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MONDAY MORNING RISK MONITOR: SHORT TERM RISK TRUMPS REWARD

Takeaway: Most of our risk measures remain benign, but rising commodities and higher taxes may be starting to exert some pressure.

Key Takeaways:

 

* Downside Trumps Upside in the Short Term: Our Macro team’s quantitative setup in the XLF shows 0.5% upside to TRADE resistance and 2.8% downside to TRADE support.

 

* Yield Spreads Are Widening: Last week the 2-10 spread widened by 12 bps to 172 bps.

 

High Yield Backs Up: High yield rates rose 15 bps last week, ending the week at 5.96%.

 

* Muni Risk Continues to Fall: MCDX 16V-1 spreads fell 3 bps to 108 bps. 

 

* Chinese Steel Rises Further: Steel prices in China rose 0.7% last week, or 26 yuan/ton, to 3755 yuan/ton. 

 

Financial Risk Monitor Summary

 • Short-term(WoW): Negative / 2 of 12 improved / 5 out of 12 worsened / 6 of 12 unchanged

 • Intermediate-term(WoW): Positive / 7 of 12 improved / 2 out of 12 worsened / 4 of 12 unchanged

 • Long-term(WoW): Positive / 9 of 12 improved / 2 out of 12 worsened / 2 of 12 unchanged

 

1. American Financial CDS -  U.S. financial swaps were mixed with mortgage insurers and bond guarantors significantly wider WoW while the rest of the sector was flat to slightly tighter. 

 

Tightened the most WoW: ACE, AON, HIG

Widened the most WoW: MTG, AGO, GNW

Tightened the most WoW: GNW, AGO, MBI

Widened the most/ tightened the least MoM: COF, MTG, GS

 

MONDAY MORNING RISK MONITOR: SHORT TERM RISK TRUMPS REWARD - 1

 

2. European Financial CDS - European financials were wider across the board last week.

 

MONDAY MORNING RISK MONITOR: SHORT TERM RISK TRUMPS REWARD - 2

 

3. Asian Financial CDS - Chinese and Indian banks were generally higher, while Japanese financials were mixed.

 

MONDAY MORNING RISK MONITOR: SHORT TERM RISK TRUMPS REWARD - 17

 

4. Sovereign CDS – Sovereign swaps were wider globally last week with Italy, Spain and Portugal leading the way.

 

MONDAY MORNING RISK MONITOR: SHORT TERM RISK TRUMPS REWARD - 18

 

MONDAY MORNING RISK MONITOR: SHORT TERM RISK TRUMPS REWARD - 3

 

MONDAY MORNING RISK MONITOR: SHORT TERM RISK TRUMPS REWARD - 4

 

5. High Yield (YTM) Monitor – High Yield rates rose 15 bps last week, ending the week at 5.96% versus 5.81% the prior week.

 

MONDAY MORNING RISK MONITOR: SHORT TERM RISK TRUMPS REWARD - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index fell -4.2 points last week, ending at 1769.2.

 

MONDAY MORNING RISK MONITOR: SHORT TERM RISK TRUMPS REWARD - 6

 

7. TED Spread Monitor – The TED spread was essentially unchanged last week, ending the week at 22.75 bps. 

 

MONDAY MORNING RISK MONITOR: SHORT TERM RISK TRUMPS REWARD - 7

 

8. Journal of Commerce Commodity Price Index – The JOC index rose 1.2 points, ending the week at 13.31 versus 12.1 the prior week.

 

MONDAY MORNING RISK MONITOR: SHORT TERM RISK TRUMPS REWARD - 8

 

9. Euribor-OIS Spread– The Euribor-OIS spread widened by 1 bp 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: SHORT TERM RISK TRUMPS REWARD - 9

 

10. ECB Liquidity Recourse to the Deposit Facility – Deposits continue the secular decline. 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: SHORT TERM RISK TRUMPS REWARD - 10

 

11. Markit MCDX Index Monitor – Last week spreads tightened 3 bps, ending the week at 107.8 bps.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: SHORT TERM RISK TRUMPS REWARD - 11

 

12. Chinese Steel – Steel prices in China rose 0.7% last week, or 26 yuan/ton, to 3755 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

 

MONDAY MORNING RISK MONITOR: SHORT TERM RISK TRUMPS REWARD - 12

 

13. 2-10 Spread – Last week the 2-10 spread widened to 172 bps, 12 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR: SHORT TERM RISK TRUMPS REWARD - 13

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.5% upside to TRADE resistance and 2.8% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: SHORT TERM RISK TRUMPS REWARD - 14

 

Joshua Steiner, CFA


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – February 4, 2013


As we look at today's setup for the S&P 500, the range is 19 points or 1.00% downside to 1498 and 0.25% upside to 1517.   

