McCullough: A China Bull ... And Loving It
After seeing its stock market down 14.3 percent in 2010, expectations for Chinese stocks are low and short interest is high. Today those who are still storytelling about China’s “pending collapse” are going to learn that lesson the hard way. China’s Q2 GDP report was outstanding.
Before I get into what the short sellers of China have wrong, let’s rattle off what the bulls have right in this morning’s GDP report:
- China Q2 GDP beat consensus estimates of 9.3 percent, coming in at 9.5 percent year over year;
- Fixed asset investment growth in Q2 was up 25.6 percent year-over-year; and ...
- June data reports (Money Supply, Loan Growth, Retail Sales, and Industrial Production growth) were big sequential accelerations versus May.
Now, back to the short sellers…
On two critical leading indicators, the macro market has warned the shorts that Chinese growth was not going to be the train wreck that US unemployment has become:
- Chinese stocks (Shanghai Composite Index) are up 6.6 percent since bottoming on June 20th, 2011
- Copper prices (highly correlated to Chinese demand) are up 12.5% since bottoming in mid-May
Of course, the shorts have sequentially accelerating inflation (China's CPI hit a 3-year high in June) in their back pockets—or do they? We expect Chinese CPI to trend downward in the second half of the year and we bought China (via the exchange-traded fund CAF ) on June 16 to express this thesis.
Bottoms are processes, not points—we get that. Whether or not we bottom-ticked buying China isn’t the point. The point is that managing risk on a globally interconnected basis works both ways. Being too bearish at bottoms can carry a short seller out.
As a credibility check, we were long Chinese Equities in 2009 and short them in 2010. It’s actually amusing to get emails (from some of the same people who were accusing me of being “too bearish” on China in the first quarter of 2010) insinuating that now I’m “too bullish!”
Bullish data and the prices that support it are crystal clear for everyone to see this morning (China was up 1.5 percent on the “news”). What you can’t see are the shorts squirming.
So here are a few more things to consider on that score:
- Short interest in Chinese stocks has almost doubled since the beginning of January 2011 (4.8 percent versus 2.9 percent of total shares)
- At $961 million year to date, outflows in the FXI (another China ETF) were the highest of ANY COUNTRY ETF in the 140 countries in XTF Inc.’s database
- Moody’s (the ultimate lagging indicator) put China “bank debt concerns” on their radar on July 5th
Classic contrarian indicators...
Here at Hedgeye we are preparing to unveil our third quarter macro-economic themes. One of our favorites? “Chinese Cowboys.”
Prior to founding Hedgeye Risk Management, McCullough built a track record as a successful hedge fund manager at the Carlyle-blue Wave Partners hedge fund, Magnetar Capital, Falconhenge Partners, and Dawson-Herman Capital Management. He is a Contributing Editor to CNBC TV, Fortune Magazine and author of Diary of a Hedge Fund Manager (Wiley 2010).