Takeaway: Japanese policymakers continue to attack the yen, both rhetorically and with incremental POLICY maneuvers.



  • In the week-to-date, Japan has certainly made a lot of noteworthy headlines – particularly on the POLICY front. In the note below, we highlight these recent developments with the intent of providing both historic context and future implications for Japanese and global financial markets.
  • Specifically, it is reasonable to anticipate that the pace of yen declines is likely to slow post the JAN 21-22 BOJ meeting, only to resume accelerated losses ahead of the changing of the guard atop the BOJ board in mid-to-late MAR (out with deputy governors Hirohide Yamaguchi and Kiyohiko Nishimura)/early-APR (out with Governor Shirakawa).
  • While we continue to view incremental monetary Policies To Inflate and expansionary fiscal POLICY as reflationary for Japanese equities and supportive of regional sentiment in the near term (Japan is the 2nd largest economy in Asia, where roughly two-thirds of all trade is intra-regional), over the long term we continue to see material risk of a Japanese currency and sovereign debt crisis borne out of those same policies.



On Monday, it was reported that the Diet is preparing a ¥12 trillion supplementary budget for fiscal stimulus measures, with ¥5-6 trillion of that directed to public works projects. Additionally, the Finance Ministry will offer ¥100 billion of loans to help spur domestic R&D and an additional ¥70 billion fund to help Japanese companies finance overseas acquisitions.


Context & Implications:


  • As we outlined in our 12/26 note titled: “JAPAN TO LOOSEN FISCAL POLICY AS WELL”, Japan’s fiscal POLICY outlook is deteriorating rapidly as PM Shinzo Abe seeks to reflate the Japanese economy to capture more political goodwill for his LDP party ahead of the late-JUL Upper House elections.
  • This ¥12 trillion supplementary budget figure is in line with our estimates of > ¥10 trillion and will likely require ¥8-10 trillion in deficit-financing bond issuance, according to market chatter. That’s ok, though: Finance Minister Taro Aso reiterated his pledge to blow right through the ¥44 trillion debt issuance ceiling in the upcoming fiscal year. Piling debt upon debt upon debt will only accelerate Japan’s jumping of the ¥1 QUADRILLION debt outstanding shark.
  • That being said, however, we continue to anticipate Policies To Inflate to continue to drive the yen lower and Japanese equities higher over the intermediate term – at least until the bond market starts to price in a sustained phase change with regards to Japan’s INFLATION dynamics.
  • For more details on how we think Japan’s Keynesian experiment could end in a globally-destabilizing Japanese sovereign debt crisis, please refer to the following two notes:



On Tuesday, it was reported that Japan is planning to use its FX reserves to buy European Stability Mechanism debt to “help weaken the yen”, according the Finance Minister Taro Aso.


Context & Implications:


  • Japan, which has $1.2 trillion in FX reserves, has already purchased $9.2 billion of EFSF debt (6.7% of total issuance), so this pledge does little to move Japan in the direction of a bonnafide foreign asset purchase program.
  • Not to mention, because they are using FX reserves to make the purchases, it’s unlikely that this initiative alone will result in material weakness in the yen over the intermediate term. In fact, the only way ramping up allocations to ESM debt would systematically and sustainably weaken the yen is if Japanese policymakers instead used JPY-denominated domestic capital to make the purchases.
  • In light of this somewhat disappointing news, we are not surprised to the see the yen bounce ever-so-slightly from oversold levels in the week-to-date.
  • That said, however, we continue to anticipate that the BOJ will ultimately be forced to print yen to buy foreign currency-denominated assets; that’s what the market wants and is sniffing out.
  • From a timing perspective, that catalyst is likely several months away – likely after Shirakawa and his two deputy governors are replaced at the BOJ in mid-to-late APR.



Today, it was reported that the Council on Economic and Fiscal Policy will meet for the first time in four years. Previously abolished by the outgoing DPJ government – which tends to favor increased central bank independence and fiscal sobriety (i.e. they shun direct financing of public expenditures by the BOJ), on the margin – the Council on Economic and Fiscal Policy meetings will once again pool together Cabinet members (including Prime Minster Shinzo Abe), academics, business leaders and BOJ board members in a broad-based discussion of Japan’s POLICY objectives.  


