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Trade of the Day: JGBL

Takeaway: Keith shorted Japanese government bonds today via JGBL, an investment vehicle that tracks JGB futures.

Keith shorted JGBL at 11:42am at $20.68. Keith writes, “I've never shorted Japanese Government Bonds before. Pray for us as we enter the mother of all widow maker positions.”

 

Here’s an excerpt from Keith’s Early Look note that he published on Tuesday at 7:41am where he writes about his take on JGBs.

 

“…Something just jumped off my page as new – JGB Yields.

 

JGB, yeah you know me – as in the most asymmetrically depressed live market quote in all of Global Macro – as in Japanese Government Bond Yields:


1.       10yr JGB Yields +10bps day-over-day to 0.84%

2.       10yr JGB Yields are now +23bps month-over-month

3.       10yr JGB Yields just jumped above my long-term TAIL risk line of 0.82%

 

Oh yes, darkness my old friend, I have been waiting for you. But for how long will you stay? I have never shorted you before. Are you toying with my emotions this morning, or are you for real? If you are for real, what will central planners in Japan do to tone you down?

 

Consensus has spent most of the last 6 months looking for a crisis that never happened. If and when this one happens, it will matter. And the if part isn’t the question in my mind. It’s the when that really matters – when will Japanese and US Government Bond Yields stop baking in that they’ll never go up?

 

Now that the Greenspan/Bernanke Top 3 (major bubbles) have popped (Tech, Housing, and Commodities), this is really the last of the mega bubbles left – the Bubble in Super Sovereign Debt.

 

I don’t like shorting a bubble until that bubble starts:

 

1.       Making lower all-time highs

2.       Confirming those lower-highs at what I define as my bifurcation point (my TREND line)

 

In terms of signaling Sovereign Yield Risk, measuring and monitoring the bubble happens upside down. Which is kind of cool; especially versus the alternative (i.e. being levered long US and Japanese Sovereign Debt for May 2013 to date).

 

In terms of big bang risk, the 2 most important live quotes on my risk management screens next to the US Dollar Index are:

 

1.       US Treasury 10yr Yield of 1.82%

2.       Japanese 10yr Government Bond Yield of 0.82%

 

These are what I call my long-term TAIL risk lines. And they matter – big time; especially when A) they continue to confirm (becoming less random) and B) have causal research (deterministic) factors explaining their confirmations.

 

What’s causal in driving our call for a continued #StrongDollar and higher-lows in UST bond yields? That’s easy – employment, housing, and consumption #GrowthAcellerating as the Fed is forced to tone down bond purchases.

 

What’s causal in driving higher JGB Yields? That’s less easy – credit risk is as likely as a growth scare. Since one or the other can really get bond yields to move, which one will it be? The only thing we know is that there has never been a country with its debt and deficit positions (as a % of GDP) that has burned its currency and not ended up in crisis.

 

So we’ll see. These Japanese risks can happen fast, or slow. They may not happen at all. But, on my risk signaling scorecard, the improbable risk of rising Yield Risk in both US and Japanese Sovereign Debt just went up in the last 2 weeks, not down.

 

Trade of the Day: JGBL - JGBL


VALUATION CONSTERNATION: Lies, Damn Lies & Valuation

SUMMARY BULLETS: 

  • Multiples are rising but valuations remain largely benign at current levels while holding a number of key risks.   We’re going to continue to risk manage the range with a bullish bias as our TREND research & risk management views on domestic consumption remain constructive.  Stick with what’s been working. 
  • PEAK MARGINS:  Operating Margins & Corporate Profitability remain at peak.   Unless you think peak returns to capital are sustainable alongside negative trend growth in real earnings and trough returns to labor, then the mean reversion risk for margins remains asymmetrically to the downside
  • CAPE Valuation:  At 24.6, the CAPE ratio is moving towards the high end of the range.   Expensive could get more expensive over the immediate/intermediate term, but historical precedent suggests return expectations should move systematically lower alongside concomitant increases in valuation from here.
  • Estimates:  Topline growth for the SPX doesn’t look out of bounds under a scenario of accelerating housing/employment/consumption growth.  However, the slope on earnings growth over the NTM continues to look aggressive given the expectations for further margin expansion embedded in those estimates. 
  • P/E:  On conventional LTM & NTM P/E metrics, the market isn’t particularly expensive at present.  However, investors should contextualize any superficial market ‘cheapness’ within the construct of corporate profitability levels that are roughly 80% above the historical average. 

