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IDEA ALERT: RE-SHORTING THE YEN, OUR FAVORITE CURRENCY SHORT ACROSS ASIA

Takeaway: We remain bearish on the JPY relative to the USD across our TRADE, TREND and TAIL durations.

SUMMARY BULLETS:

 

  • Earlier today, Keith re-shorted the Japanese yen in our Real-Time Alerts signaling product. This is not a new thesis to clients of Hedgeye Macro, so we’ll keep it tight (email us if you’d like to dialogue further on anything you see below):
  • We see downside risk in the JPY relative to the USD across our TRADE, TREND and TAIL durations, driven largely by our expectations for the BOJ to dramatically accelerate their monetary easing measures amid heightening political pressure, a rapidly-deteriorating domestic GROWTH outlook and a potential upward revision(s) to their long-term inflation target over the intermediate term.
  • Regarding the aforementioned point on political pressure, we think Japan’s looming debt ceiling showdown is likely to pull forward the timing of parliamentary elections from AUG ’13 to some point between now and the late NOV/early DEC breach.
  • If that catalyst occurs, we expect the LDP to regain control of the Diet based on the latest polls which show them taking a dramatic amount of share from the DPJ in recent months. The LDP has been openly in favor of a less independent central bank, incrementally-dovish monetary policy and incrementally-hawkish foreign policy towards China regarding the disputed islands. Judging by Japanese automakers’ SEP sales figures, the latter would be incrementally bearish for Japanese GROWTH – particularly from the BOJ’s perspective.
  • On the USD side of the trade, we think a Romney/Ryan victory is explicitly dollar-bullish. We have access to arguably the most accurate US presidential forecasting model in existence; that model suggests they’ll win in a landslide from an electoral college perspective.  John Taylor following Bernanke as Fed Chairman is a potentially positive tail risk for the USD if such a move were to be telegraphed in the context of the aforementioned scenario.

 

ECONOMIC CATALYSTS: Next week, we have the BOJ monetary policy meeting – which may be attended by new Economy Minister Seiji Maehara who is likely to seek to exert political pressure upon the board to ease – as well as a number of other economic data points that are likely to show Japanese GROWTH accelerating to the downside. That would be on the heels of yesterday’s dovish INFLATION report.

 

  • 10/28: SEP Retail Sales
  • 10/29: SEP Jobs Report; SEP Industrial Production; SEP Overall Household Spending
  • 10/30: BOJ Rate Decision; OCT Manufacturing PMI
  • 10/31: SEP Housing Starts; SEP Construction Orders
  • 11/1: OCT Vehicle Sales; OCT Monetary Base

 

RELEVANT RESEARCH: As previously mentioned, this is not a new thesis for our clients; if, however, you have not seen the relevant research notes, we encourage you to review the following reports:

 

  • 9/27: IDEA ALERT: SHORTING THE YEN AS SINO-JAPANESE TENSIONS ESCALATE
    • We are now short the Japanese yen (via the CurrencyShares Japanese Yen Trust etf “FXY”) in our Real-Time Positions product as a way to communicate our bearish TRADE and TREND thesis on the JPY relative to the USD.
    • The key catalyst in support of our bearish bias is a likely acceleration of the BOJ’s balance sheet expansion, which may include a potential implementation of a foreign asset purchase program as Japan’s economic outlook deteriorates on the margin due to slowing commerce with China and recent yen strength.
    • From a TAIL duration perspective, any sustained weakness in the yen risks Japanese banks and asset managers clearing out of the JGB market en masse in search of higher yields abroad (which they couldn’t do previously due to structural yen appreciation), as well as imposing the threat of structurally higher rates of inflation – a risk the JGB market hasn’t had to price in for over a decade.
  • 9/19: ARE CHINA AND JAPAN HEADING FOR WAR?
    • While we view the threat of military intervention as highly improbable, we do think the heightened tension over the Senkaku (Japan)/Diaoyu (China) islands risks facilitating a string of international protectionism – which is already poised to accelerate due to recent political promises out of the Obama and Romney camps.
    • Such protectionism would have dire economic effects globally, with Japanese industrial production and US/EU consumption getting hurt the most – the former due to lower Chinese demand; the latter due to higher import price inflation.
    • Retaliatory measures, while not an acute risk, could beget broader financial market and economic contagion globally. This is a meaningful TAIL risk, given the recent rhetoric and maneuvers of international policymakers.
  •  8/28: THE RAMIFICATIONS OF JAPAN’S LOOMING GOVERNMENT SHUTDOWN
    • The political calendar poses a great deal of risk to the Japanese economy, JGBs and Japanese financial institutions over the next ~2 months.
    • The ramifications of a potential/actual Japanese government shutdown are three-fold: a potential sovereign default; a potential sovereign credit rating downgrade(s); and an associated $75-80 billion capital call across the Japanese banking system in the event JGBs are downgraded to single-A level by Moody’s and/or Standard and Poor’s, where the outlook is already “negative”.
  •  7/27: ARE JAPANESE GOVERNMENT BONDS POISED TO MAKE SOME NOISE?
    • By authorizing BOJ purchases of foreign currency assets, Japanese policymakers risk materially elevating the risk of sustained yen depreciation and inflation within the JGB market.
    • Though we have yet to receive anything concrete on the policy front, we will be paying close attention to the next two BOJ monetary policy board meetings for signs of official movement in this direction. 
    • We are now short the Japanese yen (via the CurrencyShares Japanese Yen Trust etf “FXY”) in our Real-Time Positions product as a way to communicate our bearish TRADE and TREND thesis on the JPY relative to the USD.
    • The key catalyst in support of our bearish bias is a likely acceleration of the BOJ’s balance sheet expansion, which may include a potential implementation of a foreign asset purchase program as Japan’s economic outlook deteriorates on the margin due to slowing commerce with China and recent yen strength.
    • From a TAIL duration perspective, any sustained weakness in the yen risks Japanese banks and asset managers clearing out of the JGB market en masse in search of higher yields abroad (which they couldn’t do previously due to structural yen appreciation), as well as imposing the threat of structurally higher rates of inflation – a risk the JGB market hasn’t had to price in for over a decade.

