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BEST IDEAS UPDATE: RE-SHORTING THE YEN HERE

Takeaway: Just managing immediate-term risk within the construct of our intermediate-to-long-term theme.

SUMMARY CONCLUSIONS:

 

  • Our proprietary quant signals are telling us now is a good time to re-short the Japanese yen, which we’ve done through the etf FXY. We’ve got levels for that security, the USD/JPY exchange rate and the Nikkei in the charts below.
  • Regarding Japanese equities specifically, shorting the yen here probably means some reflation across Japanese stocks – almost by default to some degree. Enjoy this trade while it lasts; like the many others before it, this latest Keynesian experiment won’t end well for the Japanese economy.
  • In addition to this update on Japanese risk, we take a step back and walk through our broader process in greater detail for those of you who may be interested. As always, we're around to dialogue further.

 

Earlier this morning, we got our quantitative signal to re-short the Japanese yen, our Macro team’s best idea on the short side with respect to the TREND and TAIL durations.

 

Since peaking intraday at ¥88.62 per USD on early Monday morning and €120.05 per EUR on Sunday night, Japan’s burning currency has corrected to another lower-high on the strength of concerned commentary out of Japanese officials and some degree of profit taking ahead of next week’s BOJ board meeting.

 

@Hedgeye, we always find it helpful to remind existing clients and educate new clients on our process, which is two-fold in nature:

 

  1. Fundamental RESEARCH themes – longer term in nature (intermediate-term TREND and long-term TAIL)
  2. Quantitative RISK MANAGEMENT overlay – shorter term in nature (immediate-term TRADE)

 

Adhering to this comprehensive approach helps us to:

 

  1. Extract alpha by trading risk ranges within the construct of a security or market’s directional trend;
  2. Avoid “swinging” at outside pitches (i.e. head fakes) on the research front; and
  3. Hone in on market timing around the key events and catalysts embedded in our best ideas.

 

With respect to the Japanese yen, we became the bears on Japan’s currency back on September 27, and, as we pointed out on yesterday’s 1Q Macro Themes presentation, there are a number of reasons why we think the yen will continue to trend  lower vs. peer currencies over the intermediate term. To quickly recap those POLICY catalysts:

 

  • MONETARY: A +100bps revision to the BOJ’s current +1% INFLATION target (likely at the JAN 21-22 BOJ board meeting);
  • FISCAL: A meaningful expansion of public expenditures and sovereign debt issuance in the FY13 budget on top of the recent “large scale” stimulus package (additional details in the coming weeks);
  • MONETARY: An erosion of BOJ independence, with the BOJ governorship and two deputy governorships eventually assumed by politicized puppets (late-MAR/early-APR);
  • MONETARY: Experimental monetary POLICY – particularly a foreign asset purchase program (likely several weeks after the previous catalyst materializes);
  • FISCAL: The LDP wins a majority in the Upper House pending elections late-JUL/early-AUG, paving the way for a full-fledged assault on Japan’s public finances; and
  • FISCAL: A VAT hike delay (discussions to flare up in late 2013).

 

As it relates to the aforementioned commentary, both Economy Minister Akira Amari and Chief Cabinet Secretary Yoshihide Suga made public statements this week highlighting the expected adverse impact of “excessive” exchange rate depreciation upon the Japanese economy.

 

Personally, I think they were simply jawboning to reduce international criticism of their beggar-thy-neighbor monetary policies, as highlighted by recent comments out of Korean, Eurozone and Russian officials in the week-to-date. All this means to us is that the yen won’t go to ¥100 per USD next week…

 

As we pointed out on slide #52 in the aforementioned presentation, it truly is Japan’s turn to take center stage in the global Currency War.

 

BEST IDEAS UPDATE: RE-SHORTING THE YEN HERE - 1

 

As such, we see no need to alter to our structural bias on the yen in light of these explicitly hawkish comments. Prime Minster Abe and Finance Minster Aso are likely going to need to see a much lower exchange rate(s) if they are even going to even sniff their +3% nominal GROWTH and +2% INFLATION targets on a sustainable basis.

 

Regarding the upcoming BOJ board meeting, to some degree, their likely adoption of a +2% INFLATION target and incremental monetary easing was somewhat priced in Sunday night/Monday morning, prompting some investors to reduce positions. Moreover, the fact that Amari himself plans to attend the meeting may be quashing some hopes of anything truly meaningful on the easing front.

