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Failure? A Look At The BOJ's Negative Interest Rate Experiment

Takeaway: Since the Bank of Japan announced negative interest rates, the Yen is up and Nikkei is down. The exact opposite of its intentions.

It was inevitable. But it's finally happening. The belief system that central bankers can bend and smooth economic gravity ... it's breaking down. 


In case you missed it, back in February, Hedgeye CEO Keith McCullough wrote an Early Look entitled, "The Big Bang Theory" (we unlocked it). He posited that the entire central-market-planning belief system/edifice could implode. What would happen if macro markets no longer believed in the potency of central planners at the Fed, BOJ and ECB? What if currencies actually went up ... and stocks went down in response to central bank easing?


Well, that's what's happening in Japan right now. Look at the chart of the USD/Yen since the BOJ pursued negative interest rates in January. 


Failure? A Look At The BOJ's Negative Interest Rate Experiment - usd jpy


This morning, the BOJ downgraded its view of the economy, but held interest rates at minus 0.1% and kept asset purchases at a pace of Y80tn a year. Here's analysis from McCullough in a note sent to subscribers:


"If you’ve been bearish on the #BeliefSystem (central-market-planning) breaking down in Japan alongside us, congrats – Japanese stocks failed @Hedgeye TREND resistance overnight as the Yen popped (again) on a BOJ statement day. The Nikkei is down -0.7% to -10% for the year-to-date. It is not clear how the bulls could be trumpeting losing money year-to-date."


The Nikkei is down -2.3% since the BOJ announced NIRP.

Failure? A Look At The BOJ's Negative Interest Rate Experiment - japan nikkei


So where do we go from here?


We'll say it again. The biggest market risk is believing central banks' economic forecasts.

Builder Confidence | Past-Peak

Takeaway: Builder sentiment holds at 9-month lows while forward expectations continue their plunge from 75 in October 2015 to 61 in March 2016.

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.


Builder Confidence | Past-Peak - Compendium 031516


Today's Focus: March NAHB HMI (Builder Confidence Survey)

Builder Confidence in March was static at 58 against unrevised February estimates, holding at 9-month lows and marking a 5-month past the cycle peak of 65 recorded in October.


Across the Survey Indicators, Current Sales held flat at 65 while the -3pt decline in Forward Expectations was offset by a +4pt gain in Current Traffic.  Geographically, the West and Midwest regions were flat sequentially with +1pt and +2pt gains in the Northeast and South, respectively. 


Top-down, falling mortgage rates and an ebb in market volatility helped offset the prevailing reality that demand is slowing, supply remains constrained and labor and lot supply issues remain unlikely to resolve in the near-term. 


Commentary was largely generic with a nod to continued consternation around lots and labor and the broadly positive fundamental backdrop:


NAHB Chairman Ed Brady:  “Confidence levels are hovering above the 50-point mid-range, indicating that the single-family market continues to make slow but steady progress.  However, builders continue to report problems regarding a shortage of lots and labor.”


And from NAHB Chief Economist David Crowe:  “While builder sentiment has been relatively flat for the last few months, the March HMI reading correlates with NAHB’s forecast of a steady firming of the single-family sector in 2016.  Solid job growth, low mortgage rates and improving mortgage availability will help keep the housing market on a gradual upward trajectory in the coming months.”


In short, nothing particularly remarkable in the March release as Builder Confidence remains past peak and the larger demand trend across both the new and existing markets remains one of deceleration. 


Looking to February Housing Starts data tomorrow, we expect the number to be strong from a rate-of-change perspective as we lap the depressed, severe weather comps from last February – for reference, even if we were flat with the disappointing January numbers, Starts would be up >+22% year-over-year given the base effect.  Similar comp dynamics exist for March as well.  We’ll get EHS for February on Monday and expect sales to be down sequentially and slowing on a year-over-year basis as the trend in closed activity recouples lower to the trend in Pending Home Sales.  



