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Reality Check: The Nonsense Of Helicopter Money Speculation

Takeaway: Its been a rocky few weeks for Japan as helicopter money speculation stoked volatility. Central planners can't arrest economic reality.

Reality Check: The Nonsense Of Helicopter Money Speculation - helicopter money cartoon 07.19.2016

 

"There is considerable uncertainty over the outlook for prices," Kuroda told a press conference on Friday, following the Bank of Japan's July meeting. "In order to prevent these uncertainties from leading to a deterioration in confidence in households and businesses, we have decided to implement new measures."

 

The BOJ decided to double its annual purchases of ETFs to ¥6 trillion and will conduct an assessment of the effects of negative interest rates and its asset-buying program, which Reuters says suggests "that a major overhaul of its stimulus program may be forthcoming."

 

It's been a wild week leading up to the BOJ decision. "Helicopter money" speculation created a massive amount of volatility. Take a look at the last four days of trading in the USDJPY, with short-term intraday moves bouncing between -1.79% to +2.32%. Meanwhile, the peak-to-trough decline over the past four days is -3.55%:

 

Reality Check: The Nonsense Of Helicopter Money Speculation - usdjpy 7 29

 

In the past, BOJ Governor Haruhiko Kuroda has thrown cold water on helicopter money speculation. Here are a collection of recent statements from Kuroda addressing helicopter money:

 

  • "WSJ: There’s been a lot of discussion recently, especially among academics, about employing helicopter money, fiscal expansion financed with monetary quantitative easing. Is that something that should be considered in Japan?

    Mr. Kuroda: No.

    WSJ: Why not?

    Mr. Kuroda: No, we have no intention to employ helicopter money, anything like that, because, as you know, in any—almost all developed countries, fiscal policy is formulated by the government and approved by the parliament. Fiscal policy is the responsibility of the government and the parliament and prerogative of the government and the parliament." 4/18/16 (Wall Street Journal)
  • "Helicopter money is a policy where monetary and fiscal measures become one. But developed countries have learned through history to keep monetary policy and fiscal policy separate, with the central bank taking charge of the former and the government the latter... I don't think [helicopter money] can be adopted under the current legal system." 4/28/16 (Nikkei Asian Review)
  • "No need and no possibility for helicopter money." mid-June, (BBC Radio 4)
  • "There is an institutionally established system in which the government and the Diet are responsible for carrying out fiscal policy, while monetary policy is conducted by an independent central bank. Under the current legal system, I don’t think we can carry out (helicopter money)." 6/17/16 (Japan News)

 

Why does this matter?

 

Reality Check: The Nonsense Of Helicopter Money Speculation - bank of japan reuters

 

You'll note that the Reuters headline above is exactly one week before the BOJ announced it would pursue negative interest rates. You may be wondering... Will Kuroda shock markets again?

 

However, the more relevant question investors should be asking themselves is: Will the BOJ's "major [policy] overhaul," helicopter money or not, ultimately matter?

 

Since announcing the BOJ's negative interest rate policy in January:

 

  • Nikkei: -5.4%
  • USDJPY: -15.3%
  • 10yr JGB: -29bps

 

Clearly, markets continue to price in Japanese #GrowthSlowing regardless of what BOJ bureaucrats say. We continue to believe that central planners cannot rain money down from the heavens and expect their flagging economies to grow.

 

The central planning #BeliefSystem is breaking down.

 

Reality Check: The Nonsense Of Helicopter Money Speculation - central bankers cartoon 06.29.2016


This Overlooked Housing Investigation Has Huge Investing Implications

In this excerpt from The Macro Show, Hedgeye Housing analyst Josh Steiner explains the findings of a recent Treasury Department investigation that has significant implications for housing investors.

 

 

Subscribe to The Macro Show today for access to this and all other episodes. 

