Takeaway: While our conviction over the next 3-6M is unlikely to be anywhere near where it has been, we think it pays to #BTDB in the Abenomics Trade.
- We remain bearish on the Japanese yen and bullish on Japanese equities with respect to the intermediate-term TREND and long-term TAIL durations.
- With respect to the former duration, however, our conviction is dramatically lower than it was 12-15M ago.
- Specifically, we think Japanese economic growth is likely to slow throughout 1H14. To the extent that catalyst results in declining inflation expectations, we’d expect to see a [continued] correction in the USD/JPY cross and concomitant correction in the Japanese equity market.
- A immediate-term TRADE breakdown in the aforementioned currency cross (TRADE support = 102.68) will likely result in the exchange rate testing its intermediate-term TREND line of support at 100.06. An immediate-term TRADE breakdown in the Japanese equity market (TRADE support = 15,698) will likely result in the index testing its intermediate-term TREND line of support at 15,045.
- The aforementioned TRADE lines a good levels to buy protection to the extent you are looking to hedge for more noteworthy downside in your existing SHORT yen or LONG Japanese equity exposure(s). The aforementioned TREND lines would be a good place(s) to add to existing positions – to the extent you have pared them back or have plans to do so.
- Furthermore, there is a rising probability that both the USD/JPY cross and Japanese equities start to actually cheer on bad economic data; that would represent a material inflection from trends observed in years past, but very much akin to what we’ve all observed in the US over the course of 2010-12.
JAPANESE ECONOMIC GROWTH IS LIKELY TO SLOW FROM THESE LEVELS
The consumption tax hike (scheduled for APR 1st) has likely been the most over-analyzed fiscal policy catalyst in the world over the past 6-12M, so we’re not going to waste your time adding to the slew of analysis. Japanese growth is a near-lock to slow in second quarter.
Where we are divergent from consensus is that we think Japanese economic growth slows in 1Q14E as well (i.e. sooner than the market might expect; Bloomberg consensus forecasts currently call for an acceleration to +3.1% YoY real GDP growth in 1Q14).
Considering that Japanese economic growth data has been white-hot in recent months/quarters, it’s not exactly going out on a limb to call for it to cool off, at the margins. Tough comps and #InflationAccelerating are threatening to suppress Japan’s consumer-aided recovery from currently elevated growth rates.
Moreover, despite marked improvement in domestic industrial production, manufacturing, capital goods orders, business sentiment, exports, etc., we believe that Japanese corporations have yet to fully buy into the sustainability of Abenomics – as evidenced by their forecasts for the USD/JPY cross and CapEx guidance that remains well off the peaks of previous economic cycles.
As such, the growth rates/index levels of the aforementioned indicators is at risk of slowing from currently-elevated levels until Japanese corporations get substantially more color on the much-anticipated “Third Arrow” of Abenomics (allegedly to be detailed in JUN).
DOES SLOWING GROWTH = DECLINING INFLATION EXPECTATIONS OR HAS “KURODA’S CASINO” BROKEN THAT RELATIONSHIP?
To the extent a noteworthy slowing of Japanese economic growth results in declining inflation expectations, we’d expect to see a [continued] correction in the USD/JPY cross and concomitant correction in the Japanese equity market. It’s worth noting that the USD/JPY cross has a +0.85 correlation to Japan’s 5Y breakeven rate over the trailing 3Y.
Source: Bloomberg L.P.
That said, however, it’s hard to have a high-conviction view on that relationship at the current juncture. The next 6-9M is likely to present Japanese policymakers with their first real test on the economic growth front since Kuroda materially altered the way the BoJ conducts its monetary policy operations.
If Shirakawa were still in charge, we’d actually think about shorting the USD/JPY cross and shorting the Nikkei on a TRADE breakdown in the respective markets. Recall that Japanese capital and currency markets were constantly testing Shirakawa’s will to implement the necessary measures to overcome deflation – a task he ultimately failed miserably at.
Haruhiko Kuroda is a different animal altogether, however. It remains to be seen how much faith the market will have in his willingness to add to the BoJ’s “Quantitative and Qualitative Easing” program and how quickly they anticipate him doing so (80% of economists surveyed by Bloomberg expect additional stimulus measures by SEP). Faith, as evidenced by the net length in the futures and options market remains high – for now at least.
We too think Kuroda & Co. will continue to fight hard to achieve “+5% monetary math” and that expectation underpins our respective long-term TAIL biases on the yen and Japanese equities as outlined at the onset of this note. Moreover, the preponderance of recent commentary suggests they stand ready and willing to react to any confirmation of lost momentum on either the growth or inflation fronts in the interim.
