Now I'd Make Sales

“What I like about you guys is that you actually make calls.”
-Boston PM

Yesterday was our first day of 3 meeting with Institutional clients in Boston, MA. While some Boston based hedge funds have blown up and/or gone away in the last 3 years, plenty of Institutional investors here continue to thrive. 

Comments like the aforementioned one from a veteran hedge fund manager in Beantown are what gets me up in the morning. Having been a former hedge fund manager, nothing fires me up more than making calls vs. the competition. 

Whether I make a good or bad call doesn’t seem to matter to our clients as much as why I’m making the call I’m making. 

What is the #process? 

Explaining why I’d be making sales in HIGH BETA and SMALL CAP (Equity) Factor Exposures this morning is entirely explained by a rules-based #process that I try my best to both execute on (in my p.a.) and explain every day.

Back to the Global Macro Grind… 

The most important part of my #process today is that I have all-star teammates and modern machines to help me execute on it like I’ve never been able to before. 

Every year my most senior analyst Partners in all things Macro (Darius Dale & Christian Drake), get older and smarter. Every year our machines and methodologies get faster and more precise. 

If evolution isn’t constantly happening here, Hedgeye would be like any of those hedge funds that have gone away. 

So what makes me a seller this morning? Let’s simply A/B Test the ‘why’ on that “call”: 

A) The things we don’t like in Quad 3 have had a 2-day bounce to lower-highs and remains Bearish @Hedgeye TREND
B) The Quad 3 data we got (locally and globally) yesterday was some of the #slowest ROC data we’ve had in 2019 

For those of you who are new to my risk management (decision making) #process: 

A)Is my multi-factor, multi-duration, risk management SIGNAL and…
B) Is our 4 Quadrant measuring and mapping #process for economies and their respective markets 

On Part B, here’s the ‘why’ on the call from The DD (data dependent), Darius Dale: 

Top Callouts (refer to the tables below and hyperlinked charts for more details): 

1. China: So It Was #TheCycle All Along, Eh?

1. This morning’s APRIL high-frequency hard data out of mainland China confirmed what our market signal did last week: that the Chinese economy had not yet bottomed. Specifically:
• Retail Sales growth slowed -150bps to 7.2% YoY, the slowest RoC since MAY ’03;
• YTD Fixed Assets Investment growth slowed -20bps to 6.1% YoY, the slowest RoC since DEC; and
• Industrial Production growth slowed -310bps to 5.4% YoY, the slowest RoC since NOV, which itself tied for the slowest pace since the throes of NOV ’08.
2. Investors should note my use of all-caps for the month of “APRIL” because I am calling attention to the fact that these data slowed before the impact of Trump’s latest ratcheting up of Sino-US trade tensions in MAY.
3. The net impact of said data pushes our nowcast for Chinese economic growth deeply into #Quad3 here in 2Q19E. Recall that we had been narrowly tracking in #Quad2 prior to the aforementioned releases. Also recall that we nowcast for Nominal GPD in China’s Secondary Industries, as that indicator within China’s sketchy national account statistics backtests best with respect to China’s impact on the global economy.
4. Digging deeper into the Chinese economy, there are three important dynamics investors should be aware of that were revealed with the advent of last month’s high-frequency data:
• Existing tariff implementation is having a negative effect on both Chinese demand for global products and global demand for Chinese exports – the confluence of which is naturally weighing on global growth:
• Export growth slowed -1650bps to -2.7% YoY in APR and the negative trend is accelerating to the downside; and
• In spite of an +1190bps bounce to 4.0% YoY in APR, the negative trend for Import growth is still accelerating to the downside; and
• These dour trends were incrementally confirmed today by Indonesia’s APR Export growth – which slowed -415bps to -13.1% YoY in APR, the slowest RoC since JUL ’16 – as well as Japan’s APR Machine Tools Orders growth – which slowed -490bps to -33.4% YoY, the slowest RoC since OCT ’09.
• Beijing is no longer easing fiscal or monetary policy, at the margins, and their ability to pursue further action is limited by a lack of incremental easing by the Federal Reserve:
• The growth rate of Fiscal Expenditures slowed -9022bps in APR to 5.6% YoY, the slowest RoC since NOV;
• Infrastructure Fixed Assets Investment was unchanged at 4.4% YoY in APR;
• Net liquidity provided by PBoC Open Market Operations was ¥0 MoM in APR and is trending lower;
• Net liquidity provided by PBoC Medium Term Lending contracted -11.4% YoY in APR and is trending lower;
• Base money growth (read: sterilization) continues to trend lower;
• The confluence of all these dynamics is contributing to a rising trend for 3M SHIBOR; and
• The CNY is down -7.3% YoY vs. the USD and Beijing stepping up to ease incrementally in the absence of a further dovish pivot(s) out of the FOMC would likely exacerbate Capital Outflows – which accelerated $47B to a net $35B in MAR – by a potentially destabilizing rate.
• The lack of incremental easing is having a deleterious impact on China’s property sector:
• China’s Real Estate Climate Index is trending lower as of APR;
• The growth rate of Real Estate Capital is trending lower as of APR;
• The growth rate of Land Area Purchased is both crashing (down -33.8% YoY) and trending lower as of APR;
• The growth rate of Housing Starts is trending lower as of APR; and
• The growth rate of Total Sales of Buildings is trending lower as of APR.
5. All told, investors would do well to heed these data and the warning signals from Mr. Market. With respect to our bullish biases on Hong Kong and Taiwan, investors would do well to wait for confirmation that these two economies and markets can defy the gravity associated with China breaking bad – in the face of rising trade tensions nonetheless.

