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MONDAY MORNING RISK MONITOR: RISK MEASURES REMAIN BROADLY BULLISH

Takeaway: Various risk measures signal ongoing calm in the markets. High yield, municipal swaps, inter-bank counterparty risk are all in agreement.

* High Yield – High Yield rates fell 8.7 bps last week, ending the week at 5.92% versus 6.01% the prior week.

 

* Euribor-OIS  – The spread tightened by 2 bps to 11 bps. Europe continues to mend and rally.

 

* Markit MCDX  – Last week spreads tightened 4 bps, ending the week at 121 bps versus 125 bps the prior week. Taking a step back, municipal credit default risk has been steadily falling since its peak of 230 bps in November 2011. 

 

* Chinese Steel – Steel prices in China rose 2.0% last week, or 74 yuan/ton, to 3750 yuan/ton. Chinese steel has been rising since the end of November 2012.

 

* 2-10 Spread – Last week the 2-10 spread widened 11 bps to 162 bps. 

 

* XLF Macro Quantitative Setup – Quantitatively, the Financials remain bullish TRADE and TREND (short & intermediate term). Our Macro team’s quantitative setup in the XLF shows 2.0% upside to TRADE resistance and 1.1% downside to TRADE support.

 

Financial Risk Monitor Summary

 • Short-term(WoW): Positive / 6 of 12 improved / 2 out of 12 worsened / 4 of 12 unchanged

 • Intermediate-term(WoW): Positive / 10 of 12 improved / 2 out of 12 worsened / 0 of 12 unchanged

 • Long-term(WoW): Positive / 8 of 12 improved / 1 out of 12 worsened / 3 of 12 unchanged

 

MONDAY MORNING RISK MONITOR: RISK MEASURES REMAIN BROADLY BULLISH - summary

 

1. American Financial CDS -  Swaps tightened for 23 out of 27 domestic financial institutions. All large caps were tighter except for GS, which widened 1 bp.

 

Tightened the most WoW: MBI, AGO, MS

Widened the most WoW: MTG, GS, TRV

Tightened the most WoW: MMC, ACE, GNW

Widened the most/ tightened the least MoM: MBI, SLM, WFC

 

MONDAY MORNING RISK MONITOR: RISK MEASURES REMAIN BROADLY BULLISH - us cds

 

2. European Financial CDS - EU Financial swaps were mixed this past week, with German and French swaps nominally higher while Spanish and Italian swaps continued to tighten. 

 

MONDAY MORNING RISK MONITOR: RISK MEASURES REMAIN BROADLY BULLISH - eu cds 2

 

3. Asian Financial CDS - Asian Financials were tighter across the board, as rising expectations for Japan's new monetary initiatives continue to fuel a rally.

 

MONDAY MORNING RISK MONITOR: RISK MEASURES REMAIN BROADLY BULLISH - asia cds

 

4. Sovereign CDS – Sovereign swaps were mixed, with Italy, Spain, Ireland and France tighter, while the US, Germany, Portgual and Japan were flat or wider by 1 bp. mostly tightened over last week. 

 

MONDAY MORNING RISK MONITOR: RISK MEASURES REMAIN BROADLY BULLISH - sov table

 

MONDAY MORNING RISK MONITOR: RISK MEASURES REMAIN BROADLY BULLISH - sov cds 4

 

MONDAY MORNING RISK MONITOR: RISK MEASURES REMAIN BROADLY BULLISH - sov cds 5

 

5. High Yield (YTM) Monitor – High Yield rates fell 8.7 bps last week, ending the week at 5.92% versus 6.01% the prior week.

 

MONDAY MORNING RISK MONITOR: RISK MEASURES REMAIN BROADLY BULLISH - hy

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 8.5 points last week, ending at 1763.15.

 

MONDAY MORNING RISK MONITOR: RISK MEASURES REMAIN BROADLY BULLISH - LLI

 

7. TED Spread  – The TED spread fell 0.1 basis points last week, ending the week at 23.6 bps this week versus last week’s print of 23.7 bps.

