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Keith's Macro Notebook 12/15: Japan | UST 10YR | Sentiment

 

Hedgeye CEO Keith McCullough shares the top three things in his macro notebook this morning.


Call Today | Abenomics Round II: Risk Is GROSSLY Mispriced

Takeaway: Join us on a conference call today at 1pm to discuss our revised outlook for Japan and the associated investment implications.

The LDP/NKP coalition election victory this weekend has major implications for the global economy and the financial markets that underpin it.  

 

Please join the Hedgeye Macro Team on a conference call today at 1:00pm EST for an overview of these implications and how we think you should position your portfolio to profit from these macro catalysts.

 

KEY TOPICS WILL INCLUDE 

 

  • Where we stand vs. consensus RE: Abenomics
  • Our intermediate-term outlook for Japanese monetary and fiscal policy
  • The elevated risk of a global deflationary spiral

 

In summary, we anticipate ~20% downside in the Japanese yen vis-à-vis the U.S. dollar over the NTM. This compares to -5% and unchanged, respectively, for the Bloomberg consensus EOY '15 forecast and the current 4Q15 USD/JPY forward rate.

 

A linear regression model based on the trailing 2Y correlation would suggest our forecast of a re-test of the August 1998 highs on the dollar-yen cross implies a level of ~25,300 on the Nikkei 225 Index – or potential upside of +48% from today's closing price! 

 

If these forecasts sound crazy to you, that's a good thing [to us]. We sounded equally as crazy making a similar call in November 2012 (i.e. before Abe even took office).

 

Call Today | Abenomics Round II: Risk Is GROSSLY Mispriced - Thinking Through a Potential Currency Crisis In Japan

 

DIAL-IN INSTRUCTIONS

 

  • Toll Free Number:
  • Toll Number:
  • Conference ID/Password: 13597789
  • Materials: CLICK HERE

  

As always, there will be a live Q&A session at the end of the call. Please email to submit a question to the queue.

 

We look forward to having you join us!

 

Darius Dale

Associate: Macro Team


MONDAY MORNING RISK MONITOR: RISK IS RISING RAPIDLY

Takeaway: Russia remains front and center with Greece stepping back onstage. Global risk is rising rapidly as our Risk Monitor is now decidedly red.

Current Ideas:

MONDAY MORNING RISK MONITOR: RISK IS RISING RAPIDLY - 19 2

 

Key Takeaway:

The global theme last week was derisking as the Global Dow fell -4.43% and CDS nearly universally widened.  The only positive short-term measure on our heat map below is the falling price of commodities; however, that has recently signaled concerns over global economic slowing.  Intermediate-term measures don't look much better, dominated by red.

 

Continuing to highlight Russia, the country's Sberbank CDS continue to drastically widen (+64 bps WoW, +204 bps MoM).  The ruble continued to fall alongside the drop in oil prices last week, even with Russia's central bank decision to lift its key interest rate.

 

Greece re-entered the risk spotlight with banks CDS widening by more than +200 bps; the country's snap presidential election rekindled investor worries about the country's recovery.

 

Financial Risk Monitor Summary

 • Short-term(WoW): Negative / 1 of 12 improved / 9 out of 12 worsened / 2 of 12 unchanged

 • Intermediate-term(WoW): Negative / 2 of 12 improved / 6 out of 12 worsened / 4 of 12 unchanged

 • Long-term(WoW): Negative / 2 of 12 improved / 3 out of 12 worsened / 7 of 12 unchanged

 

MONDAY MORNING RISK MONITOR: RISK IS RISING RAPIDLY - 15

 

1. U.S. Financial CDS -  Swaps widened for 23 out of 27 domestic financial institutions.  Marsh & McLennan was the only institution whose CDS tightened (-5.6% WoW).  This continues the intermediate trend; month over month, of all American CDS, MMC's have tightened the most at -11.7%.

 

Widened the least/ tightened the most WoW: MMC, ALL, TRV

Widened the most WoW: JPM, AGO, HIG

Tightened the most WoW: MMC, ALL, CB

Widened the most MoM: GNW, C, SLM

 

MONDAY MORNING RISK MONITOR: RISK IS RISING RAPIDLY - 1

 

2. European Financial CDS - Swaps mostly widened in Europe last week.  The average move was a drastic +14.8%.  The only two institutions whose CDS tightened were Portugal's Banco Espirito Santo and the UK's HBOS.  HBOS' swaps tightened by only -1 bps.  Banco Espiroto Santo's swaps continued to tighten after the December 4 news that the bank was nearing a sale of some of its parts.

