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Weimar Nikkei

“Economics is haunted by more fallacies than any other study known to man.”

-Henry Hazlitt

 

That’s the opening sentence to one of the best introductory books on markets that you’ll ever read: Economics in One Lesson. Hazlitt wrote the book in 1962, then republished it again in 1979. The quote is timeless. It’s also cyclical.

 

Our everything Japan Jedi, Darius Dale, and I spent the day seeing clients in Boston yesterday and we had some colorful debates about what both the New York Times and The Economist are all of a sudden championing as “Abenomics.”

 

To be crystal clear on our conclusion on how we think this ends for the Japanese people: in tears. Never mind a country that starts doing it with a quadrillion in debt, there has never been a country in the history of humanity that has devalued their way to long-term economic prosperity. Championing Japan’s economics today is the equivalent of cheering on the Weimar Republic circa 1924.

 

Back to the Global Macro Grind

 

The exciting thing about getting long the Weimar Republic’s stock market in the early 1920s is that you would have crushed it on the long side. The devastating thing was the other side of the trade – The People, their liberties, and purchasing power got crushed too.

 

Try some anti-gravity (economic or physical) exercises at home, and let me know how it ends. As a general rule, what goes up comes down, fast. The Yale Economics Department didn’t teach me that, btw. Incredibly, Keynesians believe they can “smooth” gravity.

 

The Weimar Nikkei was down another -5.2% last night. It’s down -13% from its Policy To Inflate high of May 22. That’ll leave a month-end mark. So will the implied volatility this kind of a move perpetuates throughout our interconnected global macro ecosystem.

 

What is a Policy To Inflate?

  1. A Policy To Inflate is an explicit (and implicit) strategy to debauch and devalue the currency of your people
  2. Bernanke is the “innovation/communication” dude who taught the Japanese to roll this out (without calling it what it is)

How do you devalue?

  1. As Bernanke’s boy, Paul Krugman, suggested to the Japanese in 1997, you need to “PRINT LOTS OF MONEY”
  2. And, ideally, have your conflicted/compromised politicians spend their brains out on borrowed moneys, at the same time

Then you have to overlay the almighty “communication tools” (i.e. central planners whispering inside info to “consultants” who then tell fund managers and/or bark about how much more you can print if/when you feel like the stock market needs more juice).  

 

This communication tool thing has the potential to be a lot more powerful today than it was for the Germans in the 1920s, primarily because the distribution pipe for our conflicted/compromised media is exponentially larger.

 

Remember, any lie can live for as long as people are dumb enough to believe it. I don’t think the media is as dumb as they are cornered. If they don’t broadcast this Fed, BOJ, and ECB propaganda, they lose access to the only meaningful content they have left.

 

BREAKING NEWS: central planner A says B to reporter C in the WSJ and/or English Major D @CNBC – markets react!

 

People who are paid to believe lies inspire us. So we are going to publish the Hedgeye Risk Management Top 10 things a hard core Bernankian is going to tell you in a meeting about the benefits of 0% interest rates and burning your currency.

 

At the top of the list will be things like “exports”, “competitiveness”, etc. These aren’t new arguments. But what’s fascinating about them is that they are the same fear-mongering and regressive arguments that central planners have been making since the 1920s.

 

Losers make excuses when their plans aren’t working. For Abenomics to work, we need to see sustained real (inflation-adjusted for local currency) economic growth.

 

In the short-term, they might get the illusion of that – it’s called inflation. In the long-run, what do they care about what they really get? On that score they’d agree with Keynes too; in the long-run they (and the Weimar Nikkei) will be dead.

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST10yr Yield, VIX, Nikkei225, and the SP500 are $1, $101.06-103.98, $83.31-84.61, 100.41-103.69, 2.01-2.18%, 12.35-15.11, 130, and 1, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Weimar Nikkei - Chart of the Day

 

Weimar Nikkei - Virtual Portfolio


THE HEDGEYE DAILY OUTLOOK

 

TODAY’S S&P 500 SET-UP – May 30, 2013


As we look at today's setup for the S&P 500, the range is 33 points or 0.45% downside to 1641 and 1.56% upside to 1674.             

