that (non-commercial CFTC futures and options positioning):


  1. US Dollar net LONG position at its LOWEST level of 2016 (+9,083 contracts) registering a 1yr z-score of -2.11x
  2. 10YR Treasury net SHORT position at its HIGHEST level of 2016 (-103,914 contracts) = 1yr z-score of -1.74x
  3. SP500 (Index + E-mini) net LONG position at its HIGHEST level of 2016 (+30,589 contracts) = 1yr z-score +2.24x


You’d need some serious cognitive dissonance to maintain all 3 of these bets in your portfolio. Being bearish on USD when bearish on growth makes sense, but only until you hit Quad4.


Consensus being bearish on bonds while chasing US Equity Beta (in April) might explain why High Beta Stocks (SP500) got crushed last week (-3.2% to -1.2% YTD). Meanwhile the great value remained in being long doubt via Low Beta US Stocks (+1.3% on the week to +8.2% YTD).


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.71-1.83%

SPX 2036-2070

USD 92.21-94.91

Gold 1258--1313
Copper 2.08-2.20


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Doubt Has Great Value - 05.09.16 EL Chart

Dollar Up, Rates Down

Client Talking Points


China was down hard overnight (Shanghai Comp down another -2.8% and -47% from 2015’s high) on terrible export (-1.8% y/y APR vs. +11.5% MAR) and import (-10.9% y/y APR vs. -7.6% MAR) data. We’re not in the everything has “bottomed” camp.


After getting smoked for a -5.7% loss last week (Dollar Up, Chinese Demand Down), Copper is down another -1.3% this morning to $2.12/lb after failing to make a higher-high than the March “reflation” level of $2.31/lb.

S&P 500

Don’t look now but SPX is actually down for 5 of the last 7 weeks as both top-down GDP and bottom-up EPS #slowing takes hold; net LONG position (futures/options contracts) +30,589 = highest of the year.


*Tune into The Macro Show with Hedgeye CEO Keith McCullough live in the studio at 9:00AM ET - CLICK HERE

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

As our Growth, Inflation, Policy model is oscillating between tracking in quad 3 and 4 for the second quarter, we’re sticking to core positions that perform well when growth is slowing and the yield curve is flattening:

  • QUAD3: Growth Slowing, Inflation Accelerating
  • QUAD4: Growth Slowing, Inflation Decelerating


The model signals that growth is slowing either way, and we expect a continuation of bond market discounting late cycle, growth-slowing. An allocation to Long Bonds (TLT, ZROZ) and Utilities (XLU) keeps investors out of the way of guessing which way assets levered to inflation will move next. The yield spread 10s-2s moved this week like it is headed toward taking out YTD lows. To be clear, this is NOT an indication that growth is back.


McDonald's (MCD) reported 1Q16 earnings on April 22nd that beat consensus estimates. The quarter serves as continued proof that the comeback story is in full swing.


The big question is where MCD is headed in terms of their national value platform. They had the McPick 2 for $2, then 2 for $5, now they have shifted to the monopoly promotion. McDonalds regaining a consistent value message is key to their success, and they know this. Additionally, we have another two quarters of tailwind from All Day Breakfast before we begin to lap it.


McDonalds’ recovery has been nothing short of extraordinary and has been a great source of alpha for all of its holders. We continue to like the name on the LONG side given the strong fundamental turnaround and the style factors that we love, big cap, low beta and liquidity.


#GrowthSlowing remains our call here in Q2. How do we know growth is slowing (ex. being validated by Treasury bond market and XLU outperformance)?


We look at every relevant data series on a rate-of-change basis to analyze a sine curve. Taking a look at our analysis of Y/Y Non-Farm Payroll growth, a clear cyclical picture develops. Mainstream media and other sell-side sources who talk about guessing the sequential NFP number are pursuing a fool’s errand (a confidence interval that is very wide) in terms of positioning into a number. We call this “open the envelope risk."


