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Prepare The Pile

“The key is not to predict the future, but to be prepared for it.”

-Pericles

 

I was on a plane to Denver last night and was reviewing some of the required reading in my pile. For those of you un-familiar with my research process, my pile is part of it. I never leave home without it. I typically read my pile on a 1-3 week lag.

 

The Pile revealed 2 different perspectives on preparing for the future trajectory of long-term Global Economic Growth:

  1. Goldman Sachs: Global Strategy Paper No. 4 – “The Long Good Buy” (March 21, 2012)
  2. Reinhart & Rogoff: “Five Years After Crisis, No Normal Recovery” (April 2, 2012)

Goldman’s view acknowledges that “future growth may be lower than experienced over the past decade in many parts of the world”, but that equities are already pricing in “unrealistically large declines in growth.” They’re making both a growth and valuation call.

 

Reinhart & Rogoff suggest that “the concepts of recession and recovery need to take on new meaning” and that “financial crises leave behind deep recessions of long duration and considerable volatility.” They’re calling for debt and volatility to slow growth.

 

The Pile did not change my 5 year-old view on the Global Growth Cycle. Neither did it change my risk management process. From these debt and deficit levels, Big Government Interventions in our markets and economies will continue to:

 

A)     Shorten economic cycles

B)      Amplify market volatility

 

As growth slows, “cheap” markets get cheaper. Valuation isn’t a catalyst until growth re-accelerates.

 

Back to the Global Macro Grind

 

While it’s interesting to observe the emotion and Storytelling associated with why the US stocks are going down, this morning’s Global Macro research process reveals pretty much the same thing we have been flagging since February. While Growth Slowing, globally, may be new to a US stock market centric media consensus, it’s not new to the rest of the world.

 

Here’s a quick Global Equity market update:

 

1.   ASIA – context is always critical, so it’s important to acknowledge that 2 of the major leading indicators in Asia, the Hang Seng and the Nikkei, stopped going up on February 29th and March 27th, respectively. Inclusive of this week’s declines, the Hang Seng and Nikkei are down -6.1% and -7.0% from their YTD tops. India, Australia, and Singapore are all bearish TRADE.

 

2.   EUROPE – if Germany’s DAX is susceptible to a 6.2% correction from its YTD high (March 15th), any equity market in the world is. Germany’s employment situation is much more stable than that of the US, despite neighboring some of the most dysfunctional debt/deficit laden countries in the world. Spain is the Global Macro train wreck of the YTD, down -11%.

 

3.   USA – the SP500 finally broke our immediate-term TRADE line of 1391 support yesterday, but has only corrected -2.6% from its April 2nd top. The Russell 2000 stopped going up 3 weeks ago and is down -5.1% from its March 26th top (immediate-term TRADE resistance there is now 822). As for the 50-day moving averages – we only use them for behavioral observations.

 

The rest of the world, of course, doesn’t hinge on Dow 13,000 or the price of Apple. It’s globally interconnected, across asset classes, from countries, to currencies, bonds, and commodities.

 

Here are my Top 10 cross asset class callouts to make a note of this morning:

  1. US Equity Volatility (VIX) has held its long-term TAIL of 14.41 support and is now breaking out above our 16.24 TRADE line
  2. Oil Volatility (OVX) remains above its immediate-term TRADE line of 28.43 support as Oil prices break TRADE support
  3. Brent Oil (BNO) has finally broken its immediate-term TRADE support line of $124.23/barrel
  4. Copper continues to be broken from a long-term TAIL perspective and immediate-term TRADE resistance = $3.85/lb
  5. Gold is in a freshly formed Bearish Formation (bearish TRADE, TREND, and TAIL) with next support = $1616/oz
  6. Spanish and Italian 10yr bond yields remain in a Bullish Formation (bullish TRADE, TREND, and TAIL)
  7. US Treasury 10yr bond yields continue to signal Growth Slowing, under both TRADE resistance of 2.18% and TAIL 2.47%
  8. US Treasury Curve Yield Spread (10s minus 2s), which is a proxy for growth’s slope, has compressed 14bps wk/wk
  9. US Dollar Index is moving into a stealth Bullish Formation with intermediate-term TREND support = $79.55
  10. Japanese Yen is bumping up against another lower long-term high at $81.23 (vs USD) and remains in a Bearish Formation

I have a passion for my team’s process because it’s had repeatable success in revealing the deep simplicity of Growth and Inflation Accelerating or Decelerating, globally, on a real-time basis. I Prepare The Pile every day so that I am always reading the counter punches to our overall risk management conclusions, but I do not defer to The Pile’s views based on short-term market moves.

