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Keith's Macro Notebook 1/21: Japan | #Deflation | Swiss

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

 

Sign up for Hedgeye's Market Marathon on January 27: http://live.hedgeye.com/market-marathon/



Hedgeye Morning Macro Call Replay: Look Out If Draghi Doesn’t Deliver the Cow Bell

On this morning’s institutional Macro Call, Hedgeye CEO Keith McCullough navigates through myriad growing market and economic risks around the world, highlights some of his favorite (and least favorite) ideas, and warns that if the ECB’s Mario Draghi disappoints investor expectations tomorrow, beware of market nastiness.

 


THE HEDGEYE MACRO PLAYBOOK

Takeaway: We're inclined to expect a pullback in cross-asset beta on further consolidation in the USD/JPY cross amid a bullish TREND in volatility.

THEMATIC INVESTMENT CONCLUSIONS

Long Ideas/Overweight Recommendations

  1. iShares U.S. Home Construction ETF (ITB)
  2. Health Care Select Sector SPDR Fund (XLV)
  3. Consumer Staples Select Sector SPDR Fund (XLP)
  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. iShares MSCI Emerging Markets ETF (EEM)
  3. Industrial Select Sector SPDR Fund (XLI)
  4. SPDR Barclays High Yield Bond ETF (JNK)
  5. CurrencyShares Japanese Yen Trust (FXY)
  1. SHORT BENCH: SPDR Oil & Gas Exploration & Production ETF (XOP), CurrencyShares Euro Trust (FXE), WisdomTree Emerging Currency Fund (CEW)

 

QUANT SIGNALS & RESEARCH CONTEXT

Barring a Positive ECB Surprise, Expect a Pickup in Cross-Asset Volatility Following Today’s Disappointing BoJ Announcement: Overnight, the Bank of Japan concluded its two-day monetary policy meeting. The takeaways were unspectacular – for Japanese yen bears, that is:

 

  • No change to the existing QQE program, which targets an ¥80T annual increase in JGBs, a ¥3T annual increase in ETFs, a ¥90B annual increase in J-REITs, a ¥2.2T annual increase in commercial paper and a ¥3.2 annual increase in corporate bonds.
  • Marginal adjustments to their Stimulating Bank Lending Facility (i.e. increasing individual allotments to ¥2T from ¥1T; increasing the total allotment to ¥10T from ¥7T) and their Growth-Supporting Funding Facility (i.e. expanding the base of institutions that can access the program). Both programs were extended by one year.
  • The key incremental data point is the BoJ’s sharp revisions to its growth and inflation forecasts, which were set back in October. Like the FOMC, the BoJ updates its economic outlook 2x annually (in April and October) and revised them 2x annually as well (in January and July). The net result of today’s revisions is a dramatically lowered probability for QQE expansion in the near term (i.e. ~2-3 months).
  • On Real GDP growth, the BoJ revised up its FY15 and FY16 forecasts by +60bps and +40bps, respectively, to +2.1% and +1.6%. The board cited a large tailwind from energy price deflation as the primary reason for the material shift higher. Clearly they are not paying attention to U.S. retail sales data…
  • On Core CPI – which excludes both the prices of fresh food and the effects of the consumption tax hike – the BoJ revised down its FY15 forecast by -70bps to +1%. It nudged up its forecast for FY16 by +10bps to +2.2%, citing a reflationary tailwind of [assumed] higher wage growth on the strength of what they anticipate as the start of a self-perpetuating cycle of consumption and wage growth.

 

THE HEDGEYE MACRO PLAYBOOK - 1

Source: BoJ

 

THE HEDGEYE MACRO PLAYBOOK - 2

Source: BoJ

 

It’s worth noting that we [continue to] strongly disagree with just about every assumption they make in their economic forecasts.

