prev

Morning Reads From Our Sector Heads

Keith McCullough (CEO):

 

Subbarao Sees 1991 Crisis Rerun Unlikely in Trade Deficit (via Bloomberg)

 

Soros Sees China Shadow-Banking Risk Matching Subprime (via Bloomberg)

 

Todd Jordan (GLL):

 

The Rising Middle Class Fuels Hotel Boom in China (via CNBC)

 

Josh Steiner (Financials):

 

Whitney writes a counterpunch (via NY Post)

 

JPMorgan Works to Avert Split of Chief and Chairman Roles (via NYT Dealbook)

 

Jay Van Sciver (Industrials):

 

Smog dents Beijing's expat appeal (via Financial Times)

 

Rob Campagnino (Consumer Staples):

 

Anheuser-Busch InBev close to agreement with U.S. over Modelo deal (via Syracuse.com)

 

Kevin Kaiser (Energy):

 

G.E. to Buy Lufkin Industries for $3.3 Billion (via NYT Dealbook)

 


Growth Risk

Client Talking Points

Bad Data

Last week, we saw a slew of bad data hit the tape. Everything from the ADP employment report to initial jobless claims came in under expectations and really stunk. The market seems to want to keep the hope alive and has yet to perform a major correction of any sort. That being said, if we continue to get bad spurts of economic data week-after-week, the end result will not be pretty. 

The Korea Situation

All eyes are on North Korea right now and whether their war games are in fact just that: games and nothing more. Kim Jong Un and Co. sure do love the sabre rattling but we believe it's nothing more than that. North Korea is desperate to win back international aid and this is their way of asking for it back. Suffice to say, if any military action is taken by either side, we'll have to reassess the situation at hand.

Asset Allocation

CASH 18% US EQUITIES 30%
INTL EQUITIES 25% COMMODITIES 0%
FIXED INCOME 3% INTL CURRENCIES 24%

Top Long Ideas

Company Ticker Sector Duration
DRI

Darden stands to be a beneficiary from a housing recovery and an improved employment picture, which boosts casual dining trends. The company's net income declined on its recent earnings report but beat the Street's expectations.

FDX

With FedEx Express margins at a 30+ year low and 4-7 percentage points behind competitors, the opportunity for effective cost reductions appears significant. FedEx Ground is using its structural advantages to take market share from UPS. FDX competes in a highly consolidated industry with rational pricing. Both the Ground and Express divisions could be separately worth more than FDX’s current market value, in our view.

HOLX

HOLX remains one of our favorite longer-term fundamental growth companies given growing penetration of its 3D Tomo platform and high leverage to the 2014 Insurance Expansion from the Affordable Care Act.

Three for the Road

TWEET OF THE DAY

"3-day 5.6% decline in JPY i largest since October 2008..Only 4 other periods since 1971 where JPY declined more than 5% in 3-day period" -@BergenCapital

QUOTE OF THE DAY

"Because things are the way they are, things will not stay the way they are." -Bertolt Brecht

STAT OF THE DAY

Shares of LUFK surge 37% after GE announces acquisition deal.


MONDAY MORNING RISK MONITOR: FALLING RISK SIGNALS GO FOR NOW

Takeaway: After elevated volatility in the weeks since Cyprus, last week saw a degree of normalcy return to the sector.

Key Takeaways:

 

Overall, risk remains in check in spite of Europe's deposit scare. We remain vigilant based primarily on where we are in the calendar, but as yet the key metrics we watch are not showing signs of degradation. For now, we're sticking with our bullish bias on the Financials sector.

 

XLF Macro Quantitative Setup – In the short-term, our Macro team’s quantitative setup in the XLF shows better upside than downside with +1.7% upside to TRADE resistance and -0.6% downside to TRADE support.

 

* Markit MCDX Index Monitor – Last week the 16-V1 series saw spreads tighten 4.6 bps, ending the week at 79.5 bps versus 84.13 bps the prior week. In spite of Stockton, CA, systemic risk perception around the muni market's default risk continues to drop.

 

* ECB Liquidity Recourse to the Deposit Facility – In spite of Cyprus, the ECB's overnight deposits have remained stable in the past month, and declined by 9.5bn Euros last week.  

 

Euribor-OIS Spread – The Euribor-OIS spread was unchanged week-over-week at 13 bps.

 

* European Financial CDS - Most European banks were tighter last week with an average tightening of 10 bps anda median tightening of 5 bps. This was the first week of improved performance since the Cyprus news broke.

