prev

SHOULD YOU SHORT THE YEN AND BUY THE NIKKEI HERE?

Takeaway: If you’re bearish on US growth, get long the yen and short the Nikkei with impunity. Do the opposite if you’re constructive on US growth.

SUMMARY BULLETS:

 

  • The "Third Arrow" of Shinzo Abe's "Abenomics" agenda wildly disappointed investor expectations. We detail those disappointments and a widely-misunderstood critical policy delta in the first part of the note below.
  • Increasingly, it appears that we remain among the few firms left with an explicitly bullish outlook for US economic growth and we’ll maintain that view until our leading indicators tell us reverse course. For now at least, 10Y bond yields (bullish TREND & TAIL), the SPX (bullish TREND & TAIL), the DXY (bullish TREND & TAIL), Gold (bearish TREND & TAIL) and Oil (bearish TREND & TAIL) all continue to state that the positive trend in US economic growth remains intact. The recent ISM data definitely sounds the alarm bells, but determining if there is an actual fire to put out requires more than one month of data.
  • As such, we continue to be inclined to short the yen and buy the dollar with respect to the intermediate-term TREND. As the USD/JPY cross nears the low end of our immediate-term risk range, we think now is a good spot to add to positions or put the full trade back on to the extent you have previously booked gains.
  • While we are certainly not ones to catch falling knives, we do think this is as good of a buying opportunity in Japanese equities as “investors” have gotten since we were calling for Japanese equity reflation last NOV – especially in the context of our base case scenario of 110 and 125 on the USD/JPY cross by EOY ’13 and EOY ’14, respectively.
  • That is, of course, if the Nikkei 225 Index’s TREND line (under major duress as of the latest close) holds. If the breakdown is confirmed, however, expect us to start sending you “shorting Japanese equities” trade alerts in the near future.
  • All told, if you’re bearish on US growth from here, get long the yen and short the Nikkei with impunity. If, however, you’re constructive on US growth from here – like us – do just the opposite. Don’t make this policy-induced gong show any more complicated than that.

 

"THIRD ARROW" OR "FIRST RODEO"? 

Today, Japanese Prime Minster Shinzo Abe unveiled the “Third Arrow” of his Abenomics agenda, which mostly consisted of a series of grand targets for various economic measures with little-to-no details for how to achieve them:

 

  • Promote a +¥1.5M increase in gross national income per capita over 10 years – implying a CAGR of +3.4%;
  • Increase capital spending by +10% to ¥70T over the next three years;
  • Deregulate the energy, health and infrastructure sectors;
  • Boost power-related investment +150% to ¥30T;
  • Set up special economic zones in Tokyo and other large cities to attract foreign investment;
  • Double FDI to ¥35T by 2020;
  • Double exports from small and medium-sized companies by 2020;
  • Double farm exports by 2020;
  • Triple infrastructure exports, such as bullet trains and nuclear plants, to ¥30T; and
  • Have 70% of all exports covered by free trade deals – including the Trans-Pacific Economic Partnership – by 2018 (up from 19% now).

 

Taken in their entirety, these goals are designed to perpetuate an average of +3% nominal GDP growth and +2% real GDP growth over the next decade. Also worth noting is the disappointing lack of targets for reforming Japan’s public pension allocation and lowering corporate taxes, which, at 37%, are the second highest in the OECD.

 

It goes without saying that there’s a lot of politicized junk food to sift through from Abe’s speech today, but the updated GDP targets were by far the most important takeaway as it relates to Japanese and globally-interconnected financial market risk. If these nominal and real GDP targets are, in fact, accurate, this inherently takes down the LDP’s former +2% inflation target to +1%. Ultimately, this implies that the BOJ doesn’t have to be as aggressive in pursuing its monetary easing agenda.

 

SHOULD YOU SHORT THE YEN AND BUY THE NIKKEI HERE? - 1

 

It is rather unclear to us how Abe & Co. plan to adhere to a potentially lower inflation target in the context of what would be an unprecedented string of wage growth with respect to the post-bubble Japanese economy. More clarity in needed as it relates to whether or not the CPI target has truly been revised down -100bps to +1%; we’ll learn for sure by the end of next week (ether during the upcoming “Third Arrow” ratification process that is scheduled to take place JUN 12-14 in the Diet or at the BOJ’s JUN 11 board meeting).