 

MONDAY MORNING RISK MONITOR: RISK MEASURES REMAIN BROADLY BULLISH - ted spread

 

8. Journal of Commerce Commodity Price Index – The JOC index rose 1 point, ending the week at 8.8 versus 7.7 the prior week.

 

MONDAY MORNING RISK MONITOR: RISK MEASURES REMAIN BROADLY BULLISH - jocs

 

9. Euribor-OIS spread – The Euribor-OIS spread tightened by 2 bps to 11 bps. 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. 

 

MONDAY MORNING RISK MONITOR: RISK MEASURES REMAIN BROADLY BULLISH - euribor ois

 

10. 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.  

 

MONDAY MORNING RISK MONITOR: RISK MEASURES REMAIN BROADLY BULLISH - ecb liquidity

 

11. Markit MCDX Index Monitor – Last week spreads tightened 4 bps, ending the week at 121 bps versus 125 bps the prior week. Taking a step back, municipal credit default risk has been steadily falling since its peak of 230 bps in November 2011. 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 16-V1. 

 

MONDAY MORNING RISK MONITOR: RISK MEASURES REMAIN BROADLY BULLISH - mcdx

 

12. Chinese Steel – Steel prices in China rose 2.0% last week, or 74 yuan/ton, to 3750 yuan/ton. Chinese steel has been rising since the end of November 2012.

 

MONDAY MORNING RISK MONITOR: RISK MEASURES REMAIN BROADLY BULLISH - chinese steel

 

13. 2-10 Spread – Last week the 2-10 spread widened 11 bps to 162 bps. We track the 2-10 spread as an indicator of bank margin pressure.  

 

MONDAY MORNING RISK MONITOR: RISK MEASURES REMAIN BROADLY BULLISH - 2 10

 

14. XLF Macro Quantitative Setup – Quantitatively, the Financials remain bullish TRADE and TREND (short & intermediate term). Our Macro team’s quantitative setup in the XLF shows 2.0% upside to TRADE resistance and 1.1% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: RISK MEASURES REMAIN BROADLY BULLISH - levels

 

Joshua Steiner, CFA

 


FedEx Fails To Approve UPS/TNT

Takeaway: FDX has never played nice in the competitive sandbox. Scuttling the UPS/TNT deal allows FDX to buy all of TNT and keeps the assets from UPS.

 

 

FedEx Fails To Approve UPS/TNT

 

  • Aggressive Competitor:  FedEx has never been one to play nice in the competitive sandbox.  It seemed likely to us that UPS would do whatever deal was needed with FDX to secure regulatory approval.  UPS probably assumed that FedEx would want industry consolidation and choice European assets.  Apparently, however, FDX wouldn't pick up the phone.  FedEx probably wanted to both scuttle the deal and get TNT for itself.
  • FedEx the Only TNT Buyer We See:  At some point, FedEx is likely to buy TNT.  FDX is the only credible buyer and TNT has some assets that fit well into FedEx.  That part of our thesis hasn't changed.  FedEx buying the whole of TNT on the cheap is probably a better outcome than picking up UPS’s crumbs.

 

FedEx Fails To Approve UPS/TNT - eu1

 

 

  • TNT Should Want To Sell:  Given the management turnover and lack of strategic direction at TNT, the company will either sell or languish, in our view.  The Express & Courier industry is populated by sophisticated, scale competitors.  TNT is a weak #4, in our view.
  • FedEx Playing Long Game:  TNT in its entirety fits better with FedEx than just select TNT European assets.  A TNT deal with FDX would expand FedEx in Asia, in addition to better balancing its global network.  Perhaps as importantly, FedEx kept those assets away from UPS.  Aside from delay and annoyed regulators, scuttling the deal has cost FDX little.
  • Wait And See: If we had to guess, FDX will bid for TNT pretty quickly.  TNT Express is likely in disarray and the assets may deteriorate if FDX waits too long.  The price of the transaction is well within FedEx’s capability and we expect a bid in coming months.