 

Greek bank swaps blew out last week, with CDS widening +216 bps on average, on the announcement of a snap presidential election.  The announcement sparked fresh investor fears over how long-lasting and/or effective Greek fiscal reform will be.

 

MONDAY MORNING RISK MONITOR: RISK IS RISING RAPIDLY - 2

 

3. Asian Financial CDS continued the global trend of derisking with all CDS in the table below widening.  Of note, Chinese inflation figures came in at a five-year low for November.

 

MONDAY MORNING RISK MONITOR: RISK IS RISING RAPIDLY - 17

 

4. Sovereign CDS – Sovereign swaps widened across the board last week. Spanish sovereign swaps widened by 26.8% (22 bps to 105), while Portuguese swaps widened by 37 bps.  The global theme last week was derisking as the Global Dow fell -4.43% and CDS nearly universally widened. 

 

MONDAY MORNING RISK MONITOR: RISK IS RISING RAPIDLY - 18

 

MONDAY MORNING RISK MONITOR: RISK IS RISING RAPIDLY - 3

 

MONDAY MORNING RISK MONITOR: RISK IS RISING RAPIDLY - 4

 

5. High Yield (YTM) Monitor – High Yield rates rose 36.7 bps last week, ending the week at 6.70% versus 6.33% the prior week.

 

MONDAY MORNING RISK MONITOR: RISK IS RISING RAPIDLY - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 29.0 points last week, ending at 1843.

 

MONDAY MORNING RISK MONITOR: RISK IS RISING RAPIDLY - 6

 

7. TED Spread Monitor – The TED spread was unchanged last week at 22.3 bps.

 

MONDAY MORNING RISK MONITOR: RISK IS RISING RAPIDLY - 7

 

8. CRB Commodity Price Index – The CRB index fell -3.7%, ending the week at 244 versus 253 the prior week. As compared with the prior month, commodity prices have decreased -7.9% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

MONDAY MORNING RISK MONITOR: RISK IS RISING RAPIDLY - 8

 

9. Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread widened by 1 bps to 9 bps.

 

MONDAY MORNING RISK MONITOR: RISK IS RISING RAPIDLY - 9

 

10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index rose 2 basis points last week, ending the week at 2.646% versus last week’s print of 2.628%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.

 

MONDAY MORNING RISK MONITOR: RISK IS RISING RAPIDLY - 10

 

11. Chinese Steel – Steel prices in China fell 1.2% last week, or 36 yuan/ton, to 2879 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

 

MONDAY MORNING RISK MONITOR: RISK IS RISING RAPIDLY - 12

 

12. 2-10 Spread – Last week the 2-10 spread tightened to 154 bps, -12 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR: RISK IS RISING RAPIDLY - 13

 

13. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 2.0% upside to TRADE resistance and 0.5% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: RISK IS RISING RAPIDLY - 14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 

 


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THE HEDGEYE MACRO PLAYBOOK

Takeaway: In today's Macro Playbook, we highlight the risk of a global deflationary spiral with the advent of LDP/NKP election victory in Japan.

INVESTMENT CONCLUSIONS

Long Ideas/Overweight Recommendations

  1. Consumer Staples Select Sector SPDR Fund (XLP)
  2. Health Care Select Sector SPDR Fund (XLV)
  3. iShares National AMT-Free Muni Bond ETF (MUB)
  4. Vanguard Extended Duration Treasury ETF (EDV)
  5. iShares 20+ Year Treasury Bond ETF (TLT)

Short Ideas/Underweight Recommendations

  1. iShares Russell 2000 ETF (IWM)
  2. SPDR S&P Regional Banking ETF (KRE)
  3. iShares MSCI European Monetary Union ETF (EZU)
  4. iShares MSCI France ETF (EWQ)
  5. SPDR S&P Oil & Gas Exploration & Production ETF (XOP)

 

QUANT SIGNALS & RESEARCH CONTEXT

Abenomics Round II = Global Deflationary Spiral Risk: With the advent of the LDP/NKP coalition securing another supermajority in the lower house of Japanese parliament (the Diet) comes risk of another gap higher in the USD/JPY cross and another leg down in commodity prices.

