Sovereign Yield Risk

“Risk happens fast, and slow.”



I’m always looking for someone more intelligent than me to preface the Early Look with a quote that encompasses what I am thinking that day. It’s called validation theory. Especially in our group-thinking profession, it’s usually easier to convince people a new idea is a good one if someone else came up with it.


I also enjoy making stuff up. Today’s quote is a play on the title of one of my favorite investing books of the last 5 years, Thinking, Fast and Slow, by Daniel Kahneman. What I liked most about Kahneman’s thought process (and it’s really embedded in the title of his book) is that it’s Duration Agnostic. In a world where everyone wants certainty about timing risks, I say you embrace uncertainty instead.


One framework to apply to a duration agnostic risk signaling process is Chaos Theory. Think multi-duration, multi-factor. “The interplay between random factors (at the bifurcation point) and deterministic factors (between bifurcations) not only guides the systems from their old states into new configurations, but also specifies which new configurations are realized.” (Cosmic Evolution, pg 54)


Back to the Global Macro Grind


So how do you know which factors are random and which ones are deterministic? Can a random factor start to become deterministic? Oh, and how the hell do we know when we are at the bifurcation point?


Welcome to my thick mind staring into at a massive correlation matrix… It can be boring as the day is long, but it sure beats trading on inside information. It’s only when something really new begins that I get really excited. Sometimes that happens fast – sometimes it’s slow.


Whether you are looking at a market system or a physical one in nature, patterns have a not so ironic way of re-appearing. “… biological systems do change in response to an unpredictable mixture of randomness…” too (Cosmic Evolution, pg 54).


We’re just trying to adapt as the market’s ecosystem is telling us to…


So why rant about this today instead of yesterday? Well, the answer is pretty simple – and it’s born out of everything I just wrote. Something just jumped off my page as new – JGB Yields.


JGB, yeah you know me – as in the most asymmetrically depressed live market quote in all of Global Macro – as in Japanese Government Bond Yields:

  1. 10yr JGB Yields +10bps day-over-day to 0.84%
  2. 10yr JGB Yields are now +23bps month-over-month
  3. 10yr JGB Yields just jumped above my long-term TAIL risk line of 0.82%

Oh yes, darkness my old friend, I have been waiting for you. But for how long will you stay? I have never shorted you before. Are you toying with my emotions this morning, or are you for real? If you are for real, what will central planners in Japan do to tone you down?


Consensus has spent most of the last 6 months looking for a crisis that never happened. If and when this one happens, it will matter. And the if part isn’t the question in my mind. It’s the when that really matters – when will Japanese and US Government Bond Yields stop baking in that they’ll never go up?


Now that the Greenspan/Bernanke Top 3 (major bubbles) have popped (Tech, Housing, and Commodities), this is really the last of the mega bubbles left – the Bubble in Super Sovereign Debt.


I don’t like shorting a bubble until that bubble starts:

  1. Making lower all-time highs
  2. Confirming those lower-highs at what I define as my bifurcation point (my TREND line)

In terms of signaling Sovereign Yield Risk, measuring and monitoring the bubble happens upside down. Which is kind of cool; especially versus the alternative (i.e. being levered long US and Japanese Sovereign Debt for May 2013 to date).


In terms of big bang risk, the 2 most important live quotes on my risk management screens next to the US Dollar Index are:

  1. US Treasury 10yr Yield of 1.82%
  2. Japanese 10yr Government Bond Yield of 0.82%

These are what I call my long-term TAIL risk lines. And they matter – big time; especially when A) they continue to confirm (becoming less random) and B) have causal research (deterministic) factors explaining their confirmations.


What’s causal in driving our call for a continued #StrongDollar and higher-lows in UST bond yields? That’s easy – employment, housing, and consumption #GrowthAcellerating as the Fed is forced to tone down bond purchases.


What’s causal in driving higher JGB Yields? That’s less easy – credit risk is as likely as a growth scare. Since one or the other can really get bond yields to move, which one will it be? The only thing we know is that there has never been a country with its debt and deficit positions (as a % of GDP) that has burned its currency and not ended up in crisis.


So we’ll see. These Japanese risks can happen fast, or slow. They may not happen at all. But, on my risk signaling scorecard, the improbable risk of rising Yield Risk in both US and Japanese Sovereign Debt just went up in the last 2 weeks, not down.


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, and the SP500 are now $1, $100.35-103.99, $82.63-83.56, 99.61-102.53, 1.82-1.96%, 11.74-14.24, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Sovereign Yield Risk - Chart of the Day


Sovereign Yield Risk - Virtual Portfolio


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

As we look at today's setup for the S&P 500, the range is 32 points or 0.97% downside to 1618 and 0.99% upside to 1650.










