The Economic Data calendar for the week of the 18th of March through the 22nd of March is full of critical releases and events. Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.
Takeaway: The confirmation of H. Kuroda, H. Nakaso and K. Iwata as governor and deputy governors of the BOJ is structurally bearish for the yen.
After weeks of media speculation, parliamentary deliberation and general consternation, the candidacies of Haruhiko Kuroda (Governor), Hiroshi Nakaso (Deputy Governor) and Kikuo Iwata (Deputy Governor) were approved by Japanese parliament and are poised to officially take over the BOJ on MAR 20. NOTE: Kuroda will have to reappear in front of the Diet again in early APR to secure “official” approval for his 5Y term as a result of Shirakawa’s early exit; he’s got the highest parliamentary approval rating of all three, so we expect little-to-no hiccups there.
JAPAN’S “INVERSE VOLCKER MOMENT”
As long as the LDP has its heart set on taking the Upper House via election in late JUL and “5% monetary math” (+2% inflation and +3% nominal growth) at the core of the Abe administration’s economic agenda, it would be a fool’s folly to sit here and expect that BOJ isn’t poised to “do whatever it takes” (per Draghi and, now, Kuroda) to achieve those goals – at least the latter of the two.
Much like consensus had become numb to high inflation and economic volatility in the US during the 1970s, consensus has become equally as numb to deflation and no growth in Japan over the past ~20 years. Paul Volcker’s aggressive hawkishness changed the US’s circumstances in the early 80s; we expect Kuroda & Co. to attempt to do the same in Japan (only via aggressive dovishness) in the months and quarters to come.
The following chart shows just how much of an economic phase change the Abe administration is trying to perpetuate in Japan. He’ll need – or, more importantly, he thinks he’ll need – a lot of “CTRL+P” from the BOJ to get there.
To the extent they do not make material progress in working towards those targets, however, we expect to see a marked acceleration of both external and self-imposed political pressure upon the holdovers on BOJ board to step up and embrace change – with the threat of a reduction in the central bank’s autonomy currently imposed by the 1998 BOJ Act always hanging in the background.
CONSENSUS STILL DOESN’T GET IT
In a research note on Monday, we detailed exactly why we think consensus among the buy side, the sell side and Japanese corporations is not even in the area code of being bearish enough on the Japanese yen. In that vein, this morning, former MOF official Eisuke Sakakibara (known as "Mr. Yen" during his tenure) was out making the case that the USD/JPY cross won’t breach 100 – despite the aforementioned phase change in Japanese monetary policy.
What people like Mr. Sakakibara are missing is that the BOJ now has the baton as it relates to being the most aggressive DM central bank. Currencies crosses are inherently relative, so as Japan accelerates its easing measures, keep in mind that the US will be doing the exact opposite – both fiscally and monetarily – as #GrowthStabilizes in the good ol’ U-S-of-A.
And if the dollar-yen trade has indeed run its course (the USD/JPY cross is up nearly +24% since we authored the thesis back on 9/27/12) and we’re just totally wrong on the yen from here because the BOJ likely disappoints what are admittedly elevated market expectations, then there’s over -31% downside from today’s closing price to the NOV lows in both the Nikkei 225 and TOPIX indices – markets that have become stapled to ski lifts on int’l flows and policy hopium. It should be duly noted that the broad balance of Japanese high-frequency economic data and growth expectations remain squarely in the dog house.
All told, we remain the bears on the Japanese yen vis-à-vis the USD and expect further material depreciation over the intermediate-term TREND and long-term TAIL. Much like the Chavez’s Venezuela and the Weimar Republic before it, we also expect Japan’s currency-debasing Policies To Inflate to continue inflating the Japanese equity market as well.
Have a great weekend,
P.S. For those of you who may be relatively new to our thesis or how our team approaches currency market risk in general, we’ve taken the liberty to outline all of our recent work on this subject below. The yen and Japanese equities are obviously hot topics; email us if you’d like to dig in further.
Takeaway: We're shorting the Japanese yen here as risk heightens across the Japanese economy and Japanese capital markets.
Takeaway: We remain bearish on the JPY relative to the USD across our TRADE, TREND and TAIL durations.
Takeaway: We are once again short the yen and remain bearish on the JPY in light of Japan’s deteriorating cyclical and structural GIP outlooks.
11/15: HEDGEYE BEST IDEAS CALL
Takeaway: We continue to see risk that Japan experiences a currency crisis (peak-to-trough decline > 20%) over the intermediate term.
Takeaway: Japan’s fiscal POLICY outlook augurs bearishly for the yen over the intermediate term.
Takeaway: Japanese policymakers continue to attack the yen, both rhetorically and with incremental POLICY maneuvers.
Takeaway: And 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, we continue to flag material risk of Japanese currency and sovereign debt crises borne out of those same policies with respect to the long-term TAIL.
