prev

Sticking With Our Yen Short

Position: Short the Japanese yen (FXY); Long the Chinese yuan (CYB)

 

On Chinese yuan manipulation: “Frankly, they haven’t let the currency move very much so far… They know they’re just at the beginning of that process and I think we’d like to see them move more quickly.”

 

On Japanese yen intervention: “They’re working through some difficult problems… My view is they should be focusing like we are on how to make sure they’re reinforcing recovery in Japan and doing things that are going to help.”

 

Both statements we’re made just last week by the same person – U.S. Treasury Secretary Tim Geithner. While we could spend quite a few paragraphs highlighting the hypocrisy embedded in these contrasting stances, we’d rather tackle today’s Japanese FX market intervention from a more analytical standpoint.

 

For the first time since 2004, Japan intervened in the currency market in an attempt to stem an 11%+ gain since mid-May, which caused the yen to tumble ~3% - a large intra-day move for a currency of this size and liquidity. Until today, the yen hadn’t eclipsed 85 per dollar in almost two weeks.

 

Yesterday we added to our short FXY position in our Hedgeye Virtual Portfolio, reinforcing our conviction that Japanese policy makers will do what they’ve done for two decades – intervene in financial markets. Should the latest round of intervention prove unsuccessful in reversing the recent up-trend, we anticipate further intervention from here. Our confidence lies in both the economic fundamentals and the rhetoric put forth by Japanese politicians in the weeks leading up to today: 

  • Japan’s 2Q GDP rolled sequentially: +1.2% SAAR. vs. +4.98% in 1Q
  • Deflation intensified in July: (-0.9%) YoY vs. (-0.7%) in June
  • Japanese Industrial production fell in July after being revised down: (-0.2%) MoM vs. +0.3% prelim.
  • Export growth slowed in July: +23.5% YoY vs. +27.7% in June
  • 8/27: Japanese Prime Minister Naoto Kan: “We will take bold action if necessary and naturally that can include intervention… We have to use every option available as a strong yen is likely to have a severe impact on companies.”
  • 9/8: Japanese Finance Minister Yoshihiko Noda: “We will take bold action if necessary and naturally that can include intervention [in the FX market]… We have to use every option available as a strong yen is likely to have a severe impact on companies.”
  • Kan’s election victory over Ozawa was by a slim margin among Japanese legislators (+6 votes). This meant he would have to relinquish on the margin his relative fiscal hawkishness and conform to Ozawa’s “support the economy by any means necessary” approach if he is to maintain stability within the DPJ.
  • Today: Japanese Finance Minister Noda: “We will continue to watch developments in the market carefully and we will take bold actions including further intervention if necessary.” 

To be crystal clear, however, we aren’t short the yen purely based upon the catalyst provided by the current batch of Fiat Fools leading Japan. We think the top in the yen is around yesterday’s pre-intervention level of 82-83 per dollar and we see downside on a 3-6 month go-forward basis around 6-9%.

 

The reasons for our bearish stance are: the potential for both waning upward Chinese pressure on the yen and U.S. dollar stability.

 

We’ve been vocal in recent weeks highlighting the shift by China into short term JGBs an out of short term U.S. Treasuries. The most recent data for both confirm this trend: 

  • China bought more bonds than it sold in July for the seventh straight month: 583.1 billion yen vs. 457 billion yen in June – a sequential acceleration. Reports from Japanese banks suggest the incremental holdings to be comprised of mostly short term JGBs.
  • China’s holdings of short term Treasury bills fell further in June, giving the securities a 98% peak-to-trough decline within China’s FX reserves. 

Why would China seek to pump up the yen on such short notice? There are two reasons, one of which is linked directly to Tim Geithner’s comments mentioned above. By forcing Japan to intervene in the FX market, China can either hope that Japan’s intervention will alleviate pressure from U.S. Congress to expedite the appreciation of the yuan. Should the finger-pointing persist, China now has a stronger case for resistance, pointing out the U.S.’s aforementioned hypocritical stance on currency manipulation. As recently as today, China's Ministry of Commerce said that its trade policies shouldn't be dragged into U.S. electioneering and rejected criticism of the yuan's value as "groundless".After imposing duties on Chinese-made steel pipes Monday, the U.S. Department of Commerce is meeting today and tomorrow to discuss China’s currency policy. After Japan’s actions today, we don’t expect the findings of this meeting to provide any meaningful incremental pressure on the yuan.

