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#QuadrillYen Evolves

With the announcement being made that the Bank of Japan would begin a $1.4 trillion stimulus project over the next two months aimed at boosting Japan's economy and inflating its stock market, the Yen is essentially destined for devaluation. As soon as the news hit, the Yen fell in value relative to other currencies (you can see the USD/JPY pair below). Since late 2012, one of our key global macro themes for 2013 has been #QuadrillYen. The BoJ will continue to print money similar to the Federal Reserve's policy of quantitative easing and the currency will be devalued even further as time goes on. That's the name of the game.

 

#QuadrillYen Evolves - YENMACHINE


INITIAL CLAIMS - IS THE LABOR MARKET REALLY AS SOFT AS IT SEEMS?

Takeaway: Labor conditions in the latest week slowed significantly on a seasonally adjusted basis and slightly on a non-seasonally adjusted basis.

Below is the detailed breakdown of this morning's claims data from our head of Financials, Josh Steiner.  If you would like to setup a call with Josh or trial his research, please contact 

 

 

This morning's awful seasonally adjusted initial jobless claims print appears to have been negatively impacted by the Easter week holiday. Taken together with the weak ADP report and the weak Challenger report, the market is clearly developing a bearish bias in the short term around labor conditions. We'll see what tomorrow's river card brings.

 

The non-seasonally adjusted claims number was essentially flat week-over-week. Looking at the trend in the non-seasonally adjusted data, it's still trending better year-over-year, but only just barely. This week's print was better by just 0.5% vs. the same week last year. The trend in this dynamic over the last five weeks has been: -0.5%, -2.4%, -5.8%, -6.1%, -8.9%. Clearly the rate of year-over-year improvement has been slowing notably over the past month. A silver lining is that the trend in rolling NSA claims YoY is less negative, as we show in the second chart of this note. 

 

The bottom line is this: labor conditions aren't as bad as they appear (in the SA numbers), but are, in fact, showing signs of genuine cooling.

 

 

The Data

Initial jobless claims rose 28k to 385k from 357k WoW. The previous week's number was unrevised. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 10.75k WoW to 354.25k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -3.8% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -5.9%

 

INITIAL CLAIMS - IS THE LABOR MARKET REALLY AS SOFT AS IT SEEMS? - JS 1

 

INITIAL CLAIMS - IS THE LABOR MARKET REALLY AS SOFT AS IT SEEMS? - JS 2

 

INITIAL CLAIMS - IS THE LABOR MARKET REALLY AS SOFT AS IT SEEMS? - JS 3

 

INITIAL CLAIMS - IS THE LABOR MARKET REALLY AS SOFT AS IT SEEMS? - JS 4

 

INITIAL CLAIMS - IS THE LABOR MARKET REALLY AS SOFT AS IT SEEMS? - JS 5

 

INITIAL CLAIMS - IS THE LABOR MARKET REALLY AS SOFT AS IT SEEMS? - JS 6

 

Joshua Steiner, CFA


Consumer Staples and Volatility

One consistent theme in the market in 2013 has been lower volatility – except for random, brief events the trend in the VIX (CBOE Volatility Index) has been lower to start the year.  As an exercise, we have been following a couple of ETF’s that seek to track lower volatility:

  1. SPLV – PowerShares Low Volatility Portfolio
  2. USMV – iShares USA Minimum Volatility Index Fund

As one would expect, both ETFs have performed extremely well in 2013 (I know, blinding glimpse of the obvious).  Both have also seen significant inflows – SPLV $903 million YTD (versus $2,067 million in all of 2012) and USMV $1,728 million YTD (versus $735 million in all of 2012).

 

Consumer Staples and Volatility - ETFs and the VIX

 

The top holdings of each are interesting as well for the purposes of our analysis.

 

SPLV

  • ·         PEP (#2)
  • ·         CLX(#3)
  • ·         GIS (#4)
  • ·         CPB (#7)
  • ·         KMB (#12)

USMV

  • ·         GIS (#3)
  • ·         PEP (#11)
  • ·         KMB(#12)

Since the start of the year, the performance of a number of consumer staples names has been highly correlated to the performance of these low volatility ETFs and, by extension, the VIX.  No doubt, the associated money flows into these ETF's have been partly responsible for the significant outperformance of names such as CLX, GIS, CPB and KMB.

 

Consumer Staples and Volatility - CPB.CLX Low Vol

 

Consumer Staples and Volatility - GIS.KMB Volatility

 

We offer this analysis as another data point to suggest that something other than business fundamentals are driving the share prices of these companies and that someone (or something) other than fundamental investors are buying them.  It's hard to fight these kind of moves, but it will end, and when it does dedicated staples investors will be left with names that have far outstripped any reasonable valuation metric.