 

While this may be true to some degree, we continue to look well past next week’s meeting and to mid-FEB when Japanese policymakers plan to commence discussions on who will replace the upcoming three vacant seats atop the BOJ board.

 

BEST IDEAS UPDATE: RE-SHORTING THE YEN HERE - 2

 

All told, our proprietary quant signals are telling us now is a good time to re-short the Japanese yen, which we’ve done through the etf FXY. We’ve got levels for that security, the USD/JPY exchange rate and the Nikkei in the charts below. Regarding Japanese equities specifically, shorting the yen here probably means some reflation across Japanese stocks – almost by default to some degree.

 

Enjoy this trade while it lasts; like the many others before it, this latest Keynesian experiment won’t end well for the Japanese economy.

 

Darius Dale

Senior Analyst

 

BEST IDEAS UPDATE: RE-SHORTING THE YEN HERE - 3

 

BEST IDEAS UPDATE: RE-SHORTING THE YEN HERE - 4

 

BEST IDEAS UPDATE: RE-SHORTING THE YEN HERE - 5


HOUSING: Explosive Growth

Two more positive datapoints for the housing market have recently come out: household formation and mortgage demand. Household formations accelerated to a new high in December, +1.95% on a year-over-year basis versus November’s year-over-year growth rate of 1.73%. Households are being formed at the fastest rate since the start of the financial crisis several years ago and it’s quite striking to see how quickly housing is recovering as a whole. 

 

 

HOUSING: Explosive Growth - census hh formation dec 12

 

 

Meanwhile, mortgage applications surged, rising 12.9% week-over-week versus last week’s 10% rise. That brings the index level for purchase applications to 205, the highest level we've seen since the downturn bottomed. Total mortgage volume for the first two weeks of the year are running 6% below the full-year 2012 average.

 

 

HOUSING: Explosive Growth - mba short term

 

HOUSING: Explosive Growth - mba purch shark yoy


IDEA ALERT: BUYING EAT

Keith added EAT to the long side of our Real Time Alerts this morning at $32.42.  Brinker is our favorite casual dining name and, despite the many headwinds facing the group, we believe that Chili’s will continue to take share versus its competitors.

 

We expect Chili’s to produce 2QFY13 same-restaurant sales in the region of 2%.  Kitchen enhancements and remodels at Chili’s continue to aid top-line momentum and lead, in our view, to an upside surprise versus the consensus estimate of 1.5% SRS.  It will be important for results to continue to demonstrate continuing progress on the restaurant operating margin line as the benefits of the remodel program continue to flow through. 

 

At 7.5x EV/EBITDA, the stock is being valued below the average casual dining stock at 7.7x.  As well as the attractive multiple, we believe that there is modest upside to the Street’s EPS estimate, which is currently at $2.32, to $2.38-2.40.

 

Brinker’s shares represent the best way to play casual dining on the long side, in our view, particularly if macroeconomic growth continues to stabilize.  However, competitive dynamics, including the impact of Darden’s explicit desire to sacrifice margin to gain traffic should not be ignored.  It's difficult to know how great an impact Darden's "price war" will have on Chili's - particularly Chili's newly remodeled stores - but given the recent declaration from Orlando, we would advise close monitoring of long positions in any casual dining shares.

 

IDEA ALERT: BUYING EAT - eat eeg

 

 

Quantitative View

 

Our Macro Team’s quantitative view of the stock is that near-term TRADE resistance and support lie at $33.95 and $32.23, respectively.  Intermediate-term TREND support is at $31.56.

 

IDEA ALERT: BUYING EAT - brinker levels

 

 

Howard Penney

Managing Director

 

Rory Green

Senior Analyst

 

 


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Multi-Year High In Real Earnings Growth

Takeaway: Real Earnings Growth Accelerated to a multi-year high in December. The Dollar - Inflation - Real Growth connection remains the one to watch.

 

The continued burn-off in USD-Equity correlations we saw yesterday with Dollar Up, Stocks Up, & Oil Down remains the bullish factor cocktail we’d like to see persist for us to successfully bridge the inflection gap between #growthstabilzing & real growth accelerating. 