 

Another reason China may want to allow the yen to appreciate is to alleviate competitive pressure as it slowly allows the yuan to appreciate to combat inflation – Chinese CPI accelerated in August: +3.5% YoY vs. +3.3% in July. Today, the yuan touched 6.733 per dollar, which is the strongest level since the central bank unified the official and market exchange rates in 1993. Further, it has strengthened 0.8% in the past five days alone.

 

As previously mentioned, a second tenet to our bearish view on the dollar is the potential for dollar stability based on fiscal restraint and foreign central bank dollar buying. According to our proprietary models (which were designed using the specific analytic insight of Karl Rove), we expect the Republicans to take control of the House and for them to win 49 or more seats in the Senate – more than currently estimated by consensus. We feel this marginal shift towards fiscal conservatism out of Congress post the midterm elections will provide much needed support for the U.S. dollar, which has lost ~8% of its value since its cycle peak on June 7.

 

To find evidence of accelerated foreign central bank dollar buying, one needs to look no further than Brazil – though there are certainly many other countries expressing similar concern. Brazil’s central bank held two daily auctions on three days last week to buy dollars, marking the first time since May that it opted for more than one round of purchases. This is on the heels of Brazilian Finance Minister Guido Mantega’s vow last week to not allow the real to continue appreciating. Korea and Malaysia are two more Asian nations (in addition to Japan) that are expressing concern over recent appreciation.

 

In short, we stand counter to consensus that the yen will continue it March upward. While a pullback to the 82-83 level is likely in the near term, the 3-6 month outlook for USDJPN is decidedly bearish.

 

Darius Dale

Analyst

 

Sticking With Our Yen Short - 1


CHART OF THE DAY: U.S. INDUSTRIAL PRODUCTION

 

 

The CHART OF THE DAY below stands behind my 14th bearish point of the day and should illicit plenty of questions in any risk managers mind about go forward US growth expectations. US industrial production “comps” only get tougher from here – that doesn’t mean we are calling for a newsy “double dip” (which implies negative Q3/Q4 US GDP growth), but it definitely suggests US GDP growth can continue to drop sequentially for the next 3-6 months.

 

 

CHART OF THE DAY: U.S. INDUSTRIAL PRODUCTION - chart1

 

 

I’ll leave you alone with that red arrow to noodle over for today.
KM

 

 

All notes posted in the unlocked research section are posted on delay.  Subscribe to receive our research and portfolio ideas in real-time.


INSIDE THE HEDGEYE NOTEBOOK: Sept. 15, 2010

 

INSIDE THE HEDGEYE NOTEBOOK: Sept. 15, 2010 - Notebook Image Hedgeye

 

 

Another day, another grind. Here are the bullish and bearish DATA and PRICES in my notebook from the last 24 hours:
 
BULLISH:
1.      SP500 continues to hold our bullish immediate term TRADE line of support = 1107

2.      The Range in our 3-day probability model (upside/downside for SP500) narrowed day/day to 52 points from 78 yesterday

3.      Our S&P Sector Risk Management Model continues to flash bullish across all 9 sectors on immediate term TRADE (3 weeks or less)

4.      Japanese Equities reacted very bullishly (+2.3% overnight) on the Yen devaluation, taking out the crash call we’ve seen in Nikkei since April

5.      Indonesia ripped a big positive divergence (vs global equities) to the upside last night with a +3.9% price move; we remain bullish on Indonesia

6.      Both the FTSE and the DAX continue to flash bullish on both TRADE and TREND with the DAX holding TREND line support of 6084

7.      UK unemployment remains impressively below that of the US at 7.8% y/y (in line with last month as opposed to seeing the rate rise y/y)

8.      Commodities (CRB Index) continues to flash Bullish Formation (bullish on all 3 of our investment durations: TRADE, TREND, and TAIL)