                                                                                                                            

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: 1.77 from 1.75
  • VIX  closed at 12.9 1 day percent change of -9.66%
  • 10YR – with employment #GrowthStabilizing, Treasuries waking up to another 4bps higher in the 10yr Yield to 2.05% this morn as fund flows continue to dominate just about any bear case for stocks that I can find (best start for US Equity flows since 96’). US Stocks up for 5 weeks in a row; no intermediate-term resistance for the 10yr to 2.41%.

MACRO DATA POINTS (Bloomberg Estimates):

  • 9:45am: ISM New York, Jan. (prior 54.3)
  • 10am: Factory Orders, Dec., est. 2.2% (prior 0.0%)
  • 11am: Fed to purchase $2.75b-$3.5b debt in 2020-2022 sector
  • 11:30am: U.S. Treasury to sell $32b in 3M bills, $28b in 6M bills
  • U.S. Rates Weekly Agenda

GOVERNMENT:

    • President Barack Obama speaks on gun control in Minn.
    • Obama said yday that U.S. needs rev. w/spending cuts
    • Treasury issues quarterly borrowing estimates
    • Release date for Pentagon’s fiscal 2014 budget; delay expected after fiscal cliff disruptions

WHAT TO WATCH

  • China services industries expand at fastest pace since Aug.
  • PBOC’s Zhou to step down in March, official newspaper reports
  • Cowen plans to buy Dahlman Rose amid stock-trading slowdown
  • Blackrock sued by pension funds over securities lending fees
  • ntergy says service to Superdome was operating properly
  • Baltimore beat San Francisco 34-31 in Super Bowl
  • Pegasus hires Starwood Capital Hotel chief to run luxury brand
  • Permira, KKR said to work with JPMorgan on ProSiebenSat.1 exit
  • Blackstone fund buys majority stake in seaplane companies
  • Aspen Pharmacare in talks to buy Merck & Co.’s Netherlands unit
  • Zombie love tale “Warm Bodies” No. 1 film with $20m
  • S. Korea boosts diplomacy against possible N. nuclear test
  • U.S. Weekly Agendas: Finance, Industrials, Energy, Health, Consumer, Tech, Media/Ent, Real Estate, Transports
  • New feature: North American M&A Agenda
  • Canada Weekly Agendas: Energy, Mining
  • China Export Rebound, IPad, U.S. Trade: Week Ahead Feb. 4-9

EARNINGS:

    • Humana (HUM) 6am, $1.07 - Preview
    • TransDigm Group (TDG) 7am, $1.48
    • Simon Property (SPG) 7am, $2.17
    • MWI Veterinary (MWIV) 7am, $1.19
    • Sysco (SYY) 8am, $0.41
    • Clorox (CLX) 8:30am, $0.81 - Preview
    • Gannett (GCI) 8:30am, $0.88
    • Royal Caribbean (RCL) 8:30am, $0.06
    • Mercury General (MCY) 8:30am, $0.23
    • Acme Packet (APKT) 4pm, $0.08
    • Torchmark (TMK) 4pm, $1.31
    • Edwards Lifesciences (EW) 4pm, $0.77
    • Baidu (BIDU) 4pm, $1.30
    • Bottomline Technologies (EPAY) 4pm, $0.23
    • Gilead Sciences (GILD) 4:01pm, $0.48
    • General Growth Properties (GGP) 4:01pm, $0.29
    • Hologic (HOLX) 4:01pm, $0.37
    • Life Technologies (LIFE) 4:01pm, $1.11
    • Power Integrations (POWI) 4:03pm, $0.42
    • Axis Capital Holdings (AXS) 4:04pm, $(1.19)
    • SolarWinds (SWI) 4:05pm, $0.33
    • Anadarko Petroleum (APC) 4:05pm, $0.71
    • Leggett & Platt (LEG) 4:05pm, $0.32
    • Yum! Brands (YUM) 4:09pm, $0.82
    • Symetra Financial (SYA) 4:10pm, $0.34
    • Advent Software (ADVS) 4:14pm, $0.28
    • Hartford Financial (HIG) 4:15pm, $0.28
    • Healthcare Services (HCSG) 4:15pm, $0.18
    • Hillenbrand (HI) 4:23pm, $0.37
    • BRE Properties (BRE) 4:45pm, $0.60
    • Post Properties (PPS) 5pm, $0.65
    • Bristow Group (BRS) 5:05pm, $0.89
    • Idex (IEX) 5:22pm, $0.68
    • Markel (MKL) Post-Mkt, $(2.81)
    • Regal-Beloit (RBC) Post-Mkt, $0.74

