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MACAU: BIG FINISH TO SEPT BUT…

September GGR up 21% YoY but visitation softer to start October – cheap package tour ban?

 

  • September GGR finishes up 21% YoY.  Our October estimate remains at +20-25% growth but is subject to change until we see the detail behind September’s growth and how Golden Week finishes up this weekend.
  • One tiny note of caution:  September finished with a flurry (start of the Golden Week celebration) as seen by the visitation statistics in the chart below.  However, October total visitation is just flat through the first two days (Tue/Wed vs Mon/Tue).  A ban on cheap package tours (effective October 1) could be the culprit in which case low end Mass revenue would only be mildly impacted.
  • This coming weekend will round out Golden Week and give us a better feel for the overall success of the big holiday.

MACAU: BIG FINISH TO SEPT BUT… - golden


BBEP: A Closer Look at Postle, and the SEC Review

Summary

 

Our primary issue with BreitBurn Energy Partners (BBEP) is understated maintenance CapEx - and the Postle acquisition increases our concern.  With increased scrutiny now around LINN Energy's (LINE, LNCO) maintenance CapEx policy, as evidenced by the stark changes in disclosure in its latest S-4/A, investors should strongly consider whether or not BBEP's maintenance CapEx level is appropriate, or light.  We believe that it is very light.  While this SEC review did not address BBEP's maintenance CapEx, it would not surprise us if one in the future does.  

 

Postle Field Economics - Where's the Maintenance CapEx?

 

Comments from BBEP’s management team, as well as its forward guidance, suggests to us that is materially understating the amount of CapEx that it is needed to keep production flat (maintenance CapEx) on the Postle Field assets that it acquired in June 2013 and closed on in July 2013.  After adjusting for appropriate maintenance CapEx, we do not believe that the acquisition is accretive to BBEP's DCF/unit.

 

From BBEP's 8/6/2013 2Q13 Earnings Conference Call (our emphasis):

 

Analyst: Thanks. Mark, question just circling back on maintenance capital, can you talk about whether or not the addition of the Postle asset will have much of an impact on the overall corporate decline curve and the intensity of trying to – of what you need to spend for maintenance capital?

 

COO Mark Pease: Jeff, we've looked at that and it is shallow decline, which is a good thing for us. Overall, it doesn't have much impact.  I mean, it's pretty consistent with the maintenance capital that we see across the portfolio. So, while we have some areas that, as you look at them individually, they're higher than others. From a whole portfolio standpoint, Postle is right in there with the rest of our assets.

 

Analyst: Can you share what the cash flow just from that asset might be versus the capital that would be needed to keep it flat?

 

COO Mark L. Pease: Jim, I don't know what we've disclosed on that, on that the deal.

 

CFO James Jackson: Hey Jeff, it's Jim. We just haven't – we've not given that level of detail on Postle to date.

 

BBEP filed pro forma financial data for Postle in its 8/30/2013 8-K, so now we have that level of detail.  Below are the key stats:

 

BBEP: A Closer Look at Postle, and the SEC Review - bbep1AAA 

 

Production in April 2013 was 7,400 boe/d, down 9% from 2012 average.  Total CapEx in 1H13 was $44MM, or ~$87MM annualized.  This implies that this level of spend is insufficient to stem the production decline on this asset.  This is consistent with the production and spending trends at Postle over the last three years.  Production in April 2013 was down 20% from the 2010 average. 

 

After the acquisition, BBEP guided 2H13 maintenance CapEx to $55MM (see the 6/24/13 investor presentation), with Postle expected to close on August 1st (5 full month contribution in 2013).  2Q13 maintenance CapEx was $19.5MM without Postle, as stated by management on the 2Q13 conference call, so this acquisition resulted in an ~$8MM/quarter increase in Maintenance CapEx.  BBEP's guidance suggests that maintenance CapEx on Postle will be ~$32MM/year; this is difficult to reconcile with the facts that annualized CapEx at Postle since 2011 was ~$84MM, and production was in decline.  Maintenance CapEx is supposed to be the capital required to keep production flat...

 

Total CapEx on Postle was 54% of EBITDA in 1H13, and production is in decline.  BBEP’s maintenance CapEx in 2Q13 was only 23% of EBITDA.  Yet, management states that the Postle Field maintenance CapEx, “From a whole portfolio standpoint, Postle is right in there with the rest of our assets.”  In our view, the data does not support this assertion.

