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TRADING ABENOMICS FROM HERE

Takeaway: Post the Diet Upper House elections in JUL, the core driver of the USD/JPY cross will increasingly become the state of the US economy.

JUST BULLETS & CHARTS:

 

  1. Over the past month or so, the trend of USD strength vis-à-vis the JPY had been suspended – until this most recent two-day explosion of a move (from 98.65 to 101.93)!
  2. While we remain bearish on the Japanese yen with respect to the TREND and TAIL durations, it would be prudent not to chase the USD/JPY cross up here. In fact, per our quantitative risk management levels, the market is at a good spot to be booking some gains in the SHORT yen/LONG Weimar Nikkei trade.
  3. We reiterate that our thesis has legs on strong US consumption growth, as well as a perpetually-widening divergence between Fed and BOJ monetary policy. The pace of the US recovery and investor expectations of the FOMC’s next move will also determine the pace of yen depreciation from here (thus far, it’s been mostly a Japan-driven phenomenon).
  4. Is this the mid-to-late 90s all over again? The USD/JPY cross ripped from 80 to ~147 over a span of four years as the respective policy paths for the Fed and BOJ diverged substantially – as we believe they are poised to do once more with respect to the long-term TAIL duration.
  5. That’s precisely why continued improvement in the domestic housing and labor markets remains so critical to the US side of our thesis. The Fed has already signaled what would get them to taper the pace of asset purchases or completely turn off the QE spigot and FOMC leaks altogether.
  6. A 6-handle on the US unemployment rate – a risk that recent initial jobless claims prints have “activated” – would really start to make the last remaining yen bulls (i.e. just Japanese corporations and Japanese domestic investors; the sell-side has come around to our view and the buy-side is heading in that direction) extremely nervous.

 

CHART 1:

TRADING ABENOMICS FROM HERE - 1

 

CHART 2:

TRADING ABENOMICS FROM HERE - 2

 

CHART 3:

TRADING ABENOMICS FROM HERE - 3

 

CHART 4:

TRADING ABENOMICS FROM HERE - 4

 

CHART 5:

TRADING ABENOMICS FROM HERE - 5

 

CHART 6a:

TRADING ABENOMICS FROM HERE - 6

 

CHART 6b:

TRADING ABENOMICS FROM HERE - 7

 

CHART 6c:

TRADING ABENOMICS FROM HERE - 8

 

CHART 6d:

TRADING ABENOMICS FROM HERE - 9

 

CHART 6e:

TRADING ABENOMICS FROM HERE - 10

 

Remember, trading global macro is not the same as trading equities and corporate credit. In the micro world, consensus views tend to perpetuate inflections and regression to the mean as fundamental data gets increasingly priced in.

 

Conversely, in macro markets – where asset allocation shifts tend to be glacial and self-reinforcing – consensus views tend to perpetuate reflexivity as incremental parties (be they asset allocators, sovereign wealth funds, central banks, etc.) crowd into the trade. Keep that in mind as you contemplate where the yen and the Nikkei could go from here.

 

Enjoy your weekend,

 

Darius Dale

Senior Analyst


Podcast: Strong Dollar, Strong America

Keith riffs on the strong US dollar, the burning yen, Ben Bernanke and even whether or not to refinance your mortgage.


CASUAL DINING TRENDS UNINSPIRING

Takeaway: Initial indications are that April may have been another sluggish month for casual dining.

This note was originally published May 10, 2013 at 07:47 in Restaurants

Initial indications are that April may have been another sluggish month for casual dining. For some people this might come as disappointing news. What happened to the Easter “shift” from March to April? Knowing some chains weakness at the end of March, this had shifted to strength in early April. This suggests that balance of April was weak.  

 

 Sluggish sales trends are not being borne out in the casual dining stock, which have outperformed the S&P 500 by 340bps over the past month and 1080 basis points year-to-date.  Over the same time period, the average earnings estimate has increased 1.1% and 3.3%, respectively, implying a significant multiple expansion for the group.

