Takeaway: Our conviction in the direction of the JPY and Nikkei over the next 3-6M lags far behind our understanding of the [mixed] fundamentals.
- Our long-term view on Japan and the “Abenomics Trade” (short yen/long Nikkei) isn’t materially different from our previous strategy update; as such, long-term investors should remain involved in the trade.
- With respect to the intermediate-term (3-6M), however, we think any investors who have to meet performance targets on that duration should strongly consider the eight factors we outline below – the net of which leaves us uncomfortably neutral on the yen and Japanese equities with respect to that duration.
- Refer to the bullets and charts below for a comprehensive analysis of the aforementioned critical factors, which we think will drive the “Abenomics Trade” over the intermediate term.
The curse of the sell-side: feeling pressure to make a call when your conviction level would suggest otherwise. We don’t run money at Hedgeye, so our stress levels are likely consistently far lower than yours; when I do get stressed out, however, 9 times out of 10 it’s because of the aforementioned curse.
That pretty much sums up our view on Japan.
Right now our research and risk management processes are scoring the odds of a +5% correction on the USD/JPY cross vs. a +5% appreciation at about 50/50 on a 3-6M forward basis. I know, that’s super helpful… probably about as helpful as having a “hold” call on a stock or publishing a strategy note that says, “we’re cautious on the market”.
All told, our long-term view on Japan and the “Abenomics Trade” (short yen/long Nikkei) isn’t materially different from our previous strategy update; as such, long-term investors should remain involved in the trade.
With respect to the intermediate-term (3-6M), however, we think any investors who have to meet performance targets on that duration should strongly consider the following factors – the net of which leaves us uncomfortably neutral on the yen and Japanese equities with respect to that duration (please share any feedback if you disagree with our neutral bias).
RED = bearish for the JPY; GREEN = bullish for the JPY; BLACK = toss-up:
- Sentiment: The market is still net short the yen to the tune of 82k contracts (futures + options), but bearish sentiment has receded dramatically in recent weeks as evidenced by the trailing 1Y Z-Score moving from -3.4x in early DEC to +0.2x currently.
- Inflation Expectations: Breakeven rates continue to march higher across the curve, with the 2Y and 5Y tenors up +91bps MoM and +46bps MoM, respectively. In the context of the JPY strengthening +1.6% MoM vs. the USD, this signals to us that Kuroda has convinced the market that either the BoJ’s existing QQE program is large enough to meet its strategic economic objectives or that the bank will respond with enough incremental easing to accomplish its goals. Either outcome is bearish for the yen.
- “5% Monetary Math”: Lost in the context of the day-to-day news flow are the aforementioned strategic economic objectives the LDP has tasked the BoJ with achieving. In our view, which has been consistent since NOV ’12, such lofty targets all but ensure the BoJ will remain aggressively easy over the long term.
- GIP Fundamentals: Not new news, but we continue to think Japanese growth will slow throughout the balance of 1H14. To the extent that weighs on inflation expectations in Japan – which they haven’t yet – we would anticipate broad JPY strength as the market attempts to force the BoJ’s hand. Thus far, JAN data (e.g. slowing Services PMI, slowing Consumer Confidence, slowing Economy Watchers Surveys) suggests Japanese economic growth is, at best, flat sequentially in the YTD. Sequentially flat growth plus sequentially tough compares tend to equate to slowing YoY growth more often than not.
- Correlation Analysis: We are the lonely inflation hawks in the YTD and continue to trumpet our non-consensus expectation of continued commodity reflation. Our multi-duration, cross-asset correlation analysis suggests our #InflationAccelerating theme is explicitly bullish for the Japanese yen, provided historical relationships hold.
- US Dollar Index Quant Factoring: The DXY is bearish on our TREND and TAIL durations and Janet Yellen’s testimony yesterday did absolutely nothing to assuage our fears that the FOMC will eventually cease tapering and begin to lay the groundwork for incremental easing at some point over the intermediate term. In fact, the only things she said that could be remotely considered positive for the USD is that the bar is set high in terms of deviating from the existing strategy (i.e. they need to see a few months of #GrowthSlowing first) and that the recent EM-related market turmoil wasn’t material enough to alter their expectations for the US economy. Their models have US real GDP growth accelerating from +1.9% in 2013 to +3% in 2014. We are currently down at +2.3% for CY14 (and falling, depending on the timing and magnitude of incremental Policies to Inflate out of the Fed). We have little doubt that the Fed will stop tapering and contemplate easing in 2014; it’s just a matter of when.