Context & Implications:


  • Who needs to revise the 1998 BOJ Act – which created the BOJ’s independent POLICY-setting board – when one could just meet regularly to ensure the central bank’s POLICY objectives are aligned with those of the Diet leadership?
  • As such, we see limited risk for any legislative threat to BOJ independence with respect to the immediate-to-intermediate term. It should be much easier for Abe & Aso to exert political pressure upon the BOJ board in face-to-face meetings than it would be through political grandstanding, as they have been doing in recent months.
  • That being said, if the BOJ doesn’t revise its inflation target up to +2% at the JAN 21-22 meeting and introduce further easing measures (its current Asset Purchase Program and Lending Program total ¥101 trillion), we could see Abe throw down the gauntlet from a rhetorical perspective.
  • To the extent BOJ Governor Masaaki Shirakawa still believes a joint BOJ-Diet INFLATION target (de facto or de jure; the net result is the same) is not a good thing, he could be met halfway by adopting the aforementioned +2% INFLATION target while simultaneously instituting an indefinite timeframe with regards to achieving the goal.
  • Focusing on the markets, assuming some confluence of what we outlined above materializes in the coming weeks, it will be tough to see declines in the yen accelerate (i.e. break through the mid-to-low 90’s vs. the USD; break through the mid-to-low 120’s vs. the EUR) in the late-JAN through mid-MAR period on the strength of just fiscal POLICY and jawboning alone.
  • While we don’t necessarily view the following risk as probable at the current juncture, you could see the JPY pull back towards our TAIL line of ¥83.94 per USD before resuming further declines to lower-lows – particularly if we get any US Debt Ceiling-induced bout of global risk aversion.
  • What should really get Japan’s currency revved up again to the downside is the pending discussion of who’s going to replace Shirakawa and his two deputy governors atop the BOJ board. Judging by the last two appointees (Takahide Kiuchi and Takehiro Sato joined the board in mid-2012), the candidates will likely be of the view that the central bank needs to play a larger role in overcoming persistent deflation.
  • By contrast, Shirakawa has long held the view that the BOJ cannot achieve its inflation target on its own. At a business conference in JAN ‘10, he remarked: “A lack of demand was the root cause of deflation and there was no magic wand [to overcome it].”
  • If former BOJ deputy governor Kazumasa Iwata is indeed a legitimate candidate to succeed Shirakawa, he would be especially in favor of a foreign asset purchase program; he suggested in a JAN ‘12 interview that the finance minister should let the central bank create a ¥50 trillion (then $643 billion) bond-buying fund to combat the yen’s gains.
  • Toshiro Muto and Heizo Takenaka are also being rumored as candidates for the BOJ governorship in the early goings and both are also in favor of structurally more aggressive action out of the BOJ – which is exactly what we have been calling for since we outlined our bearish TREND and TAIL bias on the yen back on SEP 27 (“IDEA ALERT: SHORTING THE YEN AS SINO-JAPANESE TENSIONS ESCALATE”).




Darius Dale

Senior Analyst

Blowback In Commodities

After a near five-year build up in commodity prices courtesy of the Federal Reserve's monetary policy, the bubble is finally deflating. In the last three months, we've seen the CRB Commodity Index, which measures 19 different commodities, fall --7% and gold (GLD) has dropped -6.1% during the same time period. There are plenty of hedge funds and institutional investors who are long gold who are grimacing when looking at charts; gold broke its TAIL risk line of $1671 this morning and can easily fall farther.


Blowback In Commodities - CRBindex

Earnings Expectations Reasonable Relative to #GrowthStabilizing

Takeaway: For the first three quarters of 2013, aggregate earnings comparables look reasonable relative to growth stabilizing

With newsflow fairly thin, Congress now idly prepping for a replay of December’s fiscal debate in February, the media searching for its next, post-Cliff myopic focal point, and econ data flow light, we thought we’d take a quick look at where we are as we head into earnings season


Our quantitative outlook and the preponderance of domestic and global macro data has us sticking with our #GrowthStabilizing view while we continue to monitor the Top 3 Risks to being in equities at current prices – Rising Oil Prices, Japan, & #EarningsSlowing.    As it relates to the 3rd point, below we highlight revision trends/sentiment, growth and margin comps, and quality of earnings trends for the SPX as we head into 4Q12 earnings season and 2013.   




SPX Aggregate Comparables

Topline Comps:  4Q12 has a reasonably hard comp, after that the growth compares ease through 3Q13.  Consensus estimates over the next four quarters show modest acceleration on a Y/Y basis thru 2013.  On a 2Y basis (normalizing for comp volatility) growth estimates continue to decelerate thru 3Q13.  In isolation, modest growth estimates and easing growth comparisons on both a 1Y and 2Y basis sets up neutral-to-favorable within the context of growth stabilizing and leaves some headroom for revenue beats should economic activity & real growth accelerate.  


