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QUADRILL-YEN: NOT YET, AT LEAST

Takeaway: While the BOJ disappointed short-term market expectations, we still think the outlook for Japanese monetary POLICY is decidedly dovish.

SUMMARY BULLETS:

 

  • From our purview, Governor Masaaki Shirakawa and his fellow board members met Prime Minister Shinzo Abe & Finance Minister Taro Aso halfway at best on this one amid his constant struggle to protect BOJ independence.
  • On the explicitly dovish front (i.e. incrementally bearish for the yen) is their well-telegraphed +2% CPI target (as forecasted by 21 of 23 economists), their less-telegraphed accelerated time frame (i.e. “at the earliest possible time”) and the fact that the recently revived Council on Economic and Fiscal Policy will now monitor the BOJ’s progress at achieving this end until the target is reached.
  • What we found quite hawkish (i.e. bullish for the yen), relative to expectations, is their commitment to seeing their current ¥76 trillion Asset Purchase Program through to its culmination at the end of calendar 2013, prior to actually implementing the open-ended Asset Purchase Program – which initially targets ¥13 trillion ($146.5B) per month of mostly low-impact securities (¥10 trillion will be Japanese Treasury bills, which are more-or-less cash substitutes in Japan).
  • Forex market participants (speculators are still net short) didn’t like this latest iteration of Delaying the Drugs, which is why into and through this latest BOJ board meeting we have anchored on what is likely to become of Japanese monetary POLICY after Shirakawa and his two deputy governors are replaced in late-MAR/early-APR.
  • All told, our TREND and TAIL bearish thesis on the Japanese yen continues to play out in spades. And while we expect the pace of depreciation to slow over the next couple of months, we do think early 2Q and early 3Q catalysts will  continue to perpetuate a weaker yen over the intermediate term. As we suggested back on DEC 17th, ¥100 on the USD/JPY cross continues to be a reasonable target to hit prior to any major reassessment of Japanese monetary and fiscal POLICY.

 

With the conclusion of the Bank of Japan’s two-day monetary POLICY meeting overnight, the BOJ and Japan’s Cabinet Office issued a joint statement confirming already-reset market expectations for “price stability” in Japan. The primary deltas on the POLICY front include:

 

  • Adopting a joint +2% INFLATION target to be achieved at “the earliest possible time”: “The Bank recognizes that the inflation rate consistent with price stability on a sustainable basis will rise as efforts by a wide range of entities toward strengthening competitiveness and growth potential of Japan’s economy make progress. Based on this recognition, the Bank sets the price stability target at 2 percent in terms of the year-on-year rate of change in the consumer price index (CPI).” (source: BOJ; six of nine voted in favor of this change)
  • Adopting open-ended asset purchases to commence in JAN ’14: “With respect to the Asset Purchase Program, after completing the current purchasing method, from January 2014, the Bank will introduce a method of purchasing a certain amount of financial assets every month without setting any termination date. Particularly, for some time, following the introduction of this method, the amount of monthly purchases is specified at about 13 trillion yen, 2 trillion yen of which is JGBs. As a result of these measures, the total size of the Asset Purchase Program will be increased by about 10 trillion yen in 2014 and is expected to be maintained thereafter.” (source: BOJ; unanimous decision)

 

With the inclusion of these latest measures, Chief Cabinet Secretary Yoshihide Suga was out suggesting that the need to revise the 1998 Bank of Japan Act had “lessened”. From our purview, Governor Masaaki Shirakawa and his fellow board members met Prime Minister Shinzo Abe & Finance Minister Taro Aso halfway at best on this one amid his constant struggle to protect BOJ independence.

 

On the explicitly dovish front (i.e. incrementally bearish for the yen) is their well-telegraphed +2% CPI target (as forecasted by 21 of 23 economists), their less-telegraphed accelerated time frame (i.e. “at the earliest possible time”) and the fact that the recently revived Council on Economic and Fiscal Policy will now monitor the BOJ’s progress at achieving this end until the target is reached.

 

What we found quite hawkish (i.e. bullish for the yen), relative to expectations, is their commitment to seeing their current ¥76 trillion Asset Purchase Program through to its culmination at the end of calendar 2013, prior to actually implementing the open-ended Asset Purchase Program – which initially targets ¥13 trillion ($146.5B) per month of mostly low-impact securities (¥10 trillion will be Japanese Treasury bills, which are more-or-less cash substitutes in Japan).

 

Since delaying the start of such a program is particularly contrary to adopting an accelerated time frame for achieving the now-joint price stability target, we interpret this maneuver as the outgoing Shirakawa's issuance of somewhat of a proverbial "middle finger" to the Cabinet; it appears that he does not want his already-lackluster legacy further tainted by politicized money printing.

 

Also hawkish for the yen, Economics Minister Akira Amari recently said at the World Economic Forum Davos that the Japanese government has no political intention to guide the yen lower or higher. This bold-faced lie is a clear signal that Japan is increasingly attentive to the heightened political push-back upon their beggar-thy-neighbor policies of late. To the extent they want to calm the markets, they may slow their implementation of further reflationary measures with respect to the next 2-3 months.

