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ATH’s on Friday for the SP500, Nasdaq, and Russell 2000 – finally signaling overbought…

Client Talking Points

Japan

Post the friendly Abe visit to the USA and a #StrongDollar ramp vs. the Yen, the Nikkei’s +3% pop in the last 2 trading days registers an immediate-term TRADE overbought signal inasmuch as Yen (vs. USD) signals oversold – we still like Japanese stocks, but we'd book some gains here.

Copper

Youge +5.8% week-over-week move in an important proxy for our #InflationAccelerating call here in Q117 seeing follow through to $2.78/lb this morning but that signals immediate-term TRADE overbought within its bullish TREND too – you should continue to see y/y inflation ramps in the US CPI and PPI reports this week.

VIX

US Equities at the highs and Volatility has crashed (-27.5% since the election) despite consensus concerns about Trump – but that’s yesterday’s news; this morning we're registering my first higher-low (within my immediate-term range) for front-month VIX at 10.36; book gains in US equity beta is the call on that.

Asset Allocation

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
2/12/17 36% 18% 15% 12% 0% 19%
2/13/17 45% 15% 13% 10% 0% 17%

Asset Allocation as a % of Max Preferred Exposure

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
2/12/17 36% 55% 45% 36% 0% 58%
2/13/17 45% 45% 39% 30% 0% 52%
The maximum preferred exposure for cash is 100%. The maximum preferred exposure for each of the other assets classes is 33%.

Three for the Road

TWEET OF THE DAY

This week in Hedgeye cartoons. Get our daily cartoon emailed for free: hedgeye.com/cartoon/email

@Hedgeye

QUOTE OF THE DAY

“You are going to make mistakes in life.  It’s what you do after the mistakes that counts.”

-Brandi Chastain

STAT OF THE DAY

Charles Oakley spent 10 years with the Knicks, averaging 10.4 points per game.


Cartoon of the Day: Big Bear Beat Down

Cartoon of the Day: Big Bear Beat Down - Pummeling of the bears 02.10.2017

 

"As you can see in today’s Chart of the Day, 60-day realized volatility for the S&P 500 is at the cycle low. That’s pulverized the bears. Having been one plenty of times in my career, “believe me!," Hedgeye CEO Keith McCullough writes in today's Early Look.

 

 

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Will High-End U.S. Housing Boom Go Bust?

 

An interesting dichotomy has been developing in the U.S. housing market over the past year or so. The low-end, first time homebuyer market is booming, while high-end home buying languishes.

 

In the months following our first update on the nasty reality developing in high-end housing markets like uber-rich Greenwich, Connecticut, America elected Donald Trump. Optimism set in. The stock market popped following his Election Day victory. The real economy appears to have bottomed.

 

It’s time for a refresh to our high-end housing thesis.

 

“The strongest part of the market is still the entry level market,” says Hedgeye Housing analyst Josh Steiner. “That’s because rents have been rising above inflation for many years now.” Plus, the low-end housing market is extremely supply constrained.

 

“The high-end, however, is the exactly opposite,” Steiner says in the video above. Take the hedge fund capital of the world, Greenwich, CT for instance. It’s housing market is in deep trouble. When last we checked, there was a staggering amount of homes sitting on the market. Here’s the breakdown by home price category:

 

  • $3 million to $4 million: 17 months of supply which has risen 38% over the past year
  • $4 million to $5 million: 22 months of supply, +35% over the past year
  • $5 million to $10 million: 48 months of supply, +108% over the past year
  • Greater than $10 million: 128 months of supply, +63% over the past year

 

Let’s put that last bullet into perspective. At 128 months, that’s almost 13 years of supply.

 

Since Trump was elected, though, measures of Consumer Confidence have hit 15-year highs, GDP growth accelerated and the 10-year Treasury yield (a barometer of U.S. economic expectations) soared from 1.86% all the way up to 2.36%.

 

“It’s a little unclear post the election whether this upswing in market valuations and broader consumer confidence measures will manifest in the form of increased luxury consumption,” Steiner says.

 

As he points out, the S&P 500 is up 6% since Election Day. Wealthy people tend to “annuitize” – or convert investment gains into income – 3% to 5% of those unrealized gains, he says. And snce the top 10% of Americans by wealth distribution own 85% of all financial assets, this could obviously be a major tailwind to housing.

 

A few words of caution. “Historically, you always get this honeymoon phase from Election Day to Inauguration Day. But, the big question remains, then how much of that is directly translatable in spending,” Steiner says.