 

What we’ve all had the opportunity to learn in the last 5 years is that if you get the intermediate-term TRENDS in both Growth and Inflation right, and you’ll get a lot of other things right. Valuation calls with no catalysts are called opinions. If you’re using the wrong Global Economic Growth assumptions, you’re basing your “valuation” work on the wrong numbers anyway.

 

My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, and the SP500 are now $1, $121.31-123.84, $79.55-80.16, and 1, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Prepare The Pile - Chart of the Day

 

Prepare The Pile - Virtual Portfolio


European Banking Monitor: Risk Trickles Back

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .


Key Takeaways:

 

* The Euribor-OIS fell 1 bps to 41bps while the TED spread remained roughly flat. These measures of interbank risk are flattening out. We expect to see very little improvement from here.     

 

*The ECB’s Liquidity Recourse to the Deposit Facility remains sticky near all-time highs.

 

 

Euribor-OIS spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread tightened by 1 bps to 41 bps over last week.

 

European Banking Monitor: Risk Trickles Back - 11. euribor

 

ECB Liquidity Recourse to the Deposit Facility – The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB.  Taken in conjunction with excess reserves, the ECB deposit facility measures excess liquidity in the Euro banking system.  An increase in this metric shows that banks are borrowing from the ECB.  In other words, the deposit facility measures one element of the ECB response to the crisis.  

 

European Banking Monitor: Risk Trickles Back - 11. ECB liq

 

European Financials CDS Monitor –  Due to technical difficulties this week we were unable to pull swap rates for the European banks.

 

Security Market Program – Due to the Easter Monday holiday today, the ECB has not released its SMP sovereign purchases for the week ended 4/6.  We wouldn’t be surprised to see a fourth straight week of zero buying. We’ll update you as the data comes through.

 

Matthew Hedrick

Senior Analyst


EMPLOYMENT DATA REMAINS BULLISH FOR RESTAURANTS

Employment data released on Friday by the Bureau of Labor Statistics support the notion that restaurants saw strong top line trends in 1Q.  Of course, this is not new news and whether or not those trends can meet expectations remains to be seen.

 

We continue to like EAT, PFCB, JACK and SBUX.  DNKN and MCD are our favorite names on the short side.

 

As the chart below shows, all of the age cohorts we track on a monthly basis saw employment gains in March.  Besides the 45-54 YOA cohort, all of the age groups we track saw sequential declines from February’s year-over-year growth levels.  This could be due to a fading of the impact of favorable weather versus last year, which is expected to have boosted 1Q employment figures and in some sectors pulled demand forward to the detriment of 2Q. 

 

EMPLOYMENT DATA REMAINS BULLISH FOR RESTAURANTS - Employment by Age

 

 

Hiring trends within the restaurant industry remains strong as of February (this data set lags by one month).  As the chart below illustrates, hiring growth in the full service and limited service dining industries are growing at prerecession levels.  The sequential slowdown in full service’s employment growth versus January is worth noting, however, with employment growth in that industry near peak levels.

 

EMPLOYMENT DATA REMAINS BULLISH FOR RESTAURANTS - restaurant employment

 

 

This data is more impactful for casual than for quick service.  As with the initial claims data, the correlation is far tighter between the casual dining datasets.  The chart below shows an index of casual dining stocks versus full service employment annual growth.  The correlation between the two datasets is almost 0.9 and tightens further when the casual dining index is lagged by one month.  This makes sense, given that hiring and firing is generally reactionary.  Nevertheless, in the event of a slowdown in casual dining stocks – which we expect – we will be looking to the employment data to confirm. 

 

EMPLOYMENT DATA REMAINS BULLISH FOR RESTAURANTS - casual dining index vs full service hiring

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst


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Bearish Break: SP500 Levels, Refreshed

POSITIONS: Long Utilities (XLU) and Financials (XLF); Short Industrials (XLI)

 

Growth Slowing, globally, includes the USA. I should have told myself that 100 more times over before I bought the Financials late last week. There’s obviously massive mean reversion risk in just about everything that’s mean reverting today.

 

Across my risk management durations (TRADE, TREND, and TAIL) here are the lines that matter most: 

  1. Immediate-term TRADE resistance = 1391
  2. Immediate-term TRADE support = 1374
  3. Intermediate-term TREND support = 1331 

In other words, now that we have snapped both my hyper-immediate-term TRADE support line of 1406 and immediate-term support line of 1391, people are snapping.

 

Oh snap. Provided that Growth Slowing continues, there’s no reason why the pro-cyclical Sectors (Industrials, Basic Materials, Energy) don’t continue to map those growth expectations.

 

From a price, US Consumption Growth should stabilize, if the US Dollar does. That’s a big if – people are already out there early today begging for Bernanke and some more QE (i.e. more of what got growth to slow in February/March).

