Hedgeye CEO Keith McCullough shares the top three things in his macro notebook this morning.
Hedgeye CEO Keith McCullough shares the top three things in his macro notebook this morning.
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
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).
We look forward to having you join us!
Associate: Macro Team
Takeaway: Russia remains front and center with Greece stepping back onstage. Global risk is rising rapidly as our Risk Monitor is now decidedly red.
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
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
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.
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.
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.
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.
6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 29.0 points last week, ending at 1843.
7. TED Spread Monitor – The TED spread was unchanged last week at 22.3 bps.
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.
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.
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.
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.
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.
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.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT
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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.
Long Ideas/Overweight Recommendations
Short Ideas/Underweight Recommendations
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.
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:
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:
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!
#Quad4’s #StrongDollar asset price deflation continues…
***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.
#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.
Best of luck out there,
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.
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%.
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.).
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!
|FIXED INCOME||32%||INTL CURRENCIES||5%|
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.
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).
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.
You can ask @KeithMcCullough questions live on @HedgeyeTV at 830am ET. Watch here: http://youtu.be/vsuii37pyX0
There is nothing more genuine than breaking away from the chorus to learn the sound of your own voice.
Latin American Equities moved closer to #crash mode, down -6% on the week to -16.1% year-to-date.
"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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