 

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

 


EXPE | FAIR TRADE (2Q 2016)

Takeaway: We’re giving back 5% for a big reset in room-night estimates; means we can sleep on our long through 2016 given what we saw out of OWW/AWAY

KEY POINTS

  1. 2Q16 = SELF-INFLICTED NOISE: As we mentioned in our last note, most outside of the sell-side were already bracing for decelerating trends, but no one expected this.  Room nights growth decelerated to 20% from 37% in 1Q16.  Mgmt suggested that they were already expecting ~600bps of deceleration largely due to 1Q/2Q calendar shifts, but the incremental deceleration was due to a combination of the recent terrorist attacks and internal mishaps related to the OWW integration, which may have limited to flow of its inventory to meta-search channels due to technichal issues.  The company expects a mild reacceleration in organic room nights in 2H.  EXPE also raised its dividend by to $0.26 from $0.24 (thanks), announced that it is may try to IPO Trivago before year-end, announced that it may save up to 50% on the build-out of its +$1B corporate headquarters over the next few years.  All in, mgmt introduced a ton of noise into the story without adequately addressing the progress it's making with the core story; particularly with AWAY.
  2. BUT STILL IN CONTROL: Despite the sudden shock in room nights growth, EXPE still beat consensus EBITDA estimates by 12%; suggesting that its 2016 EBITDA target really is a just cost story.  EXPE’s inorganic expense trajectory declined in absolute dollars across each line item outside of G&A, which saw a notable decrease in the prior quarter.  However on a consolidated basis, total operating costs as a % of revenue did accelerate on a y/y basis due to a continued surge in Tech & Content costs.  But AWAY was the much bigger story, which went under the wire this quarter (see Point 1).  First, 1M bookable listing may be the biggest highlight/sigh-of-relief since the biggest risk to the AWAY model transition was the opt-in; we estimate that 1M bookable listing effectively translates to online bookability penetration of 70%-85% depending on its total listings.  AWAY is also making early progress on monetizing its new model, with 2Q revenue growth up 37% y/y vs. 17% in 1Q; note that AWAY was high-single/low-teens top-line grower as a stadalone company.  Collectively, the progress mentioned above is all about execution, and has nothing to do with the current travel environment.
  3. FAIR TRADE: We expect 3Q to fuel optimism in both the OWW & AWAY stories since the inorganic seasonality impact should optically amplify their results.  First, roughly 40% of OWW’s annual EBITDA is historically concentrated into 3Q.  The 3Q15 OWW purchase accounting headwind effectively means EXPE doesn’t really have an OWW comp from last year, and the early leverage we’ve seen on the cost side YTD will only amplify the y/y impact into 3Q16.  For AWAY, the transition into a transactional model introduces a seasonality component that didn’t really exist last year (subscription model).  Given the early progress we’ve seen in online-bookability opt-in, coupled with another quarter of +200% y/y growth in online bookings transactions in 2Q, AWAY revenue growth will likely accelerate again since most of those 2Q booking will be recognized as revenue on the 3Q stay, and AWAY will have a full quarter's worth of the user fee in effect.  Meanwhile, the risk of softening trends in room nights is already on the table after 2Q mishap, and we only had to give back 5% on the stock that had ripped through July to essentially hedge that risk away.  We should see a big reset in 2016 consensus room night estimates, which basically means we can sleep on the long through 2016 since EXPE is now just an execution story at this point.

 

EXPE | FAIR TRADE (2Q 2016) - EXPE   Inorganic Cost Trajectory 2Q16

EXPE | FAIR TRADE (2Q 2016) - EXPE   AWAY online bookability 2Q16

 

Let us know if you have any questions or would like to discuss in more detail.

 

Todd Jordan
Managing Director


@HedgeyeSnakeye

 

Hesham Shaaban, CFA
Managing Director


@HedgeyeInternet 


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EXPE | Fair Trade (2Q16)

Takeaway: We’re giving back 5% for a big reset in room-night estimates; means we can sleep on our long through 2016 given what we saw out of OWW/AWAY