9.      Corn pushing back towards $5 and Cotton prices hitting 15 year highs as the softs/ags continue to rock and roll

10.  Oil prices continue to hold our intermediate term TREND line of support (was resistance 3 weeks ago) of $75.31/barrel

11.  Gold is golden as the fear of US Congress trade reaps gains; higher-highs and higher-lows

12.  Yield spread expands day over day by 2bps

13.  TED spread remains extremely tame (15bps wide)

14.  JPM’s Jaime Dimon says he’s going to pay the dividend and hire 10,000 people

 


BEARISH:
1.      SP500 still down -8% from its April YTD peak and broken from an intermediate term TREND perspective (resistance = 1144)

2.      Our risk/reward daily model for the SP500 is now flagging lower-highs of resistance and risk outrunning reward by 2 to 1

3.      US market breadth deteriorated yesterday for the 1st day in 5

4.      Financials and Small Caps led yesterdays decliners  - Americans need both for US GDP growth to hold above 1%

5.      Chinese equities had their 1st down day today in the last 4, selling off -1.3%

6.      Greek Equities broke our circuit breaker line yesterday (1575 on the ATG Index) and see follow through selling this morning

7.      Brazilian equities backed off 50bps yesterday and are flagging the same marginal immediate term (overbought) sell signal that the SP500 is

8.      2-year US Treasury yields broke their immediate term TRADE line of support (0.52%) intraday yesterday and see follow through bond buying today

9.      US Dollar continues to flash Bearish Formation (bearish across all 3 of our investment durations: TRADE, TREND, and TAIL)

10.  ABC/Washington Post Consumer Confidence stopped improving week/week, stuck in mud at minus -43

11.  MBA mortgage applications stopped improving week/week, dropping -0.4% this week vs last

12.  II Bullish to Bearish Survey has popped 1500 basis points to the bullish side of the ledger in the last 3 weeks with Bulls up 400bps w/w to 37%

13.  Tea Party wins in NY, Delaware, etc last night impose a headwind to the consensus/expected Republican romp at midterms

14.  US Industrial Production growth reported this morning slows sequentially for the 3rd straight month to 6.2% (AUG) vs 7.4% (JULY)


Net net, we’ve started making some sales in the last 24 hours in the Hedgeye Portfolio (12 LONGS, 8 SHORTS vs. 14 LONGS 12 SHORTS yesterday) and we’ve taken some beta out of our Hedgeye Asset Allocation Model (selling Cocoa/Commodities, buying Bonds).
 
Finally, the CHART OF THE DAY below stands behind my 14th bearish point of the day and should illicit plenty of questions in any risk managers mind about go forward US growth expectations. US industrial production “comps” only get tougher from here – that doesn’t mean we are calling for a newsy “double dip” (which implies negative Q3/Q4 US GDP growth), but it definitely suggests US GDP growth can continue to drop sequentially for the next 3-6 months.

 

 

INSIDE THE HEDGEYE NOTEBOOK: Sept. 15, 2010 - chart1

 


I’ll leave you alone with that red arrow to noodle over for today.
KM

 

 

All notes posted in the unlocked research section are posted on delay.  Subscribe to receive our research and portfolio ideas in real-time.


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.

The Grind: What's In My Notebook Today...

Another day, another grind. Here are the bullish and bearish DATA and PRICES in my notebook from the last 24 hours:

 

BULLISH:

  1. SP500 continues to hold our bullish immediate term TRADE line of support = 1107
  2. The Range in our 3-day probability model (upside/downside for SP500) narrowed day/day to 52 points from 78 yesterday
  3. Our S&P Sector Risk Management Model continues to flash bullish across all 9 sectors on immediate term TRADE (3 weeks or less)
  4. Japanese Equities reacted very bullishly (+2.3% overnight) on the Yen devaluation, taking out the crash call we’ve seen in Nikkei since April
  5. Indonesia ripped a big positive divergence (vs global equities) to the upside last night with a +3.9% price move; we remain bullish on Indonesia
  6. Both the FTSE and the DAX continue to flash bullish on both TRADE and TREND with the DAX holding TREND line support of 6084
  7. UK unemployment remains impressively below that of the US at 7.8% y/y (in line with last month as opposed to seeing the rate rise y/y)
  8. Commodities (CRB Index) continues to flash Bullish Formation (bullish on all 3 of our investment durations: TRADE, TREND, and TAIL)
  9. Corn pushing back towards $5 and Cotton prices hitting 15 year highs as the softs/ags continue to rock and roll
  10. Oil prices continue to hold our intermediate term TREND line of support (was resistance 3 weeks ago) of $75.31/barrel
  11. Gold is golden as the fear of US Congress trade reaps gains; higher-highs and higher-lows
  12. Yield spread expands day over day by 2bps
  13. TED spread remains extremely tame (15bps wide)
  14. JPM’s Jaime Dimon says he’s going to pay the dividend and hire 10,000 people

 

BEARISH:

  1. SP500 still down -8% from its April YTD peak and broken from an intermediate term TREND perspective (resistance = 1144)
  2. Our risk/reward daily model for the SP500 is now flagging lower-highs of resistance and risk outrunning reward by 2 to 1
  3. US market breadth deteriorated yesterday for the 1st day in 5
  4. Financials and Small Caps led yesterdays decliners  - Americans need both for US GDP growth to hold above 1%
  5. Chinese equities had their 1st down day today in the last 4, selling off -1.3%
  6. Greek Equities broke our circuit breaker line yesterday (1575 on the ATG Index) and see follow through selling this morning
  7. Brazilian equities backed off 50bps yesterday and are flagging the same marginal immediate term (overbought) sell signal that the SP500 is
  8. 2-year US Treasury yields broke their immediate term TRADE line of support (0.52%) intraday yesterday and see follow through bond buying today
  9. US Dollar continues to flash Bearish Formation (bearish across all 3 of our investment durations: TRADE, TREND, and TAIL)
  10. ABC/Washington Post Consumer Confidence stopped improving week/week, stuck in mud at minus -43
  11. MBA mortgage applications stopped improving week/week, dropping -0.4% this week vs last
  12. II Bullish to Bearish Survey has popped 1500 basis points to the bullish side of the ledger in the last 3 weeks with Bulls up 400bps w/w to 37%
  13. Tea Party wins in NY, Delaware, etc last night impose a headwind to the consensus/expected Republican romp at midterms
  14. US Industrial Production growth reported this morning slows sequentially for the 3rd straight month to 6.2% (AUG) vs 7.4% (JULY)

 

Net net, we’ve started making some sales in the last 24 hours in the Hedgeye Portfolio (12 LONGS, 8 SHORTS vs. 14 LONGS 12 SHORTS yesterday) and we’ve taken some beta out of our Hedgeye Asset Allocation Model (selling Cocoa/Commodities, buying Bonds).

 

Finally, the CHART OF THE DAY below stands behind my 14th bearish point of the day and should elicit plenty of questions in any risk managers mind about go forward US growth expectations. US industrial production “comps” only get tougher from here – that doesn’t mean we are calling for a newsy “double dip” (which implies negative Q3/Q4 US GDP growth), but it definitely suggests US GDP growth can continue to drop sequentially for the next 3-6 months.

 

I’ll leave you alone with that red arrow to noodle over for today.

KM

 

The Grind: What's In My Notebook Today...  - 2


EARLY LOOK: INTERVENTION

 

 

HEDGEYE ASSET ALLOCATION

Cash 55%, Int'l FX 21%, Bonds 12%, Commodities 6%, Int'l Equities 6%, US Equities 0%

 

 

 

But their intervention makes our acts to serve ever less merely the immediate claims of our instincts.”
-Albert Einstein
 
I started intervening in the Hedgeye Portfolio yesterday, making my first sales (long or short) since September 3rd.
 
We’re still long Gold (GLD) and we didn’t sell any of that 6% position in the Hedgeye Asset Allocation Model as we saw yesterday’s melt-up in the World’s Replacement Currency a direct function of the fear trade – the fear of US Congress being back in session. We remain short the US Dollar (UUP).
 