Builder Confidence | Past-Peak - HMI LT


Builder Confidence | Past-Peak - Builder vs Consumer Confidence


Builder Confidence | Past-Peak - HMI Sub Indices


Builder Confidence | Past-Peak - Housing Confidence Builder vs Consumer


Builder Confidence | Past-Peak - NAHB Regional


Builder Confidence | Past-Peak - Starts total   SF Seasonal Highlight




About the NAHB HMI:

The Housing Market Index (HMI) is based on a monthly survey of NAHB members designed to take the pulse of the single-family housing market. The monthly survey has been conducted for 30 years. The survey asks respondents to rate market conditions for the sale of new homes at the present time and in the next 6 months as well as the traffic of prospective buyers of new homes. The HMI is a weighted average of separate diffusion indices for these three key single-family series. The HMI can range from 0 to 100, where a value over 50 implies conditions are, on average, improving, a value below 50 implies conditions are worsening, and an index value of 50 indicates that the housing market is neither improving nor worsening.




Joshua Steiner, CFA


Christian B. Drake


Retail Sales | A Huge Trend Nobody is Watching

Takeaway: We hit the point where e-commerce dollar growth surpassed Brick & Mortar. 2016 is officially ‘Game On’ for financial impact of e-comm.

Today’s 60bp negative revision for January Retail Sales (from +0.2 to -0.4%) was obviously disappointing, albeit not terribly surprising to anyone listening to retail conference calls over the past four weeks. Let’s step away from the obvious for a minute and look at a powerful trend that’s actually investable.  We’re referring, of course, to online growth. Now…before you jump on us and say that OF COURSE the whole planet knows that e-commerce is gaining share, we’ll remind you of something we often say at Hedgeye “Investors are Bullish, Bearish, or Not Enough of Either.”  Simply put, even Bears rarely gauge how bad things will get, and Bulls often are way too conservative.  We think the latter is spot-on as it relates to online sales.


Today, e-commerce accounts for 7.3% of total Retail Sales. A decade ago that number was 2.5%, and five years ago it was 4.4%. At face value we’re talking really small numbers…right? Not really. Consider this…in the fourth quarter, e-commerce accounted for 65% of all incremental Retail Sales. That’s S-I-X-T-Y F-I-V-E percent! This ramped from 23% a year ago, and 45% in the prior quarter. This not only speaks to the growth of e-comm, but also the sustainability (and likely share gain) when people otherwise don’t want to venture out to a mall. Also consider that the 65% growth share translates to about $100bn on a ttm basis. That alone is bigger than the entire Women’s apparel category.


For those who might not be Bullish or Bearish ‘Enough’, here are the names that will win and lose as this continues to play out…




Retail Sales | A Huge Trend Nobody is Watching - 3 15 2016 chart1

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CHART OF THE DAY: Is A Chinese Economic Crash Inevitable?

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye Director of Research Daryl Jones. Click here to learn more.


"... Last week, The Economist published a chart, which we’ve republished in our Chart of the Day below highlighting private lending within the Chinese economy, and compares it to other economies before their deleveraging and crash. Based on this chart and measure, a Chinese crash seems inevitable. But like most things that appear in the mainstream media, the better question to ask might be whether this is already baked into consensus?"


CHART OF THE DAY: Is A Chinese Economic Crash Inevitable? - 3 15 EL chart 1

Credit: The Economist

The Year of the Moving Monkey

We are just an advanced breed of monkeys on a minor planet of a very average star. But we can understand the Universe. That makes us something very special.

-Stephen Hawking


In a crazy stock market year like this, it feels somewhat appropriate that it is the Chinese Year of the Monkey. After all, how better to characterize the volatility of global stock markets than comparing them to one of the most frivolous, yet human like animals in the wild kingdom?


Here at Hedgeye, we’ve also used the word "monkey" to refer to the use (by some stock market operators) of 200 and 50-day moving averages to determine buy or sell points on stocks and markets. This positioning occurs despite any supporting evidence that breaking above or below a moving monkey average is actually predictive of a future move.


According to the Chinese Fortune Calendar:


“Therefore, we will deal with more financial events in the year of the Monkey. Monkey is a smart, naughty, wily and vigilant animal. If you want to have good return for your money investment, then you need to outsmart the Monkey”


That sounds like an appropriate 2016 analogy to us.


