Below is a note from Hedgeye CEO Keith McCullough on why we're adding Mexico (EWW) to the short side of Investing Ideas today:
With both US and Global Equity Beta now signaling immediate-term TRADE overbought, the time and price is right to add one of our favorite EM shorts (Mexico, EWW)
Per Darius Dale's latest thoughts speaking with Institutional Investors in Texas we're citing its balance of payments risks arising from a #StrongDollar. Specifically, the Mexican economy and financial system screen very poorly relative to our EM sample median on a number of key BoP metrics:
- Current Account Balance: -3.3% (Mexico) vs. -1.7% (sample median)
- Short Term External Debt as a % of FX Reserves: 29% vs. 19%
- Total Inbound Portfolio Investment as a % of Total Nonfinancial Sector Credit: 40% vs. 16%
- Total U.S. Dollar Debt as a % of FX Reserves: 141% vs. 97%
Moreover, its credit gap and debt service ratio gap metrics screen very poorly at +2.3 and +2.7 standard deviations relative to their respective trailing 10Y means. All of this implies Mexico is facing acute risk of a nasty deleveraging cycle to the extent we continue to be right on the longer-term TAIL side of the USD.