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WEEKLY FINANCIALS RISK MONITOR: EUROPE FLASHES RED BUT DOMESTIC METRICS IMPROVE

Financial Risk Monitor Summary (Across 3 Durations):

  • Short-term (WoW): Positive / 4 of 10 improved / 3 out of 10 worsened / 3 of 10 unchanged
  • Intermediate-term (MoM): Neutral / 4 of 10 improved / 4 of 10 worsened / 2 of 10 unchanged
  • Long-term (150 DMA): Negative / 2 of 10 improved / 3 of 10 worsened / 4 of 10 unchanged / 1 of 10 n/a

WEEKLY FINANCIALS RISK MONITOR: EUROPE FLASHES RED BUT DOMESTIC METRICS IMPROVE - summary

 

1. US Financials CDS Monitor – Swaps were mixed across domestic financials, tightening early in the week and then widening into the end of the week.  Swaps tightened for 16 of the 28 reference entities and widened for the other 12.  Bank of America saw tightening on the back of its settlement with the GSEs early in the week, while all the moneycenter swaps backed up on the news of the Massachusetts Supreme Court foreclosure ruling.  

Widened the most vs last week: WFC, C, GS

Tightened the most vs last week: LNC, MET, AON

Widened the most vs last month: CB, TRV, AGO

Tightened the most vs last month: SLM, MET, PRU

 

WEEKLY FINANCIALS RISK MONITOR: EUROPE FLASHES RED BUT DOMESTIC METRICS IMPROVE - us swaps

 

2. European Financials CDS Monitor – In Europe, banks swaps flashed a warning signal.  Swaps widened for 34 of the 39 reference entities. German bank swaps widened an average of 22%, Spanish bank swaps widened an average of 17%, and Belgium’s KBC Group N.V. saw swaps widen more than 40%. 

 

WEEKLY FINANCIALS RISK MONITOR: EUROPE FLASHES RED BUT DOMESTIC METRICS IMPROVE - euro swaps

 

3. Sovereign CDS – Sovereign CDS rose 21 bps on average versus last week amid growing fears of contagion.  Portuguese and Irish swaps saw the largest increase. 

 

WEEKLY FINANCIALS RISK MONITOR: EUROPE FLASHES RED BUT DOMESTIC METRICS IMPROVE - sov swaps

 

4. High Yield (YTM) Monitor – High Yield rates fell 33 bps last week, closing at 8.00 on Friday.  

 

WEEKLY FINANCIALS RISK MONITOR: EUROPE FLASHES RED BUT DOMESTIC METRICS IMPROVE - high yield

 

5. Leveraged Loan Index Monitor – The Leveraged Loan Index continued to charge higher, closing at 1590, 17 points higher than the previous week.   

 

WEEKLY FINANCIALS RISK MONITOR: EUROPE FLASHES RED BUT DOMESTIC METRICS IMPROVE - lev loan index

 

6. TED Spread Monitor – The TED spread fell to 16.8 from 18.4 the prior week.

 

WEEKLY FINANCIALS RISK MONITOR: EUROPE FLASHES RED BUT DOMESTIC METRICS IMPROVE - ted

 

7. Journal of Commerce Commodity Price Index – Last week, the index rose 4.5 points, closing at 31.8 on Thursday.

 

WEEKLY FINANCIALS RISK MONITOR: EUROPE FLASHES RED BUT DOMESTIC METRICS IMPROVE - JOC

 

8. Greek Bond Yields Monitor – We chart the 10-year yield on Greek bonds.  Last week yields rose 14 bps to a new high of 1261.

 

WEEKLY FINANCIALS RISK MONITOR: EUROPE FLASHES RED BUT DOMESTIC METRICS IMPROVE - greek bonds

 

9. Markit MCDX Index Monitor – The Markit MCDX is a measure of municipal credit default swaps.  We believe this index is a useful indicator of pressure in state and local governments.  Markit publishes index values daily on four 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. Our index is the average of their four indices.  Spreads increased into week end, rising 17 bps to 226.  