                                                                                                                  

SECTOR PERFORMANCE


THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

EQUITY SENTIMENT:


THE HEDGEYE DAILY OUTLOOK - 10


CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 1.83 from 1.82
  • VIX closed at 14.83 1 day percent change of 2.42%

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: GDP Q/q, 1Q revision, est. 2.5% (prior 2.5%)
  • 8:30am: Pers. Consumption, 1Q rev., est. 3.3% (prior 3.2%)
  • 8:30am: GDP Price Index revision, 1Q, est. 1.2% (prior 1.2%)
  • 8:30am: Core PCE Q/q revision, 1Q, est. 1.2% (prior 1.2%)
  • 8:30am: Init. Jobless Claims, May 25, est. 340k (prior 340k)
  • 8:30am: Cont. Claims, May 18, est. 2.970m (prior 2.912m)
  • 9:45am: Bloomberg Consumer Comfort, May 26 (prior -29.4)
  • 10am: Pending Home Sales M/m, April, est. 1.5% (prior 1.5%)
  • 10am: Pending Home Sales Y/y, April, est. 12.8% (prior 5.8%)
  • 10:30am: DOE Energy Inventories
  • 10am: Freddie Mac mortgage 30-yr
  • 10:30am: EIA Natural gas storage
  • 11am: DOE Energy Inventories
  • 11am: Fed to purchase $1.25b-$1.75b in 2036-2043 sector
  • 1pm: U.S. to sell $29b 7Y notes

GOVERNMENT:

    • House, Senate not in session
    • 8:30am: U.S. Chamber of Commerce holds panel discussion on “Big Data”
    • 11am: FERC Commissioner Philip Moeller, Duke Energy CEO Jim Rogers, participate in U.S. Energy Assn annual mtg and public policy forum
    • 11am: Treasury Sec. Jack Lew, HHS Sec. Kathleen Sebelius, Acting Labor Sec. Seth Harris, CMS Administrator Marilyn Tavenner release annual reports from Social Security, Medicare trust funds
    • 1:30pm: House Transportation and Infrastructure Cmte hold field hearing on freight transportation challenges in southern Calif., implications for nation

WHAT TO WATCH

  • Buffett’s MidAmerican Energy to buy NV Energy for ~$5.6b
  • Alcoa’s credit rating cut to junk as aluminum price drops
  • Dish boosts Clearwire bid to $4.40/shr, topping Sprint offer
  • GE Capital CEO Neal may step down, WSJ reports
  • Fiat said to ready $10b in financing to buy Chrysler
  • Costco 3Q profit beats est.
  • NYT said to consider BuzzFeed-style sponsored stories
  • Smithfield sale likely to pass U.S. security review, lawyers say
  • PetroChina said to sell stakes for cash to spend abroad
  • Hulu’s intl chief quits ahead of potential sale of site
  • KKR said to hire Ex-CIA Chief Petraeus to lead institute at firm
  • Google’s Motorola plans to sell made-in-Texas Moto X by Oct.
  • Takeda sues to block generic Dexilant sales by Impax, Sandoz
  • Euro-area eco. confidence increased in May
  • Japanese stocks enter correction, extending last wk’s plunge

EARNINGS:

    • Big Lots (BIG) 6am, $0.61
    • Joy Global (JOY) 6am, $1.56 - Preview
    • Royal Bank of Canada (RY CN) 6am, C$1.32 - Preview
    • Sanderson Farms (SAFM) 6:30am, $0.71
    • Express (EXPR) 7am, $0.36
    • Ship Finance International (SFL) 8:24am, $0.29
    • Golar LNG (GLNG) Bef-mkt, $0.34
    • Golar LNG Partners (GMLP) Bef-mkt, $0.48
    • Esterline Technologies (ESL) 4pm, $1.25
    • Lions Gate Entertainment (LGF) 4pm, $0.44
    • Guess? (GES) 4:03pm, $0.08
    • Palo Alto Networks (PANW) 4:03pm, $0.05
    • Splunk (SPLK) 4:05pm, $(0.06)
    • Pall (PLL) 5pm, $0.73
    • Copart (CPRT) 5:17pm, $0.49

