"That's not a bad thing. I'd take a bleeding nose for a win, wouldn't you?"
That was Dave Tippett’s quote after beating the 1st place New Jersey Devils last night. Tippett is the head coach of the Phoenix Coyotes. He’s what hockey players call a ‘guy’s guy.’ There is no sugar coating on what the tough do when the tough gets going. As my Dad likes to say, they just focus on getting the job done.
The Chinese have started to face the fiddle on some of the tough issues they face economically. My only hope is that American policy makers start to face theirs. Hope, unfortunately, is not an investment process.
In 2009, China had a bubble developing in money, loan, and real estate growth. Since November, the Chinese government has been explicit in articulating it’s goal to limit debt leveraged asset price speculation, and focus on what they consider “quality growth.” Chinese property stocks have been going down since July of 2009. For those who are calling for a bubble to pop in China, waky waky out there, they’ve been popping for 3 months.
Unlike America’s super smart Piggy Bankers, the Chinese are willing to take the short term bloody nose in order to get the long term win. In the last 3 weeks, China has raised interest rates twice and raised the reserve requirement on Chinese banks. They haven’t sugar coated this. They are getting the job done.
For the year-to-date, inclusive of last night’s +0.27% up move, the Shanghai Composite Exchange is down -1.6%, underperforming both the SP500 (+3% YTD) and the Brazilian Bovespa (+1.8% YTD) by a considerable margin. This is what Hedgeye Risk Management calls a negative country divergence. China is slowing sequentially in 2010 because The Chinese Chiefs are slowing money supply and loan growth.
For centuries countries have not measured their economic, political, and military power via the daily tick tock of their nation’s stock market price. That’s what a modern day monkey on CNBC does. China gets this. America has already provided her the historical example. The stability of a country’s currency and balance sheet are what drive a country’s long term wins.
Let’s look at China’s latest balance sheet and money growth stats (reported overnight):
1. Year end Foreign Currency Reserves +23% year-over-year to $2.4 TRILLION
2. 2009 Chinese Loans 9.59 TRILLION Yuan
3. December Money Supply (M2) growth +27.7% year-over-year
Now, if you are in the Jim Chanos camp and you think they are making these numbers up, that’s fine. I see his point but, remember, from Madoff to Alan Stanford and tricky Dick Fuld, I can show you plenty of Americans that made them up too. For now, let’s roll with what we have and put these 3 reported numbers in context:
1. FX Reserves: that’s an increase of $453 Billion dollars year-over-year, which is huge, but the rate of FX Reserve growth slowed from Q3 to Q4
2. Loan growth: that’s an increase of +131% year-over-year (versus 4.15T for all of 2008), which is monstrous, but again slowed in December (month/month)
3. Money Supply: again, that’s a beast of a number, but M2 growth slowed in December versus a record monthly growth rate of +29.7% in November
So, what does this all mean? Quite simply, I think it means that the Chinese Ox is putting herself in the penalty box. Yes, for a few minutes (or months) those who bought Chinese stocks AFTER an +80% year-over-year move on December 31, 2009, will also be put in the penalty box – and yes, Charlestown Chiefs fans (Slapshot), they will “feel shame.” But make no mistake, de goalie, Dennis Lemieux, is not running this country.
China is coaching themselves through this interconnected game of geopolitical risk much more like Dave Tippett coaches his Coyotes. There is no crying or groveling in front of Washington’s willfully blind (can you name me a Chinese banker?). Nor do the Chinese appear to look like used-car salesmen in Piggy Banker suits. These guys understand that, over the long haul, there will be blood – and now is the time to rid themselves is Greenspan/Bernanke-style speculative growth.
After being bullish on China since December of 2008, we pulled de goalie (in early December of 2009) for the intermediate term. My team and I will be wearing our newly issued Hedgeye Risk Management jerseys at 11AM EST time this morning as we host our Quarterly Macro Investment Themes conference call. If you’d like tickets to the game, please email . We don’t do trading huddles, so all are welcome to hear what we think in real-time.
My immediate term support and resistance levels for the SP500 are now 1141 and 1151, respectively.
Best of luck out there today and have a great weekend,
XLK – SPDR Technology — We bought back Tech after a healthy 2-day pullback on 1/7/10.
UUP – PowerShares US Dollar Index Fund — We bought the USD Fund on 1/4/10 as an explicit way to represent our Q1 2010 Macro Theme that we have labeled Buck Breakout (we were bearish on the USD in ’09).
VXX - iPath S&P500 Volatility — The VIX broke down to our immediate term oversold line on 1/6/10, prompting us to add to our position on VXX.
EWG - iShares Germany —Buying back the bullish intermediate term TREND thesis Matt Hedrick maintains on Germany. We are short Russia and, from a European exposure perspective, like being long the lower beta DAX against the higher beta RTSI as well.
EWZ - iShares Brazil — As Greece and Dubai were blowing up, we took our Asset Allocation on International Equities to zero. On 12/8/09 we started buying back exposure via our favorite country, Brazil, with the etf trading down on the day. We remain bullish on Brazil's commodity complex and believe the country's management of its interest rate policy has promoted stimulus.
CYB - WisdomTree Dreyfus Chinese Yuan — The Yuan is a managed floating currency that trades inside a 0.5% band around the official PBOC mark versus a FX basket. Not quite pegged, not truly floating; the speculative interest in the Yuan/USD forward market has increased dramatically in recent years. We trade the ETN CYB to take exposure to this managed currency in a managed economy hoping to manage our risk as the stimulus led recovery in China dominates global trade.
TIP - iShares TIPS — The iShares etf, TIP, which is 90% invested in the inflation protected sector of the US Treasury Market currently offers a compelling yield. We believe that future inflation expectations are mispriced and that TIPS are a efficient way to own yield on an inflation protected basis.
IEF – iShares 7-10 Year Treasury — One of our Macro Themes for Q1 of 2010 is "Rate Run-up". Our bearish view on US Treasuries is implied.
FXE – CurrencyShares Euro — We shorted the Euro ETF on strength on 1/11/10. From an intermediate term TREND perspective we remains bullish on the US Dollar Index.
RSX – Market Vectors Russia — We shorted Russia on 12/18/09 after a terrible unemployment report and an intermediate term TREND view of oil’s price that’s bearish.
EWJ - iShares Japan — While a sweeping victory for the Democratic Party of Japan has ended over 50 years of rule by the LDP bringing some hope to voters; the new leadership appears, if anything, to have a less developed recovery plan than their predecessors. We view Japan as something of a Ponzi Economy -with a population maintaining very high savings rate whose nest eggs allow the government to borrow at ultra low interest levels in order to execute stimulus programs designed to encourage people to save less. This cycle of internal public debt accumulation (now hovering at close to 200% of GDP) is anchored to a vicious demographic curve that leaves the Japanese economy in the long-term position of a man treading water with a bowling ball in his hands.
SHY - iShares 1-3 Year Treasury Bonds — If you pull up a three year chart of 2-Year Treasuries you'll see the massive macro Trend of interest rates starting to move in the opposite direction. We call this chart the "Queen Mary" and its new-found positive slope means that America's cost of capital will start to go up, implying that access to capital will tighten. Yields are going to continue to make higher-highs and higher lows until consensus gets realistic.