CHART OF THE DAY: Can The BOJ Save Japan From Economic Reality?

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye Senior Macro analyst Darius Dale. Click here to learn more.


"... So as the BoJ heads into its July 28-29 meeting with peak expectations of incremental monetary easing (22 of 28 analysts expect such per the latest Nikkei Quick survey), we must ask ourselves one very simple question:


“Does whatever they do even matter?”


CHART OF THE DAY: Can The BOJ Save Japan From Economic Reality? - 7 27 16 Chart of the Day

The Beginning of the End

“Disappointment is a sort of bankruptcy – the bankruptcy of a soul that expends too much in hope and expectation.”

-Eric Hoffer


Disappointment sucks – especially when you’re on the giving end of it. As a tall, athletic-looking black guy that can’t dunk (or shoot for that matter), I know a thing or two about being a disappointment – at least in basketball terms. As a government fully committed to reflation via coordinated monetary and fiscal easing, the current LDP regime in Japan must feel similarly disappointing.


Indeed, it’s incredibly disappointing to see that Japanese equities (Nikkei 225 Index) are down -17.8% YoY amid a +17.2% surge in the JPY vs. the USD – especially when you consider the fact that the BoJ has been targeting an annual rise of ¥80T ($758B) in Japan’s monetary base via LSAP, is implementing NIRP and remains committed to forward guidance as far as the eye can see (2Y OIS Rate = -0.30%).


I guess that’s why every morning I wake up to a new headline about the next “yuuuge” fiscal stimulus package in Japan. In a few short weeks, market expectations for the size of the post-election supplementary budget have nearly tripled from an anticipated ¥10T ($95B) to ¥27T ($256B).


The Beginning of the End - helicopter money cartoon 07.19.2016


Back to the Global Macro Grind


Never mind that Japan’s sovereign budget balance is currently at -6.7% of GDP, or that the country’s outstanding sovereign debt is a whopping 221% of GDP; who cares about financing capacity when you can just float a few helicopter money rumors? Never mind that helicopter money as it is currently described across Western media outlets (i.e. direct financing of sovereign debt issuance by the central bank) is expressly prohibited in Japan – as it is across the preponderance of advanced economies.


Propaganda is key.


If there’s one important piece of propaganda Japan has taught the Western world, it’s that sovereign debt and deficits don’t matter. After targeting a primary surplus by FY20, the Cabinet is now projecting a primary deficit of ¥9.2T ($87B) by that same year under their downwardly-revised growth assumptions which assumes nominal GDP of ¥551T ($5.2T), down from the prior Abenomics target of ¥600 ($5.7T).


The Japanese government isn’t the only institution in Japan finding itself increasingly in the hole. Pensions at listed Japanese companies have amassed a record ¥26T ($246B) in unfunded liabilities, a figure that represents 28.5% of the record total ¥91T ($862) in obligations.


And as much as expectations of perpetually low discount rates have been a buoy to consensus expectations that U.S. equities will never again draw down, they’ve been equally a pain in the you-know-what for Japanese pension fund managers, who are trying to cope with an average discount rate of 0.863% amid negative yields on JGBs through the 15Y.


So as the BoJ heads into its July 28-29 meeting with peak expectations of incremental monetary easing (22 of 28 analysts expect such per the latest Nikkei Quick survey), we must ask ourselves one very simple question:


“Does whatever they do even matter?”


On an immediate-term TRADE duration, of course it does. Assuming the policy board heeds partisan pushback against plunging deeper into negative rate territory and sticks with “traditional” QQE expansion, we’re liable to see a selloff in the JPY and a pop in Japanese stocks that lasts anywhere from 1-2 weeks, depending on how fervently those markets trade into the event.


But that’s probably it. And we’ll look to sell short into said equity strength and buy low into said currency weakness because we continue to believe the breakdown of the central planning #BeliefSystem remains ongoing in Japan.


But with the Nikkei 225 Index up +9.3% MoM and the JPY -3.0% MoM vs. the USD amid burgeoning expectations of coordinated [and incremental] monetary and fiscal easing, how can we be so sure that the #BeliefSystem is indeed breaking down in Japan? Why isn’t every chart a centrally-planned buying opportunity of a lifetime?


