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THE M3: JAPAN

THE MACAU METRO MONITOR, DECEMBER 5, 2013

 

 

JAPAN'S LDP LEGISLATORS SUBMIT BILL IN DIET TO LEGALIZE CASINOS Strait Times

Japanese lawmakers from the ruling Liberal Democratic Party submitted a bill to legalize casinos to parliament.   The bill was also jointly submitted by the members of the Japan Restoration Party and other groups, Hiroyuki Hosoda, the chairman of a cross-party group of pro-casino lawmakers.  LDP’s junior coalition partner New Komeito has approved the submission, LDP’s policy chief Sanae Takaichi said.

 

The parties aim to pass the bill in the next session beginning January, said Hosoda, who is also an executive acting LDP secretary-general.  The bill, which was drafted by a group of pro-casino lawmakers across parties, was approved by the LDP’s General Council last month.

 

The LDP has a single-party majority in the lower house and would probably gain enough opposition support to pass the bill in the upper house and enact the law even without New Komeito’s backing.


Christmas Bear Scraps

Client Talking Points

JAPAN

If you wanted to short a major equity market for a real correction, you should have tried a whirl on the Nikkei for 48 hours. Japan was down -1.5% overnight. It's down -3.7% in 2-days after the YEN stopped going down versus the US Dollar. Global macro matters.

EURO

So in spite of that European Central Bank cut, the Eurocrats just can’t seem to keep the Euro down versus the US Dollar. Why? Because Ben Bernanke is prepping his academic turkeys for more no-taper basting. Who cares what the economic data says? That scent in the air is the smell of #BurningBucks.

UST 10YR

What's that? #RatesRisingagain? Yes.. to 2.83% (Gold down -0.8% this morning, it no likey rising rates). So, Bill Gross and the bond guys over at PIMCO and the New York Fed better intervene soon. After all, our unelected central planners at the Federal Reserve must never let economic gravity get in the way of good dogmatic storytelling. #Sad. On a related note, SPX risk range is now 1788-1815. Time to buy and cover (again).

Asset Allocation

CASH 42% US EQUITIES 10%
INTL EQUITIES 12% COMMODITIES 4%
FIXED INCOME 6% INTL CURRENCIES 26%

Top Long Ideas

Company Ticker Sector Duration
FXB

Our bullish call on the British Pound was borne out of our Q4 Macro themes call. We believe the health of a nation’s economy is reflected in its currency. We remain bullish on the regime change at the BOE, replacing Governor Mervyn King with Mark Carney. In its October meeting, the Bank of England voted unanimously (9-0) to keep rates on hold and the asset purchase program unchanged.  If we look at the GBP/USD cross, we believe the UK’s hawkish monetary and fiscal policy should appreciate the GBP, as Bernanke/Yellen continue to burn the USD via delaying the call to taper.

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.

TROW

Financials sector senior analyst Jonathan Casteleyn continues to carry T. Rowe Price as his highest-conviction long call, based on the long-range reallocation out of bonds with investors continuing to move into stocks.  T Rowe is one of the fastest growing equity asset managers and has consistently had the best performing stock funds over the past ten years.

Three for the Road

TWEET OF THE DAY

Devalue The Dollar and crush seniors starving on fixed savings w/ 0% rates (and talk "income disparity") @BarackObama

QUOTE OF THE DAY

"Great minds talk about ideas, average minds talk about events, and small minds talk about people." - Eleanor Roosevelt

STAT OF THE DAY

Bond prices fell yesterday, sending the 10-year note's yield to as high as 2.852%, nearing the 3% mark touched this past summer when investors bet the Fed would retreat from buying Treasury and mortgage bonds at its September policy meeting. (WSJ)


ICI Fund Flow Survey - Hey Diddle Diddle...Bond Outflows Down the Middle

Takeaway: Taxable bond outflows have now occurred in 22 of the past 26 weeks with tax-free or municipal outflows in 26 consecutive weeks

Investment Company Institute Mutual Fund Data and ETF Money Flow:

 

Total equity mutual fund flow for the week ending November 27th was $1.5 billion, a below average weekly inflow for 2013 but none-the-less a slightly positive indication for stocks. Within the total equity inflow result, domestic equity mutual funds lost $1.3 billion, the first outflow in 6 weeks with International equity funds posting a $2.9 billion inflow. Total equity mutual fund trends in 2013 however now tally a $3.2 billion weekly average inflow, a complete reversal from 2012's $3.0 billion weekly outflow 

 

Fixed income mutual funds continued persistent outflows during the most recent 5 day period with another $4.7 billion withdrawn from bond funds. This week's draw down worsened sequentially from the $3.2 billion outflow the week prior which has now forced the 2013 weekly average for all fixed income funds to an $1.1 billion outflow which compares to the strong weekly inflow of $5.8 billion throughout 2012

 

