prev

Cartoon of the Day: China Bull!

Cartoon of the Day: China Bull! - China crash cartoon 08.25.2015

 

"The Chinese continue to panic," Hedgeye CEO Keith McCullough wrote earlier this morning. "Communist/central planning (of markets) is all they know."


Update: Why We Removed DXJ (Japanese Stocks) From Investing Ideas

Takeaway: Below is a report by Hedgeye macro analyst Darius Dale detailing why we removed DXJ from Investing Ideas.

Japanese shares have remained one of the best performing DM global equity markets as of late. That being said, we don't believe it makes a ton of sense to bet that this outperformance continues from here (at least not in the immediate-term). A confluence of domestic and international factors suggest it is now appropriate for investors to book gains – be they absolute or relative – on the long side of Japanese equities (DXJ).

 

I) No Easy Money Anytime Soon: Despite that fact that Headline CPI, Core CPI and PPI all continue to slow on a sequential and trending basis, recent commentary out of the BoJ – led by Governor Haruhiko Kuroda – continues to be [inappropriately] sanguine on the outlook for reported inflation in Japan. In addition to that, Prime Minister Shinzo Abe was out over the weekend effectively granting the BoJ leeway in its pursuit of the +2% inflation target amid the recent plunge in crude oil prices while also confessing his complete faith in the BoJ’s handling of monetary policy. The key takeaway here is that the Cabinet Office is unlikely to lean on the BoJ to ease in the near term, which, on the margin, reduces the likelihood of QQE expansion in 2H15. Specifically, increased wiggle room in obtaining key policy objectives delays the advent of presumably desired policy support measures from the perspective of Japanese equity market participants.

 

II) China Headwinds: Clearly the recent devaluation of the Chinese yuan put dour outlook for regional and global growth at the center of investors’ concerns. Last Friday, Chinese growth – in Manufacturing PMI terms – hit a 77-month low with the advent of the flash Caixin-Markit report for the month August. As such, we can reasonably conclude that investors are commensurately worried about the outlook for corporate earnings growth in Japan given the headwinds to exports stemming from Chinese #GrowthSlowing (Japan’s 2nd largest export market at 18.1%), as well as the recent bout of defensive strength in the yen amid global contagion. 

 

III) Correlation Risk: Speaking of global contagion, the recent melt-up in the Japanese yen (up +3.1% since Thursday’s close) and melt-down in the Nikkei 225 (down -11.1% since Thursday’s close) should remind investors that the Japanese equities remain tightly correlated to monetary policy expectations – despite growing calls for a sustainable decoupling. Specifically, cyclical bouts of global risk aversion have historically proved positive for the Japanese yen. This is largely due to the yen’s status as both a global funding currency and Japan’s status as an international capital allocator. Its net international investment surplus of ~$3.1T is equivalent to 75% of the country’s GDP and compares to a -$6.8T deficit for the U.S.

 

Update: Why We Removed DXJ (Japanese Stocks) From Investing Ideas - correlation risk

 

All told, while we still continue to see long-term upside for Japanese equities amid sustainable higher-highs in the USD/JPY exchange rate as the LDP and BoJ’s +3% GDP and +2% Core CPI targets clash with heinous demographic dynamics that should lead to perpetually easier monetary policy at the margins. Given the immediate-to-intermediate-term headwinds outlined above, however, we consider it prudent for investors to step to the sidelines for now.

 

Update: Why We Removed DXJ (Japanese Stocks) From Investing Ideas - Japan

 

 


HPI & NHS: Below the Headline

Takeaway: Waiting for Case Shiller to comport with CoreLogic is akin to waiting for Godot. The good news, however, is that this sets up well for 4Q.

Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume.

 

HPI & NHS: Below the Headline   - Compendium 082515 

 

Today's Focus: July New Home Sales & June Case-Shiller HPI


New Home Sales:  NHS in July retraced last month’s dud, rising +5.4% MoM and accelerating to +26% YoY.  As we’ve highlighted previously, and as the 1st chart below illustrates, July represented a quirky month from a comp perspective.  Year-over-year comps begin to steepen considerably in 3Q (July comp =+7% vs June = -12%) but the sequential was easy given last month’s retreat and, on an absolute basis, July 2014 represented the lowest level of sales in 2-years. 

 

Geographically, sales rose sequentially across all regions except the Midwest while year-over-year sales growth was positive across all geographies with growth of +39% and +29% in the Northeast and West, respectively, leading the gains. As a percentage of the total market, New Home share rose to 8.3% in July from 8.1% in June (LT average =  ~11.4%) as existing sales made another post-crisis high in the latest month.

