Takeaway: Neither you nor your clients can afford to miss what we have to say about the yen, the Nikkei and the SPX in today's Macro Playbook.


Long Ideas/Overweight Recommendations

  1. Consumer Staples Select Sector SPDR Fund (XLP)
  2. Health Care Select Sector SPDR Fund (XLV)
  3. iShares U.S. Home Construction ETF (ITB)
  4. PowerShares DB U.S. Dollar Index Bullish Fund (UUP)
  5. iShares 20+ Year Treasury Bond ETF (TLT)
  1. LONG BENCH: Vanguard REIT ETF (VNQ), Utilities Select Sector SPDR Fund (XLU), Vanguard Extended Duration Treasury ETF (EDV)

Short Ideas/Underweight Recommendations

  1. iShares TIPS Bond ETF (TIP)
  2. CurrencyShares Japanese Yen Trust (FXY)
  3. iShares MSCI Emerging Markets ETF (EEM)
  4. SPDR Barclays High Yield Bond ETF (JNK)
  5. Industrial Select Sector SPDR Fund (XLI)
  1. SHORT BENCH: SPDR Oil & Gas Exploration & Production ETF (XOP), CurrencyShares Euro Trust (FXE), WisdomTree Emerging Currency Fund (CEW)



Japan Consternation Continues: Today’s moves in global macro make us incrementally wrong on Japan. Specifically, the yen’s +1.3% rally vs. the USD helped perpetrate a -1.7% decline in Japan’s benchmark equity index, the Nikkei 225. Since we authored the thesis back on 12/16, the FXY has is more-or-less flat (down -13bps); that lack of currency debasement has contributed to a -881bps decline in the DXJ over that time frame.




The JPY rallied from a close of 117.93 yesterday to and is now trading around ~116.50 on today’s weak U.S. retail sales report – testing a key Fibonacci retracement level.



Source: Bloomberg L.P.


Our intermediate-term TREND line of support is 114.26; while a continued pullback in the cross would undoubtedly bring us more pain on the long side of Japanese equities, we are content to maintain conviction in our thesis that the Japanese yen is likely to trade materially lower vs. U.S. dollar over the intermediate-to-long term to the extent that support level holds.




Holding that level would likely present investors with a opportunity to “back the truck up” on the long side of the Nikkei, which is already nearing TREND support on our quantitative factoring.




So why are the dollar-yen rate and Japanese stocks correcting? The simple answer is repatriation.


During “risk off” periods, the USD/JPY tends to hold a strong inverse correlation with cross-asset volatility due to the country’s status as the world’s largest supplier of capital as Japan domiciled investors have historically sought higher returns offshore than those available in domestic markets. Japan’s net international investment surplus of ~$3T is equivalent to 68% of the country’s GDP and compares to a -$5.5T deficit for the U.S. (somewhat a function of its reserve currency status).


The more nuanced answer is a function of monetary policy expectations.


Specifically, “sources” are out this morning claiming that the BoJ is considering cutting its FY15 target for core CPI (which includes energy prices) and “isn’t inclined to expand QQE at the current juncture”.


While the former might be true, we remain resoundingly on the other side of the latter conclusion. Specifically, we think any cut to the BoJ’s inflation forecast will effectively force them to do more to archive their politicized “5% Monetary Math” target; the BoJ is failing miserably at its politicized objective at the current juncture.






Qualitatively speaking, continued consolidation in the dollar-yen cross to our intermediate-term TREND support level would effectively wash out the weak  hands in the Abenomics trade.


Looking to our Tactical Asset Class Rotation Model (TACRM), we see that the FXY has a Volatility-Adjusted Multi-Duration Momentum Indicator reading of +0.1x, which implies the preponderance of market participants are observing no clear direction of volume-weighted average price momentum.


A continued break out in the yen would likely register a “BUY” signal on this metric and that would likely coincide with a material ramp higher in the VIX and a lower-low in the SPY relative to its early-JAN and mid-DEC lows.




Is the #bubble in U.S. equities over? If you ask the high-yield credit market, in which TAIL risk is officially on, the answer is clearly “yes”. If you ask us, we’d say “TBD”, but, as we have been highlighting for the past 3-6 months, the risk factors are definitely there for anyone who dares to do the work…




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



Global #Deflation: Amidst a backdrop of secular stagnation across developed economies, we continue to think cyclical forces (namely #StrongDollar driven commodity price deflation) will drag down reported inflation readings globally over the intermediate term. That is likely to weigh heavily upon long-term interest rates in the developed world, underpinning our bullish outlook for U.S. Treasury bonds.


The Hedgeye Macro Playbook (1/12)


#Quad414: After DEC and Q4 (2014) data slows, in Q1 of 2015 we think growth in the US is likely to accelerate from 4Q, aided by base effects and a broad-based pickup in real discretionary income. We do not, however, think such a pickup is sustainable, as we foresee another #Quad4 setup for the 2nd quarter. Risk managing these turns at the sector and style factor level will be the key to generating alpha in the U.S. equity market in 1H15.


Early Look: Creatively #Patient (1/14)


Long #Housing?: The collective impact of rising rates, severe weather, waning investor interest, decelerating HPI, and tighter credit capsized housing in 2014.  2015 is setting up as the obverse with demand improving, the credit box opening and 2nd derivative price and volume trends beginning to inflect positively against progressively easier comps. We'll review the current dynamics and discuss whether the stage is set for a transition from under to outperformance for the complex.


Mortgage Apps | Seasonal Wheel-Spinning (1/7)


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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