2. US: #GrowthSlowing, Faster

• This morning’s APR Retail Sales and Industrial Production data confirmed the ongoing narrative of the US economy “slowing at a faster rate”:
• Headline Retail Sales growth slowed -70bps to 3.1% YoY in APR;
• The growth rate of the Retail Sales Control Group slowed -80bps to 2.9% YoY in APR; and
• Industrial Production growth slowed -143bps to 0.89% YoY in APR, the slowest RoC since FEB ’17.
• Recall that Industrial Production, the Retail Sales Control Group, and Headline Retail Sales are currently the highest, second-highest, and fifth-highest weighted factors in our 30-factor, dynamically re-weighting predictive tracking algorithm for US GDP growth. The net result of these data is an equally outsized drop in our nowcast for 2Q19E Real GDP growth to 2.54% YoY/1.47% QoQ SAAR, which is roughly in line with where Bloomberg Consensus and the Atlanta Fed’s GDPNowcast model were prior to today’s releases.
• All told, we can debate the #Quad3 vs. #Quad4 inflation dynamic for 3Q19E ‘til the cows come home (or at least until we receive the data), but one driver of intra-market dispersion is not up for debate: domestic economic growth is slowing at a faster rate.

3. Germany: Still Not Out of the Woods

1. Our nowcast for German Q1 GDP was right in line with consensus, confirming the German economy’s narrow ascent into #Quad1 for the quarter: 0.7% YoY vs. 0.6% prior vs. 0.76% Hedgeye final Q1 nowcast.
2. That said, however, that same predictive tracking algorithm for German economic growth has the German economy slowing again in 2Q19E, confirming the lack of a recovery in global growth and testing the resolve of international managers who’ve chased global equities higher in the YTD anticipating just that.
3. Recall that we moved to neutral on European equities and the EUR in early April (from persistently bearish since late-2017), but were reluctant to chase in the absence of the Eurozone economy passing our A│B Test from an economic perspective. That patience is being rewarded by Mr. Market with something like a broad index of allegedly “cheap” European financials (EUFN) down -5.8% MoM. 

Got data? How does it impute, real-time, into your risk management #process? This data dump is published to Institutional clients who pay for The DD’s premium feed. If you’d like to receive it, ping . 

There’s a lot more to making a “call” than simply issuing a timestamp or tweeting about it. 

Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND signals in brackets) are now: 

UST 10yr Yield 2.34-2.49% (bearish)
SPX 2 (neutral)
RUT 1 (bearish)
Utilities (XLU) 56.75-59.01 (bullish)
REITS (VNQ) 85.20-88.28 (bullish)
Financials (XLF) 26.13-27.32 (bearish)
Shanghai Comp 2 (bearish)
Nikkei 205 (bearish)
DAX 119 (bullish)
VIX 14.44-23.09 (bullish)
USD 96.71-97.98 (bullish)
Oil (WTI) 60.00-62.98 (bullish)
Gold 1 (bullish)
Copper 2.71-2.84 (bearish)
TSLA 220-252 (bearish)
Bitcoin 6 (bullish)

Best of luck out there today,

KM 

Keith R. McCullough
Chief Executive Officer