 

Nice, 

KM 

 

Keith R. McCullough
Chief Executive Officer

 

Bearish Break: SP500 Levels, Refreshed - SPX


RISK MONITOR: SLOWLY AND SILENTLY RISK IS COMING BACK

A RARE GROWTH STORY IN FINANCIALS: OPPORTUNITIES IN PAWN/PAYDAY

CONFERENCE CALL THIS WEDNESDAY 11 am

 

Please join us for a conference call this Wednesday, April 11th at 11am EDT, to discuss the outlook for the Specialty Consumer Finance (Payday/Pawn) space. Dial-in and materials for the call will follow. 

 

Risk Monitor Key Takeaways

* High yield rates rose sharply over the week, underscoring increased risk in the market.

 

* The Euribor-OIS fell 1 bps to 41bps while the TED spread remained roughly flat. These measures of interbank risk are flattening out. We expect to see very little improvement from here.     


*The 2-10 spread fell 5 bps points WoW. On a MoM basis, the 2-10 spread has widened by 14 bps. This is incrementally positive for Q1 bank margins. Earnings season is set to kick off this Friday for financials. 

 

Financial Risk Monitor Summary  

• Short-term(WoW): Negative / 0 of 12 improved / 5 out of 12 worsened / 6 of 12 unchanged  

• Intermediate-term(WoW): Positive / 4 of 12 improved / 1 out of 12 worsened / 6 of 12 unchanged  

• Long-term(WoW): Neutral / 3 of 12 improved / 3 out of 12 worsened / 5 of 12 unchanged

 

RISK MONITOR: SLOWLY AND SILENTLY RISK IS COMING BACK - Summary3

 

1. US Financials CDS Monitor – Swaps widened for 24 of 26 major domestic financial company reference entities last week.    

Widened the most WoW: JPM, C, MS

Tightened the most/ widened the least WoW: COF, UNM, MBI.

Widened the most MoM: PRU, ACE, ALL

Tightened the most MoM: COF, MTG, HIG

 

RISK MONITOR: SLOWLY AND SILENTLY RISK IS COMING BACK - US CDS1

 

2. European Financials CDS Monitor –  Due to technical difficulties this week we were unable to pull swap rates for the European banks.

 

3. European Sovereign CDS – European Sovereign Swaps mostly widened over last week. German sovereign swaps widened the least (+0.2 bps to 74 ) and Spanish sovereign swaps widened the most (+28 bps to 464).

 

RISK MONITOR: SLOWLY AND SILENTLY RISK IS COMING BACK - Sovereign 1

 

RISK MONITOR: SLOWLY AND SILENTLY RISK IS COMING BACK - Sovereign 2

 

4. High Yield (YTM) Monitor – High Yield rates rose 18.8 bps last week, ending the week at 7.33 versus 7.14 the prior week.

 

RISK MONITOR: SLOWLY AND SILENTLY RISK IS COMING BACK - HY

 

5. Leveraged Loan Index Monitor – The Leveraged Loan Index fell  less than a point last week, ending at 1652.

 

RISK MONITOR: SLOWLY AND SILENTLY RISK IS COMING BACK - LLI

 

6. TED Spread Monitor – The TED spread fell less than a point last week, ending the week at 39.5 this week versus last week’s print of 40.0.

 

RISK MONITOR: SLOWLY AND SILENTLY RISK IS COMING BACK - TED spread

 

7. Journal of Commerce Commodity Price Index – The JOC index rose 0.8 points, ending the week at -8.7 versus -9.5 the prior week.

 

RISK MONITOR: SLOWLY AND SILENTLY RISK IS COMING BACK - JOC

 

8. Euribor-OIS spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread tightened by 1 bps to 41 bps over last week.

 

RISK MONITOR: SLOWLY AND SILENTLY RISK IS COMING BACK - Euribor OIS

 

9. ECB Liquidity Recourse to the Deposit Facility – The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB.  Taken in conjunction with excess reserves, the ECB deposit facility measures excess liquidity in the Euro banking system.  An increase in this metric shows that banks are borrowing from the ECB.  In other words, the deposit facility measures one element of the ECB response to the crisis.  

 

RISK MONITOR: SLOWLY AND SILENTLY RISK IS COMING BACK - Recourse to the deposit facility

 

10. 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 six 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. We track the 14-V1. Last week spreads widened , ending the week at 118 bps versus 112 bps the prior week.

 

RISK MONITOR: SLOWLY AND SILENTLY RISK IS COMING BACK - MCDX

 

11. 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. Last week the index fell -6 points, ending the week at 928 versus 934 the prior week.