 

And while management stated on the deal call that the acquisition was “right around, maybe even a little less than 6X expected forward EBITDA,” the stand-alone Postle assets (excluding derivative assets/liabilities) were acquired for 11x 1H13 annualized free cash flow, and the asset is in decline.  EBITDA can be a misleading measure for a CO2 flood due to capitalized CO2.  

 

The total Postle purchase price (ex. derivative assets and liabilities) was ~$815MM, 0.83x the YE12 standardized measure of $985MM.

 

If BBEP finances this acquisition with 50% equity and 50% debt, we do not believe that it will be accretive to DCF/unit.  The asset requires significantly more capital to keep production flat than BBEP is letting on, as the actual data from 2010 - 1H13 shows.

 

BBEP: A Closer Look at Postle, and the SEC Review - bb1

 

BBEP Makes Public Correspondences with the SEC

 

BBEP made its 2013 correspondences with the SEC public late last week.  The SEC first sent a letter to CFO James Jackson on March 27, 2013 with comments related to BBEP’s 2012 10-K.  BBEP and the SEC traded a series of letters and phone conversations between May 2013 and August 2013.  On August 28, 2013, the SEC completed its review.

 

What were the SEC’s major concerns?

  1. Explanation of the “net operating cash flows from effective date through the closing date of an acquisition” adjustment in adjusted EBITDA.
  2. Explanation of why there was not a larger impairment charge in 2012 given -31% natural gas reserve revision.
  3. Explanation of commodity derivatives accounting – realized gains (losses), unrealized gains (losses), and premiums paid.
  4. Questionable application of the 5-year PUD rule.
  5. No pro forma financials for the 2012 Permian acquisitions.

What were the outcomes?

  1. 2012 10-K was revised, removing “Net operating cash flow from acquisitions, effective date through closing date.”
  2. No further impairment required, as BBEP successfully argued that the assets passed the impairment test – whether or not the undiscounted proved and risk-adjusted probable and possible reserve cash flows were in excess of the assets’ carrying values (net book value).
  3. Revised, increased, and improved disclosure around derivatives accounting and premiums paid.   BBEP amended its 2012 10-K and 1Q13 10-Q  “to revise its disclosures from a separate presentation of realized and unrealized derivative gains or losses to a combined presentation for derivative gains or losses.  In addition, the Partnership will add back total derivative gains or losses and also provide separate disclosure of derivative contract settlement amounts in its Consolidated Statement of Cash Flows as well as in its Adjusted EBITDA table. The Partnership will also disclose the amount of premiums for derivative contracts paid in earlier periods that apply to contracts settled during the period(s) shown in a footnote disclosure to its Adjusted EBITDA table” (8/14/13 Correspondence, pg. 4). 
  4. BBEP will prospectively apply a strict definition of the 5-year rule.  At YE12, BBEP had 3.3 MMboe of PUD reserves (2% of total) that were scheduled to be developed outside of five years from their initial disclosure.  These reserves had a standardized measure of $23.6MM (1% of total) at YE12. 
  5. No pro forma financials necessary, as BBEP successfully argued that the acquisitions were not material.

Takeaways

  1. We believe that BBEP’s use of non-GAAP measures is aggressive.  The SEC addressed two of our issues with adjusted EBITDA in its review – the adjustment for net operating CF between the closing and effective dates of acquisitions, and BBEP’s exclusion of commodity derivative premiums paid.  This should prevent BBEP from making these aggressive adjustments going forward – in 2012 they increased DCF by ~11%.
  2. In our view, BBEP’s biggest issue and source of over-valuation is understated maintenance CapEx, which we detailed in our 8/7/13 note, BBEP 2Q Review: Understated Maintenance CapEx = Majority of DCF.  By our calculations, BBEP’s organic production in the 12 months from 2Q12 – 2Q13 was down 0.3% YoY, while total organic CapEx exceeded maintenance CapEx by $130MMIf BBEP increased maintenance CapEx by that amount, we estimate that DCF would get cut by ~80%.  The SEC did not at all address maintenance CapEx in this review, presumably because there is no mention of it or DCF in BBEP’s SEC filings.  We cannot understand why BBEP’s maintenance CapEx and DCF is not disclosed, explained, and reconciled (both maintenance CapEx and DCF) to the nearest GAAP figures in its SEC filings – or even in its earnings press releases – despite the obvious importance of these non-GAAP figures to investors.  Maintenance CapEx is addressed in the FAQ section of BBEP’s website, though, in our view, the definition just begs additional questions.
  3. BBEP disclosed that the net book value of its Antrim Shale field was $891MM at YE12, which was 33% of total net PP&E.  At YE12, BBEP’s Antrim Shale reserves were ~242 Bcfe and 2012 production was ~48 MMcfe/d.  In our view, the fair value of this asset today is likely only ~$300MM, nearly $600MM below YE12 net book value.  Transaction multiples for comparable dry gas properties today are ~$1 - $2/proved Bcfe.  The last major Antrim Shale deal was LINN Energy’s March 2010 acquisition of HighMount Exploration’s properties for $330MM.  Those properties had 266 Bcfe of proved reserves, putting the deal multiple at $1.24/Bcfe.  More recently, in August 2013, Atlas Resource Partners (ARP) acquired 466 Bcf of natural gas 1P reserves in New Mexico and Alabama for $733MM, putting that transaction multiple at $1.57/Bcfe.