 

HEDEGYE PROCESS REDUX:  Contextualizing Our Current Positioning  

If you’ve followed Hedgeye for any significant period of time it has likely been clear that, from an Investment decision making perspective, valuation sits somewhere near the middle-bottom of the our consideration hierarchy.  In fact, you’d probably find the “valuation is not a catalyst” mantra somewhere in our Risk Management Manifesto if such a document existed. 

 

However, if valuation is, indeed, compelling and there is a discrete catalyst on the timeline, then it gets more interesting.  Layer on a positive quantitative signal from our risk management model such that the risk management (price signal) and the research view are aligned and an idea gets actionable. 

 

The prices rule and duration agnostic (TRADE/TREND/TAIL) structure anchoring the Hedgeye model is our evolving attempt to develop an investment research process that successfully functions outside of the legacy construct of management one-on-one’s, recycled expert opinion, and valuation-in-isolation and intuition driven decision making.  This basic investment approach allows us to operate within the empirically obvious reality that cheap can get cheaper and expensive can get expensive-er from a valuation perspective.

 

Yesterday served as an illustrative case-study in how the model works in practice.  From a TREND perspective, we’ve have been outspokenly bullish on #StrongDollar.  With a strong $USD (driven by positive domestic macro data and incrementally hawkish fiscal & monetary policy) as a primary causal factor – we’ve have been bearish on gold & commodities and bullish on domestic, consumer facing equity exposure.  

 

Do we still hold that view?  Yes, but from a price. 

 

Yesterday our risk management model was signaling the $USD and SPX overbought, gold oversold, and a relatively high probability that the jobless claims numbers would fail to comp the outsized acceleration (improvement) observed in each of the last two weeks - so we reduced our gross exposure and tightened up our net exposure a bit. 

 

So, in brief, our prices-based Risk Management process drives our allocation and invested positioning while complimentarily functioning within the construct of our TREND research view. 

 

From here, so long as our constructive views on the dollar/housing/consumption remain positive, we can cover shorts and buy back the same exposures we sold yesterday as we move towards the Hedgeye 1633 line on the S&P500 on any sell-off.   

 

That protracted preamble aside, where do we sit currently on market valuation and expectations? 

 

 

VALUATION:  CAPE P/E

 

We use a broad range of valuation and sentiment indicators when contemplating the direction of markets and where our view sits in the context of current prices, consensus estimates, and prevailing sentiment.  Taking a TREND/TAIL view of valuation, Yale Professor Robert Shiller’s methodology serves as a reasonable method for contextualizing current market valuation.

 

By way of background, Professor Shiller uses what is called CAPE, or Cyclically Adjusted Price to Earnings.  In terms of the numerator, or price, Shiller uses the monthly average of daily closes for the SP500.  To derive the earnings data, in this instance the denominator, Professor Shiller uses the quarterly earnings data from the SP500’s website and utilizes an interpolation to provide earnings data by month.  He then adjusts both the numerator and denominator for inflation using CPI from the Bureau of Labor Statistics.  Finally, the inflation adjusted price is divided by an average of ten years of real monthly earnings to determine the CAPE.

