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Chinese PMI, Weaker Than Expected . . . But More Than Meets The Hedgeye

Anyone that has been watching either the Chinese stock market or commodity prices for the last six weeks won’t be surprised that we received a couple of data points this morning that confirm economic growth is slowing incrementally in China.  The first, the official China Federation of Logistics and Purchasing managers index fell to 53.9 in May from 55.7 in April. The second, the HSBC China Manufacturing Purchasing Managers Index, fell from 55.2 to April to 52.7 in May – which is the lowest level in a year. 

 

Despite the sequential decline, both of these indices are still above 50, which denotes expansion in economic activity. We’ve outlined this sequential change from April in the chart below, and would highlight that 54 on the Chinese PMI reading has historically been a bit of an important line, and the next move will be critical to watch.

 

Interestingly, the most noteworthy change in the Purchasing Managers Index was a change in input prices, which fell dramatically from April’s reading of 72.6 to 58.9 in May.  This implies that underlying unit demand was likely moderately stronger than the headline number suggests, which, perversely, is probably a negative leading indicator for the next PMI data point.  Presumably, the Chinese government will look at the components of the index, and realize that their efforts to slow the economic growth, or potential overheating, are working on the margin, but perhaps not slowing the economy to the extent Chinese officials had hoped.

 

This interpretation, in conjunction with some of the recent inflationary data points from China that we’ve highlighted below, could lead to more aggressive tightening from China.  These inflationary data points include: 

  • Chinese CPI (Consumer Price Index) and PPI (Producer Price Index) are up 2.8% and 6.8%, respectively, year-over-year. Combined, this is the largest spike in combined inflation in 18 months;
  • Chinese property prices, based on a survey of 70 cities, were up 12.8% year-over-year in April, which is the largest spike since 2005;
  • Chinese money supply growth was up 21.5% year-over-year in April;
  • Chinese loan growth was up 51% sequentially from March to April at 774B Yuan; and
  • Chinese industrial production was up 17.9% on a year-over-year basis in April. 

Obviously, these are primarily April numbers, so May data will also have to be appropriately inflationary to warrant further tightening, but while the headline PMI numbers suggest some economic slowing, the internals are less supportive and suggest still robust expansion in China.

 

Daryl G. Jones
Managing Director

 

Chinese PMI, Weaker Than Expected . . . But More Than Meets The Hedgeye - China PMI


THE M3: SJM GAMING FORECAST; IMPORTED LABOR RULES INSIGHT; WYNN INTERVIEW; GDP UP 30%;

The Macau Metro Monitor, June 1st, 2010

 

HIGH EXPECTATIONS macaubusiness.com

According to Ming Pao Daily, SJM's CEO, Ambrose So Shu Fai, expects overall gaming revenue in Macau to exceed MOP 150 billion (~30% YoY).  This would imply a slowdown in GGR for the latter half of the year.  SJM’s capital expenditure will be MOP800 million this year.

 

NO ONE HAPPY macaubusiness.com

Several points to note about the new imported laborr regime:

 

1) According to the coordinator of the executive committee of the Standing Committee for the Coordination of Social Affairs and the head of DSAL (Labour Affairs Bureau), Shuen Ka Hung, the ratio of imported to local workers varies according to the "actual conditions" of different companies.

 

2) For now, the government has announced that croupiers, professional drivers, and floor supervisors are local-only jobs.

 

3) Employers are required to pay a MOP200 monthly fee for each non-resident worker hired.  But the manufacturing industry will only need to pay 50% of the levy. There were 73,932 non-resident workers in Macau at the end of February

 

4) Dormitories provided by employers to imported workers, are also obliged to comply with a clear minimum set of health and living conditions (usable area of no less than 3.5 square metres, bed per head, fans, bathroom equipped with a hot/cold shower facility and a washing machine for every 8 imported workers). If housing isn't provided for workers then employers must provide a housing allowance of MOP500/ month/ employee.

 

The construction sector is known to have the worst living conditions for workers. For example, just days before the new regime came into effect, the DSAL led a raid targeting Galaxy Macau’s construction site and found a complex of illegal dormitories for around 800 imported workers.

 

5) Because of higher costs, employers are not happy with the new regime. Employees are also wary because they do not want the changes in imported labor rules to depress wage rates for local workers. The Federation of Trade Unions of Macau (FAOM), the largest worker's organization in Macau, is studying a proposed minimum wage rule that would prevent cheap imported labor.

