Kevin Kaiser (Energy):
Rob Campagnino (Consumer Staples):
Howard Penney (Restaurants):
Kevin Kaiser (Energy):
Rob Campagnino (Consumer Staples):
Howard Penney (Restaurants):
Takeaway: Most of our risk measures remain benign, but rising commodities and higher taxes may be starting to exert some pressure.
* 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
2. European Financial CDS - European financials were wider across the board last week.
3. Asian Financial CDS - Chinese and Indian banks were generally higher, while Japanese financials were mixed.
4. Sovereign CDS – Sovereign swaps were wider globally last week with Italy, Spain and Portugal leading the way.
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.
6. Leveraged Loan Index Monitor – The Leveraged Loan Index fell -4.2 points last week, ending at 1769.2.
7. TED Spread Monitor – The TED spread was essentially unchanged last week, ending the week at 22.75 bps.
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.
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.
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.
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.
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.
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.
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.
Joshua Steiner, CFA
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
CREDIT/ECONOMIC MARKET LOOK:
MACRO DATA POINTS (Bloomberg Estimates):
WHAT TO WATCH
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
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.
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 Macro Team
“You have to be the first one in line. That’s how leaders are born.”
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?
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.
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?
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:
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:
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,
Keith R. McCullough
Chief Executive Officer
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.
HEDGEYE RISK MANAGEMENT, LLC
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