 

Time will tell.


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China: A Financial Crisis With Communist Characteristics

China: A Financial Crisis With Communist Characteristics - flag china

 

Some say China’s credit boom will perpetuate a collapse in its debt markets, the yuan, and its stock market. This misses the mark. China has the critical tools necessary to engineer a "soft landing" and slow the country's economic growth.

 

While we disagree with the China doomsday scenario, slowing growth will undoubtedly hurt the country’s stock market. We suggest investors short Chinese large-cap stocks (FXI).

 

Setting aside China’s phony GDP data, their economy is clearly slowing. The chart below shows the breakdown of China’s growth by sub-industries. The recent “recovery” in 2016 was predicated on the growth rate of heavy industry. 

 

China: A Financial Crisis With Communist Characteristics - screen shot 20170208 at 4.10.12 am

 

It's unlikely this growth in heavy industry repeats itself. It was perpetuated by a significant amount of fiscal and monetary stimulus.

 

In January 2015, the People’s Bank of China pumped 1.235 trillion yuan into the economy. This January, it was a mere 350 billion, a -72% decline. A centrally planned slowdown of this magnitude has never been attempted before in modern economic history. While we’re not calling for collapse, it is safe to assume the glide path down will be less linear than Beijing hopes. 

 

China: A Financial Crisis With Communist Characteristics - The Yuan Is Forcing the PBoC s Hand

 

Currently, China is experiencing a financial crisis with communist characteristics. While China may eventually accomplish their twin goals of permanently downshifting GDP growth and rebalancing economic drivers, their insistence upon maintaining financial and economic stability throughout effectively transfers deflation risk from the market in the near term to the real economy over the longer term.


Instead of boom turned bust, policymakers will continue throwing cold water on the economy, specifically the overheated property market.

 

China: A Financial Crisis With Communist Characteristics - Property Price Bubble 1st Tier Cities

China Won't Collapse

China’s economy has a closed capital account, which essentially means companies, banks and individuals can’t move substantial amounts of money in or out of the country without bumping up against the government’s stringent rules and regulations.

 

This largely explains away the possibility of material currency devaluation in China. Comparing China to the 25 other emerging markets we track across a variety of metrics reveals some interesting insights:

 

  • Short-Term External Debt (as a percentage of total foreign direct investment) is a proxy for how much money China needs to pay back to foreigners. It’s only 10% versus about 19% for other emerging markets.
  • Inbound Portfolio Investment is the biggest culprit for short-term, large currency fluctuations. On that measure, China has a lowly 3% relative to 16% for the average of other Emerging Markets.
  • Dollar-Denominated Debt (as a percentage of foreign exchange reserves) is only about 35% versus 100% for the average of most other emerging market economies.

Bottom Line

We believe that Beijing has the critical tools necessary to engineer a “soft landing” and slow the country’s economic growth. While a soft landing is not a face-plant for the Chinese economy, slowing growth will hurt the country’s stock market. Steer clear of Chinese large-cap stocks.


Stock Market All-Time Highs: Sell Some?

Stock Market All-Time Highs: Sell Some? - all time high

 

The S&P 500 and Nasdaq just hit all-time highs. Meanwhile, measures of volatility in the Dow, S&P 500, and Nasdaq just hit their lowest levels since 2007. Volatility rises when there's uncertainty. And falls as investors get more confident.

 

Investors are clearly confident.

 

As you can see in the Chart of the Day below, 60-day realized volatility (a fancy way of saying historical volatility) hit a cycle low. "That's pulverized the bears," writes Hedgeye CEO Keith McCullough in this morning's Early Look. Just 41 days into 2017 and the Nasdaq, S&P 500 and Russell 2000 are up 6.2%, 3.3% and 1.9% respectively.

Falling Volatility: What now?

Simple. Book some gains but keep your core position in U.S. equities. Buy more on pullbacks. Why? Here's a brief synopsis with links for further reading:

 

And Something for the Stock Market Bears...

If you’re looking for a fundamental stock market correction catalyst, the first big one is in April when we get first quarter GDP. 

 

(Click here to learn more about subscribing and how to position for a potential correction.)


Cartoon of the Day: Animal Spirits

Cartoon of the Day: Animal Spirits - NASDAQ giraffe 02.09.2017

 

The S&P 500 and Nasdaq hit fresh all-time highs today.

 

 

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