That’s easy. If Japanese investors truly believed authorities were indeed about to embark on the reflation they are threatening to perpetuate, then 10Y JGB Yields wouldn’t have come in by -9bps over that same time frame and 5Y5Y Forward Breakeven Rates most assuredly wouldn’t have crashed by another -24bps MoM. Japanese locals don’t buy the hype; should you?


No, you shouldn’t. The recent weakness in the Japanese yen has more to do with dollar strength associated with growing expectations for a U.S. economic recovery – expectations that will be cultivated handily on Friday when we receive the advance estimate for Q2 GDP.


As we outlined in our 7/18 note titled “U.S. GDP Whiplash”, our predictive tracking algorithm has nudged up to +4.8% QoQ SAAR for 2Q16E; even if the BEA finally decides to use an honest GDP deflator and growth comes in ~100bps below that, investors and policymakers will still interpret such a figure as decidedly bullish.


Indeed, the USD has been front-running a marginally hawkish Fed and a rise in implied yields across the Fed Funds Futures curve. Any follow-through will surely be positive for Japanese equities within the existing correlation regime, but said follow-through is likely to be short-lived if we’re right on the outlook for domestic economic growth and the labor market from here. Refer to the aforementioned note, as well as slides 43-45 of our Q3 Macro Themes Presentation for more details.


From there, you can short Japanese equities with impunity. I mean, what exactly is the bull case if the policies that market participants are so excited about consistently fail to produce the desired outcomes? Consider the following:


  • Japanese economic growth is slowing on a trending basis across the preponderance of key high-frequency indicators. In absolute terms, household consumption, industrial production, exports are all showing negative YoY growth at -1.1%, -0.4% and -7.4%, respectively, while the composite PMI, consumer confidence and business confidence indices are all in contraction territory at 49, 42.1 and 46.5, respectively. It’s no wonder the Cabinet Office recently revised down its FY16 real GDP forecast by -80bps to 0.9%.
  • Both headline and core CPI are slowing on a sequential, trending and quarterly average basis. The latter is currently tracking -140bps shy of the BoJ’s ever-elusive +2% price stability mandate. It’s no wonder the Cabinet Office recently revised down its FY16 CPI forecast by -80bps to 0.4%.
  • In the 10 quarters since Abenomics began in late-2012/early-2013, the Japanese economy has experienced a sequential contraction in real GDP 50% of the time!


As the authors and gatekeepers of the Abenomics trade going back to as early as November 2012 (i.e. when no one else was making the call), I would argue we understand these market dynamics as well as anyone. And with growing risk that investor consensus arrives at the conclusion that policymakers there are increasingly pushing on a string, we think it’s appropriate to extend our intermediate-term TREND bearish bias on Japanese stocks/bullish bias on the Japanese yen to the long-term TAIL duration as well.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.47-1.65%

SPX 2131-2178

VIX 11.72-16.63
USD 96.21-97.92
Oil (WTI) 42.07-44.98

Gold 1 


Keep your head on a swivel,




Darius Dale



The Beginning of the End - 7 27 16 Chart of the Day

The Macro Show with Todd Jordan Replay | July 27, 2016

CLICK HERE to access the associated slides.



An audio-only replay of today's show is available here.

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 80.46%
  • SHORT SIGNALS 78.35%

EXPE | Thoughts into the Print (2Q16)

Takeaway: We believe mgmt is largely in control of its own story; regardless of softening travel themes, which appear to be overextended to the OTAs


  1. THESIS RECAP: We added EXPE as a Best Idea Long on July 1st.  We believe mgmt is largely in control of its own story; specifically the OWW integration (EBITDA target) and the AWAY model transition.  On the former, we estimate that EXPE’s effective EBITDA guidance is only calling for low 20% organic growth vs. its 35%-45% target given purchase accounting headwinds from last year.  We suspect mgmt can get there largely on the cost side alone, with two additional underappreciated levers to get there in the event of a shortfall.  On the AWAY model transition, mgmt really doesn’t need much sub conversion to really move the needle this year, and we suspect the street would likely give the company a pass for any hiccups along the way given that it’s still very early in the transition.  More importantly, mgmt isn’t hostage to current travel trends on either of these fronts; but we discuss the current travel environment below. 
  2. THE END ISN’T NIGH: We’re referring to a potential deceleration in travel trends given mounting global headwinds, for which most outside of the sell-side are already bracing.  Indeed, Hedgeye’s Gaming, Lodging, & Leisure (GLL) Team has already offered a cautious outlook for the public hotel operators, which is being realized so far this earnings season (Hotel REITs are striking a cautious tone with respect to full year guidance).  But there is a difference between the lodgers and the OTAs.  The first is the KPIs are different since RevPAR and OCC% are measures of efficiency not volume; the latter is the better way to view the OTAs.  Second, the pressure our GLL team is expecting is due primarily to corporate transient, not leisure.  We segmented STR’s metrics in our EXPE deck to highlight the diverging trends.  Third, as it relates to EXPE, roughly 70% of its point-of-sale transactions are sourced from North America, and we estimate that roughly 70% of its hotel bookings are sourced from the merchant model.  Collectively, those two points suggest the EXPE may be the OTA most insulated from any Brexit-related travel headwinds (i.e. slowing EU/UK outbound and/or cancellation risk). 