 

Below we’ve broken the historical CAPE ratio values into deciles and looked at subsequent, average market performance across various durations.  We would highlight a few takeaways:

  1. Currently:  At the latest value of 24.6, we are currently at the top end of the 8th decile.  In other words, over the last 113 years, the CAPE has been lower ~90% of the time.  We would note however that the current value is near average for the past 30Y’s inclusive of peak, tech bubble valuation.
  2. Near-term Performance:  If the idea that expensive can get more expensive and vice versa is valid, we would expect to see a more diffuse, random distribution in subsequent performance over shorter-term durations and an increasingly less random distribution over longer term durations.  Put differently,  the distribution should reflect a more equal tendency of going both higher or lower in the short-term regardless of the CAPE value.  This is, in fact, what we observe when looking at subsequent 3M performance relative to subsequent 1Y & 3Y performance.  This is reflected in both the trend in average performance by decile (bar charts) as well as the slope of the line in the respective scatter plots below. 
  3. Longer-term Performance:  Over the longer-term, CAPE valuation is inversely related to subsequent longer-term performance.  As can be seen, for each decreasing decile change in CAPE, subsequent 1Y and 3Y performance generally shows a discrete step function lower in average return.  

In short, with the current CAPE ratio in the middle-high range on a historical basis, we could certainly go higher (or lower) in the more immediate term.  However, from a longer-term perspective, historical precedent suggests return expectations should move systematically lower alongside concomitant increases in valuation from here.  

 

VALUATION CONSTERNATION: Lies, Damn Lies & Valuation - CAPE PE

 

VALUATION CONSTERNATION: Lies, Damn Lies & Valuation - CAPE 3M

 

VALUATION CONSTERNATION: Lies, Damn Lies & Valuation - CAPE 12M

 

VALUATION CONSTERNATION: Lies, Damn Lies & Valuation - CAPE 3Y

 

 

 

PEAK MARGINS, PANGLOSSIAN ESTIMATES & IMMEDIATE-TERM INDIFFERENCE

 

On a conventional trailing or forward P/E basis, the market isn’t particularly expensive at current levels.  With global fund flows out of EU and EM markets continuing to target U.S. assets and equities benefiting from downside asymmetry in fixed income and strong dollar driven rotation out of metals and commodities broadly, multiples could certainly absorb another turn or two. As equity prices inflate, we continue to see two key risks: 

 

Peak Margins & Corporate Profitability:   We remain at peak operating margins and peak profitability with after-tax corporate profits as a % of GDP at an all-time high. Unless we’ve entered a sustained new normal in terms of corporate profitability and returns to capital (which also implies a new normal trough for returns to labor), the mean reversion risk for margins should remain asymmetrically to the downside with earnings negatively levered to any deceleration in topline trends – a dynamic that is likely to remain in place over the intermediate term.  So, investors should contextualize any superficial market ‘cheapness’ within the construct of corporate profitability levels that are roughly 80% above the historical average.   

 

Estimates:  While multiples, on a historical basis, aren’t overly stretched here despite the expedited advance over the last six months, as always, valuation based panglossian market narratives are only as good as the growth expectations embedded in the denominator.   

 

Consensus expectations for the S&P500 over the next four quarters look mixed across operating metrics.   Topline comps ease through the balance of the year and growth estimates in the low to mid single digits for the SPX appear reasonable under a scenario of accelerating housing/employment/consumption growth.  However, the slope on earnings growth over the NTM continues to look aggressive, despite easy comparisons, given the expectations for further margin expansion embedded in those estimates.

 

VALUATION CONSTERNATION: Lies, Damn Lies & Valuation - SPX Mkt  Cap Weighted Sales   EPS Growth

 

VALUATION CONSTERNATION: Lies, Damn Lies & Valuation - SPX Comps   Estimates

 

VALUATION CONSTERNATION: Lies, Damn Lies & Valuation - SPX PE   Corporate Profits   of GDP 

 

Christian B. Drake

Senior Analyst  

 


CHART DU JOUR: MACAU VIP SSS GROWTH?

