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Tears in Tokyo

Client Talking Points

JAPAN

That was quick. Japanese Prime Minister Shinzo Abe went from flying like Superman on the cover of The Economist to the Weimar Nikkei crashing to earth (-20.4% since May 22!). Evidently, people are realizing that the whole Bernanke strategy doesn’t actually work where it is promised to work – in the Japanese economy. YEN breakout > 95.95 TREND line (vs USD) #critical 

CHINA

It's just a certified train wreck in the A-shares (down -2.7%) and the Hang Seng (down -3.4%). Developing. We held our China Risk conference call yesterday which was very well attended. If you want the slide deck, ping us.

USD

I've been pounding the table on this: Get the US Dollar right and you get a lot of other things right. When we covered the USD/YEN short on Monday and sold ½ our longs in US Equities, this was the interconnected risk I was worried about. Down Dollar is bad for SPY. Period. The TREND correlation between USD/SPY = +0.84. So we’ll be looking for a USD oversold signal to start buying US stocks again.

Asset Allocation

CASH 54% US EQUITIES 17%
INTL EQUITIES 17% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 12%

Top Long Ideas

Company Ticker Sector Duration
NSM

Financials sector head Josh Steiner is the Street’s head bull on residential mortgage originator/servicer Nationstar, projecting $9 in earnings for the company in 2014.  This is well above the company’s own guidance range, which tops out at around $7.50. NSM had a successful start to the year as it won servicing bids on substantial mortgage portfolios.  They also reported significant increases in their profit margins on those portfolios, and double-digit increases in their own originations.  Housing prices are ramping significantly higher, as Steiner predicted, as demand continues to exceed supply in both new and existing homes.  Steiner says this quality mortgage company could ride the crest of a sustained wave of sector improvement.

MPEL

Gaming, Leisure & Lodging sector head Todd Jordan says Melco International Entertainment stands to benefit from a major new European casino rollout.  An MPEL controlling entity, Melco International Development, is eyeing participation in a US$1 billion gaming project in Barcelona.  The new project, to be called “BCN World,” will start with a single resort with 1,100 hotel beds, a casino, and a theater.  Longer term, the objective is for BCN World to have six resorts.  The first property is scheduled to open for business in 2016.  

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. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.

Three for the Road

TWEET OF THE DAY

ASIA: complete collapse of another Keynesian experiment in Japan; Weimar Nikkei -6.4% and rest of Asia gets smoked

@KeithMcCullough

QUOTE OF THE DAY

“To be crystal clear on our conclusion on how we think this ends for the Japanese people: in tears” (Hedgeye Early Look, May 30, 2012)

STAT OF THE DAY

38% ... The percentage of Japan's population that is 55 years old or older.


June 13, 2013

June 13, 2013 - dtr

 

BULLISH TRENDS

June 13, 2013 - 10yr

June 13, 2013 - spx

June 13, 2013 - euro

June 13, 2013 - yen

 

 

BEARISH TRENDS

June 13, 2013 - dax2

June 13, 2013 - VIX2

June 13, 2013 - dxy

June 13, 2013 - oil

June 13, 2013 - natgas


THE M3: GENTING MALAYSIA

THE MACAU METRO MONITOR, JUNE 13, 2013

 

 

RMB3BN FACELIFT FOR GENTING Edge Malaysia

In an attempt to double its profit and to respond to increasing competition from Singapore and Macau, Genting Malaysia Bhd is planning a RM3 billion facelift for its 42-year-old hilltop Genting Highlands casino resort.  "Plans are still being finalized and the board still needs to approve the plans. We've been investing substantial amounts overseas and it is now a good time to also invest here back home," said Genting Malaysia Chairman Tan Sri Lim Kok Thay.  Lim says plans should be finalized by the end of 2013.  The RM3 billion spend could span 2-3 years.

 


investing ideas

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Weimar Nikkei

This note was originally published at 8am on May 30, 2013 for Hedgeye subscribers.

“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 $1361-1424, $101.06-103.98, $83.31-84.61, 100.41-103.69, 2.01-2.18%, 12.35-15.11, 13506-14920, and 1641-1674, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Weimar Nikkei - Chart of the Day

 

Weimar Nikkei - Virtual Portfolio



Paying The Price

“Somebody had to pay.”

-Lloyd George

 

That’s what Britain’s Prime Minister had to say about German reparations at the Paris Peace Conference of 1919. He added, “If Germany could not pay, it meant the British taxpayer had to pay. Those who ought to pay were those who caused the loss.” (Paris 1919,pg 181)

 

What George forgot to mention was his founding of the British welfare state; part of the British bill had to cover government spending. The Germans didn’t like that. They didn’t like the pomp of John Maynard Keynes floating around Paris smoking the peace pipe either.

 

Oh yes, my friends, there are roots to this central planning Gong Show. They run far deeper than through Krugman’s craw. Japan is going to learn that the hard way now. Indeed, someone needs to pay the price. For the last decade American, European, and Japanese politicians have tried imposing that tax on their people via currency devaluation. Now the timing is ripe for politicians to pay the piper.

 

Back to the Global Macro Grind

 

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.”