 

On growth, the base effect alone will prevent Japan from even sniffing its GDP target for FY15. In our Bayesian prior/posterior forecasting process, a probable draw-down in 1Q15 GDP growth will likely set the Japanese economy back in a material way ahead of a likely 2H15 recovery:

 

THE HEDGEYE MACRO PLAYBOOK - JAPAN

 

THE HEDGEYE MACRO PLAYBOOK - GDP COMPS

 

On inflation, #StrongDollar commodity price deflation and a brutal demographic outlook continues to weigh on both reported CPI and structural inflation expectations in Japan:

 

THE HEDGEYE MACRO PLAYBOOK - JAPAN BREAKEVEN

 

THE HEDGEYE MACRO PLAYBOOK - JAPAN 35 54 YEAR OLD

 

Net-net, the BoJ will remain well shy of its “+5% Monetary Math” mandate over the intermediate term (i.e. the ~NTM):

 

THE HEDGEYE MACRO PLAYBOOK - FIVE PERCENT MONETARY MATH

 

So what happens next? We think the both the USD/JPY cross and the Japanese equity market are at risk  of consolidating meaningfully over the next ~2-3 months as investors are forced to delay their expectations for QQE expansion – which we now see April as the most likely timeframe:

 

THE HEDGEYE MACRO PLAYBOOK - JPYUSD vs. MSCI JAPAN

 

This is especially true in the context of the crowded net lean in the latter index throughout the buy-side; it won’t take much JPY appreciation to smoke the Nikkei down 5-10%:

 

THE HEDGEYE MACRO PLAYBOOK - EXTREME SENTIMENT MONITOR

 

All told, market participants – ourselves included – who are stuck on the wrong side of the Abenomics trade here should strongly consider hedging a probable pickup in volatility over the near-term. Our intermediate-to-long-term call for 135-147 on the USD/JPY cross and ~25k on the Nikkei remains intact, however.

 

Beyond that, the knock-on effects of a potential ~2-3 month consolidation phase on the USD/JPY cross would be many:

 

EM equities up?

 

THE HEDGEYE MACRO PLAYBOOK - JPYUSD vs. MSCI EM INDEX

 

EM FX and EM USD debt up? Or down if JPY appreciation perpetuates cross-asset volatility as it has been known to do (per the most immediate-term correlation):

 

THE HEDGEYE MACRO PLAYBOOK - JPYUSD vs. EM FX

 

THE HEDGEYE MACRO PLAYBOOK - JPYUSD vs. EM OAS

 

Commodity prices up? Or down if JPY appreciation perpetuates cross-asset volatility as it has been known to do (per the most immediate-term correlation):

 

THE HEDGEYE MACRO PLAYBOOK - JPYUSD vs. CRB INDEX

 

THE HEDGEYE MACRO PLAYBOOK - JPYUSD vs. CRUDE OIL

 

U.S. equities down?

 

THE HEDGEYE MACRO PLAYBOOK - JPYUSD vs. SPX

 

With the VIX smack dab in the middle of our 16.66 to 23.06 immediate-term risk range, it’s tough to have a concrete call on the spillover effects today. That being said, however, we’re definitely inclined to expect a pullback in cross-asset beta on further consolidation in the USD/JPY cross as the TREND in volatility remains bullish:

 

THE HEDGEYE MACRO PLAYBOOK - VIX

 

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

 

TRACKING OUR ACTIVE MACRO THEMES

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.

 

More Cowbell!  A Roadmap Ahead of the ECB’s Thursday Meeting (1/20)

 

#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.

 

The Hedgeye Macro Playbook (1/16)

 

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.

 

HOUSING: Builder Confidence Still High Despite Recent Weakness (1/20)

 

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.      


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.28%
  • SHORT SIGNALS 78.51%

Retail Callouts (1/21): NKE, AMZN, LB, JCP, SHLD, ZU, ICSC

Takeaway: E-comm biggest movers in 2014. Pos: NKE, ZU. Neg: Toys, LB, JCP, Zappos, SHLD. Easy comps and gas prices haven't flowed through ICSC #'s.

ECONOMIC DATA

 

Takeaway: A slight acceleration on both the 1 and 2yr trend lines, but January numbers aren't exactly blowing the roof off through the first 3-weeks of Jan. Comps are easy because of last year’s polar vortex, the average price of a gallon of gas is 40% below LY, but we still haven't seen that translate into $$$ at the retail cash register, or at least not the retailers that ICSC tracks.

 

Retail Callouts (1/21): NKE, AMZN, LB, JCP, SHLD, ZU, ICSC - 1 21 chart1

 

COMPANY HIGHLIGHTS

 

NKE, LB, AMZN - Who were America’s biggest Web traffic winners and losers in 2014?