Operating Margins:  EBIT Margin Comps remain modest in aggregate over the next four quarters with TTM operating margin changes running flat-to-negative.  While the comp setup isn’t particularly challenging we would note that we remain at the top of the corporate margin cycle. After the multi-year run of margin expansion into and out of the great recession, any residual juice left in efficiency gains and headcount reductions has been largely exhausted.  Wage inflation has been running negative on a real basis and with commodity costs down ~2% y/y on the quarter, input costs don’t appear to hold any particular upside here.   In short, the mean reversion risk for margins remains asymmetrically to the downside with earnings negatively levered to topline trends – a dynamic that is likely to remain in place over the intermediate term. 


Earnings:  EPS compares mirror topline trends, easing sequentially over the NTM.  Bloomberg Consensus is currently expecting a modest sales recovery in conjunction with margin re-expansion to drive a re-acceleration in earnings growth on a y/y basis.  On a 2Y basis, consensus expects flat growth thru 3Q13.  On balance, while we would be skeptical of the view that modest topline improvement can drive material operating leverage at this point in the cycle, the expectation for flat growth on a 2Y basis sits as a relatively neutral setup, in our view. 


Other Comp Considerations:

  • 4Q12:  Mgmt will have the crutch of Sandy & fiscal cliff related uncertainty to lean on if results disappoint.  The externalities in the quarter along with the legislative event catalysts just ahead on the timeline offer an easy out for mgmt and investors to dismiss or look past (now rearview) 4Q results
  • 2013 Guidance:  Initial guidance will be fluid and ranging (particularly in sectors like Healthcare & Defense) as managements attempt to handicap the fiscal policy outcomes of the debt ceiling and sequestration negotiations in February.  The uncertainty also offers management any easy avenue for low-balling estimates and conservatively managing expectations.
  • 1Q13:  1Q13 faces a particularly tough comp stemming from favorable weather in 1Q12 and in terms of working days due to Leap Year & the Easter shift.  For those companies levered to weekday traffic/volume, working days shift to a small tailwind in 2Q/3Q13


Earnings Expectations Reasonable Relative to #GrowthStabilizing - SPX Comps   Estimates


Earnings Expectations Reasonable Relative to #GrowthStabilizing - SPX EPS Comps   Estimates


Earnings Expectations Reasonable Relative to #GrowthStabilizing - LT Margins


Revision Trends:  Sentiment has recovered off the early 4Q12 lows but topline growth estimates remain modest.  Aggregate NTM Revision Trends across the SPX saw their most expedited drawdown since late 2008 post the conspicuous growth slowdown and the guide-down torrent that characterized 2Q12 earnings.  Revisions chased guidance lower out of 2Q & subsequently chased prices higher into November only to be stiff-armed by a further deceleration in growth in 3Q12 alongside resurgent EU sovereign concerns and the uncertainties and prospective growth consequences associated with the debt ceiling and fiscal cliff issues. 


Estimates have stabilized into year-end and are likely to track sideways over the next couple months as investors tread water moving through earnings and the debt ceiling/sequestration event catalysts that will peak in late February. On balance, expectations have rebased and the hurdle on sentiment isn’t particularly high given the weakness of the last few quarters the ongoing, prevailing fiscal policy uncertainty. 


Examining the historical, temporal  trend in annual estimates over the last few years reveals some consistencies.  Generally, new year optimism and favorable seasonal adjustment factors within the reported economic and employment data support growth estimates through 1Q.  As the mismatch between the optimism embedded in early year expectations and real and reported growth in 2Q/3Q emerges - due to inflationary, growth slowing impacts of fed policy initiatives and the reversal of seasonal adjustments in the data -  expectations get tempered and growth estimates fail to confirm their early year exuberance.   We’ll see if 2013 breaks the trend – while the impacts of seasonal adjustments in the reported government data will be largely the same as previous years, the debt ceiling/sequestration uncertainty will likely weigh on estimates and the Fed appears largely impotent here in regards to accelerating balance sheet expansion.    



Earnings Expectations Reasonable Relative to #GrowthStabilizing - SPX NTM Revision Trends


Earnings Expectations Reasonable Relative to #GrowthStabilizing - SPX Indexed Estimates


Earnings QualityA quick-quant means for assessing quality of earnings is to look at the distribution of beats/misses clustered around the zero line.  The Spread between companies missing by a small margin and beating by a small margin should be fairly normally distributed (or skewed modestly positive).   If the spread moves excessively positive its an indication that managements (in aggregate) may be more involved in messaging earnings by managing accruals to get to the number.  