 

Black Box Intelligence released its casual dining numbers for April this week. Same-restaurant sales gained 0.4% in April, versus 0.5% in March, which implied a sequential acceleration in two-year average trends of 70 bps. Sale-restaurant traffic declined -1.7% in April, versus -2% in March, which implied a sequential acceleration in two-year average trends of 80 bps. The “Willingness to Spend” Index, reported by Black Box, also registered a sequential acceleration in April.

 

Our favorite names in the group remain CAKE, EAT, and DRI.

 

CASUAL DINING TRENDS UNINSPIRING - BLACKBOX

 

CASUAL DINING TRENDS UNINSPIRING - cd perf

 

 


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.

Strong Dollar, Weak Yen

Client Talking Points

Strong Dollar

Thanks to back-to-back weeks of declining initial jobless claims, the US Dollar and the 10-Year US Treasury yield both are ripping. Those are both very strong pro-growth signals domestically. Being long Treasurys (or utilities for that matter) are two of the worst places you could have put your money since May 1.

Burning Yen

The yen fell to a four-year low against the US dollar this morning. According to our proprietary multi-factor model, the yen has burned a whole all the to TRADE oversold with its rapid decline against the dollar. The Nikkei’s moving the other direction – up 2.9% overnight, up 41.6% so far this year. Welcome to the world of Central Planning and systematic devaluation of your country’s currency.

Asset Allocation

CASH 28% US EQUITIES 18%
INTL EQUITIES 18% COMMODITIES 0%
FIXED INCOME 6% INTL CURRENCIES 30%

Top Long Ideas

Company Ticker Sector Duration
IGT

Decent earnings visibility, stabilized market share, and aggressive share repurchases should keep a floor on the stock.  Near-term earnings, potentially big orders from Oregon and South Dakota, and news of proliferating gaming domestically could provide near term catalysts for a stock that trades at only 11x EPS.  We believe that multiple is unsustainably low – and management likely agrees given the buyback – for a company with the balance sheet and strong cash flow as IGT.  Given private equity’s interest in WMS (they lost out to SGMS) – a company similar to IGT that unlike IGT generates little free cash – we wouldn’t rule out a privatizing transaction to realize the inherent value in this company.  

WWW

WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow.  

FDX

With FedEx Express margins at a 30+ year low and 4-7 percentage points behind competitors, the opportunity for effective cost reductions appears significant. FedEx Ground is using its structural advantages to take market share from UPS. FDX competes in a highly consolidated industry with rational pricing. Both the Ground and Express divisions could be separately worth more than FDX’s current market value, in our view.

Three for the Road

TWEET OF THE DAY

“The spire of 1 World Trade Center has been put into place making it the tallest building in the western hemisphere.” --@ITVnews

QUOTE OF THE DAY

 “Kites rise highest against the wind – not with it.” – Winston Churchill

STAT OF THE DAY

101.20, the level hit this morning by the Yen versus the US Dollar, its lowest level in four years


#Losing

This note was originally published at 8am on April 26, 2013 for Hedgeye subscribers.

“Losing on the other hand, really does say something about who you are. Among other things it measures: do you blame others, or do you own the loss? Do you analyze your failure, or just complain about bad luck?”

-Lance Armstrong

 

Yesterday, I started off the Early Look with the title #Winning and today I chose its antonym as the title.  It is rarely enjoyable to lose, or think about losing, especially in investing and business, but the reality is that we probably learn more from our mistakes than we do from our victories.

 

 Lance Armstrong is now considered by many to be one of the biggest losers of our generation after being one of the biggest winners with his unprecedented string of Tour de France victories.  In the most recent news, the Justice Department has filed a suit for $100MM against Armstrong and Tailwind Sports under the False Claims Act on behalf of the U.S. Postal Service (yes, it does beg the questions as to why the USPS was sponsoring cycling!). Time will tell what, if anything, Armstrong has learned from his failures and mistakes.

