Rumors about helicopter money aside, Japan's Nikkei is still down 19.8%, inclusive of last week's 10% pop.
Takeaway: In the last seven days of trading, the Nikkei is up +10.7% and USDJPY +5.5% on helicopter money speculation. That's a mirage.
Last week was an undoubtedly good week for Japanese equity bulls.
Conflicting rumors from Japanese officials stoked "helicopter money" speculation and the bulls cheered. In the last seven days of trading, the Nikkei is up +10.7%. Unsurprisingly, the Yen weakened (USDJPY: +5.5%, over that same period). But hang on...
Take a deep breath.
Before dogpiling into Japanese equities, consider the broader trend not dictated by helicopter money hot air and speculation. The Japanese economy continues to slow. Today, the IMF lowered its 2016 estimate for Japanese growth to 0.3%, from 0.5% prediction in April. Not good. That also explains why the Nikkei is down -19.8% in the past year, inclusive of the recent pop.
The BOJ has been desperately trying to devalue the Yen in an effort to stimulate sluggish economic growth. That's the standard central planning playbook but it isn't working. In the past year, the yen has strengthened (USDJPY is down -14.6%), despite the ¥80 to ¥90 trillion in quantitative easing. That's roughly equivalent to 16% of Japan's gross domestic product. Again... not working.
Can Japanese central planners actually stimulate economic growth or is helicopter money merely a mirage?
Takeaway: A stronger dollar matters in the housing market because foreign demand makes up ~4% of total transaction volume and ~8% of dollar volume.
Editor's Note: Below is an excerpt from an institutional research note written last week by Hedgeye Housing analysts Josh Steiner and Christian Drake. To access our Housing team's institutional research email firstname.lastname@example.org.
According to the National Association of Realtors, International Homebuyers purchased $103bn of US real estate from April 2015 through March 2016. Five countries: China, Canada, India, The United Kingdom and Mexico accounted for 51% or $52.8bn. China was the largest buyer for the second year in a row, accounting for 27% or $27.5bn of all foreign home purchases during the survey period.
The U.S. Dollar is up 23% since July 2014 and, while gains have been more muted over the 12 months, currency headwinds continue to pressure purchasing power across key demand countries.
As shown in the chart below, the Strong Dollar has increased the Median Price of US Existing Homes in the local countries of the Top 5 countries anywhere from 10% to 22% YoY.
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Takeaway: Unconventional Convention; Rules Ruckus; Rallying Republicans;
Editor's Note: Below is a brief excerpt from Hedgeye Potomac Chief Political Strategist JT Taylor's Capital Brief sent to institutional clients each morning. For more information on how you can access our institutional research please email firstname.lastname@example.org.
“I have noticed that nothing I never said ever did me any harm.”
The highly anticipated Republican convention kicked off last night with a solid celebrity B-list group of speakers and headlined by none other than Donald Trump’s wife, Melania - whose well-received maiden speech is now mired in controversy given stark similarities to Michelle Obama’s 2008 Democratic convention speech.
But this convention was supposed to be different – we all expected that - and instead of the usual emphasis on celebrities, the focus would then be centered on politicians who typically serve to give testimonials to the nominee and represent a passing of the torch for the party, but that is in short supply in Cleveland. Despite the, well, uneven start (more below), expect Donald Trump to grab the torch on his own and run with it.
The #NeverTrump crowd’s last-ditch effort to invite discord and derail Trump’s nomination was squashed after their attempt to force a roll call vote on the convention rules failed. The group submitted signatures from a majority of delegates in more than the required seven states to force a recorded vote from all 2,472 delegates. However, a number of delegates under pressure from the party reportedly removed their names, allowing the rules package to pass by a chaotic voice vote.
#NeverTrump hoped to unbind pledged delegates from voting according to their state’s primary or caucus result and allow them to vote independently. Despite its failure, the spectacle of #NeverTrump’s last stand exposed the lack of unity in the Republican party, embarrassing Trump and diverting media attention away from his message and primetime speeches.
The ten billion dollar question heading into this week’s events is: can the party survive the convention and emerge unified and enthusiastic while scores of Republicans refrain from endorsing (or even mentioning) the nominee? Speaking to the Wisconsin delegation, Speaker Paul Ryan intimated that the party still needed to come together without mentioning Trump’s name once and while TX Senator Ted Cruz is set to participate in the festivities, we understand he will not endorse.
Top that off with OH Governor John Kasich’s very public dissing of Trump and the convention in his own backyard - which happens to be a battleground state. In fact, the only former Republican presidential nominee to attend is former Senator Bob Dole – the nominee from 1996. We haven’t mentioned the litany of excuses Members of Congress are using to stay away - from hiking the Grand Canyon to cutting the grass or even taking their kids to watch dumpster fires.
Takeaway: Trump pledges to undo the Iran nuclear deal. Reimposing US sanctions will put Iran's 750K b/d of new crude exports to world markets at risk.
Editor's Note: Below is a brief excerpt from an institutional research note written this morning by Hedgeye Potomac Senior Energy Policy Analyst Joe McMonigle. Joe is in Cleveland at the Republican National Convention.
As Republicans gather this week in Cleveland, there will be considerable talk about energy issues – support for hydraulic fracturing, coal, natural gas, LNG and overall US energy independence. While Donald Trump has not provided many specifics on his energy plans, there is a solid consensus that his administration would be favorable to fossil fuel energy sectors with very little downside risk for investors.
However, there is an emerging election risk to energy markets and that is Trump’s pledge to nullify the Iran nuclear deal.
It would be especially disruptive to oil markets as Iranian crude exports have regained significant market share in recent months.
The International Energy Agency (IEA) said last week that Iran’s crude production rose to 3.66 million barrels a day in June and 750,000 barrels a day since January when international nuclear sanctions were lifted.
Re-imposing US sanctions could put much of this new Iranian crude exports on the market at risk.
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Editor's Note: Wabtec (WAB) is currently on our Industrials analyst Jay Van Sciver's Best Ideas List as a short. He is hosting a call today to update his thesis and preview their upcoming quarterly report. Send an email to firstname.lastname@example.org for access or for additional information about our institutional research.
What Levers Are Next? This management will not ride the downturn quietly, in our view. Wabtec still has substantial balance sheet capacity, and we would expect disappointing headlines to be offset with positive ones. Results last quarter should have seen pressure, but management was able to pull a Materials cost rabbit out of the hat. We will consider some options and the associated risks.
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