Takeaway: Just managing immediate-term risk within the construct of our intermediate-to-long-term theme.
Takeaway: While the BOJ disappointed short-term market expectations, we still think the outlook for Japanese monetary POLICY is decidedly dovish.
Takeaway: Japanese policymakers’ gross misinterpretation of economic history portends negatively for the ailing yen.
Takeaway: The path towards a lower yen is once again clear with the recent mollification of int’l criticism of Japan’s “beggar thy neighbor” policies.
2/14: STAY SHORT THE YEN
Takeaway: Japan’s bleak cyclical data remains the perfect handoff to the structural policy changes outlined in our bearish thesis on the yen.
Takeaway: A confirmation of Haruhiko Kuroda as the next BOJ governor is explicitly bearish for the Japanese yen over the intermediate-to-long term.
2/27: HEDGEYE BEST IDEAS CALL
Takeaway: On balance, this weekend’s data is unsupportive of our bullish bias on Chinese equities and very supportive of our bearish bias on the yen.
Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.
One would be hard pressed to find a segment of the consumer economy performing worse than regional gaming. The stocks have been a different story.
Mature regional gaming markets should post a combined gross gaming revenues (GGR) decline of close to 10% in February (still waiting on Louisiana/Mississippi to report). This ugly performance follows a very disappointing 6% decline in January. January was even more surprising based on our model which predicts monthly GGR based on sequential trends adjusted for seasonality and other factors such as the calendar, weather, and one-time events. As can be seen in the following chart, January should’ve been close to flat YoY.
It’s not like the companies can make up for it in margin; costs have already been cut to the bone and the casinos are highly fixed cost businesses. Combine the operating leverage with very high financial leverage and the stocks should be getting creamed in a declining demand environment, right? The chart below tells a different story. Regional gaming stocks have outperformed the market since mid-November. So what gives?
For the most part, it comes down to corporate finance:
The question is what happens now. We think the rest of 2013 will mark the return of focus on fundamentals. This will not be good for the stocks. Our EBITDA estimates for Q1 and 2013 fall below the Street for each regional company with the surprising exception of BYD. We’re in-line with BYD probably because everyone hates the company and it was the most recent to announce earnings.
Takeaway: Here are highlights of a call we hosted with TF Market Advisors' Peter Tchir, an expert on global credit markets.
The Hedgeye Macro team Friday hosted a conference call with Peter Tchir (@TFMkts), founder of TF Market Advisors, an independent provider of macro research and market information. Peter’s expertise in global credit markets has made him a valued advisor to hedge funds, money managers and asset allocation firms. Peter looks at global markets from a Macro perspective, watching trends in fixed income as they signal upcoming events in other markets, including currencies and equities.
In the near term, Peter sees more risk than upside in the US equities market.
He believes the emerging awareness of risks from Europe, combined with a bottomless well of QE will soon have investors seeing stock valuations as overextended. There are high hopes for an LBO boom, which he believes will not materialize, and risk contagion will also spread from weakness in emerging economies, all of which should leave the S&P vulnerable for a pullback to the 1,500 level.
Peter believes Spain and Italy will ultimately become buying opportunities for investors who trade global ETFs. But not until there is a perception that the ECB has the ability to make something happen in recalcitrant economies.
At some point, the Fed will end its QE program. They will not signal it ahead of time, but it will be important to recognize when it does occur.
Among other effects, Peter believes investors will reassess the position of the banks, which he says will do much better under Dodd Frank than most people predict. Meanwhile the US market, which he sees as mildly overvalued, should retrench, giving patient buyers an opportunity to bargain hunt.
Peter sees a number of major market segments where investor perception is at odds with reality. “When perception catches up with reality,” he says, “those are always the most interesting moves.”
Follow the Money: US Equity Markets and the Fed
Peter says, don’t listen to what the Fed says – look at what the Fed owns.
Bernanke says the Fed will not sell bonds. Peter says the Fed can’t sell bonds. They have such a massive position that, should they sell a bond, the market will rush to place enormous pressure on Treasurys.
The Fed owns 40% of all Treasury bonds with maturities in the 5-20 year range, and nearly as much in the 20-30 year. The Fed no longer participates in this market. They have become the market. As we are hearing in this morning’s JP MorganChase senate testimony, when you get too big in a market, you become its prisoner. Fed Chairman Bernanke is “The Washington Whale.”
The Fed wants to maintain momentum in housing. Since mortgage rates are tied to the 10-year Treasury, this is all the more reason why, says Peter, the Fed not only won’t sell bonds – they can’t sell.
This continues to create a bind in the economy. The Fed is both buying mortgages, and controlling rates, squeezing others out of the mortgage market. meanwhile, banks continue buying far more Treasurys than mortgages, meaning they are financing the government instead of the economy.