 

FedEx Fails To Approve UPS/TNT - asia2


The Global Connection

Client Talking Points

Cause And Effect

The NFL Playoffs aren’t the only game in town these days. The Global Macro game is one that is active 24/7 and one you need to pay attention to even if you only trade US equities. For instance: Chinese stocks are up +18% since November 2012 and the Japanese Yen vs the US Dollar is down -11% for the same time period. Since Japan is keen on following in the footsteps of the US in terms of monetary policy, this game of destroying the value of the Yen has given a boost to Japanese equities, which are up +25% since November 13.

 

As for the growth in China, that can affect certain commodities like steel rebar and oil, so keep a close eye on them. With the US dollar down last week, several commodities shot up several hundred basis points. The point is you can’t ignore what’s going on in another country just because you don’t trade that market. The world is one big interconnected place where the actions of one place affect the markets of another. Get the dollar right and you'll get a lot of other things right.

Asset Allocation

CASH 46% US EQUITIES 18%
INTL EQUITIES 18% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 18%

Top Long Ideas

Company Ticker Sector Duration
ASCA

We believe ASCA will receive a higher bid from another gaming competitor. Our valuation puts ASCA’s worth closer to $40.

ADM

ADM has significantly lagged the overall market in 2012 over concerns that weakness in the company’s bioproducts (ethanol) and merchandise and handling segment will persist. Ethanol margins suffered from higher corn costs, as well as weak domestic demand and low capacity utilization across the industry. Merchandising and handling results were at the mercy of a smaller U.S. corn harvest. Both segments could be in a position to rebound as we move into 2013 and a new crop goes into the ground. With corn prices remaining at elevated levels, the incentive to plant corn certainly exists, and we expect that we will see corn planted fencepost to fencepost.

FDX

Margins are in a cycle trough as the USPS is on the brink. FDX is taking more share in the U.S. and following the recent $TNT news flow we think $UPS is in a tough spot.

Three for the Road

TWEET OF THE DAY

“People like to hide things.. & its when you stumble upon that occurrence that you need to open your eyes and pay close attention to details” -@tjtakes

QUOTE OF THE DAY

“Few things are harder to put up with than the annoyance of a good example.” -Mark Twain                 

STAT OF THE DAY

The best performing stock market in the world is Vietnam, up +12% year-to-date.


the macro show

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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 HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – January 14, 2013

 

As we look at today's setup for the S&P 500, the range is 26 points or 0.89% downside to 1459 and 0.88% upside to 1485.                                           

                                                                                    

SECTOR AND GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 4

 

EQUITY SENTIMENT:


THE HEDGEYE DAILY OUTLOOK - 10


CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 1.60 from 1.62
  • VIX closed at 13.36 1 day percent change of -0.96%

MACRO DATA POINTS (Bloomberg Estimates):

  • 11am: Fed to purchase $1.25b-$1.75b in 2036-2042 sector
  • 11:30am: U.S. Treasury to sell $32b 3M bills, $28b 6M bills
  • 11:55am: Fed’s Williams speaks in Half Moon Bay, Calif.
  • 12:40pm: Fed’s Lockhart speaks in Atlanta
  • 4pm: Fed’s Bernanke speaks in Ann Arbor, Mich.