The Year of the Moving Monkey - 3 15 EL chart 2


Back to the Global Macro Grind


As stock market operators, one of the biggest risks you’ve faced over the last 9 months or so has been the risk of consensus. According to a Bloomberg report this morning:


  • Stocks with the most hedge fund ownership in the Russell 3000 have declined -31% since July 2015 compared to the SP500, which is down -2.8%;
  • An index tracking the companies with the most concentrated ownership have declined -45% since July 2015; and
  • Finally, hedge funds have been net sellers of $3.5 billion in equites this year. More than any other asset managers.


Talk about negative Alpha!


In all seriousness, there is a reason why we attempt to quantify buy side consensus in our best ideas. It's because if you are on the wrong side of a concentrated hedge fund bet that is unwinding, the stock is mostly definitely not going to see support at a "moving monkey" average.


On the macro front, our colleague Darius Dale has been closely investigating the consensus view of emerging markets. He's hosting a conference call tomorrow titled, “Is this a Generational Buying Opportunity in Emerging Markets?” No surprise, China will be a major focus of his call.


According to Darius, the key questions to focus on are whether the Chinese economy, its banking system and the yuan are as vulnerable to collapse as consensus believes? Many investors seem to be of the view that China requires a material devaluation of the RMB to stave off banking crisis and/or outright economic collapse. Some investors actually believe each of those outcomes is inevitable. If you’d like to join the call, please email


Last week, The Economist published a chart, which we’ve republished in our Chart of the Day below highlighting private lending within the Chinese economy, and compares it to other economies before their deleveraging and crash. Based on this chart and measure, a Chinese crash seems inevitable. But like most things that appear in the mainstream media, the better question to ask might be whether this is already baked into consensus?


Over on the oil front, the recent price move seems to imply that the worst is behind oil. With drilling activity at an all-time low in the U.S., there is some credence to that story, but like most simple models, U.S. drilling is, but, one factor in the global supply and demand story. A few things to note this morning:


  • Iranian production climbed last month by the most in almost two decades following the end of sanctions. Iran increased output by 187,800 bpd to 3.13M in February, the biggest monthly gain since 1997; and
  • OPEC is revising downwards demand for its oil produced by its members as production outside OPEC remains ever resilient; and
  • The spread between Treasuries and high yield debt of energy companies has narrowed by about a 1/3 in the last month. The implication is that the market for energy financing is opening ever so slightly based on the recent crude rally.


Needless to say, we’ll stick to our bearish view of crude oil. Supply and demand fundamentals aside, it is going to be very difficult for oil to rally in the face of a U.S. central banking that is on the margin more hawkish than its global peers. A strong dollar is not good for the global commodities that are priced in it, like, say, oil.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.76-2.00%


VIX 16.01-21.15

USD 95.83-97.66

Gold 1


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


The Year of the Moving Monkey - 3 15 EL chart 1

Credit: The Economist

INSTANT INSIGHT | Oil and Gold Prices

 INSTANT INSIGHT | Oil and Gold Prices - Oil cartoon 01.09.2015


Oil prices have had a nice run but with delusions dissipating and reality sinking in crude prices are slipping once again. 


The recent stock market reflation rally was undoubtedly bolstered by a 27% ramp in oil prices. Since oil bottomed in February, Energy stocks (XLE) are up 15%. Then, on Monday, OPEC announced that demand would be less than previously thought in 2016 ... at the same time ... sidelined producer Iran boosted its output from 1 million barrels per day in January to 3.1 million. No small potatoes. That dashed the potency of previously discussed Saudi-Russia freeze talks.


The news for oil doesn't get much better from here, Hedgeye CEO Keith McCullough wrote in a note to subscribers this morning:


"Oil is down hard after failing at the top-end of what is now a $34.05-39.76 immediate-term risk range for WTI – and, again, if you’re thinking the Fed is going to be “hawkish”, don’t forget that means Dollar Up, Commodities Down – I’d stay with the better TREND setup than chasing Energy charts (i.e. Long Gold vs. Short Oil for 2016)"



Here's the latest on Gold from McCullough: 


Want more insight on Gold and the Fed?


Bestselling author Jim Rickards (Currency Wars and The Death of Money) joins Hedgeye CEO Keith McCullough this morning at 11am ET to discuss his brand new book The New Case for Gold, along with global central bank policy, negative interest rates, currency wars and much more. Join us. It's free. (Click here for free access.)

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