- USD/JPY Quant Factoring: The dollar-yen cross is now below our TREND line; this is very new. It needs to hold, but if it does, mean reversion support is all the way down at 97.27. Again, we don’t have a strong level of conviction on it holding or not holding below the TREND line. As such, we are content to let the market determine our level of conviction here.
- Nikkei 225 Quant Factoring: The Japanese equity market is also now below our TREND line; this is somewhat of a recent phenomenon. The longer this quantitative setup holds as is, the more foreign selling pressure we think will be applied to the index. Since equity volatility tends to be inversely correlated to sentiment, we think domestic Japanese investors are likely to repatriate their foreign assets, at the margins, which is particularly bullish for the JPY. It’s worth reiterating that Japan has a net international investment/GDP ratio of +63%, which compares -24% for the US; Japanese investors have been financing global growth for decades via persistent current account surpluses.
The ability to function amid elevated levels of cognitive dissonance remains one of the keys to effective risk management. Best of luck out there!
Associate: Macro Team
Takeaway: Great news for Quicksilver in Sochi.
ZQK - IOURI PODLADTCHIKOV WINS GOLD IN MEN’S HALFPIPE AT THE 2014 SOCHI WINTER OLYMPICS
- Quiksilver athelete, Iouri Podladtchikov, wins Gold in Men's Halfpipe.
Key Takeaway from Retail Analyst Brian McGough
That picture above is worth a thousand words (and considerably more in sales). The board raised the highest is screaming Quiksilver. Take a look at the brief video below I did on ZQK to get additional color on why we like the stock.
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In an effort to evaluate performance, we compare how the quarter measured up to previous management commentary and guidance
OVERALL: BETTER - Certainly not better than consensus back in October when PNK reported Q3, Q4 margins were strong in the face of a difficult GGR environment. EBITDA actually beat reduced Street margins and in-line with our recent Regional Reversal thesis, the bad was more than reflected in the stock.
- MIXED: January was a very tough month. Negative impact on EBITDA could exceed more than the $2MM in December. However, February is off to a better start. Trip frequency continues to decline with spend patterns stable. <$100 segment hit particularly hard.
- PREVIOUSLY: There is undoubtedly some headwinds regionally.
L'AUBERGE LAKE CHARLES
- BETTER: This property continues to set new EBITDA records due primarily to strong margins. Top line was also strong.
- PREVIOUSLY: "We experienced a very strong quarter at our L'Auberge Lake Charles property where all time records were set in cable drop, cable revenue and retail revenue. We completed the renovation of our standard hotel rooms and have received very favorable guest feedback."
- BETTER: 230bps improvement in market share. Cash revenue was up 15% and F&B was up 32% in Q4.
- PREVIOUSLY: "River City is significantly outperforming the market. Our new hotel opened on August 28, completing an $82 million project that included an event center and 1,600-space parking garage. Early results have been encouraging with guests who have stayed in the hotel showing a 37% increase when compared to prior to the hotel opening."
- SAME: Belterra Park's construction budget remains $209 million, and is scheduled to open on May 1, 2014 pending required regulatory approvals.
- PREVIOUSLY: "We are looking forward to the opening of our newest property, Belterra Park, in May of next year."
L'AUBERGE BATON ROUGE
- BETTER: Market share increased 420bps from prior year and set a new EBITDA record. There was strong local and regional play. PNK reduced marketing spend at the property and achieved 2nd highest REVPAR.
- PREVIOUSLY: "L'Auberge Baton Rouge continues to be a very good story, growing the market while achieving the highest market share since opening at 53.4% in the third quarter. We are seeing the momentum of strong trial continue with over 17,000 new mychoice members visiting the property for the first time in the third quarter. Hotel demand remains high with the property now producing the second highest RevPAR in the combined company. EBITDA margins also are improving as we cycled our first year anniversary in September."
- SAME: $26MM of synergies realized at the end of 2014. Revenue synergies are expected in 1H 2014. PNK expects to reach $40MM in total synergies by 1Q.