 

The title of that Early Look was “Weimar Nikkei.” The date was May 30th, 2012. Today, the Japanese stock market is crashing.

 

To crash or not to crash, remains the question. Darius Dale and I get into this debate with clients all of the time – “so, when do you guys think this all hits the fan?”, “can’t the Japanese keep this going for a little while longer?”

 

It’s a very intellectual debate because all of Wall Street is trying to figure out how long a failed team of politicians (we call Abe and Aso the Keynesian Duo) is going to be able to suspend economic gravity.

 

And maybe that’s why even a hockey and football player (Darius was a 325lb offensive lineman at Yale) can remind you that there’s nothing intellectual about Krugman and/or Abe’s Policy To Inflate at all. It might sound clever, but as a practical matter it’s just dumb.

 

So what’s the risk to the Japanese completely screwing this up?

  1. The currency market stops believing this will end well (i.e. in sustained Japanese economic growth)
  2. The Yen rips and the US Dollar falls
  3. The Correlation Risk (USD vs SPX = +0.84 on our TREND duration) goes squirrel

I’d say those are some pretty big risks.

 

But don’t blame the politicians. Don’t ask them to pay the price. This isn’t the time to be talking about pounds of flesh or anything at all like that. Instead, let’s just watch the country where this whole money-printing experiment started (Japan) implode on the world stage.

 

The context of central planning history is critical:

  1. Post 1913 Federal Reserve Act gave birth to Bloomsbury flower power act of John Maynard Keynes
  2. Paris Peace Conference 1919 gave a platform for government spending gurus to lay the railway tracks of political plunder
  3. Post 1971 Nixon abandoning the Gold Standard, 1997 was a no brainer for Krugman to tell Japan to “PRINT LOTS OF MONEY”

To be fair, going back to the 13th century, free-market folks like Genghis Kahn have been fighting the aristocracy of kingdoms and political plunderers. So the idea that Charles de Gaulle devaluing his people’s currency was going to fail inasmuch as the Weimar Republic’s did and/or the 2013 Japanese version of the same will may be consensus amongst people who have studied history.

 

But who cares about causality (central planners), let’s talk correlation – this is where this market’s risk is at!

  1. As soon as the Japanese Yen snapped our 95.85 TREND line, the Weimar Nikkei went squirrel last night
  2. Closing down -6.4%, that puts the #WeimarNikkei in crash mode (-20.4% since May 22nd!)
  3. When the big stuff starts snapping and crashing like that, we get out of the way

Actually, we got out of the way before it happened – think Hedgeye-style “Waterfall”  - and how we proactively risk manage the oncoming entropy of a burst of interconnected H20 crashing over the damn. #oncoming!

 

With time this Correlation Risk (driven by political causality) will burn off – but not today; water doesn’t burn:

  1. USD/YEN snaps 95.85 TREND line as US Dollar Index snaps 81.21 TREND line
  2. Weimar Nikkei’s TREND line of 13,848 #snapped
  3. China, Hong Kong, Germany – all of their Equity markets are over the waterfall now too (bearish TREND)

Most of this isn’t new. It’s just all happening faster now. That’s how risk works – it happens fast. This is big water, moving real fast, and I can assure you that most of the macro “tourists” out there who didn’t respect either the Yen or Nikkei signal are now very wet.

 

What does this mean for our asset allocation?

  1. We already have a 0% asset allocation to Fixed Income (Bond Yields aren’t going down on this fyi)
  2. We already have a 0% asset allocation to Commodities (Gold is down on this, fyi)
  3. We’d already cut our US Equities allocation in half versus its max (on Monday)

Since we are bearish on #EmergingOutflows (Emerging Markets), we don’t have to deal with that this morning either. What we need to make a decision on is whether to get out of US Equities altogether.

 

Here’s how I think about US Equity Market risk:

  1. It all starts and ends with the Dollar; the TREND is broken (but can be recovered with time; long-term TAIL support = 79.11)
  2. SP500 TRADE line of 1624 is broken, but TREND support of 1583 remains intact
  3. US Equity Volatility TREND resistance of 18.98 is going to be under siege this morning

Volatility, entropy, convexity – this is the stuff that makes people go squirrel. Yes, I’ve used the squirrely metaphor 3x this morning because that’s what my inbox looks like. We are getting a lot of questions on this. Which means institutional clients are in the water.

 

My first move this morning will be to do nothing. We’re not wet, so we can watch this political gonger play out a little before we let the market tell us which of these interconnected TREND risks confirms.

 

As for who ultimately pays the price for all these unintended consequences, I formally nominate Bernanke, Kuroda, and Aso. Especially for that Aso guy, ripping their countrymen a new one via currency devaluation is something they should all be ashamed of.

 

Our immediate-term Risk Ranges for Gold, Oil, US Dollar, USD/YEN, UST 10yr Yield, VIX, and the SP500 are now $1, $100.36-103.94, $80.46-81.21, 93.69-95.85, 2.06-2.27%, 14.61-18.98, and 1, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Paying The Price - Chart of the Day

 

Paying The Price - Virtual Portfolio


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