 

Kevin Kaiser

Senior Analyst

 



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Obama Bucks

“If making money is a slow process, losing it is quickly done.”

-Saikaku Ihara

 

That’s a mint quote at the start of chapter 13 (“Wild Money And The Stealth Tax”) in one of my favorite economic history books, Jack Weatherford’s The History of Money (pg 193). I’d love to hear Bernanke and Obama’s version of this history. Devaluing the purchasing power of The People for political gain is as old as politics itself. It’s called inflation – and it’s a stealth tax.

 

Ex the anti-dog-eat-dog-class-warfare-storytelling, you’ve probably noticed that US politicians are currently burning the credibility of your hard earned currency at the stake (see Chart of The Day). No US President and/or Federal Reserve Chief has overseen A) a lower US Dollar value and/or B) a higher Oil price than Obama and Bernanke. Nice job boys.

 

No US President has been forced to “shut-down” the government in 17 years either. In order to explain the mechanics of it all, we’ll be hosting a call with the last man to force Big Government’s hand on this, Newt Gingrich, at 11AM EST @Hedgeye today (email if you’d like access – we’ll have a full access client Q&A for Newt too).

 

Back to the Global Macro Grind

 

Simple question: When it comes to the purchasing power (currency) of who Obama labels “ordinary, middle class folks”, doesn’t the buck stop with the President of The United States?

 

As Obama pointed out yesterday in an interview with raging Republican, John Harwood, the appointment of Bernanke was as important as any he’s made. So, doesn’t that make The President accountable to empowering a Burning Buck policy?

 

Silly questions, I’m sure. That’s why CNBC didn’t get me to do the interview.

 

In other news, the US stock market is now down for 9 of 11 days since Ben Bernanke arbitrarily decided to do precisely the opposite of what he was “communicating” to the marketplace (taper).

 

Counter to consensus thinking, the better part of this recent correction in stocks has come on days when:

  1. US Dollar is DOWN, and
  2. US Interest Rates are DOWN

The causal factor in driving Down Dollar has been a two track (monetary and fiscal) political strategy that is starting to look like an idea that came out of a Roman bath club circa 52 BC. Plunder the people for political gain. They won’t understand. #stealth

 

With the US Dollar having given back all of its YTD gains (it’s down -2.7% in the last month):

  1. The US Dollar Index now has a 6-week POSITIVE correlation of +0.95 to the 10yr US Treasury Yield
  2. And the USD has a 6-week POSITIVE correlation of +0.82 to the US Treasury 10Y-2Y Yield Spread

Just because you won’t get things like leading indicators from your President or the US Federal Reserve doesn’t mean they cease to exist:

  1. Down Dollar and Down Interest Rates are starting to = Down Stock Market
  2. Down Dollar and Down Interest Rates = a leading indicator for #GrowthSlowing

If this sounds familiar to you, it should – this is basically the inverse of our call for the last 10 months. We were bullish on US GDP #GrowthAccelerating because two of the most obvious leading indicators for growth (#StrongDollar + #RatesRising) had both #OldWall Street and Washington consensus chasing the rising growth expectations.

 

From a S&P Sector perspective, the easiest way to summarize growth expectations slowing is via the Financials (XLF). The reason why the 10Y minus 2Y Yield Spread matters is because this is how a bank makes money. As the long-end of the curve (interest rates) falls, banks make less of a margin and can then lend less.  How’s that for “ordinary folks”?