VIP per table stagnant over last few years but signs of an upturn emerging

 

  • Unlike the Mass chart we posted yesterday, VIP table productivity has been nonexistent
  • However, April showed promising YoY growth.  May started strong, and we’re projecting accelerating growth for most of the rest of the year
  • Not surprisingly, the two primary Cotai operators – MPEL and LVS – trail the others on the VIP side but perform well on the Mass side

CHART DU JOUR: MACAU VIP SSS GROWTH? - mmm


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Corn - Plantings Should Pick Up this Week

Corn planting progress is at a record slow pace, and while we are not yet concerned, we think it’s worth highlighting for investors at this point.  As of Sunday, 28% of the U.S. corn crop was in the ground, well below last year (85%) and the five-year average (65%).



Corn emergence is also developing as a bit of an issue as well – only 5% of the crop has emerged compared to 52% last year.  Obviously, what hasn’t been planted can’t come out of the ground, but cool temperatures have certainly kept what has been planted in the ground.



We think the weather this week has likely been constructive and should encourage an increased planting pace and make no mistake, the crop can get into the ground very quickly.  We wouldn’t be surprised to see an update indicating 40%+ of the crop in the ground, so we will be close to half the crop in the ground by the middle of May.  For some perspective, the corn crop usually reaches 50% planted during the first 7-10 days of May, so it looks like we are running about 2 weeks behind the average.



We are less concerned about planting then we are about emergence – the longer the crop takes to emerge, the greater the risk of lower yields.  However, the weather appears to be conducive to emergence and soil conditions have improved (warmed), so the pace of emergence should pick up over the next couple of weeks as well.



So, there are a few risks “emerging” here – the longer it takes the crop to get into the ground, the greater the chance that some farmers make the late May decision to switch acreage to soybeans.  The acreage risk switch isn’t that significant (maybe 1-3 million acres).  Before switching to soy, farmers can elect to switch to earlier maturing (but lower yielding) hybrids.  We should also point out that in years with planting delayed in as meaningful a fashion as it has been this year, trend line yields have suffered (see below).



Bottom line, the USDA WASDE estimate for new crop corn yield of 158 bushel per acre may be somewhat aggressive given the current conditions, but by and large we are not that concerned with yields at this point, so we are sticking with our bearish bias on corn.

 

Corn - Plantings Should Pick Up this Week - Crop Progress

 

Corn - Plantings Should Pick Up this Week - Corn Cost Curve 5.16.13

 

Corn - Plantings Should Pick Up this Week - Corn Acreage 5.16.13

 

Corn - Plantings Should Pick Up this Week - CFTC Corn1 5.16.13

 

Corn - Plantings Should Pick Up this Week - CFTC Corn2 5.16.13

 

Robert  Campagnino

Managing Director

HEDGEYE RISK MANAGEMENT, LLC

E:

P:

 

Matt Hedrick

Senior Analyst



INITIAL CLAIMS: FINALLY, A MISFIRE

Takeaway: It was starting to look like labor and housing data could do no wrong. This morning serves as a wake-up call on both fronts.

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

 

 

Taking a Breather

This morning's headline print for initial jobless claims is clearly weak and the NSA data was weak too, on a one-week basis. This is likely to take the short-term wind out of the sails for Financials, especially when combined with the also lackluster housing starts print this morning. 

 

We have subscribed to a simple philosophy since Lehman Brothers. We consider three macro factors paramount in gauging the overall direction for the sector: labor, housing and the Fed. On that score, YTD all three factors have been moving in the right direction.We continue to view labor and housing as moving in the right direction from an intermediate and longer-term standpoint, and the Fed is unlikely to go anywhere in light of this morning's lukewarm numbers. In the short-term, however, we would expect some weakness. 

 

Contrary to the prior three years, however, where it was unclear whether the weakness constituted a falling knife or buying opportunity, this time around, we would view any weakness as a buying opportunity for those with a horizon beyond a few weeks.

 

Importantly, the rolling NSA data continues to improve YoY at a better-than-expected clip of 8.9%. While that's a sequential deceleration vs. the previous week, it's still a very good rate of improvement.  

 

The Data

Prior to revision, initial jobless claims rose 37k to 360k from 323k WoW, as the prior week's number was revised up by 5k to 328k.