 

Additionally, it was reported that the Japanese government wants to cut its sovereign debt/GDP ratio by half of the FY10 level by FY15 (i.e. three years from now). In addition, fiscal policymakers are said to desire a primary balance surplus by 2020. We won’t even dignify these outlandish targets with any degree of analysis (i.e. Japan’s debt/GDP ratio isn’t going to drop by ~100 percentage points in three years), but just the mere mention of fiscal sobriety out of Japan could and should be interpreted as bullish for the yen – at least in the short term.

 

All told, currency market (speculators are still net short) didn’t like this latest iteration of Delaying the Drugs, which is why into and through this latest BOJ board meeting we have anchored on what is likely to become of Japanese monetary POLICY after Shirakawa and his two deputy governors are replaced in late-MAR/early-APR. For more details here, please review our 1/16 note titled: “BEST IDEAS UPDATE: RE-SHORTING THE YEN HERE” (a position we’ve since booked for a ~1.7% gain).

 

QUADRILL-YEN: NOT YET, AT LEAST - 1

 

It is well-documented that Shirakawa fundamentally believes that Japan cannot overcome deflation with monetary POLICY alone, so we look for the Diet to replace him and his loyal deputies with candidates that support the new Cabinet’s pledge for bold monetary easing. Japanese bureaucrats are right sick of Shirakawa being one-upped by Ben Bernanke and Mario Draghi.

 

QUADRILL-YEN: NOT YET, AT LEAST - 2

 

We continue to affirm that Japanese monetary POLICY must, and likely will, get dramatically more aggressive in pursuit of the Abe/Aso agenda (i.e. +5% “monetary math”).

 

QUADRILL-YEN: NOT YET, AT LEAST - 3

 

In light of all this, we continue to look towards mid-to-late FEB when the Diet is expected to start reviewing candidates for the pending openings. From our purview, the top three candidates out to an early lead among consensus chatter include former BOJ Deputy Governor Toshiro Muto, Asian Development Bank President Haruhiko Kuroda and former BOJ Deputy Governor Kazumasa Iwata.

 

QUADRILL-YEN: NOT YET, AT LEAST - 4

 

Elsewhere in the realm of Japanese POLICY, Prime Minister Shinzo Abe sent a letter to Chinese leaders via an envoy who suggested that the dispute should be shelved and "left for future generations" to resolve; additionally, the envoy requested a face-to-face meeting between Abe and new Chinese Communist Party General Secretary Xi Jinping.

 

This is the first major step in the right direction with regards to alleviating the Senkaku/Diaoyu Islands dispute and, to the extent it is appropriately follow up upon, should paint a brighter picture for Japanese GROWTH over the intermediate term via increased manufacturing and export activity.

 

All told, our TREND and TAIL bearish thesis on the Japanese yen continues to play out in spades. And while we expect the pace of depreciation to slow over the next couple of months, we do think early 2Q and early 3Q catalysts will  continue to perpetuate a weaker yen over the intermediate term. As we suggested back on DEC 17th, ¥100 on the USD/JPY cross continues to be a reasonable target to hit prior to any major reassessment of Japanese monetary and fiscal POLICY.

 

Darius Dale

Senior Analyst

 

QUADRILL-YEN: NOT YET, AT LEAST - 5


MCD SALES PREVIEW

McDonald’s is set to report December sales, along with 1Q earnings, tomorrow before the market open.

 

 

General View

 

Recently, we’ve been vocal on our view that McDonald’s earnings are likely to disappoint in 2013.  We are continuing to advise clients to be patient on the long side of MCD until expectations for next year come down. We believe that, aside from the macro environment and lapping difficult partially-weather-driven comps, self-inflicted wounds, that management has not yet owned up to, are also likely to impede earnings growth over the next twelve months.

 

 

Sales Preview

 

McDonald’s reports December sales, along with 1Q earnings, tomorrow before the market open.  Consensus is anticipating a sequential deceleration in two-year average trends for global trends.

 

Below, we go through what we would view as good, bad, or neutral comparable restaurant sales numbers for McDonald’s three regions in December.  For comparison purposes, we have adjusted for historical calendar and trading day impacts (but not weather).

 

Compared to December 2011, December 2012 had one additional Monday, one additional Sunday, one less Thursday, and one less Friday.  In 2012, Christmas fell on a Tuesday versus Sunday in 2011.   We expect a modestly positive impact on the headline numbers for December. 

 

MCD SALES PREVIEW - mcd preview

 

 

United States – facing a compare of 9.8%, including a calendar shift of roughly 0.7%, varying by area of the world:

 

GOOD: A print higher than -1% would be received as a positive result as it would imply, on a calendar-adjusted basis, an acceleration in two-year average trends versus November’s strong result.  November’s same-restaurant sales growth overstated true trends in the US, to a degree, as a sizeable calendar shift boosted the headline numbers.  A heavy focus on the Dollar Menu also aided results in November.  The question for December will be how much of an impact the McRib will have had.  Our expectation is for a print of -1.7%.