- PREVIOUSLY: "Over the course of the first 49 days of the integration, we have implemented synergies that will provide savings throughout our company in excess of $20 million per year. These implemented synergies fall into three categories: public company cost, labor and scale efficiencies.
- Every day, we continue to make progress and feel very confident on our ability to execute to meaningfully exceed our public target of $40 million in synergies to be implemented by the end of next year.
- We will be able to achieve that (rest of $20MM) without any revenue. And we will exceed it without any revenue.
- There is revenue opportunity for the combined company. I mentioned a few, but I'll just elaborate on them, one being the hotel yield automated system. Currently, Ameristar does not have a sophisticated hotel yield system. A second opportunity will be the combining and the unveiling of a new loyalty program in the spring of next year. One other item that I would add to the revenue mix is legacy Pinnacle has an established national casino marketing infrastructure that includes branch offices in key cities like Chicago, Dallas, Houston and others as well as a pretty expansive network of independent reps. We're now going to take that same infrastructure and leverage it across the Ameristar portfolio."
Takeaway: Given US #InflationAccelerating and consumption #GrowthSlowing, I am not convinced my @Hedgeye TREND support of 1785 holds.
POSITION: 4 LONGS, 9 SHORTS @Hedgeye
While being short into the tail-end of a market v-bottoming off the YTD lows was painful yesterday, that doesn’t mean our bearish call on consumption growth ends. If you want to be long, buy commodity inflation and/or slow-growth (bonds) assets. That’s what’s working.
Across our core risk management durations here are the lines that matter to me most:
- Immediate-term TRADE overbought = 1837
- Intermediate-term TREND = 1785
- Immediate-term TRADE support = 1729
In other words, SPX is making lower-highs on lower-volume signals than we are seeing on the down days (Top 5 Volume Days of 2014 were all down days).
Given US #InflationAccelerating and consumption #GrowthSlowing, I am not convinced my @Hedgeye TREND support of 1785 holds. This is materializing into a very different setup vs. what our process signaled in 2013.
If they snap 1785 again, there’s no support to 1729. On a move like that, risk will most likely happen fast.
Keith R. McCullough
Chief Executive Officer
Another big stock move following earnings suggests our Regional Reversal call still relevant. Feb regional gaming revs should bounce back
- New combined loyalty program launch in April 2014
- All properties will be connected to universal card by mid-2015
- New hotel yield system: Kansas City came online in Dec; all properties will come online by end of 3Q
- Trip frequency continues to decline with spend patterns stable; hardest hit among the <$100 segment
- Rational marketing spend
- Will not pursue nonprofitable revenues
- L'Auberge Lake Charles: 55% market share. Double-digit growth from higher-end segments.
- L'Auberge Baton Rouge: market share increased 420bps from prior year (strong local and regional play), reduced marketing spend; achieved 2nd highest REVPAR in the company
- ASCA St. Charles saw +10% REVPAR improvement in December due to new hotel yield system
- River City: 230bps improvement in market share; cash revenue up 15% and total food up 32%
- South segments: saw better demand trends than Midwest; record EBITDA for both L'Auberge properties
- January remain challenged; February off to better start
- ASCA synergies: public company costs, labor, and scale efficiencies; have started to implement changes in marketing. Will exceed $40MM target by 1Q 2014.
- Belterra Park: on time and slightly underbudget
- New Orleans hotel: on budget and will open early summer 2014
- Lumiere sale will close 1Q or early 2Q
Q & A
- Weather adversely impacted in December by $2MM
- January was tough; could have worse impact
- <$100MM segment: unprofitable programming and macro factors
- Corporate expense run rate: expect to trend down towards $20MM
- D&A: expansion of River City creeped up D&A in Q4. Additional D&A in Q4 due to player list purchase accounting. Real depreciation in Q4 was $55-60MM.
- 2014 Cash Taxes: $10MM
- Most of revenue synergies will be in 1H 2014
- $26MM synergies: almost exclusively cost synergies
- Careful about reinvestments
- Marketing reduction in 4Q: 1) L'Auberge Baton Rouge out of launch mode 2) marketing reductions across portfolio due to softness in revenues 3) eliminated unprofitable programming
- 10K - March 3
- Tilman Fertitta property (Lake Charles): plan to open Fall 2014
- think market will grow
- Will continue to de-lever the company
- Will look at NY, FL opportunities
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