GOVERNMENT:

    • Senate not in session, House in session
    • White House to push for comprehensive immigration plan
    • Agriculture Sec. Tom Vilsack speaks at American Farm Bureau Federation annual meeting

WHAT TO WATCH

  • UPS prepares to end $6.9b TNT Express takover as EU wants to block deal
  • JPMorgan said to weigh releasing Whale rept faulting Dimon
  • Transocean says Icahn acquired 1.56% of shrs, wants more
  • Hostess names Flowers as lead bidder for bread business
  • Evans says Fed support needed while govt tackles deficit
  • Hedge fund leverage rises to most since 2004 as margin grows
  • EnCana CEO Eresman steps down, takes advisory role
  • Lockheed’s F-35 falls short of testing goals
  • Japan Airlines probes Dreamliner fuel leak as FAA holds review
  • BlackRock profit seen accelerating as ETF sales rise to record
  • China’s unexpected export surge spurs skepticism
  • Swatch buys Harry Winston jewelry brand for $1b
  • Saint-Gobain sells U.S. jar unit to Ardagh for $1.7b

EARNINGS:

    • Corus Entertainment (CJR/B CN) 7am, C$0.62
    • PPG Industries (PPG) 8:11am, $1.53
    • Cogeco Cable (CCA CN) After-mkt, C$0.88

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

 

CORN – fast short squeeze in Corn (+7% off the lows, up +2% this morning) after a bullish supply report from WASD (World Ag Supply/Demand) on Friday. Supply is a lagging indicator here, but with the long-term Commodity Bubble popping, volatility is much higher here than that implied by an oversold 13.36 VIX.

  • WTI Oil Trades Near Four-Month High on Seaway Pipeline Expansion
  • Hedge Funds Cut Bets to Six-Month Low Before Rally: Commodities
  • Gold Gains in London as U.S. Stimulus Signal Weakens Dollar
  • Crop Prices Advance After U.S. Supply Shrinks More Than Expected
  • Copper Rises as U.S. and Japan Signal More Stimulus Is Possible
  • Raw Sugar Falls in as Goldman Cuts Price Forecast; Cocoa Rises
  • Rebar Rallies Most in Three Weeks as China’s Economy May Rebound
  • Wilmar Boosts Africa Expansion With Palm Oil Refinery in Ghana
  • Goldman Sachs Turns Neutral on Commodities Seeing Advance of 5%
  • Argentine Corn Output May Rise to Record 24 Mln Tons, FAO Says
  • Russia’s Yuriev Opens U.S. Shale Fund as State Dominates at Home
  • Cotton Seen Climbing to $1 on Elliott Wave: Technical Analysis
  • Fish & Chips Battered in U.K. as Deluge Leaves Soggy Potato Crop
  • Chinese Steelmakers Boost Use of Domestic Iron Ore, Mysteel Says

CURRENCIES

 

YEN – getting very newsy here all of a sudden as A) the Yen hits my immediate-term TRADE oversold signal at $89.41 and B) Abe steals the top one-liner in the monetary policy world this morning stating he wants a “Bold new leader” at the BOJ (read, Money Printer who wants to live large in the Political Media spotlight like Bernanke).

 

THE HEDGEYE DAILY OUTLOOK - 6

 

EUROPEAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 7

 

ASIAN MARKETS

 

CHINA – Most Read stories on Bloomberg this morn are all about Chinese growth and Japanese devaluation; Shanghai Comp ripped another +3.1% move to higher intermediate-term highs and the rest of Asian equities followed their lead (Indonesia +1.8% after leading losers at -2.4% last wk; Vietnam +12% is the best stock mkt in the world YTD).

 

THE HEDGEYE DAILY OUTLOOK - 8

 

MIDDLE EAST


THE HEDGEYE DAILY OUTLOOK - 9

 

 

The Hedgeye Macro Team

 

 

 



Simpletons & Dunderheads

“Our affairs are not conducted entirely by simpletons and dunderheads.”

-Winston Churchill

 

Per the Urban Dictionary, a “dunderhead” is, amongst other things, an idiot, dunce, numskull, or bonehead. With public opinion of him falling in early 1942, Churchill was irritated. Losing the war was one thing; being chastised by Ivory Tower academics was entirely another.

