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Trade of the Day: LEN

Takeaway: Keith sold shares of Lennar (LEN) this morning for a tidy +2.39% profit.

Keith sold shares in Lennar (LEN) at 9:47am today at $43.35. Miami-based Lennar is one of America’s largest new home builders.

 

Keith writes of his sale of LEN stock, “Backcheck. Forecheck. Paycheck. Continue to fade the bears on housing, trading the builders with a bullish bias. #HousingsHammer”

 

Keith now has three winning trades on the long side of LEN since March.

 

Trade of the Day: LEN - LEN


The Dollar Is En Fuego

Takeaway: It’s no secret that we like #StrongDollar. #StrongDollar equals Strong America.

This note was originally published May 17, 2013 at 14:17 in Macro

It’s no secret that we like #StrongDollar.  Historically, strong dollar periods have been characterized by lower commodity inflation, low energy prices, rising confidence and strong consumption growth. 

 

The Dollar is a causal factor in our model and our StrongDollar call over the last 5 months has backstopped our expectation for Gold and Commodity deflation and rising consumption as purchasing power benefits and discretionary share of wallet gets a boost. 

 

Year-to-date, we’ve seen the $USD march interminably higher alongside declining federal profligacy, improving domestic macro data, increasingly marginalized Fed policy, slower EM growth, emergent European dovishness and explicit Yen debauchery.  We expect the dollar to continue to benefit from a further perpetuation of these dynamics. 

 

Currently, the $USD remains in Bullish formation (Bullish TRADE/TREND/TAIL) and U.S. dollar correlations to the SPX (+) and Oil, Gold & Commodities (-) remain strong across durations.   

 

Now, we’re beginning to see confidence chase the dollar higher as consumer confidence measures begin a nascent break out of their 4 year slumber.   This morning’s University of Michigan Consumer confidence reading accelerated to 83.7 in May from April’s final reading of 76.4, posting it’s highest reading since July 2010.  

 

The acceleration in the Univ. of Michigan confidence reading agrees with recent breakout to new 5Y highs observed in the Bloomberg Consumer Comfort Index and the steady advance in the Conference Board’s measure of consumer confidence. 

 

Longer-term, outside of the last four years in which confidence readings essentially flat-lined, consumer confidence has been highly correlated with accelerating economic activity.  A sustained breakout in confidence alongside ongoing housing and labor market improvement represents a fertile factor cocktail capable of catalyzing positive economic reflexivity.    

 

 

#StrongDollar = Strong America.

 

 

Enjoy the weekend,

Hedgeye Macro

 

The Dollar Is En Fuego - U.S. Dollar

 

The Dollar Is En Fuego - Consumer Confidence vs DXY 051813

 

The Dollar Is En Fuego - Bloomberg Consumer Comfort 051713

 

The Dollar Is En Fuego - U.S. Dollar  Gas  GDP by Pres

 

Christian B. Drake

Senior Analyst 

 


Weimar Nikkei Rips Higher

Takeaway: If you really want to see your stock market rip, just burn your country’s currency.

We had more rip-roaring fun in Japan overnight where the Weimar Nikkei shot up another 1.6%. That brings the index up +51.5% year-to-date. That’s just inside Venezuela which is also devaluing its currency.

 

I suppose the lesson here is if you really want your stock market to rip, burn your country’s currency. Just hope people don’t pay attention to historical analysis in terms of how that might all end. 

Weimar Nikkei Rips Higher - JP.VN


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Apparel Macro: Inflation Spreads Go The Wrong Way

Takeaway: Apparel inflation spreads just went the wrong way. If trends continue, it's enough to eat away 20% of the industry's profit stream.

Conclusion: We're seeing inflation spreads, which have been a positive margin event for the apparel industry's  margins over the past five quarters, revert back to back to more normalized levels as evidenced by the latest datapoints on import and spending data. This has negative implications for makers and sellers of basic apparel that have been printing outsized gross margin improvements due to input cost reductions since 2011. It's still early to step up short exposure here, but the datapoint is not good.

 

We continue to favor those names that have very defined company-specific growth drivers, such as WWW, RH, FNP, NKE, FL, KORS, and RL. While we still think it's early to put short exposure on in this space, we don't like companies that are more susceptible to easing inflation spreads and/or are meaningfully stepping up capital investment levels, like HBI, DKS, M, PVH, CRI, GPS, and FDO.    