 

Financial Risk Monitor Summary

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

 • Intermediate-term(WoW): Negative / 1 of 12 improved / 7 out of 12 worsened / 5 of 12 unchanged

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

 

MONDAY MORNING RISK MONITOR: FALLING RISK SIGNALS GO FOR NOW - 15

 

1. U.S. Financial CDS -  Citi and Morgan showed the worst performance week-over-week, rising by 7 and 5 bps, respectively. On a month-over-month basis, however, Morgan is tied with BofA for worst at +20 bps apiece. Overall, swaps widened for 19 out of 27 domestic financial institutions.

Tightened the most WoW: AXP, GNW, XL

Widened the most WoW: MMC, AGO, C

Tightened the most WoW: XL, ALL, GNW

Widened the most MoM: MTG, JPM, BAC

 

MONDAY MORNING RISK MONITOR: FALLING RISK SIGNALS GO FOR NOW - 1

 

2. European Financial CDS - Most European banks were tighter last week with an average tightening of 10 bps anda median tightening of 5 bps. This was the first week of improved performance since the Cyprus news broke.

 

MONDAY MORNING RISK MONITOR: FALLING RISK SIGNALS GO FOR NOW - 2 best

 

3. Asian Financial CDS - While Japanese bank stocks have soared on the back of QE-Quadrill-Yen, default risk measures have ticked up modestly for most Japanese banks.

 

MONDAY MORNING RISK MONITOR: FALLING RISK SIGNALS GO FOR NOW - 17

 

4. Sovereign CDS – Sovereign swaps were tighter across the planet last week, except for Japan where they were flat. The biggest improvements were in Italy and Spain, where swaps dropped 19 bps apiece.

 

MONDAY MORNING RISK MONITOR: FALLING RISK SIGNALS GO FOR NOW - 18

 

MONDAY MORNING RISK MONITOR: FALLING RISK SIGNALS GO FOR NOW - 3

 

MONDAY MORNING RISK MONITOR: FALLING RISK SIGNALS GO FOR NOW - 4

 

5. High Yield (YTM) Monitor – High Yield rates fell 3.0 bps last week, ending the week at 5.78% versus 5.81% the prior week.

 

MONDAY MORNING RISK MONITOR: FALLING RISK SIGNALS GO FOR NOW - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 1.3 points last week, ending at 1788.1.

 

MONDAY MORNING RISK MONITOR: FALLING RISK SIGNALS GO FOR NOW - 6

 

7. TED Spread Monitor – The TED spread rose 0.8 basis points last week, ending the week at 21.64 bps this week versus last week’s print of 20.86 bps.

 

MONDAY MORNING RISK MONITOR: FALLING RISK SIGNALS GO FOR NOW - 7

 

8. Journal of Commerce Commodity Price Index – The JOC index fell -1.6 points, ending the week at 8.25 versus 9.9 the prior week.

 

MONDAY MORNING RISK MONITOR: FALLING RISK SIGNALS GO FOR NOW - 8

 

9. 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 was unchanged week-over-week at 13 bps.

 

MONDAY MORNING RISK MONITOR: FALLING RISK SIGNALS GO FOR NOW - 9

 

10. ECB Liquidity Recourse to the Deposit Facility – In spite of Cyprus, the ECB's overnight deposits have remained stable, and declined by 9.5bn Euros last week. 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: FALLING RISK SIGNALS GO FOR NOW - 10

 

11. Markit MCDX Index Monitor – Last week the 16-V1 series saw spreads tighten 4.6 bps, ending the week at 79.5 bps versus 84.13 bps the prior week. In spite of Stockton, CA, systemic risk perception around the muni market's default risk continues to drop. 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. 

 

MONDAY MORNING RISK MONITOR: FALLING RISK SIGNALS GO FOR NOW - 11

 

12. Chinese Steel – Steel prices in China fell 0.7% last week, or 25 yuan/ton, to 3,630 yuan/ton. Taking a step back, Chinese steel prices have been declining since mid-February of this year. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

 

MONDAY MORNING RISK MONITOR: FALLING RISK SIGNALS GO FOR NOW - 12

 

13. 2-10 Spread – Last week the 2-10 spread tightened to 162 bps, -4 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR: FALLING RISK SIGNALS GO FOR NOW - 13

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.7% upside to TRADE resistance and 0.6% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: FALLING RISK SIGNALS GO FOR NOW - 14

 

Joshua Steiner, CFA

 


Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.


Expectations Management

Las Vegas is busy every day, so we know that not every man is rational.”

–Charles Ellis

 

Today at 11am, we are going to be joined via conference call by Dr. Richard Peterson of MarketPsych Data.  He will be giving a presentation called, “Behavioral Markets: Quantifying the Psychological Drivers of the Global Economy.”  Over the course of the past 9 years, Peterson and his team have been developing sentiment based investment models based on global news and social media sources.