(http://thenextweb.com/insider/2015/01/20/americas-biggest-web-traffic-winners-losers-2014/)

 

Takeaway: We track visitation stats through half a dozen sources for 250 sites across retail. But this is an interesting snapshot of the biggest winners and losers across the whole e-comm spectrum. Notable callouts on the negative side: Toys R Us, LB, JCP, AMZN (zappos.com), SHLD. On the positive side: NKE, ZU, AMZN (6pm.com). The two names that surprised on the negative side were LB and zappos. The first makes sense given the brand discontinued its direct apparel business in 2014. Zappos on the other hand made us pause, until we ran the numbers and found that while Zappos online market share in apparel and footwear has held flat in the 4.7% range for the past 4 years, AMZN has increased its penetration by 420bps to 14.7%. The more interesting thing to us is Nike on the positive side, which is the only Brand or Brick and Mortar retailer to land in the top 35. As we outlined in our Athletic Black book in December, 46% of consumers would prefer to visit nike.com first when shopping Nike footwear or apparel online. That coupled with the company's more vocal stance on its desire to grow its own DTC business = a significant headwind for traditional wholesale accounts.

 

Retail Callouts (1/21): NKE, AMZN, LB, JCP, SHLD, ZU, ICSC - rank 1502 520x793

 

OTHER NEWS

 

RL, NKE - Converse, Ralph Lauren Enter Trademark Settlement Agreement

(http://www.wwd.com/business-news/legal/converse-ralph-lauren-enter-trademark-settlement-agreement-8126326?module=Business-latest)

 

SHLD, TGT - Sears Canada Offers Criticism Of Target Canada, Discount And Jobs To Workers

(http://consumerist.com/2015/01/19/sears-canada-offers-criticism-of-target-canada-discount-and-jobs-to-workers/)

 

SPLS, ODP - Starboard Releases Letter to Staples CEO and Board of Directors

(http://www.prnewswire.com/news-releases/starboard-releases-letter-to-staples-ceo-and-board-of-directors-300022852.html)

 

U.S. Supreme Court Declines Challenge to Debit Card Rules

(http://www.wwd.com/business-news/government-trade/us-supreme-court-declines-challenge-to-debit-card-rules-8123557?module=Business-latest)

 

WMT - Walmart Launches First-of-its-Kind Cash Pickup Option for Tax Refunds

(http://news.walmart.com/news-archive/2015/01/20/walmart-launches-first-of-its-kind-cash-pickup-option-for-tax-refunds)

 

DECK - Deckers Brands Appoints David Lafitte To Chief Operating Officer

(http://ir.deckers.com/phoenix.zhtml?c=91148&p=irol-newsArticle&ID=2009059)

 

Sports Direct Shares Tumble as Founder Ashley Sells Shares

(http://www.bloomberg.com/news/2015-01-21/sports-direct-shares-tumble-as-founder-mike-ashley-sells-shares.html)

  

PVH - Hilfiger Takes Showroom Digital

(http://www.wwd.com/retail-news/direct-internet-catalogue/hilfiger-takes-showroom-digital-8126787?module=Retail-latest


Call Today: Hedging The Storm in Energy

Hedgeye’s Macro and Energy teams will host a guest speaker call TODAY at 1:00pm EST to discuss current trends in and implications of the commodity hedging practices of US E&Ps, natural gas processors, and various industrial commodity consumers.

 

Call Today: Hedging The Storm in Energy - Marketing ImageVF

 

The call will feature Wayne Penello and Andy Furman of Risked Revenue Energy Associates (“R^2”).  R^2 is an independent hedge advisor serving E&P companies, midstream service providers, and large consumers.  Wayne Penello is the President and Founder of R^2, and has 30 years of experience in commodity options trading, market-making, and asset management.  Andy Furman has 25 years of experience in energy trading and is an expert at valuing and trading options.

 

Participant Dialing Instructions

Toll Free Number:

Direct Dial Number:

Conference Code: 962793#

Materials: CLICK HERE

 

Topics for Discussion

  • Overview of R^2’s services, clients, and proprietary risk management systems;
  • The mechanics of entering into a commodity hedge;
  • Assessment of current industry hedge positions;
  • R^2’s commodity price outlook for crude oil, natural gas, and NGLs;
  • Client psychology – what E&Ps are currently thinking and doing in the oil, gas, and NGL markets;
  • Likely result of borrowing-base determinations from financial institutions;
  • The challenge and opportunity in hedging NGLs;
  • And more…

      

About Risked Revenue Energy Associates:

R^2 is a consultant and market agent in the energy space serving upstream, midstream, and end users of energy-related commodities (including private equity interests).  R^2 brings over 150 years of experience including but not limited to market-making, trading, asset management, and industry expertise. The firm utilizes a patented risk management strategy to help implement and stress test a company’s hedge book, leverage, and cash flows, among a long list of other metrics under various scenarios. R^2 suggests the most relevant hedging strategies and negotiates/executes on behalf of their clients on a daily basis.