Below we looked at the Spread between the number of companies beating estimates by less than 3% and the number of companies missing estimates by less than -3%.   The longer term quarter-to-quarter trend is somewhat equivocal (& complicated by big event impacts) but its interesting to note that the spread is again beginning to rise over the last few quarters as sales growth has slowed & margin levers are largely exhausted.  Something to keep an eye on as not all “E’s” in P/E are created equal.  We’ll also take a comb through our aggregate SPX financials to look at cash vs. accrual earnings trends as well.  


Earnings Expectations Reasonable Relative to #GrowthStabilizing - SPX QE Sales


Earnings Expectations Reasonable Relative to #GrowthStabilizing - SPX QE OM



Christian B. Drake

Senior Analyst


Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

HOUSING: Bouncing Back

Nearly every data point to come out of the housing market in the past month has been positive, save for MBA mortgage applications. With this morning’s data, we finally see mortgage volume bouncing back 10% (purchase) for the week ended January 4 after tumbling 14.8% in the last two weeks of December. Next week’s data is capable of another bounce to the upside considering that this past week’s data still includes the New Years eve/day week. As we head further into the new year, we remain bullish on housing stocks and housing-levered financial stocks.


HOUSING: Bouncing Back - YoY purch Shark Chart   make 1


HOUSING: Bouncing Back - purch short term


HOUSING: Bouncing Back - purch QoQ

Bullish: SP500 Levels, Refreshed

Takeaway: This market A) remains in a Bullish Formation and B) continues to signal higher-lows and higher-highs.



At every higher-low, literally, this contra-indicator stream I built for myself on Twitter tweets bearish. That’s bullish.


So is a strengthening Dollar, weakening Gold/Bonds, stabilizing global growth, etc…


Across my core risk management durations, here are the lines that matter to me most:


  1. Immediate-term TRADE overbought = 1490
  2. Immediate-term TRADE support = 1447
  3. Intermediate-term TREND support = 1419


In other words, this market A) remains in a Bullish Formation and B) continues to signal higher-lows and higher-highs.


That’s just bullish too.



Keith R. McCullough
Chief Executive Officer


Bullish: SP500 Levels, Refreshed - SPX

Bottoms Up

Client Talking Points

Corn Collapsing

As growth continues to stabilize, we’ll be keeping a close eye on crude oil. It’s the one commodity that isn’t crashing or falling hard and the one commodity that can bring us right back into #GrowthSlowing. Meanwhile, corn is making a lower-low this morning and gold is failing at its TAIL risk line of $1671. Those gold bugs out there, from hedge funds to grandparents, are in for a rude awakening this morning. At this point, they should be used to it.


The Three Risketeers

Keith was on CNBC’s Fast Money yesterday afternoon and discussed his “Top 3 Risks” for the market: 


1.       #EarningsSlowing

2.       Rising Oil Prices

3.       Japanese Policy


As we kick off another quarter of earnings, risk number one is worth watching. Just because Alcoa (AA) didn't bomb doesn't mean it's smooth sailing ahead. We’ve discussed the implications of higher oil prices in the note above, so that leaves us with Japan. You have Japan following the US in terms of monetary policy (burn the yen) and itching to buy European bonds. It’s truly scary what the Japanese are doing to the economy. These three risks should have every investor questioning their next move in the market.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

We believe ASCA will receive a higher bid from another gaming competitor. Our valuation puts ASCA’s worth closer to $40.


ADM has significantly lagged the overall market in 2012 over concerns that weakness in the company’s bioproducts (ethanol) and merchandise and handling segment will persist. Ethanol margins suffered from higher corn costs, as well as weak domestic demand and low capacity utilization across the industry. Merchandising and handling results were at the mercy of a smaller U.S. corn harvest. Both segments could be in a position to rebound as we move into 2013 and a new crop goes into the ground. With corn prices remaining at elevated levels, the incentive to plant corn certainly exists, and we expect that we will see corn planted fencepost to fencepost.


Margins are in a cycle trough as the USPS is on the brink. FDX is taking more share in the U.S. and following the recent $TNT news flow we think $UPS is in a tough spot.

Three for the Road


“@Hedgeye @CNBC I've been trying to trade on my own for 20 yrs. I never made any real money until I got real time alerts w/@KeithMcCullough.” -@TeaCardman


“Lying increases the creative faculties, expands the ego, and lessens the frictions of social contacts.” -Clare Booth Luce


Mortgage application volume bounced back 10.0% (purchase) in the week ended January 4th, after tumbling 14.8% in the last two weeks of December according to the Mortgage Bankers Association.

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.