Rather, constructing a sine curve of the rate of change in NFP growth gives us a clear visual that employment growth peaked (in Feb. 2015), and it’s not recapturing that growth rate in this cycle. So whatever the sequential number is M/M, we know where this series is headed. And, when considered with every other relevant data series, we have a clear empirical view on where the U.S. economy is positioned in the economic cycle.

Three for the Road


REPLAY! This Week On HedgeyeTV… via @hedgeye



A mother is not a person to lean on, but a person to make leaning unnecessary.

Dorothy Canfield Fisher


According to a survey by the National Retail Federation, 66% of those celebrating Mother’s Day will buy mom flowers, spending an estimated $2.4 billion in 2016.

The Macro Show with Keith McCullough Replay | May 9, 2016


CLICK HERE to access the associated slides. 



 An audio-only version of today's show is available here.

Insight from Dan Christman 5/08/16

More Kilotons: Kim, North Korea and a New Party Congress

U.S. Pacific Command commander Admiral Harry Harris makes no secret of his worry about North Korea and its young, aggressive, unpredictable leader Kim Jong Un. In open interviews, Harris says that Kim "is what keeps me awake at night." Given the ramp-up of antics from Pyongyang in just the last two months -- ballistic missile launches, submarine missile tests, bombastic rhetoric, all in the wake of a North Korean nuclear test in January -- it's no wonder Admiral Harris and SECDEF Carter repeatedly refer to the need to be "ready to fight tonight" in this dangerous theater of operations.

But there is a special level of bellicosity of late that pours from the Pyongyang propaganda machine; it's explained by the recently convened "7th Congress of the Korean Worker's Party," the first to be held in over 35 years; combined with on-going U.S.-South Korean military exercises in the peninsula, Kim Jong Un has unleashed both military threats and "Peace" overtures that have kept the Hermit Kingdom on the front pages.  

In this light, look for at least three key developments affecting U.S. interests in the region over the coming weeks:


·       First, expect another North Korean nuclear test.  Besides anointing Kim as the North Korean leader for the next 50 years, a principal goal of the Party Congress is to "ratify" North Korea as a genuine nuclear state; another test cements that claim, at least in the minds of the Kim clique. Further, as one respected analyst recently said, "North Korea likes doing these kinds of things around U.S. elections!"


·       Second, watch China's behavior. A new UN Security Council resolution (UNSC 2270) on North Korea, passed in March, gives UN member states significant additional authority to inspect North Korean outbound cargo, or cargo in-bound for North Korea. But China's help is a necessity if the resolution is to have any effect on the Pyongyang leadership  Evidently, China so far has been at least moderately helpful, forcing major cut-backs to North Korea of items like jet fuel and coal.

                           ° Washington naturally wants China to keep the pressure on; it's what makes decisions by President Obama and the White House on how robustly to challenge PRC military adventurism in the South China Sea so delicate.


·     Third, watch the politics in South Korea.  President Park Geun Hye's popularity is plummeting; she lost her parliamentary majority last month, largely because of frustration with her economic policies; but the public is also growing weary of her strong push-back to Pyongyang. Should a liberal coalition oust Park's conservative "Saenuri" party in presidential elections next year and gain the "Blue House," the U.S. will likely see a dramatic change in Seoul's official view toward Kim Jong Un; if party history is a guide, it would signal modest reconciliation toward the north, not confrontation.


Unfortunately, this dramatic outcome in Seoul would risk disrupting what has been the closest cooperation in decades amongst the U.S.'s key northeast Asian allies -- Seoul and Tokyo -- over how to deal with both Pyongyang and Beijing. It would also pose a major challenge to a new U.S. president in 2017, who must decide how best to deter Pyongyang while not losing a vital partner to the south that has been an indispensable ally for over six decades.


So while attention might be focused on a ritualized Party Congress in the north, an even more important political development is underway in the south. Business conditions there are certainly influenced far more by events other than bellicosity from Pyongyang - - like the extent of China's economic slowdown, for example.


Add, therefore, the Korean peninsula to the growing platter of national security worries for this president, and his successor. It's not just Pyongyang but Seoul as well that give Admiral Harris his sleepless evenings.







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