Today’s market headlines are going to be dominated by the bad kind of intervention – government intervention. Particularly when it comes to the Fiat Republics of Japan and America, you have professional politicians who fundamentally believe that this is the only way out. It’s sad to watch losing teams repeat their mistakes.
 
Japan is intervening in its currency market this morning (bearish for the Yen - we are short FXY) and America is going to host another Groupthink Conference in Washington, DC where Timmy Geithner leads the unaware in pointing fingers at the Chinese for not intervening.
 
On Japan’s intervention, I found an interesting quote from Geithner who believes “deeply” in the Monetary and Fiscal Policy Manipulation model of the United States of America:
 
“They’re working through some difficult problems… My view is they should be focusing like we are on how to make sure they’re reinforcing recovery in Japan and doing things that are going to help.”
 
God help us all.
 
I’ve ended a few of my morning missives with this thought over the course of the last few days and it’s worth repeating in order to explain why I started making sales yesterday. The biggest risk to NOT selling US Equities here is US Congress and the “economists” that lead their decision making (Geithner says he’s “not an economist” by the way, so we’ll give him a hall pass as he’s only responsible for advising the President on economic matters).
 
Back to taking matters into my own hands via the Hedgeye intervention strategy…
 
Here are the moves we made intraday in the Hedgeye Portfolio yesterday. As opposed to Washington’s broken lip-service model, we are big believers in the modern day transparency/accountability model. We think the biggest opportunity in finance is showing the world what it is exactly you do when you make risk management decisions and why. Opacity is dying on the political vines of perceived wisdom.


1.      09/14/2010 10:22 AM

SHORTING FXY $119.08
We're looking forward to seeing what happens to the Yen when the Chinese start blowing out of their short term JGBs. Japanese Yen intervention imminent - thats what Fiat Republics like this do.

 

 

 
2.      09/14/2010 10:42 AM

SELLING CIT $38.74
I haven't made a sale (long or short) since September 3rd. It's time to book a gain and I'll let a Financial out the door first. Steiner remains bullish on CIT's intermediate term TREND.

 

EARLY LOOK: INTERVENTION - Chart1 CIT


 

3.      09/14/2010 12:49 PM


SHORTING ZMH $49.84
See Tom Tobin's bearish note on Zimmer today for details. The stock is up today but is broken from an intermediate term TREND perspective. Shorting green. KM


 

4.      09/14/2010 03:20 PM


SELLING NIB $38.79
Keeping a mean reversion TRADE a trade. We don't have to buy-and-hold cocoa. KM

 

EARLY LOOK: INTERVENTION - Chart2 NIB

 

 

 

These are just the headlines for research reports we put out on these positions. They are punchy because we like punching some of the hedgies out there whose business model is bullying the sell-side. Everyone knows the sell-side’s horse and buggy whip model is stale. This market needs new blood – and we’re happy to be hated by those we can beat.
 
On the same day that we bought Chinese equities (CAF) we also published a research note titled “Japan - The World's Easiest LayuP” that outlines why we were shorting the Japanese Yen as it approached 83 versus the US Dollar. Rather than listen to a revisionist sell-side bull tell you today is a “buying opportunity” in the Yen, please email sales@hedgeye.com <mailto:sales@hedgeye.com>  if you’d like the view of the interventionist firm that called this before the “risk on” day.
 
Our immediate term TRADE lines of support and resistance for the SP500 are now 1107 and 1128, respectively. That’s the first time I’ve issued a lower-high of immediate term TRADE resistance for the SP500 since September 3rd. That’s a marginally bearish signal and the SP500 not being able to eclipse 1144 on a closing basis to the upside is an explicitly bearish one.
 
Best of luck out there today,
KM
 
Keith R. McCullough
Chief Executive Officer
HEDGEYE RISK MANAGEMENT

 

 

Subscribe to Hedgeye to receive research and portfolio positions in real-time.  This note was originally published at 8am, September 15,2010.


Musing on Europe, after a week off

Hedgeye Portfolio Position: Long Germany (EWG); Long British Pound (FXB)

 

Where’s Europe at? Last week I was on vacation and had some time to think about how fear has run in and out of European markets over the last 18 months. Here’s a read-through regarding our top-down pulse on Europe.