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Wheat Drops as Japan Suspends U.S. Imports on Modified Crops
  • Copper Users Squeezed as Glut Clogs Warehouse Lines: Commodities
  • Gold Rises for Second Day on Gain in SPDR Assets as Dollar Falls
  • Copper Advances as Weakening Dollar Stokes Demand From Investors
  • WTI Trades Near Four-Week Low as Supplies Gain Before OPEC Meets
  • Monsanto Modified Wheat Not Approved by USDA Found in Field
  • Robusta Coffee at 5-Month Low on Vietnam Prices; Sugar Advances
  • Iron Ore Seen at $100 by Morgan Stanley Offers Chance to Buy
  • Coal Ban to Spur China Gains as Indonesia Hurts: Energy Markets
  • Rebar Tumbles to Eight-Month Low on Chinese Overcapacity Concern
  • Cocoa Set for 2-Month Low on Support Breach: Technical Analysis
  • EU Energy Spend May Fall Short Without Carbon Fix, IHS Says
  • Maersk’s 8.4 Billion Bananas Key for Profitable Ships: Freight
  • Japan Halts Some U.S. Wheat Imports on Gene-Altered Crops

THE HEDGEYE DAILY OUTLOOK - 5

 

CURRENCIES


THE HEDGEYE DAILY OUTLOOK - 6

 

GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 4

 

EUROPEAN MARKETS


THE HEDGEYE DAILY OUTLOOK - 7

 

ASIAN MARKETS


THE HEDGEYE DAILY OUTLOOK - 8

 

MIDDLE EAST


THE HEDGEYE DAILY OUTLOOK - 9

 

 

The Hedgeye Macro Team

 

 

 

 

 

 

 

 

 

 

 


THE M3: TAIWAN; SUEN PAYMENT; GUANGDONG VISA

THE MACAU METRO MONITOR, MAY 30, 2013

 

 

MAINLANDERS WILL FORBID VISITING MATSU IF GAMING IS LEGALIZED Macau Daily News

The spokesperson of the Mainland-based Cross-Strait Tourism Exchange Association reiterated that Mainland China will forbid Mainland visitors from gambling in Taiwan.  He added that if the bill is passed, it will definitely affect the normal exchanges and cooperation in the tourism sector across the Strait, and the Association will have to take measures to restrict Mainlanders from visiting places where gambling is lawful.

 

LAS VEGAS SANDS TO PAY SUEN US$102 MILLION Macau Business

LVS has been ordered to pay US$101.6 million (MOP813 million) to Hong Kong businessman Richard Suen.  Nevada District Court Judge Rob Bare in Las Vegas yesterday issued a judgment that added US$31.6 million in interest to the US$70 million in damages the jury awarded Suen on May 14.

 

Suen won a trial over his claims that he helped the casino operator obtain a gaming license in Macau.

 

NEW VISA POLICY SUGGESTS BEIJING'S FAVOURABLE VIEW: UNION GAMING Macau Business

The Guangdong government has announced that starting Saturday, Guangdong citizens can apply for Individual Visit Scheme visas for both Macau and Hong Kong at the same time again, says Union Gaming Research Macau. 

 

This is under the condition that their last Macau visa is more than two months old - as a Guangdong resident can only apply every two months.  The application for both visas at the same time was possible before 2008, but this policy was canceled in that year, and all mainland residents have had to apply for the visas separately since.


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CHART DU JOUR: IGT WIDENS SHIP SHARE LEAD

Small players make a push but IGT creeps back to 2008 levels

 

  • On a trailing 4 quarter basis, IGT’s share jumped to over 35%, its highest share in 5 years.  Share bottomed in mid-2010 in the mid-20s.
  • WMS continues to deteriorate, falling to 13% in ship share TTM in Q1
  • Spielo’s huge Canadian contracts in Q4 2012 and Q1 2013 drove most of the increase in Other

CHART DU JOUR:  IGT WIDENS SHIP SHARE LEAD - SSS


JGB Rates + Global Duration Risk Rising

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

This note was originally published May 22, 2013 at 13:11 in Macro

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.

 

JGB Rates + Global Duration Risk Rising - 1

 

JGB Rates + Global Duration Risk Rising - 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%.

 

JGB Rates + Global Duration Risk Rising - 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.

 

JGB Rates + Global Duration Risk Rising - 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.

 

JGB Rates + Global Duration Risk Rising - 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).

 

JGB Rates + Global Duration Risk Rising - 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%.

 

JGB Rates + Global Duration Risk Rising - 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. 

JGB Rates + Global Duration Risk Rising - 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

 

JGB Rates + Global Duration Risk Rising - 8

 

JGB Rates + Global Duration Risk Rising - 9


Trade of the Day: LEN

Takeaway: We bought back Lennar (LEN) at 11:57am this morning at $40.99.

We’re buying back our #HousingsHammer view with this high short interest home-builder. LEN is signaling immediate-term TRADE oversold, within a bullish intermediate-term TREND.

 

Trade of the Day: LEN - LEN


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