  

Our updated levels on the CurrencyShares Japanese Yen Trust etf (FXY) are included in the chart below. Email us if you’d like our quantitative risk management levels for the USD/JPY cross as well.

 

Darius Dale

Senior Analyst

 

IDEA ALERT: RE-SHORTING THE YEN, OUR FAVORITE CURRENCY SHORT ACROSS ASIA - 1


Bearish TREND: SP500 Levels, Refreshed

Takeaway: Our top Hedgeye Global Macro Theme for Q4 of #EarningsSlowing continues to play out at an accelerating rate.

This note was originally published October 26, 2012 at 11:09 in Macro

POSITIONS: Long Utilities (XLU), Short Industrials (XLI)

 

Our top Hedgeye Global Macro Theme for Q4 of #EarningsSlowing continues to play out at an accelerating rate. Half way through Earnings Season, we see no reason to back off that fundamental research view.

 

From a quantitative perspective (different from the research view), the bearish TREND signal remains. Across our core risk management durations, here are the lines that matter to me most:

 

  1. Intermediate-term TREND resistance = 1419
  2. Immediate-term TRADE support = 1391
  3. Long-term TAIL support = 1354

 

In other words, now that the SP500 is slicing through its April 2012 highs (and there’s no Fed put), long-term TAIL support is back in play.

 

On growth, 1/3 of this morning’s GDP print came from a Government Spending (contributing +0.71% out of nowhere, after 8 consecutive quarters of declines!). That’s going to matter as the legacy media figures it out.

 

KM

 

Keith R. McCullough
Chief Executive Officer

 

Bearish TREND: SP500 Levels, Refreshed - SPX


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BREAKING DOWN THE US GDP REPORT

Takeaway: With a pre-election boost in government spending comes heightened odds that US GDP growth slows demonstrably in 4Q12/1Q13.

This note was originally published October 26, 2012 at 11:23 in Macro

SUMMARY BULLETS:

 

  • On an industry-standard C+I+G+NX (C=consumption, I=investment, G=government and NX=net exports) basis, the 3Q12 GDP report was not good. The underlying trends suggest the odds of US recession over the intermediate term are now much higher than they were a 8:29am EST.
  • The unsustainable uptick in government spending ahead of the election portends quite negatively for 4Q12/1Q13 real GDP growth. Without Uncle Sam’s pre-election encroachment, 3Q12 US real GDP growth would have came in at +1.3% QoQ SAAR – or unchanged from 2Q12. If “G” actually came in at the trailing four quarter average of its contribution to GDP, 3Q12 US real GDP growth would have been a paltry +0.9% QoQ SAAR.
  • Imports contributed +4bps to the headline GDP figure of +2% on the strength of a sequential contraction of -0.2% (down from +2.8% QoQ in 2Q12). This is the first sequential contraction of US imports since 2Q09. Importantly, the slowdown in import growth portends somewhat negatively for domestic demand trends over the intermediate term. Imports, which themselves are led by orders, lead real final sales. We’ve highlighted this relationship in previous notes (click here for more details). Is a disappointing holiday season on the horizon?
  • Furthermore, the 3Q12 GDP report suggests weak imports may be leading a sequential slowdown in both “C” and “I”  in the upcoming quarter(s). Additionally, an demonstrable and unsustainable acceleration  in “G” was all that stood in the way of a -35% deceleration to +0.9% QoQ SAAR, allowing the headline figure to come in at +2% QoQ SAAR. This means that growth is trending along a +0.9% QoQ SAAR run rate and potentially headed lower if “C” and “I” exhibits signs of slowing.
  • Unfortunately, dual slowing of “C” and “I” is indeed a probable scenario, given the uncertainty surrounding the election, fiscal cliff and debt ceiling breach. Moreover, each catalyst may actually be contributing to a noteworthy acceleration in corporate cost-cutting initiatives (layoffs?), as highlighted on 3Q earnings calls. Recessions happen when baseline GROWTH is weak, the corporate earnings cycle slows and companies start trying to cut their way into meeting peak-cycle, peak-margin forward EPS estimates. In this respect, 4Q12 is very much like 4Q07.