 

Contagion Fears

Despite the contagion fears and Europe “parity” callers that occupied front-page news in 1H10, the fear trade has settled down across most of the region to the benefit of the Euro. The EUR-USD has held its TREND line of support at $1.26 since 7/5.

 

Musing on Europe, after a week off - mh1

 

Europe’s Baby

Our view is that Greece (and debt and deficit-laden countries like it) will remain the EU’s baby in the sense that European commissioners and heads of state will do everything in their power to prevent the immediate term failure (default) of member states for fear of the associated volatility (contagion).

 

Remember, leaders had a good taste of contagion fears in the first half of the year, which led to the decision on May 9th to issue a €750 Billion package of medicine to contain it. Politics are generally local, but recently the EU’s political scene has gone global.

 

Evidence refuting European Contagion over the immediate to intermediate term:

  • Investor Protection: on Monday, Greece received its second tranche of funds, worth €6.5 Billion, and we expect future payments to go off without a hitch. Due to the highly interconnectedness of European debt across European banks, it’s in the interest of the EU to prevent default by any member state.  In the case of Greece, our call is for the EU to continue to work in close cahoots with Greek PM Papandreou to show a good face to the investment community. Papandreou has promised to reduce the country’s budget deficit to 8.1% of GDP this year, versus 12.2% in 2009.  
  • Credible Buyers: Norway’s sovereign wealth fund (the 2nd largest in the world) decided to buy an undisclosed amount of Greek, Spanish, Italian and Portuguese debt late last week.  This confirms that Norway is also betting that the EU will be feeding the PIIGS the bottle for quite some time. [Greece’s most recent sale of €1.17 Billion of 26-week bills commanded a hefty 4.82% yield with investors biding 4.5x the offering = confidence rising or yield chasing.]
  • Idealism on the Line: the notion of a Eurozone member defaulting on its debt cuts to the core of the idea of the mutual benefit from a union of countries. Politicians in Brussels will take grave measures to insure the Eurozone remains whole.  [Hedgeye note: we believe the utility of the Eurozone is still in question, and for good reasons. As we’ve noted in previous work, member countries are not created equal, and therefore we see a flaw in unilateral monetary policy for all; as ever, measures to manipulate currency and trade are very important in this global world.]

Austerity and Longer Term Structural Issues

While we’re bullish on countries cutting balance sheet and income statement ‘fat’ now in such forms as trimming spending, government jobs, and wages over the next 1-4 years, we expect more moderate growth in lock step with these fiscal cuts.

 

A couple of pressing issues over the longer term for the Eurozone are:

  1. What’s to be done if the Eurozone’s weaker nations continue to pile on debt, especially when they can’t compete for trade?
  2. Will the Eurozone’s fiscally weaker countries be able to bend on such cultural norms as the obligation to pay taxes, the duration of the work week, and creation of alternate job offerings as government positions are pared back?

To the second point, unemployment remains a huge structural issue on our long term TAIL duration.  We see significant headwinds for countries like Spain, Ireland, and Greece where we don’t see their double-digit unemployment figures turning around materially in the next 1-2 years, which should hinder growth prospects out on the curve. 

 

The chart below displays Greece’s equity market (left axis, down -28.9 YTD) versus Greek 5YR sovereign CDS (in bps) and the Greek 10YR bond spread over the German 10YR bund (in bps, right axis).  What’s interesting to note here is that although we expect the EU to rescue Greece at all costs, which should boost equities and dampen yields and CDS, ‘fear’ since the EU’s bailout package in early May continues to heighten.  Obviously this is a negative read-through, which we’ll continue to monitor for an inflection.

 

We’re currently long Germany via the etf EWG in our virtual portfolio, and bullish on the Pound versus the USD, a play we continue to like as UK inflation remains elevated (currently at 3.1% in August Y/Y) and US fiscal policy continues to be politically compromised.

 

Matthew Hedrick

Analyst

 

Musing on Europe, after a week off - mh2


Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.

next