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Stories Bears Tell Themselves

Takeaway: These are interesting times for bearish market story tellers.

(Excerpted from this morning's Hedgeye conference call)

 

These are interesting times for bearish market story tellers. They get one late Friday afternoon, light volume sell-off and now all of a sudden they’re asserting how they’ve been right all along. The reality is that what they have wrong, we have right, namely the emergence of #Growth Accelerating.

 

It would be disingenuous at best to suggest that bond yields aren’t ripping higher because growth is accelerating and that the Fed is going to likely begin to get out of the way for precisely that reason. 

 

Don’t forget that back in March, and early April, people were poo-pooing the market rally saying, “I don’t like that the defensives—consumer staples and utilities—are leading." Well, now they’re lagging. 

 

Only two of the nine S&P sectors in our model are broken from an immediate term trade perspective. You guessed it—Utilities (XLU) and Consumer Staples (XLP). What is leading now are pro-growth sectors like Financials (XLF). Utilities (which were down 9% in May) are bearish trade and trend. We would short them on a bounce.

 

The opportunity right now lies in taking advantage of the fear. Taking advantage of the fear that growth is going to surprise on the downside which it obviously has not.

 

Stories Bears Tell Themselves - bear


Mortgage Rates Go Vertical

Takeaway: 30Y Mortgage rates backed up 35 bps in the last week and 70bps in the last month. Refi activity and affordability have taken a hit.

Last week saw a significant back up in 30Y Residential Mortgage Rates as the national average rose 35 basis points W/W to 4.10% from 3.75% the week prior.  From the near historical low of 3.40% reached back on May 1st, we’ve seen an expedited 70 bps backup in rates over the last month. 

 

The move in rates holds a few notable impacts for housing.  First, the increase in mortgage rates should have a (unsurprisingly) significant, negative impact on refinancing activity – something that has already manifest in the MBA mortgage application data with refi activity down 12.3% in the last week and 23% over the last month.  This contrasts with Purchase Activity, which was actually up 2.6% in the latest week and down just 2.3% over the last month.   

 

While we believe the positive Giffen cycle in housing (see Here for fuller discussion) should continue to predominate with demand chasing higher prices in a reflexive fashion, higher interest rates have a direct, negative impact on housing affordability. 

 

Previously, we have shown (Here, slide 49) that under standard median income and DTI assumptions for a 30Y Freddie Mac Mortgage loan, a 10bps change in rates equates to an approximate 1.0% change in affordability.  A continued rise in interest rates would serve as a headwind to a further acceleration in home values, particularly as HPI growth comparison’s get steeper. 

 

While we would view the breakout in treasury yields alongside the material sector level performance divergences (XLF  +6.1%, XLU -9.0% in May) as pro-growth signals, with the housing recovery a key tenet underpinning our domestic growth outlook, we’ll certainly be monitoring rate impacts on affordability closely here.  

 

Mortgage Rates Go Vertical - 30Y Mortgage Rate 060313

 

Christian B. Drake

Senior Analyst 

 


BUY MORE INDIA ON WEAKNESS?

Takeaway: India is poised to remain a relative winner amid the sinking ship that our #EmergingOutflows theme continues to call out.

This note was originally published May 31, 2013 at 14:22 in Macro

SUMMARY BULLETS:

 

  • As we have mentioned repeatedly, a tapering of QE or mere expectations that QE will be ended sooner (i.e. “6-handle” in 2014) rather than later (i.e. “6-handle” in 2017) and the accompanying USD strength and US Treasury weakness (i.e. higher rates) are the biggest risks to emerging market asset prices over the long term.
  • For current account deficit economies like India, the threat of capital outflows – or just sustainably slower capital inflows – puts their respective structural growth outlooks at risk. To India’s credit, imports of the now-crashing gold account for ~80% of the total current account deficit; India also imports ~80% of their crude oil consumption, so #StrongDollar actually mitigates their primary economic risk (per RBI Governor Duvvuri Subbarao on MAY 4) via commodity deflation. Moreover, Finance Minster Chidambaram’s fiscal consolidation plan – while pathetic underneath the hood – is a signal that they are cognizant of these risks and are at least attempting to address them.
  • Within the EM space – which we clearly do not like across the various asset classes – we continue to prefer overweighting consumption-heavy countries, like India, on the long side with respect to the intermediate-term TREND duration. Another factor in support of maintaining a TREND-duration bullish bias on Indian equities is its robust intermediate-term GIP outlook.
  • All told, India is poised to remain a relative winner amid the sinking ship that our #EmergingOutflows theme continues to call out. To that tune, the latest data shows a $2.9B WoW outflow from EM equities, which was the largest since DEC ’11; moreover, the $200M outflow from EM debt was the first in 51 weeks. Remember, valuation is not a catalyst when the Queen Mary turns – or better yet, capsizes. It’s important that investors fully comprehend the “Queen Mary” for what it really is/was – an institutionalized search for yield.

 

 

Overnight, India put up a directionally positive, but absolutely weak 1Q13 real GDP number of +4.8% YoY (from +4.7% prior). That, coupled with concerns surrounding recent INR weakness (-5.2% MoM vs. the USD), drove the SENSEX to its biggest 1-day loss in 14 months (-2.3%).

