prev

JAPAN’S JUGULAR 2.0: WILL 2012 BE THE BEGINNING OF THE END?

***It has come to our attention that the hyperlink in Tuesday's note did not successfully download the accompanying presentation for everyone. As such, we're re-sending the link to the deck; please email us if the updated link below still fails to work and we'll be happy to get you the PDF file.***


CLICK HERE TO DOWNLOAD THE CORRESPONDING SLIDE DECK: http://docs.hedgeye.com/Japans%20Jugular.pdf


Conclusion: The perception of the Japanese sovereign debt market is at risk of a fundamental inflection point in 2012, as heavy issuance is likely to be accompanied by very public failures in passing much-needed fiscal reform. As such, we will seek to manage immediate-term risk within this long-term bearish thesis by trading Japanese equities and the Japanese yen with a bearish bias.

  

Current Virtual Portfolio Positioning: Short Japanese equities (EWJ).

 

“I skate to where the puck is going to be, not where it has been.”

-Wayne Gretzky

 

For long-time Hedgeye clients, our long-term bearish outlook for Japanese economic growth is not new news; neither is our aggressive stance against their ultra-Keynesian monetary policy and fiscal positioning. That said, however, 2012 shapes up to be a rather interesting year for Japan’s sovereign debt market, as both a heavy auction calendar coincides with debates on key fiscal reforms – both of which possess the potential of dramatically surprising consensus expectations to the downside.

 

Given our own deep understanding of the tailwinds supporting the Japanese yen and the Japanese government bond market, it would be reckless to assign a timeline to a potential Japanese sovereign debt and/or banking crisis. We have, however, done the work and are comfortable in saying that, more so than any year prior, 2012 shapes up to be the year where confidence in the JGB market is lost – putting Japan at risk of being next in line to face the music of ourSovereign Debt Dichotomy theme.

 

As the aforementioned quote by hockey great Wayne Gretzky suggests, we think it’s appropriate for investors to begin hedging their portfolios against Japanese sovereign credit risk. As always, feel free to email us at if you have any follow-up questions and would like to dialogue further.

 

Darius Dale

Senior Analyst


JOBLESS CLAIMS - GOOD NEWS SELF-REINFORCES

Claims Tailwind Persists 

Weekly initial jobess claims for last week fell 10k WoW to 367k (down 12k after a 2k upward revision to last week’s data). 4-week rolling claims fell 2k to 376k. On a non-seasonally-adjusted basis, reported claims fell 2k WoW to 415k.

 

This obviously represents continued progress. The big question is whether claims have reached self-reinforcing levels yet. We've chirped endlessly about 375-400k being the threshold that, below which, unemployment begins to fall, which allows autocorrelation to take hold. In other words, falling unemployment inspires confidence which begets further declines in unemployment. This is an extremely powerful force and it's important to understand that its different from the move from 650k to 400k that we've seen from early 2009 through year-end 2011. That move was catalyzed on the back of monetary and fiscal stimulus alone. 

 

As we highlighted last week, the Fed's significant easing last week has thrown cold water on what had been a strengthening US dollar. As our Macro team makes clear daily, a strong dollar is good for America as it makes gas, food and lots of other less perceptible things cheaper for the average American. The opposite of this, inflation, is a tax and markets hate new taxes. So it will be interesting to watch the interplay between self-reinforcing claims and this inflationary tax. For now, claims are trending lower, which bodes well for the Financials on two fronts: credit quality and loan growth.

 

JOBLESS CLAIMS - GOOD NEWS SELF-REINFORCES - Rolling

 

JOBLESS CLAIMS - GOOD NEWS SELF-REINFORCES - Raw

 

JOBLESS CLAIMS - GOOD NEWS SELF-REINFORCES - NSA chart

 

JOBLESS CLAIMS - GOOD NEWS SELF-REINFORCES - S P and claims

 

JOBLESS CLAIMS - GOOD NEWS SELF-REINFORCES - FED and Claims

 

2-10 Spread

The 2-10 spread tightened 17 bps versus last week to 160 bps as of yesterday.  The ten-year bond yield also decreased 17 bps to 183 bps.

 

JOBLESS CLAIMS - GOOD NEWS SELF-REINFORCES - 2 10 spread

 

JOBLESS CLAIMS - GOOD NEWS SELF-REINFORCES - 2 10 QoQ

 

Financial Subsector Performance

The table below shows the stock performance of each Financial subsector over four durations. 

 

JOBLESS CLAIMS - GOOD NEWS SELF-REINFORCES - Subsector performance

 

Joshua Steiner, CFA

 

Allison Kaptur

 

Robert Belsky

 

Having trouble viewing the charts in this email?  Please click the link below.