EXPE | Thoughts into the Print (2Q16) - EXPE   Travel Slide


The links to GLL’s Lodging Preview and our EXPE Best Idea Long note are below.  Let us know if you would like the deck/replay from our EXPE call.



07/25/16 04:35 PM EDT
[click here]


07/1/16 08:34 AM EDT
[click here]



Hesham Shaaban, CFA
Managing Director



Todd Jordan
Managing Director




UA/KSS | The Best + The Worst = Not The Best

Takeaway: The key point for us is UA’s ability to Tier product to low/high consumers to make this KSS shot in the dark work.

This Under Armour print was as vanilla as any we can remember for this company. The growth algorithm was far from perfect, particularly for a company trading at 60x earnings. But at least from a trading vantage point, short interest doubled from 15% in April to 30% today – which probably made the event a push from where we sit given an in-line print and guide.


But we hardly cared about the quarterly numbers when management gave us the gift of its new bifurcated distribution strategy – basically it is attacking the high end and the low end of the consumer spectrum simultaneously.


The biggest factor of this strategy – by a mile – is the fact that UA will sell into Kohl’s starting next year. Yes…UA + KSS. While some brands have navigated this in the past without blowing up – Nike and Ralph Lauren, most notably – we’d note that announcing Kohl’s as a distribution partner is usually Brand-suicide. And relative to expectations, it’s proven to blow up more than a few investors who are betting on a benefit to KSS. How we’re doing the math, it’s about $70mm (1.5% growth) to UA, which might be a nascent tailwind – presuming the company can tier the product appropriately to mitigate cannibalization. And despite what people are already speculating, this is only a 0.5% comp boost to KSS – at best, and a likely set-up for a disappointment for America’s favorite remedial-quality retailer.


Lets Look At Some Raw Numbers:

UA/KSS | The Best + The Worst = Not The Best - 7 26 2016 kss chart


The high-end strategy is best represented by the push in to UAS (Under Armour Sportswear), which will distributed at ‘Best’ department stores and fully controlled DTC, and the continued investment in Brand Houses in top retail markets. Both will require a material capital investment with the store portion making up the lion’s share of that. Look no further than the newly announced UA store in the old FAO Schwartz digs. It will be the company’s biggest store by at least 20k sq. ft., but it’s also in the 0.1% in rent terms in the world.  Can UA pull it off? Probably, but a lot can change in 3yrs by the time the company gets that monster opened.


On the low end, this is where we think the conversation gets interesting. Not only for UA, but for one of our top short ideas in the retail space, KSS. The new bit of information being that KSS would carry UA footwear and apparel product in about 600 of its locations starting in FY17. The two obvious questions that need to be answered are a) what’s the risk to UA by going lower down the value chain in the US (from our perspective KSS is the lowest of the low), and b) what does the new partnership translate to in $ for both of the parties involved. More on each below…


Why KSS Now

The sports apparel market in the US sums up to a total of $70bn. With the two biggest players in the space, NKE and UA, sitting at 11% and 5% share, respectively. Nike has the obvious edge in distribution (with 24k points in distribution vs. UA at 11k in the US) having entered into the likes of KSS and JCP 20+ years ago. But it’s also tiered the distribution across multiple sub-channels in Brick and Mortar retail better than any other brand on the planet. The risk here for UA is that the brand doesn’t get the tiered distribution right, bungles its premium cache, and follows the road map laid out by Adidas, Reebok, and Columbia.