 

On the supply side, the inventory of new homes rose 3.8% month-over-month to 221K on a unit basis while decelerating -80 bps sequentially to +7.3% YoY. 

 

Summarily, in the immediate-term the comp setup for NHS is less favorable while the longer-term mean reversion opportunity in the New Home Market remains both conspicuous and favorable relative the magnitude of upside available in the existing market.  Further, in a global environment characterized by price deflation and 0% +/- growth, a deceleration to low-teen’s sales growth may indeed be the Cyclops in a blind Macro land. 

 

 

HPI:  Concentrated Deceleration vs Diffuse Gain, Month 2

The Case-Shiller 20-City HPI for June released this morning – which represents average price data over the April-June period – showed home prices declining -0.12% MoM while holding flat at +4.9% year-over-year.  For a second month, all 20 cities reported sequential increases on an NSA basis while, on an SA basis, 10-cities reported declines.  Performance by City along with associated city index weightings is illustrated in the scatterplots below

 

Notably, and also for the 2nd consecutive month, the 20-city series and the National HPI (which covers all U.S. Census divisions ) have shown divergent, albeit modest, 2nd derivative trends.  Whereas the 20-city series showed modest deceleration, the National HPI showed modest acceleration.  This dynamic stems largely from the index weighting methodology and the fact that index heavyweights New York, San Francisco and Chicago all showed MoM declines and sequential YoY deceleration.   

 

The deceleration in the 20-city series also stands in contrast to both the CoreLogic HPI for June and the multi-month trend in the FHFA HPI series which continue to reflect accelerating price growth.   As it stands, we remain inclined to side with the CoreLogic/FHFA data as it's more leading and accords with the rising demand, tightening supply dynamic prevailing currently.   

 

In our view, the more important release will be next week’s CoreLogic data for July along with the short-term projection for August. 

 

 

HPI & NHS: Below the Headline   - NHS Units vs YoY

 

HPI & NHS: Below the Headline   - CS MoM vs Index Weight Scatter

 

HPI & NHS: Below the Headline   - CS National vs 20 City

 

HPI & NHS: Below the Headline   - CS YoY vs MoM Scatter

 

HPI & NHS: Below the Headline   - FHFA HPI YoY   TTM

 

HPI & NHS: Below the Headline   - NHS EHS to NHS Ratio

 

HPI & NHS: Below the Headline   - NHS LT

 

HPI & NHS: Below the Headline   - NHS Mean   Median Price

 

HPI & NHS: Below the Headline   - NHS Sales   Starts TTM 

 

HPI & NHS: Below the Headline   - NHS YoY

 

 

About New Home Sales:

Each month the Census Department releases the New Home Sales report, which measures the number of newly constructed homes that have been sold in the month. The difference between the New Home Sales report and the Starts and Permits report is that New Home Sales only includes single family spec homes built and sold by builders, and does not include condos, apartments, or owner-built units. This is why New Home Sales typically run at roughly half the rate of Starts.

 

About Case Shiller:

The S&P/Case-Shiller Home Price Index measures the changes in value of residential real estate by tracking single-family home re-sales in 20 metropolitan areas across the US. The index uses purchase price information obtained from county assessor and recorder offices. The Case-Shiller indexes are value-weighted, meaning price trends for more expensive homes have greater influence on estimated price changes than other homes. It is vital to note that the index’s printed number is a 3-month rolling average released on a two month delay.

 

Frequency and Release Date:

The S&P/Case-Shiller HPI is released on the last Tuesday of every month. The index is on a two month lag and therefore does not reflect the most recent month’s home prices.

 

  

 

Joshua Steiner, CFA

 

Christian B. Drake

  


get free cartoon of the day!

Start receiving Hedgeye's Cartoon of the Day, an exclusive and humourous take on the market and the economy, delivered every morning to your inbox

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.

DXJ: Removing Japanese Stocks From Investing Ideas

Takeaway: We are removing Japan from Investing Ideas.

***Please note we are removing Japanese Stocks from Investing Ideas (long side) today.

 

We will send out a full report explaining our decision later today by Hedgeye macro analyst Darius Dale.