 

 

DETAILS 

By 'inflation cost spreads' we mean the difference in consumer price and retailer cost. They can't be looked at in isolation. For example, the average garment sells for around $10. But it's only about $3.50 to import at cost. In other words, a 10% hike in input costs leads to about a $0.35 deficit to overcome per garment -- or about a 3.5% change in consumer prices.

 

The good news is that the latest month shows a +$0.17 per garment spread. The bad news is that just one month ago that spread was $0.41, and the average over the past year was +$0.39. In other words, we're definitely looking at a deceleration on the margin. Two-thirds of the slip was driven by consumer prices, while the other third was import cost. On the consumer price side, the weakest prices were in children's apparel. We don't think it's enough for us to make a blanket call-out as it relates to an impact on CRI or PLCE. But it's a datapoint worth noting.

 

What does this translate to in aggregate?   It's often hard to put this math in context. But think of it like this. Last year, the apparel industry imported almost 24bn units of apparel.  If we keep units steady on a year/year basis (i.e. making no major assumptions about elasticity) then the change we saw over the past month incrementally accounts for about $5.7bn in pure profit.   This is about a $280bn industry. Let's be generous and say that it has 10% margins ($28bn in profit). So we just saw inflation spreads change (negatively) by 20% of the total profit stream of the apparel retail supply chain.

 

Many people might argue that you can't make macro calls like this and make any money. But once we chart the data against the industry's gross margins (which are at peak levels, mind you), we think we can make a strong arguement otherwise.

 

Apparel Macro: Inflation Spreads Go The Wrong Way - 1

 


BERNANKE: WHO IS THIS GUY?

Takeaway: After listening to this unelected, unaccountable central planner’s testimony earlier this morning, all I can say is be very careful up here.

(From @keithmccullough and Keith's morning call.)

 

The top three items in my risk notebook this morning were as follows:

  1. Bernanke
  2. Bernanke
  3. Bernanke

After listening to this unelected, unaccountable central planner’s testimony earlier, all I can say is be very careful up here.

 

Here are some of my key thoughts and takeaways from the man Marxists fawn over:

  • The Serial Debaucher of your hard earned currency marches on, deciding not to acknowledge economic gravity and taper bond buying.
  • The best path for US #GrowthAccelerating is for the Fed to get out of the way. On a related note, the faster the Fed gets out of the way of #StrongDollar, the faster gas prices will finally fall and fuel U.S. consumer spending.
  • Bernanke says, “I have a great inflation track record" (all-time highs in oil, gold, and food prices during my term). The man is a world class storyteller, but a horrendous market and economic forecaster.
  • Why are consumer prices falling? Simple. Because Bernanke perpetuated the all-time highs in consumer prices back in 2011-2012.
  • Modern science and math has taught us to embrace uncertainty - Bernanke's model promises politicians certainty. Meanwhile, the certainty Bernanke promises (his forecasts, timing, etc) is certainly wrong at least 2/3ds of the time.
  • There was a day when I didn't like the policy and traded what I didn't like about it. Now I just accept it, and front-run it.

Bottom Line: Bernanke is officially the market's biggest liability. He has no idea how all of this will end. This whole thing will end in tears if he thinks he can call the turn. Be careful up here.

 

BERNANKE: WHO IS THIS GUY? - ben bernanke


JAPAN ASKS: “ARE YOU PREPARED FOR A MEANINGFUL BACK-UP IN GLOBAL INTEREST RATES?”

Takeaway: Our fundamental research & quantitative risk management signals are suggesting that global duration risk is rising at an accelerating rate.