 

Singapore fell on February 15 (1942). It was death foretold – too few defenses, a weak commanding general, a demoralized garrison, and too savvy an enemy … Churchill had no need to resort to hyperbole… he informed Roosevelt that the fall of Singapore was the greatest disaster in our history.” (The Last Lion, page 484-485)

 

While the 113th United States Congress has yet to prove that it is the worst in free-market history (the 112th is a tough compare), it still has time. I’m just elated that these economic dunderheads of the #PoliticalClass have been out of this market’s way for the last few weeks. Geithner leaving and Congress being out of the way definitely helped the Russell2000 close last week at an all-time high.

 

Back to the Global Macro Grind

 

This is the first Global Macro morning that I can remember where the names Boehner and Reid aren’t in the Bloomberg’s “Most Read.” Today it’s all about Chinese growth (acceleration) and Japanese currency (debauchery).

 

Neither of those macro stories are new. That’s the point about consensus macro – by the time it becomes this newsy, the big moves in the related markets have already occurred.

 

From their intermediate-term troughs/peaks in November 2012 (as global growth stopped slowing):

  1. Chinese stocks (Shanghai Composite) are up +18%
  2. Japanese Yen (vs the US Dollar) is down -11%

Especially in the context of the SP500 and US Dollar Index being +8.7% and -2.1% from their respective November 2012 lows/highs, respectively, those are massive moves in Asian markets.

 

The move in Japanese Equities has been even more powerful than China’s. Since November 13th, the Nikkei225 is +25%! Krugman/Bernanke Playbook 101: burn your currency at the stake, admit nothing about it publicly, and point at the daily closing price of stocks.

 

How will what Jim Rickards coined the Currency War end? I don’t know. But it probably won’t end well. So, as you ride the bull of higher-lows and higher-highs in stocks out there, just keep that in mind. Remember, in Chaos Theory, our daily objective is to embrace uncertainty.

 

CONSENSUS WATCH: On Friday I highlighted the massive shift from bearish to bullish we have seen in US Equity market sentiment in the last two months. Today, it’s worth reminding you that the sentiment in Commodities has done almost the exact opposite.

 

Last week’s CFTC (futures and options) net long commodities figures revealed the following realities:

  1. Total net long positions down another -5.4% wk-over-wk to 654,443 contracts (down -51% from all-time highs in SEP 2012)
  2. Gold’s net long position dropped another -13% wk-over-wk to 92,115 (lowest level since August 2012)
  3. Corn’s net long positioned dropped another -15% wk-over-wk to 115,113 (lowest since June 2012)

In other words, when it comes to risk managing the Commodities Bubble, you are best served doing the exact opposite of what the hedge fund community is doing. This may be the most glaring intermediate-term example of BUY HIGH, SELL LOW I have seen in a decade.

 

Both Gold and Corn prices went up on that last week. What better bull case do you need other than consensus dunderheads who call themselves “smart” getting bearish? While we have deflated the inflation in commodity prices (CRB Index -8% from its SEP 2012 lower long-term high) for the last 3 months, that certainly doesn’t mean they can’t re-flate.

 

With the US Dollar Down hard last week (-1.2%), here’s where the beta-juice was to Down Dollar:

  1. Platinum +4.8%
  2. Corn +4.2%
  3. Coffee +4.1% 

At the same time, we saw some of the widest global equity market divergences (by geographic region) that we have seen in some time. Europe saw Germany down -0.8% on the week, but Italy was +3.2%. In Asia, Vietnam was +8.6% versus Indonesia -2.4%.

 

What do we simpletons do with all of this? We stay with the research and risk management process; we do our best to incorporate all of the real-time economic data and price changes (across multiple factors and durations) in our models;  and we keep moving.

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, UST10yr Yield, and the SP500 are now $1, $109.98-111.48, 3.64-3.75, $79.39-79.98, $1.31-1.33, 1.84-1.97%, and 1, respectively.

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Simpletons & Dunderheads - Chart of the Day

 

Simpletons & Dunderheads - Virtual Portfolio


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