 

DXJ: Removing Japanese Stocks From Investing Ideas - z ja


Get Out of Japan – For Now At Least

Through August 17th, Japanese shares were handily the best performing DM global equity market since we added to the long side back in mid-December:

 

  • Nikkei 225 (Japan): +20.6%
  • STOXX 600 (Europe): +19.8%
  • FTSE 100 (U.K.): +6.0%
  • S&P 500: (U.S.) +5.7%

 

Now, after a week of crisis and turmoil that saw each market give back well over 1,000bps of absolute performance, Japanese shares continue to outperform from our hypothetical cost basis date of 12/16/14:

 

  • Nikkei 225: +6.3%
  • STOXX 600: +8.1%
  • FTSE 100: -4.3%
  • S&P 500: -1.9%

 

That being said, however, it doesn’t make a ton of sense to bet that that outperformance continues from here at least not in the immediate-term. Specifically, a confluence of domestic and international factors suggests it is now appropriate for investors to book gains – be they absolute or relative – on the long side of Japanese equities (DXJ) and on the short side of the Japanese yen (FXY):

 

I) No Easy Money Anytime Soon: Despite that fact that Headline CPI, Core CPI and PPI all continue to slow on a sequential and trending basis, recent commentary out of the BoJ – led by Governor Haruhiko Kuroda – continues to be [inappropriately] sanguine on the outlook for reported inflation in Japan. On top of that, Prime Minister Shinzo Abe was out over the weekend effectively granting the BoJ leeway in its pursuit of the +2% inflation target amid the recent plunge in crude oil prices while also confessing his complete faith in the BoJ’s handling of monetary policy. The key takeaway here is that the Cabinet Office is unlikely to lean on the BoJ to ease in the near term, which, on the margin, reduces the likelihood of QQE expansion in 2H15. Specifically, increased wiggle room in obtaining key policy objectives delays the advent of presumably desired policy support measures from the perspective of Japanese equity market participants.

 

Get Out of Japan – For Now At Least - 1

 

Get Out of Japan – For Now At Least - 2

 

Get Out of Japan – For Now At Least - 3

 

II) China Headwinds: Clearly the recent devaluation of the Chinese yuan put dour outlook for regional and global growth at the center of investors’ concerns. Last Friday, Chinese growth – in Manufacturing PMI terms – hit a 77-month low with the advent of the flash Caixin-Markit report for the month August. As such, we can reasonably conclude that investors are commensurately worried about the outlook for corporate earnings growth in Japan given the headwinds to exports stemming from Chinese #GrowthSlowing (Japan’s 2nd largest export market at 18.1%), as well as the recent bout of defensive strength in the yen amid global contagion. For more details regarding our structurally bearish outlook for Chinese economic growth, refer to slides 7-19 of our recent presentation titled, “IS CONSENSUS RIGHT ON CHINA?” (7/16/15).

 

Get Out of Japan – For Now At Least - 4

 

Get Out of Japan – For Now At Least - 5

 

Get Out of Japan – For Now At Least - 6

 

Get Out of Japan – For Now At Least - 7

 

Get Out of Japan – For Now At Least - 8

 

Get Out of Japan – For Now At Least - 9

 

III) Correlation Risk: Speaking of global contagion, the recent melt-up in the Japanese yen (up +3.1% since Thursday’s close) and melt-down in the Nikkei 225 (down -11.1% since Thursday’s close) should remind investors that the Japanese equities remain tightly correlated to monetary policy expectations – despite growing calls for a sustainable decoupling. Specifically, cyclical bouts of global risk aversion have historically proved positive for the Japanese yen. This is largely due to the yen’s status as both a global funding currency and Japan’s status as an international capital allocator. Its net international investment surplus of ~$3.1T is equivalent to 75% of the country’s GDP and compares to a -$6.8T deficit for the US.

 

Get Out of Japan – For Now At Least - 10

 

Get Out of Japan – For Now At Least - 11

 

All told, while we still continue to see long-term upside for Japanese equities amid sustainable higher-highs in the USD/JPY exchange rate as the LDP and BoJ’s +3% GDP and +2% Core CPI targets clash with heinous demographic dynamics that should lead to perpetually easier monetary policy at the margins. Given the immediate-to-intermediate-term headwinds outline above, however, we do consider it prudent for investors to step to the sidelines for now.

 

Get Out of Japan – For Now At Least - 12

 

Get Out of Japan – For Now At Least - 13

 

Get Out of Japan – For Now At Least - 14

 

Please feel free to email us with any follow-up questions.

 

DD

 

Darius Dale

Director


McCullough: It Might Be Worse Than 2008

 

On Monday’s edition of RTA Live, Hedgeye CEO Keith McCullough talks about where investors should have stopped out of big-cap names like Disney and says 2015 is different from (and potentially worse than) 2008.

 

Subscribe to Real-Time Alerts today for access to this and all other episodes of RTA Live.

 

Subscribe to Hedgeye on YouTube for all of our free video content.

 


the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

next