SUMMARY BULLETS:

 

  • In recent weeks, both our fundamental research and quantitative risk management signals are suggesting that global duration risk is rising at an accelerating rate. Sure, it could be a massive head fake, but we certainly won’t be the ones holding the bag if we’re sitting here at EOY ’14 with G-7 bond yields +150-200bps higher than they are now. At a bare minimum, this is an increasingly probable scenario worth looking into.
  • As we’ve shown in previous research notes (HERE, HERE and HERE), a demonstrable backup in JGB rates could serve to apply selling pressure upon global sovereign debt securities, dragging up rates across various markets. Per the most recent Bank of America Merrill Lynch data, the spread between the nominal yields on G-7 notes and JGB yields narrowed to 61 basis points last week, the lowest since 1990!
  • While it’s not new news that investors have been increasingly shunning duration risk, we think it’s important to understand all of the moving pieces, rather than just relying on consensus expectations for what the Fed is going to do next. 

To recap those moving pieces:

  1. Domestic labor market improvement driven by a housing market recovery that itself is driven by a timely and marked acceleration in US births and household formation and a domestic consumption acceleration that is fueled by a commodity tax cut that is perpetuated by #StrongDollar are all reasons why we think Fed policy is poised for a major inflection over the intermediate term.
  2. A weakening yen that facilitates rising JGB yields that are more attractive on a relative basis should serve as an incremental drag on demand for US Treasuries stemming from Japan, which, as a country, currently represents 19.2% of total foreign demand for US Treasuries.
  3. Lastly, in a global currency war, manipulators simply need to buy less dollars to remain competitive if the USD continues to rally on trade-weighted basis (the Trade-Weighted US Dollar Index is already up +6% YTD). That ultimately equates to the central banks of commodity producing nations (many of which are EMEs) buying less US Treasuries, at the margins, in order to hold down their nominal exchange rates. The very recent blood-bath we’ve seen across the commodity currency spectrum is supportive of this view.

 

In today’s monetary policy announcement, the BOJ kept its “quantitative and qualitative monetary easing” program unchanged today, citing its view that previous measures would spur growth and lift consumer prices. The move (or lack thereof) was expected by consensus and came amid what policymakers termed "positive movements" in the Japanese economy. Central bank governor Haruhiko Kuroda downplayed the suggestions that the BOJ had lost control of the JGB market and said they would tweak the terms of its bond-buying program "as needed" to keep prices in check.

 

Net-net-net, the BOJ meeting was total non-event. In our opinion, the only important takeaway was that the BOJ plans to hold a meeting with financial institutions and institutional investors on MAY 29 to discuss recent market movements. Headlines are likely to follow – especially as it relates to the specter of rising interest rates and how the BOJ plans to facilitate that event. We’re guessing Japanese banks and pension funds – which have anywhere from 25% to 65% of their total assets parked in JGBs, depending on institution – would like an “orderly decline” of the JGB market as the Abenomics agenda progresses.

 

JAPAN ASKS: “ARE YOU PREPARED FOR A MEANINGFUL BACK-UP IN GLOBAL INTEREST RATES?” - 1

 

JAPAN ASKS: “ARE YOU PREPARED FOR A MEANINGFUL BACK-UP IN GLOBAL INTEREST RATES?” - 2

 

Perhaps the most important news of the day was the releasing of Japan’s APR trade data, which was very disappointing and highlighted some of Japan’s key macroeconomic issues that we’ve been detailing to investors for the past 12-18 months.

 

 

Export growth accelerated to +3.8% YoY from +1.1% prior vs. a Bloomberg consensus estimate of +5.4%. Import growth accelerated even more to  +9.4% YoY from +5.5% prior vs. a Bloomberg consensus estimate of +6.7%.

 

JAPAN ASKS: “ARE YOU PREPARED FOR A MEANINGFUL BACK-UP IN GLOBAL INTEREST RATES?” - 3

 

Thus far, the weakening yen has yet to prompt any structural shift in Japan’s BOP dynamics (these things take time), and that’s keeping Japan squarely in deficit territory with respect to its seasonally-adjusted trade balance, which narrowed slightly to -¥767.4B from -¥919.8B prior vs. a Bloomberg consensus estimate of -¥602.9B.

 

JAPAN ASKS: “ARE YOU PREPARED FOR A MEANINGFUL BACK-UP IN GLOBAL INTEREST RATES?” - 4

 

If the Japanese economy fails to make an import substitution adjustment prior to achieving any assumed structural increase in export competitiveness and fiscal retrenchment, we’re going to see more realized volatility in the JGB market as the current account dips squarely into deficit territory – which means Japan will be at the hostage of international creditors who’ll ultimately demand higher yields to compensate for the currency risk and Japan’s now-hawkish inflation outlook.