 

Unfortunately, we don't know when this will end, but perversely, these ETFs are now likely faultily constructed, as these names at these levels don't represent (to us at least) "low volatility".  At some point, the long-term betas used in the construction of these ETFs will catch up to the reality of the recent move.

 

Call with questions,

 

Rob

 

Robert  Campagnino

Managing Director

HEDGEYE RISK MANAGEMENT, LLC

E:

P:

 

Matt Hedrick

Senior Analyst


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“KURODA’S CASINO” IS NOW OPEN FOR BUSINESS

Takeaway: Stay short the Japanese yen and long of Japanese equities – if, unlike us, you’ve been inclined to roll the bones at “Kuroda’s Casino”.

SUMMARY BULLETS:

 

  • The Bank of Japan did not disappoint in Haruhiko Kuroda’s first meeting as BOJ Governor unlike consensus had been incorrectly calling and positioning for. Right on target with what we have been expressly calling for since early 4Q12, the BOJ has completely jumped the shark with respect to monetary policy and Japan is now officially (as opposed to rhetorically) home to the G10’s most dovish central bank.
  • In true “shock and awe” manner, the BOJ introduced “quantitative and qualitative monetary easing” (details below). In addition to these seismic shifts monetary policy operations, the BOJ also introduced a few other noteworthy housekeeping items (details below). Lastly, the BOJ responded directly to near-consensus expectations that its anti-deflation campaign would continue to structurally disappoint (statement below).
  • We were appropriately loud on Monday afternoon calling for clients to get long both the dollar-yen cross and the Nikkei ahead of today’s announcements and, far more importantly, we continue to anticipate further price appreciation in both asset classes over the intermediate term as our structural thesis plays out
  • To recap our bearish thesis on the yen, borrowing a quote from the title of our 3/15 research note following the confirmation of Kuroda, Hiroshi Nakaso and Kikuo Iwata as governor and deputy governors of the BOJ, we think Japan’s Inverse Volcker Moment is upon us
  • In confirmation of our thesis, the USD has appreciated +23.9% vs. the JPY since we authored the bearish thesis on the yen back on 9/27; it is rumored that George Soros has netted about $1 billion on shorting the yen since NOV – right around the time we reiterated our bear case on our 11/15 Best Ideas Call. Additionally, the Nikkei 225 Index is up +44.3% since our 11/9 note explicitly calling for Japanese equity reflation – though, admittedly, we have purposely avoided pounding the table on Japanese equities in ethical disgust of Policies To Inflate.
  • All told, the one is simple folks: stay short the Japanese yen and long of Japanese equities – if, unlike us, you’ve been inclined to roll the bones at “Kuroda’s Casino”. Just pray that the JGB market doesn’t wake up to the threat of hyperinflation over the long-term TAIL.

 

All eyes were on the Bank of Japan this AM, which did not disappoint in Haruhiko Kuroda’s first meeting as BOJ Governor unlike consensus had been incorrectly calling and positioning for. Right on target with what we have been expressly calling for since early 4Q12, the BOJ has completely jumped the shark with respect to monetary policy and Japan is nowofficially (as opposed to rhetorically) home to the G10’s most dovish central bank. To recap their monetary policy phase change (all quotes from the accompanying BOJ statement; emphasis is our own):

 

In true “shock and awe” manner, the BOJ introduced “quantitative and qualitative monetary easing”:

 

  • “The Bank will achieve the price stability target of 2 percent in terms of the year-on-year rate of change in the consumer price index (CPI) at the earliest possible time, with a time horizon of about two years. In order to do so, it will enter a new phase of monetary easing both in terms of quantity and quality. It will double the monetary base and the amounts outstanding of Japanese government bonds (JGBs) as well as exchange-traded funds (ETFs) in two years, and more than double the average remaining maturity of JGB purchases.”
  • “With a view to pursuing quantitative monetary easing, the main operating target for money market operations is changed from the uncollateralized overnight call rate to the monetary base… The Bank of Japan will conduct money market operations so that the monetary base will increase at an annual pace of about 60-70 trillion yen.” [unanimous vote]
  • “With a view to encouraging a further decline in interest rates across the yield curve, the Bank will purchase JGBs so that their amount outstanding will increase at an annual pace of about 50 trillion yen.” [unanimous vote]
  • “… JGBs with all maturities including 40-year bonds will be made eligible for purchase, and the average remaining maturity of the Bank's JGB purchases will be extended from slightly less than three years at present to about seven years – equivalent to the average maturity of the amount outstanding of JGBs issued… The monthly flow of JGB purchases is expected to become 7+ trillion yen on a gross basis.” [unanimous vote]
  • “The Bank will purchase ETFs and Japan real estate investment trusts (J-REITs) so that their amounts outstanding will increase at an annual pace of 1 trillion yen and 30 billion yen respectively.” [unanimous vote]
  • “The Bank will continue with the quantitative and qualitative monetary easing, aiming to achieve the price stability target of 2 percent, as long as it is necessary for maintaining that target in a stable manner.” [8-1 majority vote; board member Takahide Kiuchi dissented against the firm two-year commitment]