Furthermore, there is a rising probability that both the USD/JPY cross and Japanese equities start to actually cheer on bad economic data; that would represent a material inflection from trends observed in years past, but very much akin to what we’ve all observed in the US over the course of 2010-12.
These views lead us to conclude that the current correction in the USD/JPY cross and the Japanese equity market are just that – corrections. As such, while our conviction over the next 3-6M is unlikely to be anywhere near where it has been in months and quarters past, we still think it pays to #BTDB in the dollar-yen and Japanese equities if and when the opportunity presents itself.
Feel free to ping me with follow-up questions if you’d like to dig in further on a specific topic(s).
Associate: Macro Team
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This weekend Black Box gave us a look at December sales trends, which are, on the margin, negative for the industry. Same-restaurant sales and same-restaurant traffic trends were both negative during the month and down sequentially from November. Before we delve further into the details of the release, we thought it would be useful to highlight which casual dining chains had same-restaurant sales estimates adjusted since December 2nd.
Zero of the casual dining companies that we track had 4Q13 same-restaurant sales estimates revised up over the course of December.
The following companies had 4Q13 same-restaurant sales estimates remain flat over the course of December: BOBE, BWLD, CAKE, CBRL, CEC, DIN, IRG, KONA, RUTH, RRGB, TXRH
The following companies had 4Q13 same-restaurant sales estimate revised down over the course of December: BBRG, BJRI, BLMN, CHUY, DFRG, EAT
Moving back to the release, Black Box reported that December 2013 same-restaurant sales decreased -2.0%, a 280 bps sequential decline from November. Same-restaurant traffic trends were down -4.5%, a 360 bps decline sequential decline from November. These same-restaurant sales and traffic estimates come against results of -1.1% and -3.7%, respectively, in December 2012. 3-month same-restaurant sales and same-restaurant traffic declined 70 bps and 90 bps, respectively, on a sequential basis.
December was hurt by winter storms and a shortened shopping season due to a late Thanksgiving. Furthermore, Thanksgiving was included in December figures which hurts the majority of casual dining same-store sales, as they typically see lower weekly sales due to the holiday. California was the best performing region during the month, with same restaurant sales up +0.7% and same-restaurant traffic down -3.4%. NY/NJ was the worst performing region, with both same-restaurant sales and same-restaurant traffic down -5.5% and -8.1%, respectively.
In aggregate, December numbers imply that same-restaurant sales and same-restaurant traffic were down -0.1% and -2.3%, respectively, in 4Q13. This suggests that casual dining chains continue to lose share to fast casual and fine dining chains, both of which had positive same-store sales in the quarter.
On an annual basis, same-restaurant sales and same-restaurant traffic were down -0.1% and -2.1%, respectively, in 2013.
One bullish data point, however, is the 2 point sequential acceleration in the Restaurant Willingness to Spend Index (which resembles consumer willingness to spend). At 95, this marks a 3-year high in the index suggesting consumers are willing to eat out. Unfortunately, these consumers appear to be frequenting chains outside of the casual dining industry.
Clearly, December was a let-down month for the industry after a solid October and November and, judging by the weather thus far, we suspect January will be another difficult month.
IS THE STREET TOO BULLISH?
What is remarkable is that despite Knapp estimates indicating same-restaurant sales will be down -0.7% in 4Q and Black Box estimates indicating same-restaurant sales will be down -0.1% in 4Q, our index (composed of Consensus Metrix estimates for the 25 casual dining chains we track) indicates the street is expecting +1.2% same-restaurant sales growth in the quarter. This is further evidenced by the fact that only 6 out of the 17 casual dining companies we track had their same-restaurant sales estimates revised down over the dreadful month of December. In our opinion, the street appears to be disconnected from reality.
Below, is our Hedgeye Sales Monitor for the casual dining sector. Same-store sales are color coded green (if above) or red (if below) the sub-sector's mean. 2-year averages are color coded green (if accelerating) or red (if decelerating) on a sequential basis.
Takeaway: The last week of '13 spelled continued solid money flow into equities at the expense of bonds; Net flow was $13 B, above the avg of $7.8 B.
This note was originally published January 09, 2014 at 08:34 in Financials
Investment Company Institute Mutual Fund Data and ETF Money Flow:
Total equity mutual funds experienced solid inflows for the week ending December 31st with $6.0 billion flowing into stock funds. Within the total equity fund result, domestic equity mutual funds gained $3.3 billion, the most positive result in 7 weeks, with international equity funds posting a $2.6 billion inflow. Including these year ending trends, equity mutual funds averaged a solidly positive reversal in 2013 with an average weekly inflow of $3.0 billion for the year compared to 2012's weekly average outflow of $3.0 billion.