  • YIELD CURVE: 1.67 from 1.68
  • VIX  closed at 12.55 1 day percent change of -0.32%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7:30am: NFIB Small Bus. Optim, Apr, est. 90.5 (prior 89.5)
  • 7:45am: ICSC weekly sales
  • 8:30am: Import Price Index M/m, Apr, est. -0.5% (pr -0.5%)
  • 8:30am: Import Price Index Y/y, Apr, est. -3.1% (pr -2.7%)
  • 8:55am: Johnson/Redbook weekly sales
  • 11am: Fed to purchase $2.75b-3.5b notes in 2020-2023 sector
  • 11am: New York Fed issues quarterly household debt report
  • 11:30am: U.S. to sell 4W bills
  • 4:30pm: API energy inventories


    • House, Senate in session
    • SEC hosts Credit Ratings Roundtable w/panels on potential creation of assignment system for asset-backed securities, alternatives to issuer-pay business model
    • Senate Banking panel holds hearing on “Returning Private Capital to Mortgage Markets: A Fundamental for Housing Finance Reform,” 3:15pm
    • Senate Agriculture Cmte considers farm bill, 10am
    • Senate Judiciary Cmte considers immigration bill, 10am
    • House Energy and Commerce marks up H.R.1407, the “Animal Drug User Fee Amendments of 2013;” and H.R.1919, the “Safeguarding America’s Pharmaceuticals Act of 2013,” 4pm
    • IFC hosts Global Private Equity Conference w/speakers incl. TPG Founding Partner David Bonderman, World Bank Pres. Jim Yong Kim, 8:30am
    • U.S. Court of Appeals for the D.C. Circuit hears arguments over how Export-Import Bank processes loan-guarantee applications from foreign airlines, 9:30am


  • Verizon Wireless agrees to pay co-owners $7b dividend
  • Vodafone may not announce more investor returns: JPMorgan
  • Third Point said to urge Sony to sell part of entertainment unit
  • Commerzbank to sell $3.25b shares at 38% discount to repay debt
  • CFTC probes use of derivatives by commodities traders: FT
  • XD Group said in talks to buy GE Prolec for as much as $1b
  • AstraZeneca, Cubist, Astellas said to make bids for Optimer
  • Ex-BlackRock manager said to be arrested in U.K. insider probe
  • Goldman Sachs investors should oppose pay plan, Glass Lewis says
  • Fed’s Plosser says slowing inflation not a concern for policy
  • German ZEW investor confidence rises less than forecast
  • Tata Steel expects $1.6b writedown on sluggish Europe demand
  • ECB picks fight with Germany on rules for handling failing banks
  • Spain sells 12-mo. bills at yield below 1% for first time since 2010


    • Rona (RON CN) 7am, C$(0.14)
    • Valspar (VAL) 7:30am, $0.90
    • Argonaut Gold (AR CN) 7:30am, $0.08
    • Taminco (TAM) Bef-mkt
    • Vipshop Holdings (VIPS) 4:01pm, $0.04
    • Agilent Technologies (A) 4:05pm, $0.67
    • Eagle Materials (EXP) 4:15pm, $0.39
    • Taylor Morrison Home (TMHC) Aft-mkt, $0.22 - Preview


  • WTI Trades Near One-Week Low on U.S. Supply; IEA Sees Shale Boom
  • Used Gold Supply Heads for ’08 Low as Sellers Balk: Commodities
  • Gold Trades Near 2-Week Low on Physical Demand, Dollar Strength
  • Copper Falls Most in Two Weeks on Indications of China Slowdown
  • Corn Falls as Planting May Accelerate on Drier U.S. Weather
  • Cocoa Gains as Supply May Be Limited Before Expiry; Coffee Rises
  • Cooking Oil Imports by India Slump on Stockpiles, Low Demand
  • Rebar Falls After Chinese Industrial Output Signals Weak Outlook
  • Crude Supplies Gain for Fourth Week in Survey: Energy Markets
  • IEA Sees U.S. Oil Shockwaves Ousting OPEC as Supply Driver
  • Gold Rush Lifts Profit at Biggest Jewelry Maker: Corporate India
  • Gasoline Rises Most in Three Months at U.S. Pumps, Report Shows
  • Brazil Oil Auction Gathers Drillers With Taste of Africa: Energy
  • Deutsche Bank Sees SPDR Gold Falling 2-4 Million More Ounces






















The Hedgeye Macro Team












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Trade of the Day: YUM

Takeaway: Keith bought shares of YUM today on weakness.

Keith bought YUM Brands (YUM) at 3:15pm today at $68.85 a share.


Keith writes, “(YUM is a) great trading stock because there's always something qualitative China and flu to tell stories about. (We’re) buying it back on red because (Restaurants sector head Howard) Penney likes the intermediate-term research view.”