 

While almost every said “economics” guru advising Obama will tell him that a “weak Dollar is good for manufacturing and exports”, that’s the biggest crock since Nero started devaluing The People’s currency in the first place. Let’s look at what just happened in a country whose currency was lit on fire earlier this year (and whose stock market was crashing, in kind) – Brazil:

  1. Brazil finally said enough is enough, and RAISED rates to defend its currency (the Real)
  2. Brazilian Real is now +7.8% in the last month versus USD; Brazilian Stocks (Bovespa)= +17.9% in the last 3 months
  3. Brazil’s SEP economic data (both manufacturing PMI and Exports) accelerated as its currency did (Exports +5% y/y SEP)

Yep. Them be the facts, “folks.” And if you want to re-gain the trust of The People, you better start talking #truth. Politically preying on the ignorance of “ordinary” people is un-American. Losing respect like the US Dollar has happens slowly, then all at once.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.58-2.73%

SPX 1

Nikkei 134

VIX 14.86-17.39

USD 79.21-80.42

Euro 1.34-1.36

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Obama Bucks - Chart of the Day

 

Obama Bucks - Virtual Portfolio


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – October 3, 2013


As we look at today's setup for the S&P 500, the range is 15 points or 0.76% downside to 1681 and 0.13% upside to 1696.                                              

                                                                                 

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: 2.32 from 2.30
  • VIX closed at 16.6 1 day percent change of 6.82%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7:30am: Challenger Job Cuts Y/y, Sept. (prior 56.5%)
  • 7:30am: RBC Consumer Outlook Index, Oct. (prior 51.1)
  • 8:30am: Init Jobless Claims, Sept. 28, est. 315k (pr 305k)
  • 8:30am: Continuing Claims, Sept. 20 (prior 2.800m)
  • 9:45am: Bloomberg Consumer Comfort, Sept. 29 (prior -28.1)
  • 10am: ISM Non-Manuf Index, Sept., est. 57 (prior 58.6)
  • 10am: Freddie Mac mortgage rates
  • 11am: U.S. announces plans for 3Y note auction on Oct. 8, 10Y notes on Oct. 9, 30Y bonds on Oct. 10
  • 11am: Fed to buy $1.25b-$1.75b in 2036-2043 sector
  • 11am: Fed’s Williams speaks in San Diego
  • 12:30pm: Fed’s Fisher speaks on economy in Dallas
  • 1pm: Fed’s Lockhart speaks on labor market in Atlanta
  • 1:30pm: Fed’s Powell speaks on banking in St. Louis
  • 5:30pm: Fed’s Fisher speaks in Little Rock, Ark.

GOVERNMENT:

    • Partial U.S. govt shutdown enters 3rd day
    • IMF’s Christine Lagarde speaks on global economy
    • SEC Commissioner Daniel Gallagher speaks about his agency at the Security Traders Association Market Structure Conf. 3:15pm

WHAT TO WATCH:

  • White House meeting fails to end stalemate that led to shutdown
  • Eco releases to include claims today, no payrolls tmw
  • Frustrated Republicans urge Boehner to find deal to end shutdown
  • Goldman said to make $1.5m error in Ford bond issue
  • U.S. holiday sales may rise 3.9% as budget fight curbs sentiment
  • Pershing’s Ackman moves to soften risk on Herbalife pyramid bet
  • Draghi said to task ECB panel to mull bank liquidity options
  • China services index rises to 6-month high
  • BP wins review of challenged payouts to Gulf spill victims
  • Google seen by U.S. risking security if data release is allowed
  • Mark Cuban to defend himself on stand in SEC’s insider trial
  • Spain sells 10-yr bonds to yield 4.269%, lowest since Sept. ’10
  • Google buys gesture recognition startup Flutter: AllTHingsD
  • Zale says Golden Gate Capital may sell 25% stake: WSJ
  • Eurozone Aug. retail sales up 0.7% M/m; est. up 0.2% M/m
  • United Technologies sees 5k jobs at jeopardy in U.S. shutdown

EARNINGS:

    • Constellation Brands (STZ) 7:30am, $0.88
    • International Speedway (ISCA) 7:30am, $(0.01)