Fixed income mutual funds continued persistent outflows during the most recent 5 day period and ended 2013 with another $2.8 billion withdrawal from bond funds. This week's draw down was a sequential improvement from the $3.4 billion lost the week prior but was still worse than the 2013 weekly average which finished at a $1.5 billion outflow for 2013. This year end average for 2013 compared to the strong weekly inflow of $5.8 billion for fixed income throughout 2012.
ETFs experienced broadly mixed trends in the most recent 5 day period, with equity products seeing heavy inflows and fixed income ETFs seeing slight outflows week-to-week. Passive equity products gained $4.5 billion for the 5 day period ending December 31st with bond ETFs experiencing a $224 million outflow. 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.
The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a $13.5 billion spread for the week ($10.5 billion of total equity inflows versus over $3.0 billion in fixed income outflows). This was almost double the 2013 weekly average of a $7.8 billion spread but was well off of the largest weekly spread of $30.9 billion and the smallest equity/debt weekly spread of -$9.2 billion (negative numbers imply a net inflow into bonds for the week).
For the week ending December 31st, the Investment Company Institute reported solid equity inflows into mutual funds with $6.0 billion flowing into total stock funds. The breakout between domestic and world stock funds separated to a $3.3 billion inflow into domestic stock funds and a $2.6 billion inflow into international or world stock funds. These results for the most recent 5 day period compare to the year-to-date weekly averages of a $451 million inflow for U.S. funds and a running $2.6 billion weekly inflow for international funds. The aggregate inflow for all stock funds this year now sits at a $3.0 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 December 31st with outflows staying persistent within the asset class. The aggregate of taxable and tax-free bond funds booked a $2.8 billion outflow, a sequential improvement from the $3.4 billion lost in the prior 5 day period but worse than the year-to-date weekly average outflow of just $1.5 billion for bond funds. Both categories of fixed income contributed to outflows with taxable bonds having redemptions of $404 million (although this outflow was the best result in 13 weeks), which joined the $2.4 billion outflow in tax-free or municipal bonds. Taxable bonds have now had outflows in 27 of the past 32 weeks and municipal bonds having had 32 consecutive weeks of outflow. These redemptions late in the year are likely tax loss selling related with the Barclay's Aggregate Bond index down nearly 2% in 2013, the first annual loss in 14 years. The 2013 weekly average for fixed income fund flows is now a $1.5 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 $1.0 billion inflow in the most recent 5 day period, although the past 6 weeks have been below year-to-date averages. Hybrid funds have had inflow in 30 of the past 32 weeks with the 2013 weekly average inflow now at $1.5 billion, a strong advance versus the 2012 weekly average inflow of $911 million.
Exchange traded funds had mixed trends within the same 5 day period ending December 31st with equity ETFs posting a strong $4.5 billion inflow, the seventh consecutive week of positive equity ETF flow. The 2013 weekly average for stock ETFs is now a $3.5 billion weekly inflow, nearly a 50% improvement from last year's $2.2 billion weekly average inflow.
Bond ETFs experienced moderate outflows for the 5 day period ending December 31st with a $224 million redemption, an improvement from the week prior which lost $1.0 billion but well below the year-to-date average of a slight weekly inflow. Taking in consideration this most recent data however, 2013 averages for bond ETFs are flagging with just a $234 million average weekly inflow for bond ETFs, much lower than the $1.0 billion average weekly inflow for 2012.
The net spread of all equity products including mutual fund and ETF flow tallied a $10.5 billion total inflow into all equity products in the most recent 5 day period which compared to a total fund and ETF result for fixed income of a negative $3.0 billion outflow for the week ending December 31st. Thus the net of equity minus fixed income production totaled a $13.5 billion spread in favor of equity products. This compared to the 2013 weekly average of a positive $7.8 billion spread to equities but was well off of the weekly high during last year of $30.9 billion and the weekly low of -$9.2 billion (negative numbers favor fixed income products).
With net weekly spreads continuing to favor equity products with a rising 52 week linear trend line and a favorable setup for stocks versus bonds into the beginning of this year, our favorite long asset management idea remains T Rowe Price (TROW), the manager with industry leading stock fund performance to potentially gather outsized net new assets.
Jonathan Casteleyn, CFA, CMT
Joshua Steiner, CFA
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