 


THE HBM: CMG ,GMCR, YUM, DNKN

THE HEDGEYE BREAKFAST MONITOR

 

MACRO NOTES

 

Consumer

 

Initial jobless claims came in at 367k versus 371k consensus and 379k (revised from 377k) the week prior.

 

THE HBM: CMG ,GMCR, YUM, DNKN - initial claims 22

 

 

Comments from CEO Keith McCullough

 

Almost all of the sequential Growth Slowing signals that matter in my model are flashing amber lights now:

  1. CHINA – all of the high-frequency economic data (inflation accel, growth decel) looks primed to slow in FEB as both the Shanghai Comp (+2% last night) and the Hang Seng (+12.5% YTD!) move to immediate-term TRADE overbought signals. Plenty of Johnny come lately pundits, who I didn’t hear a peep from when we bought China in DEC, going bullish.
  2. COPPER – the Doctor finally breaking its most immediate-term price momentum level of support of $3.83/lb this morn at the same time that Singaporean Stocks back off and moved red into the close. Stealth signals, but they’re leading ones that matter in my model. Copper’s long-term TAIL of 3.98/lb resistance intact – lower-highs.
  3. TREASURIES – if you only bet w/ the bond market for the last year on its implied growth slowing/accelerating signals, you’d have not been sucked into any of the lower-highs in US Equities (Feb 2011, Apr 2011, Jan 2012). I bought the long-bond back yesterday as the 10yr yield looks like it wants to make lower-lows for the YTD.

 

I was very bullish until policy infected the growth/inflation signals in my model. I’m data dependent – and the data is now going the wrong way. Jobless claims and the employment report up next.

 

 

SUBSECTOR PERFORMANCE

 

THE HBM: CMG ,GMCR, YUM, DNKN - subsector

 

 

QUICK SERVICE

 

CMG: Chipotle Mexican Grill reported $0.81 EPS for 4Q11 versus $1.83 consensus.  Comps were up +11.1% and January comps were up roughly 10.1%.  The company plans to take price in the Pacific region which should help comps by 1%.

 

CMG: Chipotle Mexican Grill was reiterated Conviction Buy at Goldman Sachs.  The price target was raised from $410 to $425.

 

CMG: The price target for Chipotle was raised from $370 to $450 at Credit Suisse.

 

GMCR: Green Mountain is up ~20% premarket after reporting 1QFY12 EPS of $0.60 versus $0.36 consensus.  FY12 revenue (Sept) was reiterated at +60-65% y/y or $4.24-4.37b versus consensus $4.24b.  K-Cup Packs revenue was $715.7M versus $332.9M year-over-year.

 

YUM: Yum Brands’ Taco Bell is being linked to a salmonella outbreak in Oklahoma, according to media reports.

 

DNKN: Dunkin’ Donuts is adjusting its menu in an effort to make its growth into new markets more successful than previous efforts, according to media reports.  See the article here.

 

 

NOTABLE PERFORMANCE ON ACCELERATING VOLUME:

 

COSI: Cosi traded up 14% on accelerating volume as news emerged that Carin Stutz filed a Form 4 on January 31st, buying another 65k shares.

 

 

CASUAL DINING

 

NOTABLE PERFORMANCE ON ACCELERATING VOLUME:

 

CHUX, RRGB, BOBE, EAT, TXRH, BWLD: All traded higher on accelerating volume.

 

KONA: Traded down -8% on accelerating volume.

 

THE HBM: CMG ,GMCR, YUM, DNKN - stocks

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 


get free cartoon of the day!

Start receiving Hedgeye's Cartoon of the Day, an exclusive and humourous take on the market and the economy, delivered every morning to your inbox

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.


LVS: A HOLD-AIDED MAKE

EBITDA would’ve been 8% lower with normal hold.  In this note, we focus on two forward issues for LVS.

 

 

We don’t want to bore you with the details of LVS’s Q4 – there’s plenty of sell-side research that can do the trick better than we can (I mean, the boring part).  The quarter was not as good as we were projecting.  Moreover, the quarter benefited from high hold, the net impact of which boosted company EBITDA by $69 million (8% of total).  Worse, the property we are most concerned about vis-à-vis expectations, MBS, was the beneficiary of most of it.

 

LVS is in great shape over the long-term.  No question.  We would be buyers of the stock at this price for the long haul.  However, it is the near and intermediate term that concerns us.  Our near-term focus is on two issues:  2012 growth in the Singapore market and the cannibalization at Venetian from Sands Cotai Central.

 

So what did we learn from this quarter related to these two issues:

  1. MBS Singapore – Q4 YoY EBITDA growth was 40%. Fantastic. However, it was 71% in Q3. EBITDA only grew 3% QoQ. Worse, on a hold adjusted basis for both quarters, EBITDA would have fallen 13% QoQ. So is seasonality to blame? Certainly, that is a factor.  But that isn’t all of it.  Singapore growth is likely slowing.