 

The headline (unrevised) number shows claims were higher by 32k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 1.25k WoW to 339.25k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -8.9% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -9.0%

 

 

INITIAL CLAIMS: FINALLY, A MISFIRE - JS 1

 

INITIAL CLAIMS: FINALLY, A MISFIRE - JS 2

 

INITIAL CLAIMS: FINALLY, A MISFIRE - JS 3

 

INITIAL CLAIMS: FINALLY, A MISFIRE - JS 4

 

INITIAL CLAIMS: FINALLY, A MISFIRE - JS 5

 

INITIAL CLAIMS: FINALLY, A MISFIRE - JS 6

 

INITIAL CLAIMS: FINALLY, A MISFIRE - JS 7 

 

Joshua Steiner, CFA

 


INITIAL CLAIMS: FINALLY, A MISFIRE

Takeaway: It was starting to look like labor and housing data could do no wrong. This morning serves as a wake-up call on both fronts.

This note was originally published May 16, 2013 at 10:09 in Financials

Taking a Breather

This morning's headline print for initial jobless claims is clearly weak and the NSA data was weak too, on a one-week basis. This is likely to take the short-term wind out of the sails for Financials, especially when combined with the also lackluster housing starts print this morning. 

 

We have subscribed to a simple philosophy since Lehman Brothers. We consider three macro factors paramount in gauging the overall direction for the sector: labor, housing and the Fed. On that score, YTD all three factors have been moving in the right direction.We continue to view labor and housing as moving in the right direction from an intermediate and longer-term standpoint, and the Fed is unlikely to go anywhere in light of this morning's lukewarm numbers. In the short-term, however, we would expect some weakness. 

 

Contrary to the prior three years, however, where it was unclear whether the weakness constituted a falling knife or buying opportunity, this time around, we would view any weakness as a buying opportunity for those with a horizon beyond a few weeks.

 

Importantly, the rolling NSA data continues to improve YoY at a better-than-expected clip of 8.9%. While that's a sequential deceleration vs. the previous week, it's still a very good rate of improvement.  

 

The Data

Prior to revision, initial jobless claims rose 37k to 360k from 323k WoW, as the prior week's number was revised up by 5k to 328k.

 

The headline (unrevised) number shows claims were higher by 32k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 1.25k WoW to 339.25k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -8.9% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -9.0%

 

INITIAL CLAIMS: FINALLY, A MISFIRE - 1

 

INITIAL CLAIMS: FINALLY, A MISFIRE - 2

 

INITIAL CLAIMS: FINALLY, A MISFIRE - 3

 

INITIAL CLAIMS: FINALLY, A MISFIRE - 4

 

INITIAL CLAIMS: FINALLY, A MISFIRE - 5

 

INITIAL CLAIMS: FINALLY, A MISFIRE - 6

 

INITIAL CLAIMS: FINALLY, A MISFIRE - 7

 

INITIAL CLAIMS: FINALLY, A MISFIRE - 8

 

INITIAL CLAIMS: FINALLY, A MISFIRE - 9

 

INITIAL CLAIMS: FINALLY, A MISFIRE - 10

 

INITIAL CLAIMS: FINALLY, A MISFIRE - 11

 

INITIAL CLAIMS: FINALLY, A MISFIRE - 12

 

INITIAL CLAIMS: FINALLY, A MISFIRE - 13

 

INITIAL CLAIMS: FINALLY, A MISFIRE - 14

 

Yield Spreads

The 2-10 spread rose 14.5 basis points WoW to 170 bps. 2Q13TD, the 2-10 spread is averaging 153 bps, which is lower by -14 bps relative to 1Q13.

 

INITIAL CLAIMS: FINALLY, A MISFIRE - 15

 

INITIAL CLAIMS: FINALLY, A MISFIRE - 16

 

 

Joshua Steiner, CFA

203-562-6500

jsteiner@hedgeye.com

 


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