 

BUY MORE INDIA ON WEAKNESS? - 1

 

BUY MORE INDIA ON WEAKNESS? - 2

 

International investors have been net sellers of rupee-denominated bonds each day since holdings touched a record $38.5 billion back on MAY 21. As we have mentioned repeatedly, a tapering of QE or mere expectations that QE will be ended sooner (i.e. “6-handle” in 2014) rather than later (i.e. “6-handle” in 2017) and the accompanying USD strength and US Treasury weakness (i.e. higher rates) are the biggest risks to emerging market asset prices over the long term.

 

BUY MORE INDIA ON WEAKNESS? - 3

 

BUY MORE INDIA ON WEAKNESS? - 4

 

For current account deficit economies like India, the threat of capital outflows – or just sustainably slower capital inflows – puts their respective structural growth outlooks at risk. To India’s credit, imports of the now-crashing gold account for ~80% of the total current account deficit; India also imports ~80% of their crude oil consumption, so #StrongDollar actually mitigates their primary economic risk (per RBI Governor Duvvuri Subbarao on MAY 4) via commodity deflation. Moreover, Finance Minster Chidambaram’s fiscal consolidation plan – while pathetic underneath the hood – is a signal that they are cognizant of these risks and are at least attempting to address them.

 

BUY MORE INDIA ON WEAKNESS? - 5

 

Within the EM space – which we clearly do not like across the various asset classes – we continue to prefer overweighting consumption-heavy countries, like India, on the long side with respect to the intermediate-term TREND duration. Another factor in support of maintaining a TREND-duration bullish bias on Indian equities is its robust intermediate-term GIP outlook.

 

BUY MORE INDIA ON WEAKNESS? - INDIA

 

Obviously both incremental rupee weakness and continued political gridlock ahead of the MAY ’14 general elections are key idiosyncratic risks to the downside. That being said, however, political gridlock has largely become the base case scenario during the Singh administration.

 

As such, any positive momentum on bills to reduce restrictions on foreign investment in the country’s pension and insurance industries, overhaul the 1894 colonial-era Land Acquisition Act and help implement a uniform goods and services tax to encourage commerce would be a dramatic upside surprise for investors ahead of next year’s elections.

 

All told, India is poised to remain a relative winner amid the sinking ship that our #EmergingOutflows theme continues to call out. To that tune, the latest data shows a $2.9B WoW outflow from EM equities, which was the largest since DEC ’11; moreover, the $200M outflow from EM debt was the first in 51 weeks.

 

Remember, valuation is not a catalyst when the Queen Mary turns – or better yet, capsizes. It’s important that investors fully comprehend the “Queen Mary” for what it really is/was – an institutionalized search for yield.

 

Stay tuned.

 

Darius Dale

Senior Analyst


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European Banking Monitor: Sberbank Inflects

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .

 

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European Financial CDS - The median EU bank widened by 7 bps week-over-week. French, Italian and Spanish banks saw the most significant deterioration. Sberbank of Russia showed the largest WoW % change in swaps (+10.8%), rising 20 bps to 206 bps. This is consistent with the ongoing drop in the commodities complex. 

 

European Banking Monitor: Sberbank Inflects - ww. banks

 

Sovereign CDS – The U.S. and Germany tightened notably WoW, while the rest of the world deteriorated. U.S. swaps came in by 4 bps to 26 bps, while Japanese swaps widened by 6 bps to 78 bps. 

 

European Banking Monitor: Sberbank Inflects - ww.sov 1

 

European Banking Monitor: Sberbank Inflects - ww.sov2

 

European Banking Monitor: Sberbank Inflects - ww.sov3

 

Euribor-OIS Spread – The Euribor-OIS spread was flat at 13 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. 

 

European Banking Monitor: Sberbank Inflects - ww.euribor

 

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.  

 

European Banking Monitor: Sberbank Inflects - ww.facility

 


Morning Reads From Our Research Team

Takeaway: A quick snapshot of some stories on the Hedgeye radar screen.

Josh Steiner - Financials

Investors Square Off In Battle Over Subprime Mortgages (via Financial Times)

Hunch About Bloomberg Brought Rivals Together (via New York Times)

 

Matt Hedrick - Macro

Report of Tobin Tax Death Exaggerated, EU Says (via euobserver.com)

 

Keith McCullough - CEO

Turkey Protests: Clashes Rage in Istanbul's Besiktas (via BBC)

 

Howard Penney - Restaurants

Can a Fast Food Chain Win by Hiring Better People? (via Forbes)

New TV Comedy Puts McDonald's in Spotlight -- But Is It Good Or Bad Break? (via AdAge)

 

Daryl Jones - Macro 

Toilet Paper-Less Venezuela Fueling Bond Sale Talk (via Bloomberg)

BofA $8 Billion Mortgage Deal Before Judge After 2 Years (via Bloomberg)

 

Morning Reads From Our Research Team - coff


MONDAY MORNING RISK MONITOR: CREDIT MARKETS CONTINUE TO TURN DOWN

Takeaway: The risk monitor remains negative on a short term basis. We continue to watch high yield for signs of inflection.