 

THE HEDGEYE MACRO PLAYBOOK - LDP   NKP Coalition

 

Specifically, we think Japanese Prime Minster Shinzo Abe will use the renewed four-year mandate to push forward this “Abenomics” agenda, which calls for a combination of aggressive fiscal and monetary easing in pursuit of “+5% monetary math” – an extremely aggressive economic goal in the context of Japan’s structural economic trends:

 

THE HEDGEYE MACRO PLAYBOOK - FIVE PERCENT MONETARY MATH

 

As we outlined in our 11/19 note titled, “JAPAN: DOES THE "ABENOMICS TRADE" HAVE MORE ROOM TO RUN?”, we think the trend in Japanese growth and inflation data along with the GPIF reallocation will force the BoJ to further expand its QQE program over the intermediate term. On balance, that should be bearish for the Japanese yen in the context of consensus expectations for monetary tightening in the U.S. over that same duration.

 

To the extent the U.S. dollar starts to price in this incrementally bearish outlook for the Japanese yen, our multi-duration correlation study implies further downside in commodity prices:

 

THE HEDGEYE MACRO PLAYBOOK - DXY vs. CRB Indices

 

THE HEDGEYE MACRO PLAYBOOK - DXY vs. Brent Crude Oil

 

As we’ve reiterated in recent editions of the Macro Playbook, that portends an incrementally dour outlook for energy equities and high-yield energy bonds, as well as for emerging market equities, currencies and debt. To the extent we’re right on our outlook for the USD/JPY cross, buy-side consensus is not in the area code of being Bearish Enough on either of these asset classes; nor are they Bullish Enough on Japanese equities.

 

 

Looking to our Tactical Asset Class Rotation Model (TACRM), currently 46% of the nearly 200 ETFs that comprise the model have a Volatility-Adjusted Multi-Duration Momentum Indicator (VAMDMI) reading less than -1x; that indicates a clear trend of negative VWAP momentum across three distinct durations. On a rolling 3M average basis, that figure is 39%, which is the highest ratio of bearishly trending macro markets since the week ended November 4th, 2011!

 

THE HEDGEYE MACRO PLAYBOOK - TACRM GMRS

 

#Quad4’s #StrongDollar asset price deflation continues…

 

***We will be hosting a conference call today at 1pm to discuss these evolving global macro risks. Please email to obtain access to the call and the associated slide deck.***

 

***CLICK HERE to download the full TACRM presentation.***

 

TRACKING OUR ACTIVE MACRO THEMES

#Quad4 (introduced 10/2/14): Our models are forecasting a continued slowing in the pace of domestic economic growth, as well as a further deceleration in inflation here in Q4. The confluence of these two events is likely to perpetuate a rise in volatility across asset classes as broad-based expectations for a robust economic recovery and tighter monetary policy are met with bearish data that is counter to the consensus narrative.

 

Early Look: U-G-L-Y (12/10)

 

#EuropeSlowing (introduced 10/2/14): Is ECB President Mario Draghi Europe's savior? Despite his ability to wield a QE fire hose, our view is that inflation via currency debasement does not produce sustainable economic growth. We believe select member states will struggle to implement appropriate structural reforms and fiscal management to induce real growth.

 

Draghi Drugs at the JAN ECB Meeting? Nope! (12/10)

 

#Bubbles (introduced 10/2/14): The current economic cycle is cresting and the confluence of policy-induced yield-chasing and late-cycle speculation is inflating spread risk across asset classes. The clock is ticking on the value proposition of the latest policy to inflate as the prices many investors are paying for financial assets is significantly higher than the value they are receiving in return.

 

#Bubbles: “Hedge Fund Hotel” Edition (Part II) (12/8)

 

Best of luck out there,

 

DD

 

Darius Dale

Associate: Macro Team

 

About the Hedgeye Macro Playbook

The Hedgeye Macro Playbook aspires to present investors with the robust quantitative signals, well-researched investment themes and actionable ETF recommendations required to dynamically allocate assets and front-run regime changes across global financial markets.

 

The securities highlighted above represent our top ten investment recommendations based on our active macro themes, which themselves stem from our proprietary four-quadrant Growth/Inflation/Policy (GIP) framework. The securities are ranked according to our calculus of the immediate-term risk/reward of going long or short at the prior closing price, which itself is based on our proprietary analysis of price, volume and volatility trends.