KEY POINTS

  1. 2Q16 = SELF-INFLICTED NOISE: As we mentioned in our last note, most outside of the sell-side were already bracing for decelerating trends, but no one expected this.  Room nights growth decelerated to 20% from 37% in 1Q16.  Mgmt suggested that they were already expecting ~600bps of deceleration largely due to 1Q/2Q calendar shifts, but the incremental deceleration was due to a combination of the recent terrorist attacks and internal mishaps related to the OWW integration, which may have limited to flow of its inventory to meta-search channels due to technichal issues.  The company expects a mild reacceleration in organic room nights in 2H.  EXPE also raised its dividend by to $0.26 from $0.24 (thanks), announced that it is may try to IPO Trivago before year-end, and that it may save up to 50% on the build-out of its +$1B corporate headquarters over the next few years.  All in, mgmt introduced a ton of noise into the story without adequately addressing the progress it's making with the core story; particularly with AWAY.
  2. BUT STILL IN CONTROL: Despite the sudden shock in room nights growth, EXPE still beat consensus EBITDA estimates by 12%; suggesting that its 2016 EBITDA target really is a just cost story.  EXPE’s inorganic expense trajectory declined in absolute dollars across each line item outside of G&A, which saw a notable decrease in the prior quarter.  However on a consolidated basis, total operating costs as a % of revenue did accelerate on a y/y basis due to a continued surge in Tech & Content costs.  But AWAY was the much bigger story, which went under the wire this quarter (see Point 1).  First, 1M bookable listing may be the biggest highlight/sigh-of-relief since the biggest risk to the AWAY model transition was the opt-in; we estimate that 1M bookable listing effectively translates to online bookability penetration of 70%-85% depending on its total listings.  AWAY is also making early progress on monetizing its new model, with 2Q revenue growth up 37% y/y vs. 17% in 1Q; note that AWAY was high-single/low-teens top-line grower as a stadalone company.  Collectively, the progress mentioned above is all about execution, and has nothing to do with the current travel environment.
  3. FAIR TRADE: We expect 3Q to fuel optimism in both the OWW & AWAY stories since the inorganic seasonality impact should optically amplify their results.  First, roughly 40% of OWW’s annual EBITDA is historically concentrated into 3Q.  The 3Q15 OWW purchase accounting headwind effectively means EXPE doesn’t really have an OWW comp from last year, and the early leverage we’ve seen on the cost side YTD will only amplify the y/y impact into 3Q16.  For AWAY, the transition into a transactional model introduces a seasonality component that didn’t really exist last year (subscription model).  Given the early progress we’ve seen in online-bookability opt-in, coupled with another quarter of +200% y/y growth in online bookings transactions in 2Q, AWAY revenue growth will likely accelerate again since most of those 2Q booking will be recognized as revenue on the 3Q stay, and AWAY will have a full quarter's worth of the user fee in effect.  Meanwhile, the risk of softening trends in room nights is already on the table after 2Q mishap, and we only had to give back 5% on the stock that had ripped through July to essentially hedge that risk away.  We should see a big reset in 2016 consensus room night estimates, which basically means we can sleep on the long through 2016 since EXPE is now just an execution story at this point.

 

EXPE | Fair Trade (2Q16) - EXPE   Inorganic Cost Trajectory 2Q16

EXPE | Fair Trade (2Q16) - EXPE   AWAY online bookability 2Q16

 

Let us know if you have any questions or would like to discuss in more detail.

 

Hesham Shaaban, CFA
Managing Director


@HedgeyeInternet 

  

Todd Jordan
Managing Director


@HedgeyeSnakeye


CHART OF THE DAY: Can Trump Win?

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.

 

"... Despite the punditry and career politicians missing the rise of Trump, the vast majority of voters are unhappy, so it shouldn’t have been terribly surprising. According to a recent poll from Rasmussen, 70% of likely voters believe the country is on the wrong track and a mere 24% believe the country is going in the right direction. The spread is near the highest level of the last 8 years.

 

So, despite his flaws, errant tweets, and narcissistic moments, it’s not difficult to see why a candidate that has never held political office is doing so well. The people are frustrated. Very frustrated. But can Trump win?"

 

CHART OF THE DAY: Can Trump Win?  - 7 29 16 chart of day


#WhoAreYouWith?

“Any American who is prepared to run for president should automatically, by definition, be disqualified from ever doing so.”

-Gore Vidal

 

The political conventions are officially behind us. That’s the good news. The bad news is that we have more than three months to go before the almost satirical 2016 election is in the books.   

 

Over time we’ve been accused of being partisan Democrats, partisan Republicans, or just plain disinterested Canadian hockey bros. The truth is that we are none of the above. We look at and analyze politics to the extent it will impact markets. And without doubt, there will be investment outcomes that develop into next year based on who is elected this fall.

 

#WhoAreYouWith? - trump and hillary

 

Back to the Global Macro Grind

 

In our sweet spot of policy analysis – healthcare, defense, energy, and telecom – there is likely to be a lot of change. As the candidates further define the specific policies they will implement, that cabinet members may put in place, our policy team will be commenting real time on the potential investment implications. In the meantime, though, it’s time to start thinking about who will win the Presidency.