Columbia being the most relevant example we can point to in order to gauge the downside risk. The brand started getting distributed in earnest in the early 2000’s. Following that strategic decision, Columbia gross margins collapsed by 500bps and the multiple was cut in half. It took the brand almost a decade to see a positive inflection in either metric.


That’s the worst case. But we’re willing to give the company the benefit of the doubt on its decision to tap KSS. The fact is UA is at a phase in its growth cycle where it needs to widen the aperture to continue to take share, even if that means doing so with Kohl’s. And, this has been a management team that has a track record of making the right strategic decisions. In its 11 years as a public company nearly everything with the exception of maybe Int’l has been executed upon exceptionally well. And that one black eye has earned a gold star over the past 3 years.


What’s The Upside

Let’s first start at the top with the details of the new distribution agreement. This is a FY17 event, and will see UA take floor space with both apparel and footwear in about 600 doors, with the potential for a full fleet roll out at a later date. News outlets are reporting that it will be fleet wide, though Plank on the call seemed less committed. Our take is that anything more than 600 doors would makes us start questioning UA’s thought process on the deal – especially in light of the fact that KSS management has even stated that it has more doors than it needs by as much as 1/3rd.


Today we know that Nike has an $800+mm business within all of KSS’ doors. When we do the math on that (full explanation below) we get to $70mm revenue opportunity for UA in year one, which is good for 1.5 points of growth. Assuming a 25% growth rate going forward it’s an additional 30bps in growth in year two and beyond. Additional upside could be recognized if the partnership is rolled out across KSS’ fleet of 1100 doors.


For KSS, the math is a little trickier, because the UA will be displacing existing product in the store – something people tend to forget when discussing new brand offerings. By our math the UA opportunity in year one is $142mm, that will be displacing about $53mm in product which we assume has a productivity rate at 75% below the company average, for a net total of $89mm or about a half of a point in comp. Maybe good for a retailer who struggles on its best day to hit positive territory, but not enough for a concept that has one of the leanest cost structures in retail and needs a 2% comp to leverage fixed expenses.


Lastly…Ignore the KSS Hype

Specifically on KSS, this UA announcement is a non-event. Yes, it’s a considerably better brand than most of the current portfolio, but brands pop in and out of the assortment every year. The news was announced just a few hours ago, meaning the hype machine hasn’t kicked into full gear and probably won’t until KSS reports numbers in mid-August. So we thought we’d run a refresh on the last time the street got over excited on KSS’ addition of new brands. That was back in 2015 with the addition of Juicy and Izod. To provide context we looked at expectations before the year started for each quarter to gauge the expected ramp in comp store sales , and what the ultimate reported metric was. The result…a 100-200bps spread in the expectation vs. the reported number. The punchline = don’t believe the hype.


UA/KSS | The Best + The Worst = Not The Best - KSS JUICY IZOD


Key Assumptions/Conclusions In UA/KSS Math

1) Nike revenue at KSS $825. That’s 4% of KSS’ current revenue base.

2) Productivity on the floor space NKE product lives inside = 3x the company average. In excess of $550/sq.ft. (including e-comm sales) vs. the $191 company average.

3) Nike has a 1,500 sq. ft. footprint inside each KSS door.

4) For UA we assume the company only enters 600 doors, and has half the floor space allocated to Nike.

5) On that floor space we assume a 2x premium to the company average, heck it took NKE 20yrs to get to 3x.

6) That gets us to $142mm in revenue for UA inside KSS (half that rate shows up on UA’s P&L).

7) That displaces $53mm in what we call legacy product which we assume sells through at 75% the rate of the company average.

8) That nets out to an $89mm benefit in year one to KSS from the addition of UA or a 0.5% lift to comps. In year 2, assuming a 25% growth rate (about in-line with NKE comps at KSS over past 2yrs), it’s an additional 2 points to comp.

9) There is also margin considerations to consider, with National Brands coming in at a lower margin from the likely Private Label product it will be displacing. We’ll revisit that at a later time.

[From The Vault] Cartoon of the Day: In Case You Didn't Know

[From The Vault] Cartoon of the Day: In Case You Didn't Know - Fed lady cartoon 06.25.2016  1


Our inimitable, in-house cartoonist Bob Rich is on a much-deserved summer vacation. While he kicks back and relaxes, we're going into the Hedgeye Vault and highlighting some of his best work. On that note, ahead of tomorrow's Fed policy announcement, we bring you another audience favorite

Daily Trading Ranges

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