 

THE ABENOMICS TRADE: WHERE TO FROM HERE?

All in, the JPY is up +3.8% vs. the USD since MAY 22, which compares to about +1.7% for the EUR (likely dragged up on a correlation-weighted basis). Going back to our 5/10 note titled: “TRADING ABENOMICS FROM HERE”, the sustainability of the Abenomics trade we authored (short yen; long Japanese equity reflation) has become primarily a function of the slope of US economic growth expectations and not a function of Japanese policy as it had been prior to then.

 

The only meaningful Japanese catalyst left is the JUL Upper House elections, but even that is turning out to be less of a catalyst as its outcome becomes increasingly obvious: per a recent Nikkei Newspaper poll, almost half of voters planned to vote for the LDP, compared with 6% for the next largest party (DPJ). An LDP majority would give Abe & Co. free reign to delay fiscal reform to the extent they aren’t getting the results they are currently hoping for on the GDP growth front several quarters from now. Recall that outgoing Prime Minster Yoshihiko Noda of the DPJ staked his political career and his Party’s fate on passing the VAT hike legislation.

 

On the flip side, the only probable catalysts we see that could derail the Abenomics trade are likely to continue coming from Japan at this point – much akin to today’s disappointing “Third Arrow” speech and Friday’s news that Japan’s FSA tightened rules on forex margin trading, which were designed to “protect investors” and “limit speculation”.

 

Needless to say, the latest US mini-growth scare we’ve experienced over the past 2-3 weeks has weighed on the USD. Ironically, to us at least, the scare is being perpetuated by rising interest rates – which have historically signaled an acceleration in the trend growth rate(s) of US GDP. Consensus has become so hooked on financial repression that investors are broadly missing what may wind up being the most obvious economic signal in recent memory.

 

SHOULD YOU SHORT THE YEN AND BUY THE NIKKEI HERE? - 2

 

Increasingly, it appears that we remain among the few firms left with an explicitly bullish outlook for US economic growth and we’ll maintain that view until our leading indicators tell us reverse course. For now at least, 10Y bond yields (bullish TREND & TAIL), the SPX (bullish TREND & TAIL), the DXY (bullish TREND & TAIL), Gold (bearish TREND & TAIL) and Oil (bearish TREND & TAIL) all continue to state that the positive trend in US economic growth remains intact. The recent ISM data definitely sounds the alarm bells, but determining if there is an actual fire to put out requires more than one month of data.

 

SHOULD YOU SHORT THE YEN AND BUY THE NIKKEI HERE? - UST 10Y

 

SHOULD YOU SHORT THE YEN AND BUY THE NIKKEI HERE? - SPX

 

SHOULD YOU SHORT THE YEN AND BUY THE NIKKEI HERE? - DXY

 

SHOULD YOU SHORT THE YEN AND BUY THE NIKKEI HERE? - GOLD

 

SHOULD YOU SHORT THE YEN AND BUY THE NIKKEI HERE? - OIL

 

SHOULD YOU SHORT THE YEN AND BUY THE NIKKEI HERE? - ISM Manfuacturing   Services

 

As such, we continue to be inclined to short the yen and buy the dollar with respect to the intermediate-term TREND. As the USD/JPY cross nears the low end of our immediate-term risk range, we think now is a good spot to add to positions or put the full trade back on to the extent you have previously booked gains.

 

SHOULD YOU SHORT THE YEN AND BUY THE NIKKEI HERE? - USDJPY

 

Indeed, the Abenomics trade has experienced a fairly meaningful correction in recent weeks (the Nikkei 225 is down -16.7% from its 5/22 YTD peak; the USD/JPY cross is down -3.8% from its 5/17 YTD peak); on the heels of this demonstrable pullback, the Nikkei 225 Index is now broken TRADE and TREND on our quantitative risk management score.