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Platinum Gains to Four-Month High on South Africa Output Concern
  • Mongolia Should Get More Control of Rio Mine, President Says
  • Bulls Rewarded With Best January Rally Since 2006: Commodities
  • Brent Crude Slips From Four-Month High Amid Iran Discussions
  • Soybeans Reach Six-Week High on Threats to South American Crops
  • Zinc Declines From One-Year High as European Equities Retreat
  • Sugar Advances in New York as Speculators Curb Bearish Wagers
  • Iron-Ore Swaps Rally to 15-Month High as China Seen Accelerating
  • Rubber Rallies to 10-Month High on U.S. Car Sales, Weakening Yen
  • Corn Imports by South Korea Seen Climbing on Higher Wheat Costs
  • Land Battles Rise as U.S. Eyes 450,000 Miles of New Pipe: Energy
  • Hedge Funds Racing Oil Refiners to $100 a Barrel: Energy Markets
  • Freezing California Lettuce Boosts Salad Costs: Chart of the Day
  • Shanghai Rebar Rises to Nine-Month High on Service Industry Data

THE HEDGEYE DAILY OUTLOOK - 5

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - 6

 

EUROPEAN MARKETS


SPAIN – what is the #PoliticalClass getting greased w/ bailout funds on the side, amongst friends? Most Read headline on Bloomberg this morn is about Spanish (Rajoy) and Italian corruption; it’s like watching Lincoln. All the while both the IBEX and MIB indexes has abruptly snapped my TRADE lines of support, looking nothing like Germany.

 

THE HEDGEYE DAILY OUTLOOK - 7

 

ASIAN MARKETS


JAPAN – old Taro Aso was at it again overnight, jawboning the Yen to new lows, breaking the 93 level (en route to 100, then 120) as the Nikkei’s crash (to the upside) moves to +30% since November 13th – seems normal. I couldn’t make this up if I tried but last night Aso said “we can only learn from history”.

 

THE HEDGEYE DAILY OUTLOOK - 8

 

MIDDLE EAST


THE HEDGEYE DAILY OUTLOOK - 9

 

 

The Hedgeye Macro Team

 

 

 

 



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 80.33%
  • SHORT SIGNALS 78.51%

Flows Follow

“You have to be the first one in line. That’s how leaders are born.”

-Ray Lewis

 

Did global growth stop slowing in mid-to-late November? Is #GrowthStabilizing bad for Gold and Bonds? These questions are now rhetorical ones.

 

When you want to win a game, you have to teach. When you lose a game, you have to learn.” -Tom Landry

 

Our congratulations to Ray Lewis and the Baltimore Ravens. #winning

 

Back to the Global Macro Grind

 

US Equities were up for the 5th consecutive week and long-term US Treasury Yields continued to breakout to the upside last week (10yr Yield up another +6bps to 2.01%) as fund flows into US Equities continue to surprise on the upside.

 

How did this all happen so fast?

  1. Sentiment was bombed out in mid-November and short interest was high
  2. Fundamental global economic growth data steadily improved for 2 consecutive months
  3. Equity Fund Flows Followed

The 1st two points of the process were trivial. We wrote about them every day. The last point about flows was the hardest to nail down. While we usually get the memo on flows after the fact, we do know what leads them.

 

Q: What leads people out of Gold/Bonds and into Equities? A: Growth Expectations.

 

Example (Gold):

  1. Gold made a long-term lower-high in mid November at $1755/oz (versus the all-time high in 2011)
  2. Gold snapped our intermediate-term TREND line of $1698 in early December
  3. Gold net long positions (futures and options contracts) crashed to 82,081 last week

Crashed? Yes. Last week the bulls (who had been buying Gold contracts the whole way down from October to January) capitulated, selling the net long position in Gold contracts down -24% wk-over-wk.