JPMorgan recently laid off a large number of employees in its mortgage unit – a sign of widespread concern that a true private market for mortgages may never reappear. Peter says we need to return to the normal scenario of Banks lending money to People and to Businesses. There will almost certainly be a volatility hiccup on the way, but once the Fed finally steps back from its Quantitative Easing (QE) program, the economy will emerge much stronger.
How does this work its way into the stock market?
The Fed’s recent stress test scenarios all assumed 10 year rates at around 2%, but they were able to achieve a projected result, in at least one case, of stock prices doubling, coupled with 4% GDP growth. On the way to a double, stock first declined substantially, but the Fed looks at the positive part of the analysis. This means the Fed believes they can remain in the driver’s seat for a long time, though it is still not clear what policy measures they foresee in the event their rosy scenario comes true. After all, even the greatest bull market only lasts until it doesn’t. QE has taken the bounce out of the economy.
Recent gains in employment are not resonating through the equities markets the way they normally would, housing prices are rising, retail activity is picking up, but Peter’s work indicates none of those factors will have the strength they normally would to take equity prices higher. You can’t fight the Fed, as they say.
What About All Those Equity Deals?
There have been a couple of substantial equity deals lately. Two prominent deals – Dell and Heinz – have investors salivating over a new wave of buyout activity. Peter cautions that these transactions had unique owners and participants, and that in both cases the owners sought large pieces of secured debt – not your normal private equity of investment bank-led equity deal. Peter says it is unclear whether there is enough unrealized value for a real LBO wave to take off. And he points out that credit is not yet exuberant enough to provide the levels of leverage needed for a consistent flow of transactions.
Another theme that has equity investors living in hope is the Great Rotation, the notion that investors will dump their bonds and buy stocks. Peter says this correlation has broken down, largely thanks to the Fed’s relentless buying of $85 billion worth of bonds and mortgages every month.
Europe and the ECB
Italy and Spain remain key risks in Europe. While they are no longer cited as major concerns by most commentators, Peter says the risks have definitely not gone away, noting that yields in both countries’ sovereign debt rose in the past week. Italy’s election has not been resolved – the front runners are Beppe Grillo, a former clown who may be prevented from assuming office because of a 1980 manslaughter conviction; and former Prime Minister Silvio Berlusconi, recently sentenced to one year in jail over a wiretap scandal.
Italy’s political disarray is ominous, Peter says, because their economy is big enough to go it alone. Italy’s continued refusal to cooperate in the ECB’s credit program puts significant pressure on the rest of the ECB system.
Spain, while not so colorful, continues to have its share of economic woes, similarly compounded by an ongoing corruption investigation of its own Premier Rajoy.
France, largely viewed as part of the core of the “good Europe,” may be showing signs of a new brewing crisis as analysts dig deeper.
To manage all this, the ECB instituted the Outright Monetary Transaction program (OMT), where the ECB will buy bonds of countries that enter into a program under conditions established and negotiated by the IMF. Says Peter, the ECB is not the Fed – it can make recommendations, but without a European central fiscal authority, the OMT relies on the voluntary cooperation of member states.
It also relies on the continued willingness of strong members – particularly Germany – to backstop weaker members’ bond issuance, a willingness that is dwindling by the hour.
Italy and Spain have rejected the IMF conditions, possibly because they are holding out for a better deal, and possibly because they believe the pain of going it alone would not be worse than the pain of submitting to the OMT requirements. If either country gets in fiscal trouble, there is no mechanism to stop the bleeding. And with no government in place, Italy doesn’t have anyone to negotiate with the IMF, much less the ability to reach a consensus to reach out to the OMT. Peter says the risks posed by Italy are not priced into the European credit markets, creating the possibility of a severe bump in an already rocky road.
Takeaway: As housing prices recover across much of the US, the Chicago market is also poised for significant gains. Here’s a stock that could benefit.
TCF Financial (NYSE: TCB) is one of our Financials Sector team’s favorite stocks on the long side. That’s because TCB, a bank holding company based in Chicago, stands to be a beneficiary of the overall recovery in the nation’s housing market. Now, TCB’s home market, Chicago, is really showing signs of life, too.
Take a look at the chart below. We're showing inventory (x-axis) and volume (y-axis) changes on a year-on-year basis by market as of either January or February, depending on the market. The Financials Sector team’s work has shown that prices lag both demand (sales volume) and supply (inventory) in housing by 11 to 18 months.
Currently, Chicago is one of, if not the strongest looking market on a prospective basis. The change in inventory over the past year is -41.6%, while the change in demand is +32.3%. Putting those two factors together creates a very powerful tailwind for the coming year. Given how much exposure TCB has to this market, we think they will be a primary beneficiary of Chicago's coming property recovery.
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