 

RISK MONITOR: SLOWLY AND SILENTLY RISK IS COMING BACK - BALTIC

 

12. 2-10 Spread – We track the 2-10 spread as an indicator of bank margin pressure.  Last week the 2-10 spread tightened to 184 bps, 5 bps tighter than a week ago.

 

RISK MONITOR: SLOWLY AND SILENTLY RISK IS COMING BACK - 2 10

 

13. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.6% upside to TRADE resistance and 0.9% downside to TRADE support.

 

RISK MONITOR: SLOWLY AND SILENTLY RISK IS COMING BACK - XLF

 

Margin Debt - February: +0.85 standard deviations 

We publish NYSE Margin Debt every month when it’s released. NYSE Margin debt hit its post-2007 peak in April of 2011 at $320.7 billion. The chart below shows the S&P 500 overlaid against NYSE margin debt going back to 1997. In this chart both the S&P 500 and margin debt have been inflation adjusted (back to 1990 dollar levels), and we’re showing margin debt levels in standard deviations relative to the mean covering the period 1. While this may sound complicated, the message is really quite simple. First, when margin debt gets to 1.5 standard deviations or greater, as it did last April, it has historically been a signal of extreme risk in the equity market - the last two times it did this the equity market lost half its value in the ensuing period. We flagged this for the first time back in May 2011. The second point is that margin debt trends tend to exhibit high degrees of autocorrelation. In other words, the last few months’ change in margin debt is the best predictor of the change we’ll see in the next few months. We would need to see it approach -0.5 to -1.0 standard deviations before the trend runs its course. There’s plenty of room for short/intermediate term reversals within this broader secular move. Overall, however, this setup represents a long-term headwind for the market. One limitation of this series is that it is reported on a lag.  The chart shows data through February.

 

RISK MONITOR: SLOWLY AND SILENTLY RISK IS COMING BACK - Margin Debt

 

Joshua Steiner, CFA

 

Allison Kaptur

 

Robert Belsky

 

Having trouble viewing the charts in this email?  Please click the link below to view in your browser.    

 


THE HBM: PNRA, WEN, YUM, RT, RRGB

THE HEDGEYE BREAKFAST MONITOR

 

PORTFOLIO POSITIONS

 

LONGS: PFCB, EAT, JACK, SBUX

 

SHORTS: DNKN, MCD

 

MACRO NOTES

 

Commentary from CEO Keith McCullough

 

Growth Slowing, globally, will be a lot easier for consensus to see once this market opens:

  1. CHINA – Dollar Debauchery (Bernanke on Jan 25th, pushing easy money to 2014) fired up commodity inflation sequentially in FEB/MAR, and accelerating inflation then slowed real growth, globally. Same model we have been using for 5yrs – China’s inflation data for MAR rises to 3.6% vs 3.4% FEB.
  2. BOND YIELDS – as far as 1-day moves go, Friday’s reaction in the 10yr was violent; now you have 10yr Treasuries yielding 2.06% (down 35bps in a month!) and the Yield Spread just compressed -14bps in 1-day, wow – just like that growth slowing gets marked to market before everyone thought they could get out.
  3. SP500 – my math says the SP500 closes higher than where the futures are trading, but it also says that a close below 1391 would be bearish if sustained – so wait/watch that line throughout the wk as the inflation data domestically gets reported wed-fri (it will rise again sequentially) and earnings season, which will be one of the slowest growth ones in years, is upon us.

KM

 

SUBSECTOR PERFORMANCE

 

THE HBM: PNRA, WEN, YUM, RT, RRGB - subsector

 

 

QUICK SERVICE

 

PNRA: Panera Bread was rated “New Outperform” at Credit Suisse.

 

WEN: According to an SEC filing filed Friday, Emil Brolick’s total comp for 2011 was $4.6mm after taking the CEO position at Wendy’s in September.

 

YUM: Yum Brands CEO David Novak earned $20.4mm in 2011 versus $14.6mm in 2010.

 

NOTABLE PERFORMANCE ON ACCELERATING VOLUME:

 

SBUX: Starbucks gained 2.1% on accelerating volume on Thursday.

 

CASUAL DINING

 

RT: Raymond James is standing by Ruby Tuesday, according to the WSJ.  The stock sold off on Thursday on weaker-than-expected comps and guidance provided last Wednesday after the close.

 

RRGB: Red Robin Gourmet Burger has commissioned a study that has revealed that “pink slime” related concerns are impacting Americans’ behavior.  The company has never served beef containing the ingredient, according to a press release.

 

NOTABLE PERFORMANCE ON ACCELERATING VOLUME:

 

RT: Ruby Tuesday declined 18% on accelerating volume

 

THE HBM: PNRA, WEN, YUM, RT, RRGB - stocks

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 


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This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.

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