 

On a SAAR basis, US real GDP growth accelerated to +2% QoQ in 3Q12 from +1.3% in 2Q12; on a YoY basis, US real GDP growth accelerated to +2.3% in 3Q12 from +2.1% in 2Q12.

 

Looking beyond the headline figures, there were some rather interesting occurrences that we think are worth highlighting:

 

  • Driven by a demonstrable acceleration in federal government spending (+9.6% QoQ in 3Q12 from -0.2% in 2Q12) the “G” in the C+I+G+NX equation contributed +71bps (or 36%) to the +2% headline figure. This was the first quarter “G” posted a positive contribution to the headline figure since 2Q10. Like the SEP Unemployment Rate and the OCT UofMich Consumer Confidence Index, the 3Q12 GDP report is just strong enough for President Obama to claim he’s got the US economy back on track just in time for the election.
  • Driven by a -1.3% QoQ decline, business investment (i.e. nonresidential fixed investment) was net drag of -13bps on the headline GDP figure of +2%; this is the first time we’ve seen US businesses retrench since 1Q11, when a -1.3% QoQ contraction then contributed to a net drag of -11bps on the then-headline +0.1% QoQ SAAR figure. Uncertainty over the domestic political situation continues to contribute to slow economic growth. More on this later.
  • Driven largely by drought-induced weakness in farm inventories, inventories overall contributed a -12bps drag on the headline GDP figure of +2%; this is up sequentially from -46bps. Nonfarm inventories contributed +30bps to the headline GDP figure, while farm inventories contributed a -42bps drag.
  • The much-celebrated recovery in the housing market continues to auger positive for domestic real GDP growth, contributing +33bps to the headline figure in 3Q12 (up from a +19bps contribution in 2Q12) on the strength of a +14.4% QoQ growth rate (accelerated from +8.5% QoQ in 2Q12).

 

BREAKING DOWN THE US GDP REPORT - 1

 

Given that we’re well into 4Q12 already, we think it’s worth highlighting a few nuggets from the 3Q12 report that may offer clues as to where the rate of domestic GROWTH might end up in the current and proceeding quarters:

 

  • Imports contributed +4bps to the headline GDP figure of +2% on the strength of a sequential contraction of -0.2% (down from +2.8% QoQ in 2Q12). This is the first sequential contraction of US imports since 2Q09. Importantly, the slowdown in import growth portends somewhat negatively for domestic demand trends over the intermediate term. Imports, which themselves are led by orders, lead real final sales. We’ve highlighted this relationship in previous notes (click here for more details). Is a disappointing holiday season on the horizon?
  • The unsustainable uptick in government spending ahead of the election – as great as it may be for the Keynesian elite – actually portends quite negatively for 4Q12/1Q13 real GDP growth. Without Uncle Sam’s pre-election encroachment, 3Q12 US real GDP growth would have came in at +1.3% QoQ SAAR – or unchanged from 2Q12. If “G” actually came in at the trailing four quarter average of its contribution to GDP, 3Q12 US real GDP growth would have been a paltry +0.9% QoQ SAAR. Imagine if three months from now, US real GDP slowed from +2% QoQ SAAR in 3Q12 to +0.9% QoQ SAAR (or lower) in 4Q12. That is a real risk.

 

BREAKING DOWN THE US GDP REPORT - 2

 

Net-net, the 3Q12 GDP report suggests weak imports may be leading a sequential slowdown in both “C” and “I”  in the upcoming quarter(s). Additionally, an demonstrable and unsustainable acceleration  in “G” was all that stood in the way of a -35% deceleration to +0.9% QoQ SAAR, allowing the headline figure to come in at +2% QoQ SAAR. This means that growth is trending along a +0.9% QoQ SAAR run rate and potentially headed lower if “C” and “I” exhibits signs of slowing.

 

Unfortunately, dual slowing of “C” and “I” is indeed a probable scenario, given the uncertainty surrounding the election, fiscal cliff and debt ceiling breach. Moreover, each catalyst may actually be contributing to a noteworthy acceleration in corporate cost-cutting initiatives (layoffs?), as highlighted on 3Q earnings calls. Recessions happen when baseline GROWTH is weak, the corporate earnings cycle slows and companies start trying to cut their way into meeting peak-cycle, peak-margin forward EPS estimates. In this respect, 4Q12 is very much like its 2007 counterpart.

 

Our updated US GIP model is included in the chart below.

 

Darius Dale

Senior Analyst

 

BREAKING DOWN THE US GDP REPORT - US LOW


Casual Dining Downturn

How bearish can you be on a particular sector? As far as we’re concerned, we’re as bearish as can be on casual dining. The consensus is far too bullish on top-line trends and earnings season is suggesting that companies are in worse shape than previously thought. Anemic real wage growth is just one of many macroeconomic headwinds involved with casual dining.

 

The Restaurant Value Spread is suggesting that inflation at restaurants is outstripping inflation at grocery stores and may have an adverse impact on same-restaurant sales growth this year. As you can see in the chart below, things are heading lower and lower; clearly Street estimates are overdue for a revision.

 

Casual Dining Downturn  - casual dining RVS


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