 

“KURODA’S CASINO” IS NOW OPEN FOR BUSINESS - BOJ Balance Sheet Projections APR  13

 

In addition to these seismic shifts in monetary policy operations, the BOJ also introduced a few other noteworthy housekeeping items:

 

  • The Asset Purchase Program will be terminated. The purchases of JGBs conducted for facilitating money market [rinban] operations – including the amount outstanding of JGBs already purchased – will be absorbed into the aforementioned JGB purchases.
  • The aforementioned JGB purchases are executed for the purpose of conducting monetary policy and not for the purpose of financing fiscal deficits. In addition, the government – in the joint statement released with the Bank in January – stated that "in strengthening coordination between the Government and the Bank of Japan, the Government will steadily promote measures aimed at establishing a sustainable fiscal structure with a view to ensuring the credibility of fiscal management." Based on such recognition, the Bank will temporarily suspend the so-called banknote principle as it pursues the quantitative and qualitative monetary easing.”
  • The terms and conditions under the Securities Lending Facility (SLF) will be relaxed for the time being in order to ensure that the market liquidity of JGBs is maintained.”

 

Lastly, the BOJ responded directly to near-consensus expectations that its anti-deflation campaign would continue to structurally disappoint:

 

  • “The quantitative and qualitative monetary easing, introduced by the Bank today, will underpin the Bank's commitment, and is expected not only to work through such transmission channels like longer-term interest rates and asset prices but also to drastically change the expectations of markets and economic entities.”

 

Evidence of muted expectations among consensus can been seen in the USD/JPY cross and Nikkei 225’s respective intraday bounces on the BOJ announcement(s). The former jumped from a low of 92.76 to today’s high of 96.40 and the latter swung from being down -1.8% on the day to closing up +2.2%! Again, the JPY is down over three full percent vs. the USD intraday! It’s hard to express in words how truly remarkable that is in the context of G3 currency fluctuations.

 

We were appropriately loud on Monday afternoon calling for clients to get long both the dollar-yen cross and the Nikkei ahead of today’s announcements and, far more importantly, we continue to anticipate further price appreciation in both asset classes over the intermediate term as our structural thesis plays out.

 

To recap our bearish thesis on the yen, borrowing a quote from the title of our 3/15 research note following the confirmation of Kuroda, Hiroshi Nakaso and Kikuo Iwata as governor and deputy governors of the BOJ, we think Japan’s Inverse Volcker Moment is upon us

 

In confirmation of our thesis, the USD has appreciated +23.9% vs. the JPY since we authored the bearish thesis on the yen back on 9/27; it is rumored that George Soros has netted about $1 billion on shorting the yen since NOV – right around the time we reiterated our bear case on our 11/15 Best Ideas Call. Additionally, the Nikkei 225 Index is up +44.3% since our 11/9 note explicitly calling for Japanese equity reflation – though, admittedly, we have purposely avoided pounding the table on Japanese equities in ethical disgust of Policies To Inflate.

 

More from that 3/15 note:

 

  • “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."
  • "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." 
  • "... 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.”

 

All told, the one is simple folks: stay short the Japanese yen and long of Japanese equities – if, unlike us, you’ve been inclined to roll the bones at “Kuroda’s Casino”. Just pray that the JGB market doesn’t wake up to the threat of hyperinflation over the long-term TAIL.

  

Darius Dale

Senior Analyst

 

“KURODA’S CASINO” IS NOW OPEN FOR BUSINESS - 2

 


Bonds: Jobs Off, Risk On?

If we examine the correlation between the 10-Year US Treasury and 4-week Rolling NSA Initial Jobless Claims on a year-over-year basis, you'll find that as the labor market deteriorates to some degree, investors are keeping their cool and not fleeing to Treasuries as a safe haven play. Conversely, investors seem to be confident that the bull run in the US equity market will continue despite weakness in yesterday's ADP report and this morning's jobless claims numbers. The 10-year yield hit a two-month low earlier this morning at 1.823% before rising back above 1.826%.

 

Bonds: Jobs Off, Risk On? - 753981515


Downside Pressure On The Euro

Europe's slew of problems include the uncertainty surrounding Italy's next government, the fallout from the Cyprus banking crisis and scares over Slovenia being the next nation that will need an ECB-backed bailout. Our critical quantitative lines on the EUR/USD are outlined in the chart below. Beyond immediate term TRADE support of $1.27 we do not see any meaningful support until around $1.22. April will be a challenging month for the European Union as it struggles to keep itself together.

 

Downside Pressure On The Euro - ww. eurusd


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