 

JAPAN ASKS: “ARE YOU PREPARED FOR A MEANINGFUL BACK-UP IN GLOBAL INTEREST RATES?” - 5

 

A backup across the JGB yield curve as a function of the aforementioned macroeconomic risks is amplified with Japanese domestic investors allocating financial assets to equities (currently 6.8% of the total), at the margins, in lieu of cash and bank deposits (currently 55.2% of the total, which are traditionally then intermediated into JGBs).

 

JAPAN ASKS: “ARE YOU PREPARED FOR A MEANINGFUL BACK-UP IN GLOBAL INTEREST RATES?” - 10

 

As it relates to Japan’s deteriorating BOP dynamics, the only saving grace we can think of is for Japanese bureaucrats to defy popular consensus by restarting the country’s nuclear reactors in a major way – an event rumored to be in the political works post the Upper House elections in MAR. Recall that Japan’s imports of mineral fuels increased to 34.1% of total imports in 2012 from 28.6% in 2010, which was the last full-year prior to the earthquake/tsunami. Adjusting for the impact of turning off the nuclear reactors, which subsequently increased Japan’s need to import incremental energy products, the 2012 current account balance would have been a positive 2.2% of GDP – double the reported 1.1%.

 

JAPAN ASKS: “ARE YOU PREPARED FOR A MEANINGFUL BACK-UP IN GLOBAL INTEREST RATES?” - 6

 

As we’ve shown in previous research notes (HERE, HERE and HERE), a demonstrable backup in JGB rates could serve to apply selling pressure upon global sovereign debt securities, dragging up rates across various markets. Per the most recent Bank of America Merrill Lynch data, the spread between the nominal yields on G-7 notes and JGB yields narrowed to 61 basis points last week, the lowest since 1990!

 

Even assuming that spread stays flat or that there is room for further compression given Japan’s bearish outlook for real interest rates, a material back-up in JGB yields over the next 12-18 months (akin to the 1994 and 2003 episodes) could be very hazardous indeed for bond investors around the world.

 

While it’s not new news that investors have been increasingly shunning duration risk, we think it’s important to understand all of the moving pieces, rather than just relying on consensus expectations for what the Fed is going to do next. To recap:

 

  1. Domestic labor market improvement driven by a housing market recovery that itself is driven by a timely and marked acceleration in US births and household formation and a domestic consumption acceleration that is fueled by a commodity tax cut that is perpetuated by #StrongDollar are all reasons why we think Fed policy is poised for a major inflection over the intermediate term.
  2. A weakening yen that facilitates rising JGB yields that are more attractive on a relative basis should serve as an incremental drag on demand for US Treasuries stemming from Japan, which, as a country, currently represents 19.2% of total foreign demand for US Treasuries.
  3. Lastly, in a global currency war, manipulators simply need to buy less dollars to remain competitive if the USD continues to rally on trade-weighted basis (the Trade-Weighted US Dollar Index is already up +6% YTD). That ultimately equates to the central banks of commodity producing nations (many of which are EMEs) buying less US Treasuries, at the margins, in order to hold down their nominal exchange rates. The very recent blood-bath we’ve seen across the commodity currency spectrum is supportive of this view. 

JAPAN ASKS: “ARE YOU PREPARED FOR A MEANINGFUL BACK-UP IN GLOBAL INTEREST RATES?” - 7

 

All told, the writing’s on the walls here, folks. In recent weeks, both our fundamental research and quantitative risk management signals are suggesting that global duration risk is rising at an accelerating rate. Sure, it could be a massive head fake, but we certainly won’t be the ones holding the bag if we’re sitting here at EOY ’14 with G-7 bond yields +150-200bps higher than they are now. At a bare minimum, this is an increasingly probable scenario worth looking into.

 

Darius Dale

Senior Analyst

 

JAPAN ASKS: “ARE YOU PREPARED FOR A MEANINGFUL BACK-UP IN GLOBAL INTEREST RATES?” - 8

 

JAPAN ASKS: “ARE YOU PREPARED FOR A MEANINGFUL BACK-UP IN GLOBAL INTEREST RATES?” - 9


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