 

While we are certainly not ones to catch falling knives, we do think this is as good of a buying opportunity in Japanese equities as “investors” have gotten since we were calling for Japanese equity reflation last NOV – especially in the context of our base case scenario of 110 and 125 on the USD/JPY cross by EOY ’13 and EOY ’14, respectively. That is, of course, if the Nikkei 225 Index’s TREND line (under major duress as of the latest close) holds. If the breakdown is confirmed, however, expect us to start sending you “shorting Japanese equities” trade alerts in the near future.

 

SHOULD YOU SHORT THE YEN AND BUY THE NIKKEI HERE? - 10

 

All told, if you’re bearish on US growth from here, get long the yen and short the Nikkei with impunity. If, however, you’re constructive on US growth from here – like us – do just the opposite. Don’t make this policy-induced gong show any more complicated than that.

 

Darius Dale

Senior Analyst


CASUAL DINING: LOOKING GOOD

Takeaway: Strong price action in the casual dining stocks is being confirmed by sequentially stronger Blackbox Intelligence Data.

This note was originally published June 05, 2013 at 08:42 in Restaurants

Strong price action in the casual dining stocks is being confirmed by sequentially stronger Blackbox Intelligence Data. Blackbox Intelligence Data for May is giving us added confidence in our casual dining longs. 

  • Casual dining stock have outperformed the S&P 500 by 16% YTD
  • Casual dining sales continue to recover in May.  Blackbox reported May same-store sales trends of 0.8%, an improvement of 40bps sequentially. 
  • Traffic declined 1.6% in May versus 1.7% in June
  • 2Q sales appear to be on track to meet consensus expectation.  Consensus expectations are for the 15 publicly traded companies we track to report 2.8% same store sales in 2Q13 versus 0.8% in 1Q13.  The average spread between reported same-store sales SSS and the Blackbox reported numbers over the last 5 quarters has been 200 bps.  The current spread is 220bps, with one month left in the quarter.
  • Our favorite names in casual dining are EAT, DRI and CAKE

CASUAL DINING: LOOKING GOOD - blackbox SRS large

 

CASUAL DINING: LOOKING GOOD - Blackbox SRT

 

 

Howard Penney

Managing Director

HPenney@hedgeye.com

 

 

Rory Green

Analyst

RGreen@hedgeye.com


Morning Reads From Our Research Team

Takeaway: A quick look at some articles on the Hedgeye radar screen.

Josh Steiner – Financials

HSBC Sued by New York Over Alleged Foreclosure Violations (via Bloomberg)

AIG argues against $8.5 billion settlement with BofA (via Reuters)

 

Keith McCullough – CEO

Japan's Abe targets income gains in growth strategy (via Reuters)

Asian Stocks Fall as Japan Reverses Gain After Abe Speech (via Bloomberg)

Turkey protests resume in Istanbul after apology (via BBC)

 

Howard Penney – Restaurants

Domino's Uses a Drone to Deliver a Pizza (via Mashable)

 

Jonathan Casteleyn - Financials

Top 100 Most Valuable Global Brands 2013 (via millwardbrown.com)

 

Matt Hedrick – Macro

Latvia’s Euro Path Shows Allure of Crisis-Hit Currency, for Some (via Bloomberg)

 

Morning Reads From Our Research Team - reading


Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.

MAY IN MACAU - DETAIL LOOKS EVEN BETTER

As you already know, May was a strong month in Macau with GGR up 13.5% YoY.  What you may not know is that hold was actually 8bps below normal (including Direct VIP) accounting for a 3.0% drag on growth.  MPEL, LVS, and MGM were the standouts.  Here are some market and concessionaire observations:

 

MARKET

  • YoY growth would’ve been 16.5% assuming trailing 12-month VIP hold of 3.0%
  • VIP volume posted a 3rd straight above trend (trailing 3 month avg) performance
  • Mass grew 33% YoY, its best performance in over a year

LVS

  • Overall looks better than the market share print
  • GGR growth led the market despite well below normal VIP hold
  • VIP volume share was well above trend
  • Mass grew above trend, pushing market share to within 10bps of April’s all-time high

MPEL

  • Very low hold impacted results yet market share of 14% was above recent trend and YoY GGR growth of 30% trailed only LVS
  • Mass revenue increased a whopping (yes I like that word) 63% YoY and pushed Mass market share to an all-time record
  •  VIP volume share was in-line with recent trend