 

CHASING THE DRAGON macaubusiness.com

In an interview with macaubusiness reporters, Steve Wynn mentioned regarding the Cotai project, he "wouldn't need any more tables than (what he has) in Macau." Currently, Wynn has around 400 tables in Macau.  Wynn said that if the government maintains its 5,500 table cap beyond 2012, he wouldn't build the hotel/casino on Cotai.  Meanwhile, Wynn has revealed that he refused to work with seven junkets because they failed a compliance examination.  “Every 90 days at our board meeting, Governor Miller, who is the head of our compliance committee, [presents] our latest report...We conducted fifty three investigations of junket operators, forty six of those junket operators were found acceptable and seven were not,” Wynn said.

 

GROSS DOMESTIC PRODUCT (GDP) FOR THE 1ST QUARTER 2010 DSEC

GDP for 1Q 2010 rose by 30.1% in real terms, up from 27.4% growth in 4Q 2009. Gross gaming revenue soared 57.1% YoY in nominal terms and total visitor spending (excluding gaming expenses) rose by 14.3% YoY.


WEEKLY RISK MONITOR FOR FINANCIALS - TRAJECTORY FLATTENS, WHICH IS A POSITIVE ON THE MARGIN

Last week, 2 of the 8 risk measures registered positive readings on a week-over-week basis, while 4 were neutral and two were negative - a pretty balanced reading suggesting the jury is still out on whether concerns around Europe are subsiding or simply pausing before their next move. That said, last week 6 of 8 measures recorded worse readings sequentially, suggesting that this week's leveling out may be a positive on the margin from a second derivative standpoint.

 

One caveat is that our interpretation of the AAII Bulls/Bears survey is that a more bearish reading is bearish. Most market observers would use this survey as a contrarian indicator, which we wouldn't disagree with from a practitioner standpoint. However, for the purposes of this risk monitor, we treat an increase in bearish sentiment as a negative.

 

Our risk monitor looks at the following metrics weekly:

1. CDS for all available US Financials (30 companies).

2. High Yield

3. Leveraged Loans

4. TED Spread

5. VIX

6. Greek Bond Spreads

7. Markit Subprime Spreads

8. AAII Bulls/Bears Sentiment Survey

 

 

1. Financials CDS Monitor - Credit default swaps in Financial companies were mixed last week, a week of respite following major hikes over the last few weeks.  The largest decreases week over week were AGO, C, GS, and COF. Swap prices remain considerably elevated compared to a month ago, with the most widening at XL, ABK, GNW, and HIG. Conclusion: Neutral.

  • Widened the least vs last week: GS, C, COF, AGO 
  • Widened the most vs last week: XL, ABK, BBVA-ES, POP-ES
  • Widened the least vs last month: C, GS, SAB-ES, POP-ES
  • Widened the most vs last month: XL, ABK, GNW, HIG
WEEKLY RISK MONITOR FOR FINANCIALS - TRAJECTORY FLATTENS, WHICH IS A POSITIVE ON THE MARGIN - cds

 

2. High Yield (YTM) Monitor - High Yield rates fell 14 bps last week, remaining above their elevated levels preceding the Greek bailout. Rates closed the week at 8.97% down from 9.11% the week prior. Conclusion: Positive.

 

WEEKLY RISK MONITOR FOR FINANCIALS - TRAJECTORY FLATTENS, WHICH IS A POSITIVE ON THE MARGIN - high yield

 

3. Leveraged Loan Index Monitor - Leveraged loans were flat last week, closing at 1464, the same point they went out the week prior. Conclusion: Neutral.

 

WEEKLY RISK MONITOR FOR FINANCIALS - TRAJECTORY FLATTENS, WHICH IS A POSITIVE ON THE MARGIN - lli

 

4. TED Spread Monitor - The TED Spread is a great canary. It rose last week closing at 37.1 bps up from 33.2 bps in the week prior. Conclusion: Negative.

 

WEEKLY RISK MONITOR FOR FINANCIALS - TRAJECTORY FLATTENS, WHICH IS A POSITIVE ON THE MARGIN - ted spread

 

5. VIX Monitor - The VIX is admittedly a far more coincident indicator, but we include it as a general reflection on the equities market. Last week the VIX closed at 32.07 down from 40.10 the week prior. Conclusion: Positive.

 

WEEKLY RISK MONITOR FOR FINANCIALS - TRAJECTORY FLATTENS, WHICH IS A POSITIVE ON THE MARGIN - vix

 

6. Greek Bond Yields Monitor - The Greece situation remains in flux and so we include Greek Bond 10-Year Yields as a reflection of that dynamic. Last week yields fell 20 bps to 762 bps from 782 bps. Conclusion: Neutral.