 

To be fair, it is natural to over react to mistakes (although I don’t think Armstrong is guilty of this) and I’ve certainly noticed this with myself and my colleagues at times.  The immediate reaction to a loss is often a willingness to quit a strategy. In reality, the reaction to a loss should be to analyze it, learn from it, and focus on improving the results.

 

The more interesting point on not learning and moving on from mistakes is that we basically inhibit ourselves from creating new ideas and opportunities.  As Po Bronson and Ashley Merriman write in “Top Dog: The Science of Winning and Losing”:

 

“By definition, new ideas can’t come from a playing-not-to-lose mindset, where the inhibition system is hyperactive. Creativity requires disinhibition: it requires turning off the internal censors in order to allow brainstorming and idea generation. Neuroscience has shown that in the very moment when a new idea sparks to life in the brain, the prevention system is turned off.”

 

So, in effect, if you can’t actually forget about your past mistakes and become uninhibited, you will chemically impair your ability to generate new and innovative ideas.

 

Forgetting about mistakes is certainly not easy, especially when the reminders are very present.  In the Chart of the Day, we’ve highlighted the three worst performing major global asset classes in the year-to-date: Peruvian equities, the Japanese Yen, and gold.  The irony of the last two is that when central bankers are aggressively printing money, like the Japanese central bank is, gold is not supposed to go down.  Of course, if unilateral money printing leads to U.S. dollar strength, the case for gold obviously becomes less compelling.  It should be no surprise that in U.S dollar terms the Yen is down almost the same percentage as gold this year.

 

The larger risk to gold is that we actually get to a place in which the U.S. Federal Reserve begins to tighten policy.  Certainly some slackness remains in the U.S. economy and inflation appears largely in check, but as my colleague and our U.S. economist Christian Drake pointed out yesterday in a note, we are starting to see potential that economic growth in the U.S. may accelerate based on:

 

1)      Housing – The housing recovery continues on the parabolic recovery that we outlined at the start of the year. Specifically, mortgage purchase applications recently registered a YTD high, median home prices of existing homes for existing home sales rose 11.8% (the highest level since November 2005), and inventory of existing home remains basically at its trough (down 17% in the last 12 months); and

 

2)      Employment -This week’s Initial Jobless Claims data was again positive with both the SA and NSA series showing sharp sequential improvement.   We consider the 4-week rolling average in NSA claims to be the more accurate representation of the underlying labor market trend and on that metric, the trend improved 250bps week-over-week as the year-over-year change in 4-wk rolling claims went to -6.3% Y/Y from -3.8% Y/Y the week prior.  So, despite initial sequester related impacts beginning in April and the seasonal distortion in the seasonally adjusted data shifting to a headwind, labor market trends continue to show steady improvement.

 

Despite what some of the talking heads might have you believe, in an economy that is 70% consumption, a strong U.S. dollar (the currency with which we consume), an improving housing market (the consumer’s balance sheet), and stabilizing employment, are all very supportive factors of improving economic growth.

 

I’m going to end this morning in the winner category.  If you haven’t been watching European sovereign yields, you should be focused on them as a measure of global tail risk.  Since the freak-out highs in yields perpetuated by the Cyprus dysfunction, yields in the 10-year sovereign bonds of Italy, Spain, and Portugal have recovered to some of the lowest levels we’ve seen since the beginning of the European sovereign debt crisis began.  In fact, it won’t be long before Italian 10-year yields starts with a three handle . . . I mean, who would’ve thunk!

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, and the SP500 are now $1321-1478, $97.31-103.34, $82.55-83.44, 97.45-101.36, 1.70-1.76%, 11.33-14.89, and 1564-1595, respectively.

 

Keep your head up and stick on the ice,               

                                                                                               

Daryl G. Jones

Director of Research

 

#Losing - Chart of the Day

 

#Losing - Virtual Portfolio



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