 

The inverse relationship between USD appreciation and energy and commodity deflation remains pronounced across durations. Similarly, the inverse relationship between real earnings growth & commodity inflation over the last 5 years has been distinct – in addition to inflations’ direct drag on the calculation of real earnings growth, it’s likely that as input costs rise and/or real consumption growth slows, employer’s look towards managing the SWB line as a margin supportive offset. 

 

Below we show the trend in Real Earnings Growth (updated for this morning’s release) along with a long duration view of the relationship between Commodities Price Growth, the US Dollar, and  Real Earnings Growth (note that commodity prices are inverted in the charts).   The takeaway from the chart series below is really very simple with the data implying: 

 

USD Higher --> Energy/Commodities lower --> Real Earnings/Real Growth Higher

 

As simplistic as this Dollar based flow model is, it remains the outstanding, untried policy transmission mechanism most capable of catalyzing sustainable real growth both domestically & globally, in our view. 

 

The Real Earnings update for December showed Real Weekly Earnings growth accelerating to +0.6% - a new multi-year high and an obvious positive in the wake of the elimination of the 2% payroll tax holiday to start calendar 2013.  The USD remains bullish on TRADE & TAIL durations and, alongside an easy comp setup through mid-year, should support further positive growth in real earnings should the USD bid continue. 

 

Will legislators & policy makers make a genuine go at sustainable fiscal consolidation domestically, or even just stay out of the way?  Will the phase transition in Japanese monetary policy promised by Taro Aso et al. continue to provide a relative bid to the dollar?  We don’t know either -  but so long as prices continue to confirm and the Dollar Up, Stocks Up dynamic can perpetuate itself, the immediate term game plan on the equities side remains to buy the Dips.    

 

Christian B. Drake

Senior Analyst 

 

 

Multi-Year High In Real Earnings Growth - USD vs CRB

 

Multi-Year High In Real Earnings Growth - Real Weekly Earnings

 

Multi-Year High In Real Earnings Growth - Inflation vs Real Earnings

 

Multi-Year High In Real Earnings Growth - Gas Price vs Real Earnings

 

 


Apple Picking

Takeaway: Here’s a look at our recent trading signals around Apple stock. $AAPL

Below is an excerpt of a note published to our institutional clients earlier this morning. It provides insight into how we trade Apple stock.

 

We bought Apple (AAPL) at immediate-term TRADE oversold yesterday.

 

That doesn’t mean we love Apple (AAPL) long-term here (see chart). It just means what it means – we are at war with consensus and our quantitative process was signaling immediate-term exhaustion on the sell side of a stock that we risk manage like an ETF.

 

Before I get AAPL geniuses in a heat about that, here are the last 3 big signals our process has delivered:

 

1.       June 1, 2012 at $571.86 = BUY  

2.       September 28, 2012 at $677.74 = SELL

3.       December 17,2012 at $502.50 = BUY

 

No research. Just math, and some behavioral context.

 

How many people in our profession thought/think that it’s their own unique, non-inside info, qualitative research edge that made them “smart” being long AAPL? I don’t know. All I know is that a lot of hedge funds have gone away for doing the inside info thing, and a lot more research-only funds that don’t have a quantitative risk management overlay get mad at me.

 

That’s progress.


Bullish Formation: SP500 Levels, Refreshed

Takeaway: The Risk Range is tight – if 1466 breaks, first line of support is 1456.

POSITIONS: 11 LONGS, 8 SHORTS @Hedgeye

 

This is what Bullish Formations do, they frustrate people inasmuch as bearish ones do.

 

They get overbought and they get oversold. This one was overbought, then corrected (briefly), and isn’t as overbought as it was.

 

Overbought doesn’t always happen at the same price. Time, Volume, and Volatility signals all matter – so does the catalyst calendar. It’s a lot, but managing beta risk isn’t for rookies either.

 

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

 

  1. Immediate-term TRADE overbought = 1478
  2. Immediate-term TRADE support = 1466
  3. Intermediate-term TREND support = 1421

 

In other words, the Risk Range is tight – and I like it tight, because that makes our job easier before it becomes more difficult again (it will). If 1466 breaks, first line of support is 1456.

 

KM

 

Keith R. McCullough
Chief Executive Officer

 

Bullish Formation: SP500 Levels, Refreshed  - SPX


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