 

WEEKLY RISK MONITOR FOR FINANCIALS - TRAJECTORY FLATTENS, WHICH IS A POSITIVE ON THE MARGIN - gr bond

 

7. Markit ABX Index Monitor - The Markit ABX Index was generally flat/down vs the prior week. We use the 2006-2 series and look at the AAA, AA, A and BBB- series. We include this measure as a reflection of what is going on in deep subprime distressed paper. Conclusion: Neutral.

WEEKLY RISK MONITOR FOR FINANCIALS - TRAJECTORY FLATTENS, WHICH IS A POSITIVE ON THE MARGIN - markit

 

8. AAII Bulls/Bears Monitor - The Bulls/Bears survey grew more Bearish on the margin vs last week. Bulls decreased by 11.5% to 29.8% while Bears rose 17.2% to 50.9%, putting the spread at 21% on the bearish side, versus 7.6% to the bullish side last week. Conclusion: Negative.

 

WEEKLY RISK MONITOR FOR FINANCIALS - TRAJECTORY FLATTENS, WHICH IS A POSITIVE ON THE MARGIN - bulls bears

 

Joshua Steiner, CFA

 

Allison Kaptur


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.28%
  • SHORT SIGNALS 78.51%

US STRATEGY – NEGATIVE SENTIMENT GROWS

US equities finished lower last Friday, partly on Fitch’s Spain debt downgrade.  It’s truly amazing that the Fitch, Moody’s, or S&P ratings can still have this type of impact on the market.  After a long weekend, we are looking at growth slowing around the world and markets in a steep dive.

 

China’s Purchasing Managers’ Index slid to 53.9 from 55.7 in April that was less than the median 54.5 estimate in a Bloomberg survey.  Also, the Eurozone manufacturing PMI declined to 55.8 in May from 57.6 in April (also below an initial estimate of 55.9 released on May 21).  In early trading, the euro is trading down 1.3% to 1.2131.  The Hedgeye Risk Management models have the following levels for the EURO – Buy Trade (1.21) and Sell Trade (1.23).

 

Over the weekend, Germany’s president unexpectedly quit, making Germany less of a source of stability in the region.  The now former president, Horst Koehler, is also the former head of the International Monetary Fund.

 

This follows on the heels of some disappointing MACRO data points in the US last week.  Breaking a four-month upward trend, consumer spending failed to deliver in April; spending was flat versus expectations for +0.3% and personal income met consensus at +0.4%.  Also on Friday, May Chicago PMI was reported at 59.7; below consensus 61.0 and prior 63.8. The one bright-spot was the Final May University of Michigan Confidence of 73.6; slightly better than consensus 73.3 - the preliminary reading was 73.3.

 

On Friday, Financials (XLF), Energy (XLE) and Materials (XLB) were the three worst performing sectors, down 2.2%, 1.9% and 1.8%, respectively.  The XLE Oil services stocks (OSX down 5.2%), were the worst performing sub-sector on the day.   Late Friday afternoon, President Obama addressed the media from Louisiana, where he pledged the full force of the government in responding to the continuing oil spill and cleanup. The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (71.46) and Sell Trade (77.32).

 

The theme of slowing growth is negatively impacting China and commodity prices.  Over the last two days, China is down 3.3%.  In early trading today, copper and crude prices are down more than 2%.  The XLE and XLB will continue to underperform in this environment.    The Hedgeye Risk Management models have the following levels for COPPER – Buy Trade (3.02) and Sell Trade (3.20).    

 

In early trading, the dollar is trading up about 1%.  The Hedgeye Risk Management models have the following levels for the USD – Buy Trade (86.49) and Sell Trade (87.51). 

 

The three defensive sectors of the S&P 500 outperformed on Friday - Consumer Staples, Healthcare and Utilities.  Large-cap Pharma, HMO’s and beverages were all sectors that rose on Friday. 

 

Despite more instability in the euro zone region, the VIX declined 20% last week.  The Hedgeye Risk Management models have the following levels for the VIX – Buy Trade (28.65) and Sell Trade (45.06). 

 

Gold has rallied 2.3% last week and is now up 11.3% year-to-date.  The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,194) and Sell Trade (1,231).

 

As we look at today’s set up for the S&P 500, the range is 50 points or 1.2% (1,076) downside and 3.4% (1,126) upside.  Equity futures are trading below fair value with the Dow back below 10,000 in reaction to further selling in global equities as global growth is slowing. 