 

Wayne Penello is the President and Founder of R^2. He has 30 years of market-making, option trading and asset management experience in the energy industry. Mr. Penello began his career on the New York Mercantile Exchange, where he was a market maker and served as Ring Chairman of options trading. Subsequently, he held positions managing globally distributed energy assets for Vitol S.A., Vitol U.S.A., Tenneco Gas Marketing and Torch Energy. Mr. Penello was formerly a research scientist. He holds a Masters degree in Marine Sciences from Stony Brook University and an undergraduate degree in Marine Biology from Southampton College.

  

Andy Furman was co-founder and CEO of Atlantic Capital Consultants, an options market-making firm on the NYMEX from 1987 – 2001. After leaving the NYMEX trading floor in 2001, Mr. Furman traded for hedge funds. Most recently he held the position of Managing Director for Hudson Capital Group, LLC where as Manager and Trader for Energy Futures and Options he used spread arbitrage and option strategies to achieve consistent profitability. Mr. Furman holds a Bachelor of Science degree in Chemical Engineering from MIT.

 

Macro Team


Japan, #Deflation and Switzerland

Client Talking Points

JAPAN

Surprisingly the Japanese central planners at the BOJ didn’t impress markets with enough cowbell last night – Yen +0.8% and Nikkei -0.5% as Bank of Japan Governor Haruhiko Kuroda told ½ the truth (that there’s no way he gets his monetary (inflation) math in 2015) but that he’ll eventually get what the Japanese haven’t been able to achieve since 1997.

#DEFLATION

As the central planning attempts by the Japanese and Europeans get more desperate, the world gets a stronger dollar and that’s hammering inflation expectations. The CRB Index (19 commodities) hit a fresh new low of 219 yesterday, that’s a 30% crash since June. Copper down another -1.7% this morning.

SWISS

The Swiss stock market got smoked, then bounced, and is getting hit again this morning, leading European equity index losers at -1.9% (-10.7% year-to-date) with no support on the Swiss Market Index to 7680.

Asset Allocation

CASH 56% US EQUITIES 5%
INTL EQUITIES 2% COMMODITIES 0%
FIXED INCOME 31% INTL CURRENCIES 6%

Top Long Ideas

Company Ticker Sector Duration
EDV

The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). As our declining rates thesis proved out and picked up steam over the course of the year, we see this trend continuing into Q1.  Short of a Fed rate hike, there’s no force out there with the oomph to reverse this trend, particularly with global growth decelerating and disinflationary trends pushing capital flows into the one remaining unbreakable piggy bank, which is the U.S. Treasury debt market.

TLT

As growth and inflation expectations continue to slow, stay with low-volatility Long Bonds (TLT). We believe the TLT has plenty of room to run. We strongly believe the dynamics in the currency market are likely contribute to a “reflexive deflationary spiral” whereby continued global macro asset price deflation and reported disinflation both contribute to rising investor demand for long-term Treasuries, at the margins.

HOLX

Hologic (HOLX) is a name our Healthcare Sector Head Tom Tobin has been closing monitoring for awhile. In what Tom calls his 3D TOMO Tracker Update (Institutional Research product) of U.S. facilities currently offering 3D Tomosynthesis, month-to-date December placements signaled a break-out quarter after a sharp acceleration in October and slight correction to a still very high rate in November. We believe we are seeing a sustained acceleration in placements that will likely drive upside to Breast Health throughout FY2015. Tom’s estimates are materially ahead of the Street, but importantly this upward trend in Breast Health should lead not only to earnings upside, but also multiple expansion and a significant move in the stock price.

Three for the Road

TWEET OF THE DAY

Boom! We're going LIVE at 8:30am ET. @KeithMcCullough hosting morning macro markets call w/@HedgeyeDDale It's free. https://www.youtube.com/watch?v=oWAwgpx27yA …

@Hedgeye

 

QUOTE OF THE DAY

Wisdom begins in wonder.

-Socrates

STAT OF THE DAY

The top 1% of income earners in the U.S. get over a 1/3 of that income from capital gains. 


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