Trade of the Day: YUM - YUM

USA: Was April Better than March?


TRADE vs. TREND:  In contrast to the general deceleration observed in March, on balance, the April Macro data to date is registering sequential improvement and agreeing with the TREND in the domestic economic data which has been one of discrete acceleration since November.  


As we have highlighted, with the consumer related data (housing, labor, confidence, consumption, commodity deflation) remaining strong, we have been inclined to stick with the TREND view as it relates to asset class positioning and targeted exposure in domestic, consumer facing equities.  We show the M/M (TRADE) as well as the Q/Q and Y/Y (TREND) changes in the table below.


April:  The bulk of the reported consumer, housing, confidence and inflation data continued to come-in positive in April. And while the ISM New Orders, Backlog and Current Production components all improved sequentially with the latest reading, the regional manufacturing data slowed further in aggregate. On the balance sheet side of the consumer, given the strong purchase application and pending home sales figures, we expect the April Housing data to remain strong.      


Retail Sales:  This morning's data showed U.S. Retail Sales growth accelerating sequentially across the various index aggregates. Total Retail and Food Service Sales accelerated to +0.1% m/m in April vs a revised -0.5% in March.  On a year-over-year basis, growth in Total Retail Sales and Retail Sales less Food and Auto accelerated 70 bps and 60 bps sequentially, respectively.  


On the tax refund front, the latest treasury data (5/9/13) shows individual income tax refunds are currently lagging last years total by ~$8.8B. In addition to higher refund totals stemming from higher nominal tax receipts in FY12, we expect the remaining delta due to tax refund processing delays to resolve positively over the balance of the month.


USA: Was April Better than March? - U.S. Eco Summary Table 051313



Christian B. Drake

Senior Analyst 


Dean Foods: Compelling Opportunity?

Takeaway: Here's our take on the value and potential opportunity around the stock of Dean Foods.

This note was originally published May 13, 2013 at 11:52 in Consumer Staples

With Dean Foods (DF) reporting last week, we wanted to take the opportunity to update our thoughts with respect to the value and opportunity surrounding the fluid milk business at DF (DF less WhiteWave (WWAV), or the DF stub).

We expect a good bit of volatility in both DF and WWAV as we move toward the May 23 distribution date (WWAV shares to be distributed to DF shareholders on a pro rata basis).  Holders of DF as of May 17 will receive a total of 115.6 million shares of WWAV, or approximately 0.62 shares of Class A and Class B WWAV shares for every DF share held.  DF will retain an approximately 19.9% ownership interest in WWAV subsequent to the distribution, with plans to monetize that portion at some point over the course of the next 18 months.

Admittedly, it’s tough to isolate the value at DF – buying DF and shorting WWAV is difficult because WWAV is such a tough borrow at this point.  Fully half the float is short, but note that it likely isn’t “squeezy” short as a significant portion of those shares won’t need to be covered in the market, but will be covered through the distribution.  Still, eliminating the value of WWAV over the near term is likely to be dodgy.

Also, DF is currently an S&P 500 component, but its continued inclusion post-distribution is an open issue given what will be a much lower share price and reduced market cap.  Forced selling by index funds and closet indexers is a consideration, adding to the complexity of trading the stub in the near term.  In terms of the lower share price, DF announced on its first quarter earnings call last week that it would seek approval for a reverse stock split with the appropriate split ratio to be determined.

So, lots of moving parts, but let’s keep our eye on the prize.  In Q1, the DF stub generated $116 million of EBITDA, putting it squarely on track to exceed our forecast of $415 million of EBITDA for 2013. DF currently has a market cap of $3.540 billion, which represents both the value of the fluid milk business and the ownership of 86.7% of WWAV.  Excluding the value of WWAV (86.7% times WWAV market capitalization of $3.108 billion) from the market cap of DF gets us to a stub equity value of approximately $845 million.  The stub has net debt of $1.034 billion and therefore an associated Enterprise Value (EV) of $1.898 billion covering over $400 million of EBITDA, or right around 4.5 times EV/EBITDA.  That’s just too cheap, in our view.  Admittedly, we have never liked the fluid milk business and are loathe to put an sort of significant multiple on it, but even a reasonable 7.5 times multiple makes this a compelling investment.


Dean Foods: Compelling Opportunity? - DF Stub

Part of the reason it’s cheap is precisely because it is so difficult to isolate the value.  However, we believe that investors should be prepared to move if any of the near-term volatility presents an opportunity (short-covering at WWAV, forced selling at DF because of index considerations).  Further, once we move past the distribution date, we think it makes sense for long-only small and mid-cap investors to become involved in what is a very compelling opportunity.

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