     

    Of course, Q1 has a very easy comparison due to low hold and the newness of the market in Q1 of last year.  Q1 2011 EBITDA was only $285 million. However, on a hold adjusted go forward basis, we think top line growth of 5-10% for the market is more likely than the 15-20% expected by the Street.  Beyond Q1, we see EBITDA growing only 5-10% YoY. This could be a disappointment.

     

  2. Sands Cotai Central will open in March or April.  Given the overlap with Venetian, we are expecting cannibalization. With its new focus on the VIP, Four Seasons should be fine.  So what can we learn from Q4? Well, Venetian and Sands are badly trailing the market in revenue and EPS growth.  Given past cannibalization (Venetian on Sands, Grand Lisboa on Lisboa, and CoD on Altira), we have little reason to believe that these numbers are going to improve upon the opening of a sister property.  Four Seasons is on a different path because of its new focus on VIP.

The following table outlines the property performance for the quarter.

 

LVS: A HOLD-AIDED MAKE - LVS


Self-Control

This note was originally published at 8am on January 30, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“The conclusion is straightforward: self-control requires attention and effort.”

-Daniel Kahneman

 

That’s a very simple quote from a very important chapter in “Thinking, Fast and Slow” titled The Lazy Controller. I personally have a lot of work to do on this front. As an athlete, I was much better at this than I am as an investor – control what you can control.

 

It required some attention and effort to sell into the stock and commodity market inflations inspired by The Bernank Tax last week. With the S&P futures trading at 1305 this morning, US stocks are down over -2% from Thursday morning’s intraday 2012 high of 1333.

 

With China coming back from the holiday closing down -1.5% overnight, it looks like I should have sold that too (I sold everything else). The Chinese do not appreciate US policies to inflate because food and energy inflation slows Chinese growth.

 

Back to the Global Macro Grind

 

I make a lot of mistakes. The biggest ones tend to occur when I either get influenced by someone else’s process and/or when I don’t let the market stop me out of my own.

 

Thinking fast about the immediate-term while thinking slow about the long-term is the holy grail of being at what Kahneman calls “cognitive ease.” I can’t work any harder – so for me, at this stage of my career, my goal is to work smarter.

 

I think Kahneman nails my own issues to the boards in saying that, sometimes, “too much concern about how well one is doing in a task sometimes disrupts performance by loading short-term memory with pointless anxious thoughts.” (page 41)

 

But, most of the time, that’s our over-supplied profession’s short-term cross to bear more than it is my own – and we can turn that regressive energy into positive P&L by coming to the most straightforward conclusion, fast.

 

As a reminder, our primary conclusions about Big Government Interventions in markets for the last 4 years has been:

 

1.       They Shorten Economic Cycles

2.       They Amplify Market Volatility

 

This is the #1 reason why I am such a bull on stabilizing/strengthening the #1 factor in my Global Macro Model that drives short-termism in global market prices/volatilities – the US Dollar Index.

 

Last week’s price action doesn’t lie, Keynesian policy makers do. With the US Dollar down -1.6% week-over-week, here’s what the big stuff did:

  1. CRB Index (18 commodities) Inflation = straight up +1.6%
  2. US Stocks = flat (Dow down -0.5%; SP500 up +0.1%)
  3. US Treasuries = 10-year yields dropped -6.4% to 1.89%

Why?

 

1.       Inflation Expectations were rising

2.       Growth Expectations were falling

 

And, again, that’s how my risk management model rolls:

  1. Policy drives currency
  2. Currency debauchery drives inflation expectations
  3. Inflation expectations drive growth (and margin) expectations

If you go back and analyze every single big investment mistake I have made in the last 13 years (I have), unless there’s something like a take-out in one of my short positions (I was short Reebok when Adidas bought them), almost all of the time I was long something where Growth Slowed and Margins Compressed.

 

That’s why I think, fast and slow, about Countries/Economies this way. Ultimately, on the margins of Growth and Inflation, they act like companies.

 

I know there’s a lot of controversy around my macro views. I know there’s a lot of emotion in what we do. I know I should have been long Gold last week. I know what I know.

 

What I don’t know is what really matters to me. That’s why I need the Self-Control to Embrace Uncertainty and let the market tell me what to do next.

 

My immediate-term support and resistance ranges for Gold, Oil (Brent), EUR/USD, Shanghai Composite, German DAX, and the SP500 are now $1682-1739, $110.12-112.06, $1.29-1.31, 2221-2351, 6440-6503, and 1297-1326, respectively.

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Self-Control - Chart of the Day

 

Self-Control - Virtual Portfolio


investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

next