 

The 10,000 foot view coming from the nominating conventions is that both parties are creating starkly different narratives about the country. Trump is emphasizing everything that is broken and needs fixing (or building as it relates to his wall). Clinton is painting a much more optimistic view of the future and effectively running for the 3rd Obama term.

 

In effect, it is the incumbent versus the change-making rabble rouser, but which narrative will carry the day? Much has been made about the rise of Trump and the fact that literally no mainstream pundit believed he would get the Republican nomination. 

 

Despite the punditry and career politicians missing the rise of Trump, the vast majority of voters are unhappy, so it shouldn’t have been terribly surprising. According to a recent poll from Rasmussen, 70% of likely voters believe the country is on the wrong track and a mere 24% believe the country is going in the right direction. The spread is near the highest level of the last 8 years.

 

So, despite his flaws, errant tweets, and narcissistic moments, it’s not difficult to see why a candidate that has never held political office is doing so well. The people are frustrated. Very frustrated. But can Trump win?

 

The short answer is that Trump can win. In fact, if the election were held today it is basically a coin toss. According to the Real Clear Politics poll aggregate, Trump is ahead of Clinton by +0.9 points. He literally established his first lead this week and while it is in part due to a convention bounce, numbers don’t lie.

 

The convention helped Trump, but it is also important to note that the race was narrowing for the weeks leading into the convention. Trump support bottomed on June 16th at about 38.3 and is now at 45.6 with a little under half the gain coming before the convention. Meanwhile, Clinton has held steady over that period in a range of 44 – 45.

 

One of the most astute observers of polling and electoral data is Nate Silver from FiveThirtyEight.com. Silver runs three scenarios on the outcome of the Presidential race utilizing all of the polling data available (#WisdomOfCrowds). Two of his scenarios are projections on what will happen on November 8th and one scenario is what would happen if the election were held today. In that scenario, Silver predicts that Clinton would win the popular vote by a small margin and Trump would garner more electoral-college votes and become President.

 

The success of Trump and/or Clinton will ultimately come down to a few key factors:

 

  1. Ohio (or could it be Pennsylvania) – Since 1896, the candidate that won Ohio in the electoral college went on to win the Presidency 28 out of 30 times, or 93% of the time. This makes Ohio the best state predictor of the next President. Further, since 1896 no Republican has won the Presidency without winning Ohio. Since 1980 Ohio has only deviated from the national vote for the winning candidate by 1.2%, which is the tightest margin of any state. So watching Ohio will be a critical focus and it is likely a must-win state for Trump, unless he can win Pennsylvania. There would certainly be no irony if Trump’s protectionist views help him carry Pennsylvania and he became the first Republican in 120 years to get elected President without Ohio. Just one more thing that the pundits missed.
  2. Demographics – Trump is basically dominating among white voters without a college degree. This is the sole reason the national polls are so close. A New York Times study showed that in six polls conducted this month that broke out vote preference by race, Trump led by a margin of 58 – 30 in white registered voters without a college degree. Romney did about 10 points worse in the last polls before the 2012 election with a spread of 55 – 37. If Trump can hold and or expand this “base”, the race will be very close on Nov. 8th.
  3. Favorability – Rightly or wrongly, both candidates have a likeability issue. According to poll aggregates, both candidates are running at about 56%+ unfavorable ratings. The Republican convention helped Trump on the margin and the Democratic convention should help Clinton. The key for both will be to create a more favorable view of themselves with voters and continue to engender the unfavorable view of their opponent. The undecided voters currently in the 10 – 15 percentage range and improvement in favorability rating will be a key in capturing these currently undecided voters.

 

One point that has surprised many of us at Hedgeye, even if anecdotal, is that in many of our one-on-one conversations, there appears to be a lot of liberals that are reluctant or unwilling to support Clinton and many conservatives that are reluctant to support Trump. So, we are curious, who are you going to support and why?

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.48-1.63%

SPX 2138-2179  

VIX 11.70-15.69
USD 96.25-97.93 
Oil (WTI) 40.35-43.81

Gold 1 
Copper 2.16-2.28

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research 

 

#WhoAreYouWith? - 7 29 16 chart of day 


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