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Malaysia Starts Gold Futures Trade as Investor Demand Grows
  • Rio Replacing Train Drivers Paid Like U.S. Surgeons: Commodities
  • WTI Crude Declines on Concern U.S. Shutdown May Curb Fuel Demand
  • Gold Falls on Signs of Slowing Demand in China; Palladium Drops
  • Copper Declines as U.S. Government Shutdown Enters Third Day
  • Wheat Rises as Rain Slows Winter Planting From Ukraine to Russia
  • Sugar Falls in New York for First Time This Week; Cocoa Climbs
  • BHP Sees Robust Commodity Demand Growth as China Urbanizes
  • Iron Ore Exports From Port Hedland Climb as China Purchases More
  • World Food Prices Drop to Lowest in Three Years on Grain Slide
  • Saudi Aramco Set to Narrow Light-Heavy Price Spread: Asia Crude
  • Europe Faces Winter Gas Squeeze Even With Faster Stores Refill
  • Gold Double Bottom Signals Rally to $1,425: Technical Analysis
  • Russia’s VTB Capital May Expand in Base Metals Trading Next Year

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

 

 

 

 

 

 

 

 

 

 

 

 


GET TIGHT AND TRADE THE RANGES IN JAPAN

Takeaway: Investors would do well to reduce their gross exposure and/or tighten their net exposure to the Abenomics Trade for at least the next 2-3M.

SUMMARY BULLETS:

 

  • From our vantage point, the following three scenarios are all probable, with each ascending scenario being roughly twice as probable as the previous one on the list:
    1. The SEP and/or OCT US employment and inflation data cause the Fed to commence tapering in 4Q13;
    2. Abe’s Third Arrow platform (TBD) is well-received by the market and/or the BoJ preemptively eases monetary policy in 4Q13; or
    3. Abe’s Third Arrow platform is not well-received by the market and the BoJ refrains from preemptively easing monetary policy in 4Q13.
  • The unique nature of each of the aforementioned scenarios is supportive of developing consternation that may contribute to rising levels of implied volatility on the USD/JPY cross and in the Japanese equity market.
  • While we certainly don’t see the Abenomics Trade as being a rearview phenomenon, we do think the unsettled nature of the catalyst calendar is likely to breed contempt in the marketplace and contribute to a widening of the associated immediate-term trading ranges on a go-forward basis.
  • Thus, investors would do well to reduce their gross exposure and/or tighten their net exposure to the Abenomics Trade for at least the next 2-3M.

 

THE 30,000 FOOT VIEW

With the recent announcement that the +300bps VAT hike will proceed as scheduled come APR ‘14 and the accompanying ¥5T stimulus package now in the rearview mirror, the policy calendar in Japan becomes relatively light again.

 

The general lack of clear policy catalysts from Japan is important in the context of the developing US monetary policy situation – specifically, the Fed’s recent decision not to taper asset purchases in spite of a clear acceleration in US growth data.

 

On the margin, the aforementioned FOMC surprise was a decidedly dovish maneuver that has weighed on the US dollar (now bearish TREND) vis-à-vis the Japanese yen (the USD/JPY cross is flirting w/ a TREND-line breakdown).

 

GET TIGHT AND TRADE THE RANGES IN JAPAN - 1

 

GET TIGHT AND TRADE THE RANGES IN JAPAN - 2

 

Quantitatively speaking, what’s bullish for the Japanese yen in almost perfectly bearish for Japanese equities; the trailing 1Y and 3Y correlation between the USD/JPY cross and the Nikkei 225 Index is +0.97, respectively.

 

GET TIGHT AND TRADE THE RANGES IN JAPAN - 3

 

Perhaps more importantly, the Nikkei 225 Index remains underwater vs. it’s late-MAY YTD high and is down -6.4% since the USD/JPY cross peaked on MAY 17. The more that currency cross remains under pressure due to FOMC dogma(s), the greater the probability that market participants start to walk away from the Japanese equity reflation side of the trade.

 

IN THE WEEDS

The aforementioned playbook is something to keep in mind as you attempt to manage risk around the next couple of US Jobs Reports and any headlines surrounding Prime Minster Abe’s Third Arrow over the next 2-3M.