 

WEEKLY FINANCIALS RISK MONITOR: EUROPE FLASHES RED BUT DOMESTIC METRICS IMPROVE - markit

 

10. Baltic Dry Index – The Baltic Dry Index measures international shipping rates of dry bulk cargo, mostly commodities used for industrial production.  Higher demand for such goods, as manifested in higher shipping rates, indicates economic expansion.  The index fell to a new low of 177 amid Australian flooding. 

 

WEEKLY FINANCIALS RISK MONITOR: EUROPE FLASHES RED BUT DOMESTIC METRICS IMPROVE - baltic dry index

 

11. 2-10 Spread – We track the 2-10 spread as a proxy for bank margins.  Last week the 2-10 spread held flat at 273 bps. 

 

WEEKLY FINANCIALS RISK MONITOR: EUROPE FLASHES RED BUT DOMESTIC METRICS IMPROVE - 2 10

 

12. XLF Macro Quantitative Setup – Our Macro team sees the setup in the XLF as follows: 2.1% upside to TRADE resistance, 2.6% downside to TRADE support. 

 

WEEKLY FINANCIALS RISK MONITOR: EUROPE FLASHES RED BUT DOMESTIC METRICS IMPROVE - XLF

 

 

Joshua Steiner, CFA

 

Allison Kaptur


Buck Breakout

“The best way to destroy the capitalist system is to debauch the currency.” 

-John Maynard Keynes

 

This year I am going to try my best to kick off each week with a Global Macro recap of the week prior. I’ll also try to address what decisions I made in the Hedgeye Asset Allocation Model to reflect ongoing and ever-changing Global Macro risks.

 

The biggest move that mattered last week was the Buck’s Breakout above my immediate-term TRADE line of $79.92 on the US Dollar Index. After taking a breather into December end, the US Dollar Index is now bullish again on both our immediate-term TRADE and intermediate-term TREND durations.

 

With the US Dollar Index closing up +2.6% on the week (up for the 8th week out of the last 10), here’s the big stuff that went down: 

  1. Euro = down -3.1% to close the week at $1.29 (we covered our short position in FXE into week’s end)
  2. CRB Commodities Index = down -2.7%, after hitting a new cycle-high of 333 on the 1st trading day of 2011
  3. Oil = down -3.7%, breaking its immediate-term TRADE line of support of $89.46 midweek (we sold our OIL this wk)
  4. Gold = down -3.7%,  breaking its December closing low (we remain short GLD)
  5. Copper = down -3.6%, after hitting an all-time closing-high of $4.48/lb on the 1st trading day of 2011 
  6. Volatility = down -3.3% to $17.14 on the VIX, after seeing volatility rise in an up US equity market in the 2 weeks prior

I’m no Keynesian, but I (like Keynes did when he was 36 years old) trade currencies and believe them to be a very important barometer of a country’s overall health. In those days, as Liaquat Ahamed wrote in one of my favorite financial history books (Lords of Finance, page 11), “in 1914 the single most important, indeed overriding, objective of these institutions was to preserve the value of the currency.”

 

As a direct result of last week’s US currency strength, I think last week was a win, win, win for most Americans who care, not only about how much money they make, but how the rest of society does in the meantime.

 

Let’s look at these 3 wins associated with a strong American currency:

  1. Stocks went up (SP500 was up +1.1% on the week)
  2. Inflation went down (that’s what should happen if a country’s currency is pervasively strong)
  3. Rates of return on our hard earned savings accounts went up (10yr and 30yr US Treasury rates climbed again week-over-week)

No, I’m not saying we are out of the woods yet. I’m just saying that last week was a better week for America by my global macro scorecard than the week prior was – and by the looks of the aforementioned Keynesian quote, the Fiat Fools should agree.

 

Nor am I saying this was good for the rest of the world (some of their currencies went down, and so did their stock markets):

  1. India’s BSE Sensex Index = down -4.0%
  2. Spain’s IBEX Index = down -3.0%
  3. Luxembourg’s LUX Index = down -2.6%
  4. Portugal’s PSI Index = down -2.4%
  5. Taiwan’s TAIEX Index = down -2.1%
  6. Indonesia’s Jakarta Index = down -1.9%

After all, inflation, like politics, is priced in local currency. This, of course, isn’t a consensus way to look at the world; particularly from a money printing government official’s perspective – but I think that will change.