 

Despite Gold and Silver being down another -0.2% and -1.1%, respectively, this morning, from an immediate-term TRADE duration perspective this is obviously an interesting contrarian indicator. But what does it tell you about longer-term growth expectations?

 

What has the Treasury Bond market been telling you?

  1. 10yr US Treasury Yields made higher-long-term lows in November-December in the 1.57-1.61% range
  2. 10yr US Treasury Yield broke out above our intermediate-term TREND line of 1.73% in mid-December 2012
  3. 10yr US Treasury Yields are up another 5 basis points this morning (that’s a lot in a day) to 2.05%

At the same time, the HYG (High Yield) and Junk (JNK) Bond ETFs finally broke my immediate-term TRADE lines of support last week. With Investment Grade and Junk Bond yields up another +1.9% and +3.3% last week, that was new for this cycle (not new at turns in other major cycles).

 

The concept of buying “High Yield” debt (that has record low yields) is far from simple; especially if people start to bake in that Ben Bernanke’s money printing days are over. This is why we are so focused on the slope of growth expectations for:

  1. Global GDP Growth
  2. US Employment Growth
  3. US House Price Inflation Growth

All 3 of these factors can drive Gold/Bond prices down until people actually start to believe we could re-flate the Commodity Inflation Bubble (which peaked alongside Gold in 2011). Which, in turn, could slow growth (again). That’s why:

  1. CRB Commodities Index closing 1 point inside of our long-term TAIL line of 306 last week is a NEW concern
  2. Oil Prices up another +1.8% and +2.9% on WTIC and Brent last week are a mounting concern
  3. 5-year Breakevens up +6.5% last week in the US (Bernanke’s former inflation expectations bogey) matter too

Whether you were bullish or bearish throughout this 2-month move doesn’t matter anymore. Today is a new day. You are either first on the line to register what is changing on the margin in macro, or you are not. We’ll do our best to stand alongside you.

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, EUR/USD, USD/YEN, 10yr UST Yield, and the SP500 are now $1, $114.19-116.87, $79.01-79.71, $1.34-1.36, 90.67-93.12, 1.96-2.11%, and 1, respectively.

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Flows Follow - Chart of the Day

 

Flows Follow - Virtual Portfolio


FTC Taking a Look at Herbalife?

This morning, the NY Post reported that Herbalife (HLF) was the target of a federal law enforcement investigation.



It appears that Pershing Square’s commentary was not the catalyst for this investigation, but rather a series of complaints that had been levied against the company over the course of a number of years.



We saw some sort of investigation as a virtual certainty given the high profile nature of the debate over HLF’s business model.  We also suggested that the stock gets much more interesting on the weakness associated that headline, but not immediately.  Bottoming is a process, and so are federal investigations.

 

Further, Pershing Square’s founder is scheduled to present at the Harbor Investment Conference on February 13th – it appears probable that his short position in HLF will be a (the?) topic of discussion.



Perversely, a lower stock price will ultimately work to the company’s benefit if it moves to buy back stock in aggressive fashion, as the company will be able to deploy it’s finite resources to repurchase a larger number of shares, which is what matters to the extent future news flow can be a catalyst for a short squeeze.  We actually think it makes sense for the company to play possum here, and allow its stock to drift lower in the coming weeks.



For investors, we continue to think the best course of action right now is to do nothing.  We have seen this play before when we covered the tobacco sector, and the day to buy the stocks is not the day the trial starts.  Investors should recognize that this data point does get one substantial piece of negative news flow that we were anticipating out of the way, and therefore takes us one step closer to the day the stock becomes investable.



Finally, in order to offer some balance to our prior expert call on the subject of multi-level marketing, we are hosting Anne Coughlan – she is a professor at the Kellogg School of Management specializing in distribution channels.  The call is tentatively scheduled for the 14th.  Investors may recognize the name from the HLF investor day, held earlier in the year.



Bottom line, we view today’s news as wholly consistent with the way we see the saga playing out – we caution investors to remain engaged in the news flow, but on the sidelines for the time being.

 

Call with questions.



 

Rob

 

Robert  Campagnino

Managing Director

HEDGEYE RISK MANAGEMENT, LLC

E:

P:

 

Matt Hedrick

Senior Analyst




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