ETFs experienced mixed trends in the most recent 5 day period, with equity products seeing very strong inflows and fixed income ETFs seeing slight outflows week-to-week. Passive equity products gained $11.4 billion for the 5 day period ending November 27th, the 5th best week in all of 2013. Bond ETFs experienced a $251 million outflow, a deceleration from the $363 million subscription in the 5 days prior. ETF products also reflect the 2013 asset allocation shift, with the weekly averages for equity products up year-over-year versus bond ETFs which are seeing weaker year-over-year results

 

ICI Fund Flow Survey - Hey Diddle Diddle...Bond Outflows Down the Middle - chart 1

ICI Fund Flow Survey - Hey Diddle Diddle...Bond Outflows Down the Middle - chart 2

 

 

For the week ending November 27th, the Investment Company Institute reported slight equity inflows into mutual funds with over $1.5 billion flowing into total stock funds. The breakout between domestic and world stock funds separated to a $1.3 billion outflow into domestic stock funds and a $2.9 billion inflow into international or world stock funds. These results for the most recent 5 day period within stock funds were bifurcated, with the outflow in domestic stock funds below the weekly average of a $597 million inflow and with world stock fund production slightly above the $2.6 billion weekly inflow average. The aggregate inflow for all stock funds this year now sits at a $3.2 billion inflow, an average which has been getting progressively bigger each week and a complete reversal from the $3.0 billion outflow averaged per week in 2012.

 

On the fixed income side, bond funds continued their weak trends for the 5 day period ended November 27th with outflows staying persistent within the asset class. The aggregate of taxable and tax-free bond funds booked a $4.7 billion outflow, a sequential deterioration from the $3.2 billion lost in the 5 day period prior. Both categories of fixed income contributed to outflows with taxable bonds having redemptions of $3.6 billion, which joined the $1.0 billion outflow in tax-free or municipal bonds. Taxable bonds have now had outflows in 22 of the past 26 weeks and municipal bonds having had 26 consecutive weeks of outflow. While the sharp outflows that marked most of the summer and the start of the third quarter have moderated, the appetite for bonds has hardly rebounded. The 2013 weekly average for fixed income fund flows is now a $1.1 billion weekly outflow, a sharp reversal from the $5.8 billion weekly inflow averaged last year.

 

Hybrid mutual funds, products which combine both equity and fixed income allocations, continue to be the most stable category within the ICI survey with another $870 million inflow in the most recent 5 day period. Hybrid funds have had inflow in 24 of the past 26 weeks with the 2013 weekly average inflow now at $1.6 billion, a strong advance versus the 2012 weekly average inflow of $911 million.

 

 

ICI Fund Flow Survey - Hey Diddle Diddle...Bond Outflows Down the Middle - chart 3

ICI Fund Flow Survey - Hey Diddle Diddle...Bond Outflows Down the Middle - chart 4

ICI Fund Flow Survey - Hey Diddle Diddle...Bond Outflows Down the Middle - chart 5

ICI Fund Flow Survey - Hey Diddle Diddle...Bond Outflows Down the Middle - chart 6

ICI Fund Flow Survey - Hey Diddle Diddle...Bond Outflows Down the Middle - chart 7

 

 

Passive Products:

 

 

Exchange traded funds had mixed trends within the same 5 day period ending November 27th with equity ETFs posting a very strong $11.4 billion inflow, a sequential improvement from the $4.0 billion subscription the week prior and the 5th best week all year for stock ETFs. The 2013 weekly average for stock ETFs is now a $3.3 billion weekly inflow, nearly a 50% improvement from last year's $2.2 billion weekly average inflow.

 

Bond ETFs experienced a slight outflow for the 5 day period ending November 27th with a $251 million redemption, a sequential deceleration from the week prior which netted a $363 million inflow for passive bond products. Taking in consideration this most recent data, 2013 averages for bond ETFs are flagging with just a $265 million average weekly inflow for bond ETFs, much lower than the $1.0 billion average weekly inflow for 2012.

 

 

ICI Fund Flow Survey - Hey Diddle Diddle...Bond Outflows Down the Middle - chart 8

ICI Fund Flow Survey - Hey Diddle Diddle...Bond Outflows Down the Middle - chart 9 

 

 

Jonathan Casteleyn, CFA, CMT 

 

 

 

Joshua Steiner, CFA


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All of Us

“There is no one left, none but all of us.”

-S.S. McClure

 

So I was in my homeland (Canada) yesterday meeting with some free-market capitalists and couldn’t help but think of what it felt like when I came to this country in the early 1990s  - liberating.

 

Other than the Chris Farley looking mayor dude who did crack, Toronto, Ontario seemed void of what dominates our market lives in today’s USA. There’s no “taper-talk.” There are no professional politicians and TV pundits gorging on the uninformed.