 

Whether it was the price of oil hitting an all-time high choking off US consumption in 2008 or the price of the United Nation’s Food Index hitting an all-time high (this week) staring Indian and Indonesian stock markets right in the face (the #2 and #4 largest country size populations in the world), it’s all the same to me. The Fiat Fools around this world are just taking turns.

 

Back to the Hedgeye Asset Allocation Model, I ended the week with the same allocation to US Cash that I started the week with (61%). Although I did drop down to a 49% position in cash intra-week and changed the complexion of my invested position into Friday’s close (I call this managing risk around my gross invested exposure). My updated positioning is now as follows:

  1. US Cash = 61%
  2. International Currencies = 21% (all in the Chinese Yuan, CYB)
  3. International Equities = 9% (all in German Equities, EWG)
  4. Commodities = 3% (all in Corn, CORN)
  5. US Equities = 3% (all in Volatility, VXX)
  6. Fixed Income = 3% (all in Treasury Inflation Protection, TIP)

Now I fully understand that this isn’t the way that most strategists do it  - that’s why I do it this way.

 

As price, volatility, and volume studies change, I change both my asset allocation positions and invested exposures. For example, I started the week long oil (stocks and the commodity) and US Healthcare stocks (XLV), but Oil broke its immediate-term TRADE line of support and US Healthcare (XLV) became immediate-term TRADE overbought on Thursday. There are no rules stating that I can’t buy either of those positions back (lower) in the coming weeks.

 

Nor are there rules stating that I can’t get less bearish on US Equities if the US Dollar were to continue to strengthen. US stocks actually closed down for back-to-back sessions for the 1st time on Thursday/Friday since November 29th and 30th. I don’t have to buy them when they are on sale. I don’t have to get bullish on the way down either. I’m just saying that with a 61% cash position, I have plenty of options.

 

My immediate term support and resistance levels in the SP500 are now 1251 and 1276, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Buck Breakout - matt



Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - January 10, 2011


As we look at today’s set up for the S&P 500, the range is 25 points or -1.61% downside to 1251 and 0.35% upside to 1276.  Equity futures are trading below fair value in response to weaker Asian and European markets as investors digest Friday's jobs report. This week’s MACRO data points sees the Fed's Beige Book, PPI, CPI, Initial Jobless Claims, Retail Sales and the first reading of January's Consumer Confidence later in the week.

 

According the FT, the Fed is expected to start stress testing a number of US banks this week to determine which ones are allowed to raise dividends or return capital to shareholders. The test is expected to be finalized by March. Alcoa starts the Q4 earnings season off after the close today.

 

MACRO DATA POINTS:

  • U.S. Fed to purchase $7b-$9b in notes/bonds, 11 a.m.
  • Export inspections (corn, soybeans, wheat), 11 a.m.
  • U.S. to sell $29b in 3-mo. bills, $28b in 6-mo. bills, 11:30 a.m.
  • Fed’s Lockhart speaks on U.S. economic outlook in Atlanta

TODAY’S WHAT TO WATCH:

  • Airgas Inc. (ARG US) extended tender offer for Airgas until Feb. 4 from Jan. 14.
  • Commonwealth REIT (CWH). Adam Portnoy to become president, replacing John Mannix, who resigned as president and chief investment officer to lead acquisition plans in Australia.
  • Olam International (OLMIF)  along with Wilmar International (WLMIF) and Noble (NOBGF) may be attractive amid global commodities boom, Barron’s reported.
  • Salix Pharmaceuticals (SLXP) may rise on Food and Drug Administration approval of its irritable-bowel syndrome treatment - Barron’s
  • Strayer Education (STRA) new student enrollments down by ~20%
  • Union Pacific (UNP) may rise as much as 50 percent over the next three years as the railroad raises prices and cuts costs, Barron’s reported, citing Lisa Dong, Westwood Holdings Group portfolio manager.
  • WellPoint (WLP) preliminary 2010 EPS exceeded $6.60