 

On the economic front, to be reported today are:

  • May ISM Manufacturing
  • April Construction Spending
  • May Dallas Fed Manufacturing
  • API Crude Inventories
  • ABC Consumer Confidence

Howard Penney

 

US STRATEGY – NEGATIVE SENTIMENT GROWS - S P

 

US STRATEGY – NEGATIVE SENTIMENT GROWS - DOLLAR

 

US STRATEGY – NEGATIVE SENTIMENT GROWS - VIX

 

US STRATEGY – NEGATIVE SENTIMENT GROWS - OIL

 

US STRATEGY – NEGATIVE SENTIMENT GROWS - GOLD

 

US STRATEGY – NEGATIVE SENTIMENT GROWS - COPPER


Unchangeable Certainty

“The only unchangeable certainty is that nothing is certain or unchangeable”

-John F. Kennedy

 

It was a nice long weekend. A successful May is over. Let the performance scoring for June begin.

 

I’m using a JFK quote to kick start the month, not only because we need some American leadership in this country, but because the last time we saw stocks get crushed like we did in May was when Kennedy was the President of the United States.

 

Ironically enough, the US stock market locked in a cyclical peak on the exact same day (April 23rd) of both 1962 and 2010. So far, the peak-to-closing-trough decline from April 23, 2010 has been -12.3% (1067 SP500). The question for risk managers this morning remains, are the lows for 2010 in?

 

The best place to start answering this question is from the top down. To understand where we are going, we better have a deep respect for where we came from. Where are we relative to our Q210 Hedgeye Macro Themes? What’s working? What’s not? Market prices don’t lie.

  1. Sovereign Debt Dichotomy: Check, check, check. We thought Greece was the first domino of sovereign debt maturities that would concern the world; then Spain; then Italy and France. Both Spain and Italy implemented austerity measures late in May and over the weekend we saw France’s Budget Minister, Francois Baroin, admit that it was a “stretch” for France to maintain an objective AAA rating. With France’s burgeoning deficit, we concur.
  2. Inflation’s V-Bottom: Across the world, inflation readings hit a series of higher-highs sequentially for the month of April. Our Hedgeye Inflation Index turned down month-over-month in May. Inflation’s V-shaped recovery is what every 12 month chart you look at looks like until the music stopped on April 23rd. Inflation’s V is now setting up to deflate in June. This will help insulate the Fed’s Japanese style monetary policy, and keep treasuries relatively safe.
  3. April Flowers/May Showers: Check. One fund of funds investor from Boston had an interesting take on what we considered proactively predictable: “Attempting to manage risk in an environment where everything that could go wrong does go wrong seems like a fruitless endeavor.” For the month of May, the SP500 was down -8.2%. One manager utilizing the Hedgeye long/short strategy was up +4.05% gross. Another was up +0.52% net. We’ll call that fruitful.

No matter where you go this morning, there market prices are. Spain, China, and France are down -21.6%, -23.7%, and -12.9%, respectively YTD. Our task isn’t to make excuses or point fingers. Our risk management goal is to see the game for what it has become. Are the lows for 2010 to-date already a rear-view event? Unlikely.

 

We run a multi-factor risk management model across equities, bonds, currencies, commodities, etc., globally. There are very few things that are flashing cover/buy to us yet. Simplifying our model on the US Equity side of the ledger, these are the 2 lines that are most concerning to me:

  1. SP500 intermediate term TREND line resistance of 1144
  2. Volatility Index (VIX) intermediate term TREND line support of 22.19

Provided that the SP500 can’t breakout above 1144 and the VIX can’t breakdown through 22.19, the bear market in US stocks will continue to manifest into consensus that should find another short term cyclical bottom sometime in Q2/Q3.

 

Another 10 intermediate term TREND lines that remain broken around the world and across asset classes that compliment this simple 2-factor US Equity bear case:

  1. Shanghai Composite Exchange = 2933
  2. Tokyo Nikkei Average = 10598
  3. Hang Seng Index = 20789
  4. London Financial Times Index (FTSE) = 5511
  5. Spain Bolsa (IBEX) = 10499
  6. French CAC 40 Index = 3794
  7. Brazilian Bovespa = 66992
  8. CRB Commodities Index = 271
  9. Copper = 3.33/lb
  10. WTI Oil = $79.11/barrel

Nothing, of course, is “certain or unchangeable” in our risk management model. It’s grounded in chaos theory and, after all, that’s grounded in uncertainty.

 

My immediate term TRADE lines of support and resistance for the SP500 are now 1076 and 1126, respectively. Our asset allocation to equities, globally, remains zero percent. We continue to be short both the SP500 (SPY) and Nasdaq (QQQQ).

 

Best of luck out there today and have a great month,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Unchangeable Certainty - May Showers



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