 

Regarding that latter point, we think any policies designed to facilitate wage increases, spur corporate CapEx and/or convince Japanese companies to believe in the sustainability of the weak yen will be most impactful as it relates to FX market participants bidding up the USD/JPY cross on [good] news:

 

  1. Wage growth remains anemic in Japan with growth in monthly cash earnings slowing to -0.6% YoY in AUG; the trailing 1Y and 3Y average growth rate is -0.4% and -0.3%, respectively.
  2. Despite the 3Q13 Tankan Survey results accelerating to the highest levels in over 5Y, the one major disappointment of the survey was the large enterprises CapEx guidance forecast slowing to +5.1% from +5.5% prior. That forecasted rate of fixed investment growth is well off prior peaks of +10-12%.
  3. We believe the primary reason Japanese multinationals are still reluctant to invest in Japan’s future is because they are not yet convinced of the sustainability of the weak yen. Per the latest Tankan Survey, the NTM forecast of Japan’s large enterprises for the USD/JPY cross is a measly 93.77. A measured shift in the direction of our ~18M view of ~125 on that cross will be highly supportive of Japanese corporations reversing the secular trend of off-shoring production and unwinding entrenched deflation expectations that have perpetually weighted on wage growth in Japan. To the former point, Japan’s overseas auto production grew +3.6% YoY in AUG, which contrasts with the -8.1% YoY decline of domestic auto production (the 12th straight month of declines).

 

GET TIGHT AND TRADE THE RANGES IN JAPAN - 4

 

GET TIGHT AND TRADE THE RANGES IN JAPAN - 5

 

GET TIGHT AND TRADE THE RANGES IN JAPAN - 6

 

As we have forecast all along, Japan’s policy prescription has done little more than contribute to rising inflation expectations in Japan, thereby adversely widening the spread between those very expectations and expectations for economic growth. The following two data points highlight this bifurcation:

 

  1. Results from a Nikkei survey released today showed that there are roughly ~4x more companies that are considering passing along the VAT hike via price increases (fully = 48%; partially = 17.1%) than those that are considering pay increases in FY14 (bonus increase = 13%; wage increase = 2.4%; both = 8.1%).
  2. Results from the BoJ’s 3Q13 consumer survey showed that the number of Japanese households that anticipate inflation will accelerate over the NTM (83%, up from 80.2% prior) is roughly 5x greater than those that anticipate growth will accelerate over the NTM (16.2%, down from 24.3% prior).

 

Indeed, in the absence of near-term tapering out of the Federal Reserve (an event that we believe would be bullish for the USD/bearish for the yen/bullish for the Nikkei), the pressure upon the LDP to hit a home run with Abe’s Third Arrow program and/or upon the BoJ to preemptively ease monetary policy ahead of the APR ‘14 VAT hike in order to maintain faith in the market that it is appropriately progressing towards its +2% inflation mandate is great.

 

Regarding that latter point, SEP 19 commentary from BoJ Board Member Takahide Kiuchi highlights the heightening risk of the BoJ being forced by the market to reengage in the Currency War: “The Fed’s decision [to not taper] shows how hard it is to end unconventional monetary policy. Market expectations may push the BoJ to ease further.”

 

THE PORTFOLIO MANAGER’S PLAYBOOK

All told, for the time being, the “Abenomics Trade” (i.e. short the Japanese yen/long Japanese equities) no longer has the policy support of a #StrongDollar. That means Japanese policymakers will become increasingly important in determining the performance of the trade – a marked shift from the last 3-6M of US growth expectations largely determining the performance of the USD/JPY cross.

 

From our vantage point, the following three scenarios are all probable, with each ascending scenario being roughly twice as probable as the previous one on the list:

 

  1. The SEP and/or OCT US employment and inflation data cause the Fed to commence tapering in 4Q13;
  2. Abe’s Third Arrow platform (TBD) is well-received by the market and/or the BoJ preemptively eases monetary policy in 4Q13; or
  3. Abe’s Third Arrow platform is not well-received by the market and the BoJ refrains from preemptively easing monetary policy in 4Q13.

 

As an aside, we put emphasis on "preemptive" because, at the moment, both growth data and inflation expectations are supportive of the BoJ standing pat.

 

GET TIGHT AND TRADE THE RANGES IN JAPAN - 7

 

GET TIGHT AND TRADE THE RANGES IN JAPAN - 8

 

GET TIGHT AND TRADE THE RANGES IN JAPAN - 9

 

The unique nature of each of the aforementioned scenarios is supportive of developing consternation that may contribute to rising levels of implied volatility on the USD/JPY cross and in the Japanese equity market.

 

While we certainly don’t see the Abenomics Trade as being a rearview phenomenon, we do think the unsettled nature of the catalyst calendar is likely to breed contempt in the marketplace and contribute to a widening of the associated immediate-term trading ranges on a go-forward basis.

 

Thus, investors would do well to reduce their gross exposure and/or tighten their net exposure to the Abenomics Trade for at least the next 2-3M.

 

Darius Dale

Senior Analyst


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.28%
  • SHORT SIGNALS 78.51%
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