 

Their underlying technology scours 1,000s of data sources (in natural languages) and then assigns scores for various indicators.  These scores are then updated by the minute to create an ongoing data feed, which can provide a real time assessment of sentiment in over 200 countries stock markets, 60 commodities, 30 currencies, and 40 industries.

 

The key reason that Peterson believes his models can highlight inflection points in markets, via blog and news sources, is based on science.  In effect, intense emotions direct attention to vivid events and catastrophic consequences.  As a result, the reasoning prefrontal cortex is taken offline and probability assessments are distorted.  To Ellis point in the quote above, men and women are not always rational.

 

In his presentation today, Peterson will walk us through his process and analysis, and then get into the outputs of his model on various time frames and over various asset classes.  Many of his investment conclusions we agree with, but others stand in contrast to our models and analysis.  This last point should make this morning’s discussion a lively one.

 

The dial-in information for the call this morning is and conference code is 141433. The materials can be downloaded at 10:00am following the link docs.hedgeye.com/BehavioralMarkets_04.08.13.pdfWe hope you can join us for the call to get a sense for how a true behavioral finance practitioner quantifies expectations in markets.

 

Related to gauging the market sentiment, Friday’s labor report was a bomb by almost any estimation.  Non-farm payrolls increased by a mere 88,000 in March versus 190,000 expectations and a 268,000 increase in February.  Most disconcerting was the internal participation rate, which measures the percentage of total eligible employees that are in the labor force.  We highlight this in the Chart of the Day with a look at long term labor force participation rates, which is now at its lowest level since 1979.

 

Clearly, muted employment growth is a potential risk to growth accelerating in the U.S. , so we are and will be monitoring this data closely.   The response on Friday from the SP500 was somewhat muted as the market was down -0.47% and remains up on the year just under +9%.  In terms of sector divergence on Friday, the worst performing sector was Technology -0.8% (and +3.1% on the year) and remains NEGATIVE in our quant models on the shortest duration.   The best performing sector on Friday was Utilities +0.43% on the day and +13% on the year.

 

As usual, we are seeing the interconnected follow through this morning from global markets as Taiwan is down -2.4%.  Taiwan is an important geography in the global technology food chain, so is seeing some of the follow through from U.S. technology stock weakness on Friday.  As well, having been closed since Wednesday, both the bird flu fears are being reflected in the Taiwanese market as is an increase in North Korean sabre rattling.

 

The latest from North Korea this morning is that there are signs the country is preparing for a fourth nuclear test.  This is based on South Korean intelligence that is showing increased movement of vehicles and personnel at Punggye-ri.   This is the site on North Korea’s northeast coast where the previous three nuclear tests occurred.  The prior three detonations occurred in 2006, 2009 and February 12th of this year.  Clearly, any additional detonation would be a notable acceleration of activity.

 

In terms of positives related to the North Korean situation, they received their strongest, although also most subtle rebuke, over the weekend from the Chinese.  Chinese President Xi Jinping was speaking at the three-day Boao Forum for Asia and said:

 

“No one should be allowed to throw a region and even the whole world into chaos for selfish gains.”

 

This is notable in that there is strong support for North Korean within the Chinese People’s Liberation Army, so Jinping is going out on a limb.

 

The head of the International Monetary Fund Christine Lagarde went less out on a limb when she strongly encouraged Japanese monetary actions over the weekend and called the latest move from Japan a “welcome step”.  Her statement is a precursor to newly anointed Treasury Secretary Jack Lew’s first strip to Europe where he is expected to encourage, are you ready for this, more government spending.  Keynesians of the world unite!

 

In the short run, accelerating government spending in Europe would have the likely side effect of expanding deficits.   This morning, we can actually see real time the impact of not reducing spending in Europe on government bond yields.  Portugal’s Supreme Court rejected cuts in state and pensions and cuts in public sector wages and as a result peripheral bond yields are spiking with Spain and Italy backing up 4.7% and 4.3%, respectively.

 

Given all of the negative global macro events on the horizon this morning, we have a number of potholes to seemingly avoid so that domestic equity returns can continue their upward climb.  The caveat being that the chief risk may be staring at us in the mirror.  As Benjamin Graham once said:

 

“The investor’s chief problem – and even his worst enemy – is likely to be himself.”

 

Indeed.

 

Our immediate-term Risk Range for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, and the SP500 are now $1, $104.18-108.31, $82.48-83.44, 94.62-98.71, 1.71-1.85%, 12.31-14.55, and 1, respectively.

