Takeaway: In today's edition of the Macro Playbook, we revisit our bearish bias on the Japanese yen and bullish bias on Japanese equities.


Long Ideas/Overweight Recommendations

  1. Health Care Select Sector SPDR Fund (XLV)
  2. Consumer Staples Select Sector SPDR Fund (XLP)
  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 TIPS Bond ETF (TIP)
  2. SPDR S&P Regional Banking ETF (KRE)
  3. SPDR S&P Oil & Gas Exploration & Production ETF (XOP)
  4. iShares MSCI European Monetary Union ETF (EZU)
  5. iShares MSCI France ETF (EWQ)



Revisiting Our Thoughts on Japan: In yesterday’s edition of the Macro Playbook, we updated our bearish thesis on emerging markets (CLICK HERE to review). The long and short of it was that we continue to anticipate considerable downside for EM asset prices over the intermediate term.


In that note, we also took a victory lap of sorts, as EM asset prices have been in some version of free-fall since we introduced the bearish thesis back in late September.


Don’t short them down here, though! With the U.S. Dollar Index, the VIX and long-term Treasury bonds nearing immediate-term TRADE overbought, we think EM asset prices are likely to experience another low-volume bear market bounce in the coming days. We still believe the directional trend remains lower with respect to the intermediate term, however.








In the spirit of accountability, let us turn our attention to a call that has not worked out as well thus far – specifically our bearish bias on the Japanese yen (FXY) and bullish bias on Japanese equities (DXJ).


Since we re-introduced the thesis back on 12/15, the FXY has moved +68bps against us, contributing to a -1019bps decline in the DXJ.




The latter move is not at all surprising in the context of the crowded net LONG lean in non-commercial yen-denominated futures and options contracts. Recall that immediate-term counter-trend rallies tend to be epic once the net length approaches/exceeds 2 SIGMA in either direction.




The recent correction in Japanese equities and the dollar/yen cross has likely wiped out a healthy degree of LONG positions (we’ll get confirming data this Friday afternoon) in Japanese equities, so we’d expect them to bounce through this week and next.


Beyond that, we still need to see Abenomics continue to deliver the bacon on reform and monetary base expansion for the Nikkei 225 to approach the ~18% upside from today’s closing prices by year-end 2015 expected by consensus among Japanese money managers. Recall that we anticipate ~50% upside from today’s closing prices if the USD/JPY tests its August ’98 highs over the intermediate-to-long term.


These policy catalysts will be instrumental in perpetuating foreign inflows into Japanese equities, at the margins, and we think such capital flows will be instrumental in perpetuating a rally in the Nikkei.


On that note, with the exception of a few weeks in/around the BoJ’s surprise QQE expansion net foreign inflows into Japanese equities were negative in 2014. Recall that this is coming off a monster year in 2013 when net foreign inflows of ~$132.5B perpetuated a +56.7% melt-up in the Nikkei. 2014’s paltry net inflows of $23.1B perpetuated a commensurately paltry +7.1% advance in the Nikkei in 2014. We think 2015 is likely to resemble 2013 when it’s all said and done.


THE HEDGEYE MACRO PLAYBOOK - Net Foreign Inflows into Japanese Equities


All told, the next few weeks will be critical in testing our conviction in our thesis on Japan. Stay tuned for further commentary.


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



#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.


Captain Obvious: December ISM (1/6)


#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.


Grexit? Not So Fast (1/6)


#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,




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.     

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