MGM

  • This property continues to impress us
  • VIP hold was above normal and MGM generated its 2nd highest level of growth since Feb 2012 and 3rd highest in the market
  • Mass share grew sequentially and was above trend

WYNN

  • Was one of 2 concessionaires to hold above normal in May
  • Mass growth was below recent trend
  • VIP volume barely grew in May but was the first month of YoY growth since November 2012

GALAXY

  • VIP hold was normal
  • Pretty much an in-line month across the board for Galaxy 

SJM

  • VIP hold was well below normal contributing to a 12% YoY drop in GGR
  • Mass market was only flat YoY and VIP volume actually declined
  • Market share fell to its lowest level ever

MAY IN MACAU - DETAIL LOOKS EVEN BETTER - d1

 

MAY IN MACAU - DETAIL LOOKS EVEN BETTER - g2

 

MAY IN MACAU - DETAIL LOOKS EVEN BETTER - g3


ECB on Hold Tomorrow

Takeaway: Draghi will monitor last month's cut and further assess non-standard measures to spur growth.

This note was originally published June 04, 2013 at 11:32 in Macro

Continuing with our call, we believe that Mario Draghi and the ECB will keep rates unchanged this Thursday after making a big splash cutting the main interest rate by 25bps (to +0.50%) last month.

 

ECB on Hold Tomorrow - ECB

 

Here’s how we’re sizing up our positioning:

  • Draghi has signaled that he expects a gradual recovery in growth in the back half of 2013, and therefore is monitoring the impact of the May 2nd interest rate cut and the current high-frequency data
  • Manufacturing PMIs were better in MAY vs APR (48.3 vs 46.7)
  • May Eurozone Confidence figures (Economic, Consumer, Business, Services, Industrial) all improved month-over-month
  • Sovereign yields remain largely anchored and the majority of European equity markets are positive YTD
  • The ECB needs more time to consider non-standard measures to encourage growth, including initial hints at 1.) Increased lending to small and medium-sized enterprises (SMEs) and 2.) Cutting the deposit rate to negative
  • On SME funding, it’s not clear the channel by which the funding would be carried out, ie from top-down coordination (Brussels/ECB) or bottom-up (at the individual CB/State Government level)
  • On a negative deposit rate, there is mixed discussion about the merits and benefits of such a move. Denmark provides one example of this and its government has claimed that it had no impact in boosting lending, and could negatively distort the property market. The jury is still clearly out on this option
  • Consensus is baking in no change to rates: 41 of 42 economists polled by Bloomberg agree

ECB on Hold Tomorrow - yy. rates large

 

Our critical TAIL line of resistance on the EUR/USD at $1.31 has not changed over recent months. We’ll be monitoring this level closely into and out of Thursday’s ECB meeting. Our immediate term TRADE range is outlined in the chart below. (The cross can be traded via the etf FXE).

 

ECB on Hold Tomorrow - yy. eur usd

 

Matthew Hedrick

Senior Analyst


2Q13 CASUAL DINING RECOVERY

Strong price action in the casual dining stocks is being confirmed by sequentially stronger Blackbox Intelligence Data. Blackbox Intelligence Data for May is giving us added confidence in our casual dining longs. 

  • Casual dining stock have outperformed the S&P 500 by 16% YTD
  • Casual dining sales continue to recover in May.  Blackbox reported May same-store sales trends of 0.8%, an improvement of 40bps sequentially. 
  • Traffic declined 1.6% in May versus 1.7% in June
  • 2Q sales appear to be on track to meet consensus expectation.  Consensus expectations are for the 15 publicly traded companies we track to report 2.8% same store sales in 2Q13 versus 0.8% in 1Q13.  The average spread between reported same-store sales SSS and the Blackbox reported numbers over the last 5 quarters has been 200 bps.  The current spread is 220bps, with one month left in the quarter.
  • Our favorite names in casual dining are EAT, DRI and CAKE

2Q13 CASUAL DINING RECOVERY - blackbox SRS

 

2Q13 CASUAL DINING RECOVERY - Blackbox SRT

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst


GET THE HEDGEYE MARKET BRIEF FREE

Enter your email address to receive our newsletter of 5 trending market topics. VIEW SAMPLE

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.

next