PERFORMANCE: Consumer Staples is BROKEN on TRADE

  • One day: Dow (0.19%), S&P (0.18%), Nasdaq (0.25%), Russell (0.45%)
  • Last Week: Dow +0.84%, S&P +1.10%, Nasdaq 1.90%, Russell +0.53%
  • Month/Quarter/Year-to-date: Dow +0.84%, S&P +1.10%, Nasdaq +1.90%, Russell +0.53%
  • Sector Performance - BEARISH (Only 3 sectors positive) - Energy +0.72%, Utilities +0.36%, Industrials +0.20%, Consumer Discretionary (0.05%), Healthcare (0.06%), Materials (0.09%), Tech (0.46%), Consumer Staples (0.51%) and Financials (0.90%)   

 EQUITY SENTIMENT: MIXED

  • ADVANCE/DECLINE LINE: -368 (+289)  
  • VOLUME: NYSE 1089.51 (-0.35%)
  • VIX:  17.14 -1.49% YTD PERFORMANCE: -3.44%
  • SPX PUT/CALL RATIO: 1.79 from 0.86 (+108.71%)  

CREDIT/ECONOMIC MARKET LOOK:


Treasuries were stronger across the curve; outperformance mainly in the belly of the curve, where 5s and 7s fell ~10bps. 10-yr yield down ~7bps, ending at 3.32%.

  • TED SPREAD: 17.33 0.507 (3.016%)
  • 3-MONTH T-BILL YIELD: 0.14% -0.01%    
  • YIELD CURVE: 2.74 from 2.76

COMMODITY/GROWTH EXPECTATION:  

  • CRB: 323.94 -0.35%
  • Oil: 88.03 -0.40% - trading +0.74% in the AM (down 3.67% last week)
  • Oil Rises in New York After Alaskan Crude Pipeline Leak Cuts U.S. Supplies
  • COPPER: 428.25 -1.09% - trading -0.11% in the AM (down 3.70% last week)
  • Copper May Fall for Fifth Day as Lower Equity Markets Cool Demand Outlook
  • GOLD: 1,367.90 -0.43% - trading 0.16% in the AM (down -3.58% last week)
  • Gold Fluctuates Amid Concern About Sovereign Debts in Euro-Zone Nations

OTHER COMMODITY NEWS:

  • Alaskan Oil Pipeline Shutdown Cuts Production, Pushes Crude Prices Higher
  • Corn Advances as Dry, Warm Weather in Argentina May Limit Grain Production
  • Freight Rates Poised to Tumble as 35-Mile Line of Ships Passes Coal Demand
  • Hedge Funds Increase Bets on Wheat Rally to Highest Level Since September
  • EU Wheat-Export Slump Signals Tightening Supplies of Grain, Analysts Say
  • Florida Orange Output May Fall on Unusually Frigid Weather, Survey Shows
  • China Likely to Impose Tariffs on U.S. Dried Distillers' Grains, Yigu Says
  • Silver is `Common Man's Gold' in India as Bullion Expensive, Trader Says
  • Copper Imports by China Decline in December as Arbitrage Profits Shrink
  • South Korea Finds More Foot-and-Mouth Cases, Livestock Culling Tally Jump
  • Palm Oil Production in Malaysia Declines to the Lowest Level in 10 Months

CURRENCIES:

  • EURO: 1.2907 -0.93% - trading flat in the AM (down 3.56% last week)
  • DOLLAR: 81.012 +0.27% - trading +0.07% in the AM (up 2.51% last week)

EUROPEAN MARKETS:

  • European Markets: FTSE 100: (0.56%); DAX: (0.87%); CAC 40: (1.54%)
    European markets fell as continuing concerns over peripheral Europe's debt crisis and weaker markets across Asia. 
  • Reports that Portugal denied having been pressured by France and Germany to accept a bailout impacted the euro, peripheral debt spreads and equity markets, with France and Portuguese equity markets leading the region lower down around (1.5%) and (1.86%), respectively.
  • All but one sector trades lower led by banks down over (2.5%) and basic resources (1.9%). US futures trade lower
  • France Nov Industrial Production +2.3% m/m vs consensus +1%
  • Eurozone January Sentix Index 10.6 vs consensus 11.3
  • UK Dec house prices (1.3%) m/m vs consensus (0.4%) and (1.6%) y/y vs consensus (1.4%) - 

ASIAN MARKTES:

  • Asian Markets: Nikkei (closed); Hang Seng (0.67%); Shanghai Composite (1.66%)
  • Asian markets mostly fell this morning, due to disappointment with the January US jobs report and renewed concerns about European sovereign debt.
  • Australia traded up 0.16%, with retailers supporting the market.
  • China's auto sales last year rose 32.37% to 18.06M units, according to the China Association of Automobile Manufacturers.
  • Hong Kong traded down 0.67%.
  • South Korea went down 0.26%.
  • India down 2.38%
  • Japan is closed for Coming of Age Day.
  • Indonesia was the biggest looser down 4.21% - the biggest drop in 2 years on inflation concerns
  • China’s December trade surplus $13.1B vs survey $20B.

Howard PenneyManaging

BCS Champ Game: NKE v. UA

I’m sitting here on this snowy Saturday afternoon celebrating my twins’ 13th birthday. Life is good. We’re watching the Saints play who my colleague Darius Dale calls ‘the best worst team in the NFL’. Yes, Darius is from Seattle and is a hardcore Seahawks fan. It’s halftime now and Darius is happy.

 

This is definitely a big game for football. But to ANYONE that cares about sports endorsements, the game on Monday is the one that matters by a country mile.

 

Yes, I’m talking about the BCS championship.  #2 Oregon Ducks vs. top-ranked Auburn Tigers.

 

It should come as no surprise that the Ducks serve as Nike’s primary face-plate in College Football. Phil Knight’s support for this program is legendary (Google it).

 

But Auburn is less obvious, as the Maryland Terrapins are logically the hallmark UnderArmour team. But the problem is that the high school team at our small New England town can probably hold its own against the Terps (not really, but you get the idea). Auburn, however, is a powerful franchise, and is UnderArmour’s most important college affiliation – as evidenced by a 7-year $28mm deal. Tack on all the noise around QB Cam Newton, who won the Heisman Trophy despite allegations of eligibility due to unethical/criminal behavior – and you’ve got yourself an event!

 

So let’s throw all this soap opera noise aside for a minute. What should we care about?

1)      The investments in each of these teams have already been made by NKE and UA, but…

2)      It is absolutely positively meaningless if the companies don’t suck it up and use the event to establish a better communication with consumers. That's incremental SG&A. Nike has the edge there due to sheer size.

3)      UnderArmour has more to gain, and little to lose. While Nike has more to lose and less to gain.

  • Nike is so big that people expect (consciously or not) to see the swooshes at any major sporting event.
  • No one expects UnderArmour to be on the grid. The fact that it will be at the big game is meaningful.  UnderArmour, however will need to be tactical about turning this into a near term-money maker.

4)      In netting it all out, what do you get? As it stands today, just showing up is a non-event for Nike. But they can boost top line in its American Football business if they run the right 11th hour marketing campaign. Keep in mind that Nike has been investing in this sport meaningfully over the past 12 months – and capped it with its deal to take over the NFL next year.

5)      For UA, the exposure should help. Furthermore, the apparel and footwear opportunity from the single event might actually be fairly meaningful to UA’s P&L – but that’s IF and ONLY IF they can be quick and tactical enough with marketing product that has already been created. They learned from their Superbowl experience a few years back that they need to be careful with their '11th hr' SG&A spend.  Also keep in mind that they just endorsed Tom Brady. We're not too sure if UA can afford an SG&A surprise at this valuation.

6)      Note: An important point is that it does not really matter who wins. Winning helps – don’t get me wrong -- at Hedgeye we expect to win every day.  But Some of the most powerful franchises were helped by marketing sportsmanship or other extraordinary events that don’t necessarily synch with a W or L.

7)      From a retailer perspective, its pretty much a wash. The obvious beneficiary might be Hibbett  Sports given southeast exposure, but keep in mind that last year we had the Texas Longhorns and Alabama Crimson Tide shooting it out for the BCS title. So from a yy perspective, the difference may be marginal.  

 

Go Jets

 

Brian


The Week Ahead

The Economic Data calendar for the week of the 10th of January through the 14th is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.

 

The Week Ahead - call1

The Week Ahead - call2

The Week Ahead - call333

 


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 80.28%
  • SHORT SIGNALS 78.51%
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