 

Effectively, it is a dynamic ranking of the order in which we’d buy or sell the securities today – keeping in mind that we have equal conviction in each security from an intermediate-term absolute return perspective.


Japan, UST 10YR and Sentiment

Client Talking Points

JAPAN

Not surprisingly, Abe wins re-election – surprisingly, the Yen is Up (small) on that and the Weimar Nikkei drops -1.6%. The Yen (vs. USD is right in the middle of its 117.06-121.68 risk range) and the Nikkei are now bearish TRADE (Nikkei 17,769 resistance); bullish TREND (Nikkei 16,451 support); the rest of Asian Equities acted poorly, again – Thailand led losers -3.1%.

UST 10YR

After crashing to 2.08% on the close of last week, bounces to 2.12% this morning (immediate-term risk range is now 2.08-2.22%) and while we would love to see another big buying opportunity (if, say, the Fed removed the “considerable time” language), we don’t think we’re going to get that this week – Long Bond is still our favorite Macro LONG idea (TLT, EDV, etc.).

SENTIMENT

Hedge fund consensus remains as long of S&P 500 futures/options as it is bearish on long-term Treasuries. As of last week’s CFTC futures/options contracts data, there’s a +48,911 net LONG position in SPX (Index + Emini) vs. its 6 month average of a -21,000 net short position, and a 10YR Treasury net SHORT position at its year-to-date high of -214,778 contracts!

Asset Allocation

CASH 61% US EQUITIES 2%
INTL EQUITIES 0% COMMODITIES 0%
FIXED INCOME 32% INTL CURRENCIES 5%

Top Long Ideas

Company Ticker Sector Duration
EDV

The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). U.S. real GDP growth is unlikely to come in anywhere in the area code of consensus projections of 3-plus percent. And it is becoming clear to us that market participants are interpreting the Fed’s dovish shift as signaling cause for concern with respect to the growth outlook. We remain on other side of Consensus Macro positions (bearish on Oil, bullish on Treasuries, bearish on SPX) and still have high conviction in our biggest macro call of 2014 - that U.S. growth would slow and bond yields fall in kind.

TLT

We continue to think long-term interest rates are headed in the direction of both reported growth and growth expectations – i.e. lower. In light of that, we encourage you to remain long of the long bond. The performance divergence between Treasuries, stocks and commodities should continue to widen over the next two to three months. As it’s done for multiple generations, the 10Y Treasury Yield continues to track the slope of domestic economic growth like a glove. We certainly hope you had the Long Bond (TLT) on versus the Russell 2000 (short side) as the performance divergence in being long #GrowthSlowing hit its widest for 2014 YTD (ex-reinvesting interest).

XLP

The U.S. is in Quad #4 on our GIP (Growth/Inflation/Policy) model, which suggests that both economic growth and reported inflation are slowing domestically. As far as the eye can see in a falling interest rate environment, we think you should increase your exposure to slow-growth, yield-chasing trade and remain long of defensive assets like long-term treasuries and Consumer Staples (XLP) – which work decidedly better than Utilities in Quad #4. Consumer Staples is as good as any place to hide as the world clamors for low-beta-big-cap-liquidity.

Three for the Road

TWEET OF THE DAY

You can ask @KeithMcCullough questions live on @HedgeyeTV at 830am ET. Watch here: http://youtu.be/vsuii37pyX0

@Hedgeye

QUOTE OF THE DAY

There is nothing more genuine than breaking away from the chorus to learn the sound of your own voice.

-Po Bronson

STAT OF THE DAY

Latin American Equities moved closer to #crash mode, down -6% on the week to -16.1% year-to-date.


CHART OF THE DAY: Our Least Preferred Player on the 2014 Market Field vs Our Most Preferred

CHART OF THE DAY: Our Least Preferred Player on the 2014 Market Field vs Our Most Preferred - 12.15.14 chart

 

"After doing absolutely nothing for the 6 weeks prior, our least preferred 2014 player on the US Equity market field (Russell 2000), dropped -2.5% last week to -1.0% YTD ... [Meanwhile] UST 10yr Yield -22 basis points on the week to 2.08% (that’s a -31.3% crash in bond yields for 2014 YTD) ... Our favorite player, TLT (20yr Treasury Bond ETF) was up another +2.9% last week to +24% YTD."

 

This is an excerpt from today's Morning Newsletter by Hedgeye CEO Keith McCullough.


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