 

NEUTRAL: A result between -1% and -2% would imply calendar-adjusted two-year average trends roughly flat versus November.   Decelerating trends would arguably lend credence to our contention that self-inflicted wounds, and not only macro, have been impacting MCD sales in recent quarters.

 

BAD: Same-restaurant sales growth less than -2% would imply a sequential deceleration in two-year average trends in the United States.  We would expect the stock to react negatively to such a result.

 

MCD SALES PREVIEW - mcd us preview

 

 

Europe – facing a compare of 10.8%, including a calendar shift of roughly 0.7%, varying by area of the world:

 

GOOD: Better than -3% would be viewed as a stronger-than-expected result.  On a calendar-adjusted basis, such a result would imply a sequential acceleration in two-year average trends.  Soft economic conditions persisted in Europe during November with Germany one of the underperforming markets.  We would note the sequentially improving “Zew Germany Expectations of Economic Growth” index as being a positive sign for MCD Europe in December, but we continue to expect sluggish trends across the pond.  Our expectation is for a print of -3.3%.

 

NEUTRAL: A print between -3% and -4% would be received as neutral as it would imply calendar-adjusted two year average trends roughly flat versus November.

 

BAD: Weaker-than- -4% same-restaurant sales growth would imply, on a calendar-adjusted basis, two-year average trends in line with the weakest months of 2012: February and August.

 

MCD SALES PREVIEW - mcd europe preview

 

 

APMEA – facing a compare of 6.5%, including a calendar shift of roughly 0.7%, varying by area of the world:

 

GOOD: A print of better than 0.5% would be a positive result for MCD APMEA.  Weakness in Japan is ongoing and we are not expecting much from this division in December as the fallout continues around the KFC Chicken scandal.  While MCD is a competitor of KFC’s, we feel that some impact may follow through to other western chains.  Our expectation is for a print of 0.5%.

 

NEUTRAL: A print between -0.5% and 0.5% would be received as neutral by investors as it would imply calendar-adjusted two year average trends roughly flat versus November.

 

BAD: Same-restaurant sales growth slower than -0.5% in December would imply sequential deceleration in two-year average trends.

 

MCD SALES PREVIEW - mcd apmea preview

 

 

Howard Penney

Managing Director

 

Rory Green

Senior Analyst

 

 


Japanese Yen Gets Aso'd

Early this morning, the Bank of Japan announced it would enter into an "open ended" asset purchase program and would "firmly" target 2% inflation. As a result, the Japanese Yen spiked over 1% on the news, much to the chagrin of those who were short the currency. Japan's Finance Minister Taro Aso and Prime Minister Shinzo Abe are determined to fight deflation, calling the move ""...a bold review of monetary policy, an epoch-making document." Timing is everything in this market. Our Global Macro Theme of #QuadrillYen rings truer than ever today.

 

Japanese Yen Gets Aso'd - DAYEN


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.65%
  • SHORT SIGNALS 78.63%

Hedge Funds Chase Corn

Corn prices have inched upward after the recent World Agricultural Supply and Demand Estimates (WASDE) and Quarterly Stocks report showing an increase in demand and a lower harvest. Hedge funds have piled into long corn positions as they chase the uptick in price. Net positioning (net long positions/net short positions) remains bullish at 166%, well off the ’12 highs that we saw back in December (525%). We have no position in corn right now but remain bearish on the commodity.

 

Hedge Funds Chase Corn - corn1


HOUSING: Inventory Falls Lower

Existing home inventories fell further in December by 170,000 units, another positive data point for the housing market that falls in-line with our second Q1 2013 Global Macro Theme of #HousingsHammer. Don’t let the 1% month-over-month decline in existing home sales we saw print this morning get to you; the housing recovery is still underway and in full effect. It's worth noting that this morning's decline in inventory can act as a catalyst for driving home prices higher in the coming year.

 

HOUSING: Inventory Falls Lower - inventory 2 normal


FNP: Kate in the Spotlight

Takeaway: Kate Spade was unofficially endorsed by the Obama fashionistas at Monday’s Presidential Inauguration.

The Kate Spade brand got a little kicker yesterday in the nation’s capital as Sasha Obama wore a Kate Spade dress and overcoat to President Obama’s second inauguration. While this isn’t exactly a stock moving event, we think it’s a brand validator given that the First Lady is arguably the most trend-setting First Lady since Jackie O fifty years ago. We’ve seen that thus far with brands like J Crew, and the addition of Kate Spade into the mix can’t hurt by any means. Again, this does little to alter our value for FNP today as it is minor in the grand scheme of things, but the underlying strength and value of Kate Spade is core to any investment thesis, and this is a nugget of evidence that it still holds true.

 

 

FNP: Kate in the Spotlight                 - FNP KatePI

 

 


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