 

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

Expectations Management - Chart of the Day

Expectations Management - VP

 


Cave Dwellers

This note was originally published at 8am on March 25, 2013 for Hedgeye subscribers.

“New is always bad. Never not be afraid.”

-Grug

 

If you don’t know who Grug is, take your kids to see The Croods – the latest American computer-animated family film by Dreamworks that opened this weekend. Nicolas Cage crushes it in this one. We loved it!

 

The movie starts with scarier stuff than Cyprus (Croods fend it off), then Grug’s daughter introduces herself: “My name is Eep and this is my family, the Croods. We never had the chance to explore the outside world because of my Dad’s one rule: Never leave the cave.”

 

I know – I’m too bullish about US Equity markets, life, etc. these days. But, sometimes, it’s ok to look on the bright side. If you have a fear-mongering Cave Dweller in the office, maybe you should take him to see the movie too. Everyone needs to leave the cave.

 

Back to the Global Macro Grind

 

There are plenty of things to worry about out there – and, from a time and price, that will include US Equities too – but for now, the most bullish TREND in America remains your friend: #StrongDollar = Stronger America. Period.

 

We’ll dig deeper on the Dollar on our upcoming Q2 2013 Global Macro Themes presentation, but for now it’s important to review why US Equity Markets are testing all-time highs into the end of Q1 (our Q113 Themes):

  1. #GrowthStabilizing – US GDP Growth bottomed, sequentially, in Q4 of 2012; upside vs consensus in Q1/Q2 2013
  2. #HousingsHammer – consensus is not yet Bullish Enough on US employment and housing reflexivity
  3. #QuadrillYen – as the US Dollar strengthens on domestic factors, it’s picking up the relative (Burning Yen) trade too

What’s good for the US Dollar is bad for Commodities:

  1. US Dollar Index = +0.5% last week to $82.53 (up for 6 of the last 7 weeks)
  2. CRB Commodities Index = -0.6% last wk to 294 (down for 6 of the last 7 weeks)

What’s good for the US Dollar is also bad for Commodities Correlation Risks:

  1. 30-day inverse correlation between USD and Brent Crude Oil = -0.97
  2. 30-day inverse correlation between USD and High Grade Copper = -0.94
  3. 30-day inverse correlation between USD and Rough Rice = -0.86

Rice? Grug didn’t know how to boil water, but it’s still the world’s top consumed food these days.

 

And that’s the other big thing going on out there this year in Global Equity markets – not all markets are going up as the US Dollar does.

 

A)     Emerging Markets that don’t have a US Dollar peg are seeing local inflations (inflation is priced in local FX)

B)      Emerging Markets whose Equity Markets are commodity-linked are losing (Brazil = down -9.4% YTD)

 

On that score, note the following Global Equity market divergences:

  1. SP500 and Russell2000 = +9.1% and +11.4% YTD, respectively
  2. MSCI Emerging Markets (EM) Index = -3.8% YTD
  3. MSCI Emerging Markets (EM) Index = -1.9% last wk vs the Dow -0.013%

If you want to freak yourself right out, there are plenty of securities and markets out there where you can do that. After all, there’s always a bear market somewhere – and the top 3 bearish TRENDs in our macro model continue to be:

  1. Japanese Yen
  2. US Treasuries
  3. Commodities

Within the Commodities Deflation trend, consensus first saw Copper imploding as a “bearish growth signal.” Now, consensus is calling it what it is this morning – the biggest build of Copper inventory on the LME (London Metals Exchange) since 2003. What if you bought SPY in 2003?

 

Yep, LME Copper inventory is up +76% YTD. With supply that high and the Correlation Risk in Copper to #StrongDollar ripping, who cares about anything else? It certainly doesn’t mean the world is ending either.

 

The End of World (#EOW) trade has great marketing programs and tends to get priced into Gold in a hurry. Last week’s net long position in Gold (per CFTC futures/options data) exploded to the upside by 63% week-over-week (to 70,193 net long contracts).

 

But Gold bulls have been going back to this Cave Dweller well of fear for the last 6 months. So that’s not new. Neither is Gold’s price not reacting to the fear-born expectation that it out-performs. Gold is down again this morning, testing $1605 support.

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, USD/YEN, UST 10yr Yield, VIX, and SP500 are now $1599-1619, $106.97-108.66, $3.36-3.48, $82.15-83.25, 94.07-96.71, 1.89-1.97%, 10.78-14.92, and 1543-1565, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Cave Dwellers - Chart of the Day

 

Cave Dwellers - Virtual Portfolio


investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

next