Key Takeaways:

 

* 2-10 Spread – Last week the 2-10 spread widened to 188 bps, 19 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

* High Yield (YTM)  – High Yield rates rose 28.2 bps last week, ending the week at 5.75% versus 5.47% the prior week.

 

* Sovereign CDS – The U.S. and Germany tightened notably WoW, while the rest of the world deteriorated. U.S. swaps came in by 4 bps to 26 bps, while Japanese swaps widened by 6 bps to 78 bps. 

 

Financial Risk Monitor Summary

 • Short-term(WoW): Negative / 1 of 13 improved / 8 out of 13 worsened / 4 of 13 unchanged

 • Intermediate-term(WoW): Positive / 4 of 13 improved / 3 out of 13 worsened / 6 of 13 unchanged

 • Long-term(WoW): Positive / 4 of 13 improved / 2 out of 13 worsened / 7 of 13 unchanged

 

MONDAY MORNING RISK MONITOR: CREDIT MARKETS CONTINUE TO TURN DOWN - 15

 

1. American Financial CDS -  Morgan Stanley was the outlier this week, with its swaps tightening by 2 bps. Everywhere else in the U.S., swaps widened. Noteworthy increases in mortgage insurers this week follow two weeks of no improvement. Sallie Mae saw swaps blow out 62 bps on plans to split the company.

 

Tightened the most WoW: TRV, MS, UNM

Widened the most WoW: SLM, MBI, AIG

Tightened the most WoW: MBI, AGO, MMC

Widened the most MoM: SLM, MET, ACE

 

MONDAY MORNING RISK MONITOR: CREDIT MARKETS CONTINUE TO TURN DOWN - 1

 

2. European Financial CDS - The median EU bank widened by 7 bps week-over-week. French, Italian and Spanish banks saw the most significant deterioration. Sberbank of Russia showed the largest WoW % change in swaps (+10.8%), rising 20 bps to 206 bps. This is consistent with the ongoing drop in the commodities complex. 

 

MONDAY MORNING RISK MONITOR: CREDIT MARKETS CONTINUE TO TURN DOWN - 2

 

3. Asian Financial CDS - Almost universally wider across the board. Chinese banks all widened by 10-11 bps. Japanese financials were all wider. Indian banks were mixed.

 

MONDAY MORNING RISK MONITOR: CREDIT MARKETS CONTINUE TO TURN DOWN - 17

 

4. Sovereign CDS – The U.S. and Germany tightened notably WoW, while the rest of the world deteriorated. U.S. swaps came in by 4 bps to 26 bps, while Japanese swaps widened by 6 bps to 78 bps. 

 

MONDAY MORNING RISK MONITOR: CREDIT MARKETS CONTINUE TO TURN DOWN - 18

 

MONDAY MORNING RISK MONITOR: CREDIT MARKETS CONTINUE TO TURN DOWN - 3

 

MONDAY MORNING RISK MONITOR: CREDIT MARKETS CONTINUE TO TURN DOWN - 4

 

5. High Yield (YTM) Monitor – High Yield rates rose 28.2 bps last week, ending the week at 5.75% versus 5.47% the prior week.

 

MONDAY MORNING RISK MONITOR: CREDIT MARKETS CONTINUE TO TURN DOWN - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index fell -5.2 points last week, ending at 1799.41.

 

MONDAY MORNING RISK MONITOR: CREDIT MARKETS CONTINUE TO TURN DOWN - 6

 

7. TED Spread Monitor – The TED spread rose 1.3 basis points last week, ending the week at 24.725 bps this week versus last week’s print of 23.475 bps.

 

MONDAY MORNING RISK MONITOR: CREDIT MARKETS CONTINUE TO TURN DOWN - 7

 

8. Journal of Commerce Commodity Price Index – The JOC index fell -1.4 points, ending the week at 3.16 versus 4.5 the prior week.

 

MONDAY MORNING RISK MONITOR: CREDIT MARKETS CONTINUE TO TURN DOWN - 8

 

9. Euribor-OIS Spread – The Euribor-OIS spread was flat at 13 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: CREDIT MARKETS CONTINUE TO TURN DOWN - 9

 

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: CREDIT MARKETS CONTINUE TO TURN DOWN - 10

 

11. Markit MCDX Index Monitor –  Last week spreads widened 4.7 bps, ending the week at 66.3 bps versus 61.7 bps the prior week. 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: CREDIT MARKETS CONTINUE TO TURN DOWN - 11

 

12. Chinese Steel – Steel prices in China fell 1.9% last week, or 67 yuan/ton, to 3469 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: CREDIT MARKETS CONTINUE TO TURN DOWN - 12

 

13. 2-10 Spread – Last week the 2-10 spread widened to 188 bps, 19 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR: CREDIT MARKETS CONTINUE TO TURN DOWN - 13

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 2.2% upside to TRADE resistance and 1.1% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: CREDIT MARKETS CONTINUE TO TURN DOWN - 14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


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