 

As I boarded the plane back to beautiful Newark, New Jersey, I sighed. Then I cracked open a new book, and felt better again. In the preface to Doris Kearns Goodwin’s The Bully PulpitTheodore Roosevelt, William Howard Taft, and The Golden Age of Journalism, she reminds us of what objective research and reporting used to be. I smiled again. This is our opportunity.

 

Back to the Global Macro Grind

 

As S.S. McClure well understood, the vitality of democracy depends on popular knowledge of complex questions” (The Bully Pulpit, pg XIV); not using complexity, policy, and demagoguery, as a political Trojan horse to obfuscate the truth.

 

Albeit I’m just a man with my team in a room, that’s my solemn commitment to you – providing you an objective research view of the truth. To be clear, this is not a position in life I always longed for – it’s simply the position I find myself in.

 

Even though he went to Harvard, for a long-time I’ve respected Teddy Roosevelt via a paper one of my freshman guidance counselors (who I was older than at the time!) put on my desk when I first got to Yale – The Strenuous Life. If you ever feel like you’ve lost your moral compass, re-read that – and read it again. It does the soul good.

 

Moving along…

 

Buying-the-damn-bubble #BTDB may not be chicken soup for your soul, but it has certainly paid the bills in 2013. From a behavioral market practitioner’s perspective, I have developed an affinity for doing precisely the opposite of how I think this ultimately ends. Weird, but it works.

 

To review, the multi-disciplinary triad of our Global Macro Research Process, there are 3 big parts:

  1. History
  2. Math
  3. Behavioral Psych

History provides us context (economic/market patterns, mean reversion risk, etc.); math (fractal dimensions and risk ranges) signals timing; and behavioral, well, that’s a learning process.

 

How else would you define what it is that you do? Other than Embracing Uncertainty and constantly re-evaluating your position relative to the information surprise (price, volume, volatility) of the day, is there an alternative to mental flexibility? There isn’t for me. I’m not smarter than the market. And it took me a good long while to accept that.

 

In terms of our current strategy, quite simply put in our Q413 Macro Theme of #GetActive, it’s to do just that. Unaccountable and un-elected @FederalReserve policy making means we need to engage in unconventional market strategies.

 

In practice, in our Hedgeye Asset Allocation Model, what does that mean?

  1. At the US stock market highs we moved to 58% Cash (last Friday)
  2. After a 4-day US stock market correction we moved back to 42% Cash

Don’t lose the message of mental flexibility in the absolute numbers. If you want to be in 90% cash or 10% cash makes no difference to the point I am trying to make. It’s how you move on the margin that counts. I call it Fading Beta.

 

Looking at it from a different perspective (different Hedgeye product  - #RealTimeAlerts):

  1. Last Friday (on green) we moved to 5 LONGS, 5 SHORTS
  2. Into yesterday’s close (on red) we moved to 11 LONGS, and 3 SHORTS

Again, the point here is about the process. My process is far from perfect. But at least I can explain, evaluate, and evolve it. Doing that in an open network of client feedback has made me a more responsible and accountable investor.

 

So why can’t we do that running America? Wasn’t the whole marketing pitch “Yes We Can”? Or, somewhere along the way towards truth, did we put political reputations and excuse making ahead of your country’s learning process?

 

How do you ever learn if you’re constantly on a quest to prove that you’re never wrong? If there’s one question I’d ask one of the most conflicted and compromised outcrops of Big US Government Intervention (the power of the Fed), that would be it.

 

And that’s all I have to say about that. It’s time to grind and get on with my day. It’s time for you to get on with yours. Thanks again for taking the time to read what I have to say. Teddy wrote it much more eloquently, but you’ll get the point:

 

“… our country calls not for the life of ease but for the life of strenuous endeavor. The twentieth century looms before us big with the fate of many nations. If we stand idly by, if we seek merely swollen, slothful ease and ignoble peace, if we shrink from the hard contests where men must win at hazard of their lives and at the risk of all they hold dear, then the bolder and stronger peoples will pass us by, and will win for themselves the domination of the world. Let us therefore boldly face the life of strife, resolute to do our duty well and manfully; resolute to uphold righteousness by deed and by word; resolute to be both honest and brave, to serve high ideals, yet to use practical methods. Above all, let us shrink from no strife, moral or physical, within or without the nation, provided we are certain that the strife is justified, for it is only through strife, through hard and dangerous endeavor, that we shall ultimately win the goal of true national greatness.”

 

Our immediate-term Global Macro Risk Ranges (see our Daily Trading Range product for all 12):

 

UST 10yr Yield 2.76-2.85%

SPX 1

DAX 9128-9411

USD 80.45-80.91

Pound 1.62-1.64

Gold 1

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

All of Us - Macro Process Triangles

 

All of Us - Virtual Portfolio


December 5, 2013

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BULLISH TRENDS

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BEARISH TRENDS

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