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Bullish: SP500 Levels, Refreshed

POSITONS: 5 LONGS, 3 SHORTS @Hedgeye

 

Bullish, then bearish, then bullish – like sands through the hour glass (of Chaos Theory), these are the days of our lives…

 

As I get older, I don’t get caught up with the risk management style of being flexible as much as I worry about the results of the process. That’s what matters in this game. Quantitative signals within research views are constantly changing, so I try my best to change alongside them.

 

Across our core risk management durations, here are the lines that matter to me most:

 

  1. Immediate-term TRADE resistance = 1637
  2. Immediate-term TRADE support = 1617
  3. Intermediate-term TREND support = 1592

 

In other words, the SP500 has quietly recaptured both TREND (1592) and TRADE (1617) lines of support and now has no resistance to 1637, then to the all-time highs (1669) after that.

 

This morning’s ISM New Orders data (51.9 June vs 48.8 May) supports more of the same in terms of old news (US #GrowthAccelerating in the April-June data series). The problem with that is June is over. The other problem with this rally is that it has occurred on no volume.

 

There are always problems in life – dwelling on the wrong problems at the wrong times can also be problematic.

 

Stay flexible out there and Happy Canada Day!

KM

 

Keith R. McCullough
Chief Executive Officer

 

 

Bullish: SP500 Levels, Refreshed  - SPX


Morning Reads on Our Radar Screen

Takeaway: A quick look at some stories on the Hedgeye team's radar screen.

Keith McCullough – CEO

They said the sequester would be scary. Mostly, they were wrong. (via Washington Post)

Europe and Japan show signs of stabilizing, but China slides (via Reuters)

Police clashes at start of Brazil Confederations Cup final (via BBC)

 

Morning Reads on Our Radar Screen - earth2

 

Howard Penney – Restaurants

11 Worst Burgers in America (Note: Chili’s burger has 1,910 calories; Red Robin burger has 1,254! .. via Men’s Health)

Groupon Pivots Further From Daily Deals With Upscale Restaurant Reservations (via Mashable)

 

Tom Tobin – Healthcare

US childbirth is uniquely expensive, study says (via Boston Globe)

 

Daryl Jones – Macro

Autos Sales in June Stayed on Best U.S. Pace Since 2007 (via Bloomberg)

Simons Strategy to Shield Profit From Taxes Draws IRS Ire (via Bloomberg)

 

Josh Steiner – Financials

Bank of America suit under scrutiny of settlement watchdog (via Charlotte Observer)

Banking on scams: Money laundering is on rise (via New York Post)

 

Kevin Kaiser – Energy

Oil and gas explorers seek investor favour (via Financial Times)

 

Matt Hedrick – Macro

Private Banks Leave Switzerland as End of Secrecy Hurts (via Bloomberg)

DenizBank completes the acquisition of the Citibank's Turkey Consumer Business (via 4-traders)


European Banking Monitor: Tightening on the Week

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 - Swaps were generally tighter among European banks last week, mirroring the trend we saw in EU sovereigns. We've been calling out Sberbank of Russia as a laggard in recent weeks with the commodity crack-up casting a shadow over its outlook. Last week we saw some reprieve for Russia's largest bank with swaps tightening 27 bps to 250 bps.

 

European Banking Monitor: Tightening on the Week - uu. banks

 

Sovereign CDS – Sovereign swaps globally last week, with the exception of France, which saw its swaps widen 2 bps to 80 bps. Germany was unchanged at 32 bps. Japan tightened by 8 bps to 78 bps. 

 

European Banking Monitor: Tightening on the Week - uu sov 1

 

European Banking Monitor: Tightening on the Week - uu sov 2

 

European Banking Monitor: Tightening on the Week - uu sov3

 

Euribor-OIS Spread – The Euribor-OIS spread tightened 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. 

 

European Banking Monitor: Tightening on the Week - uu euribor

 

ECB Liquidity Recourse to the Deposit Facility – Overnight deposits rose 7.1 billion 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.  

 

European Banking Monitor: Tightening on the Week - uu. facility


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DEAD CATS BOUNCING

Client Talking Points

JAPAN

The #WeimarNikkei showed some impressive follow through  following Friday’s +3.8% ramp. It closed up another +1.3 overnight (and more importantly, above our TREND line of 13,369). The USD/YEN continued lower, testing 99.74 resistance now. Commodities usually try to reflate on any USD correction. The immediate-term correlation between Gold and USD is -0.92. In other words, it's very high correlation. 

DAX

A rather ugly PMI print out of Germany for June at 48.6. Believe it or not, this was actually worse than Italy and Spain this month. Yes that is saying something! The DAX snapped key TREND support of 8079 in June and is seeing follow through selling this morning. Careful here: there's no support to 7613.

COMMODITIES

Dead cats bouncing. And no, that’s not what you want to see from a US #GrowthAccelerating perspective. Commodity Deflation is of course good for US Consumption. For all you home gamers out there, Consumer Discretionary was the best S&P Sector ETF in June at +0.5% vs SPY -1.5%. The CRB Index probed its year-to-date lows at -6.6%.

Asset Allocation

CASH 60% US EQUITIES 12%
INTL EQUITIES 6% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 22%

Top Long Ideas

Company Ticker Sector Duration
WWW

WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.

MPEL

Gaming, Leisure & Lodging sector head Todd Jordan says Melco International Entertainment stands to benefit from a major new European casino rollout.  An MPEL controlling entity, Melco International Development, is eyeing participation in a US$1 billion gaming project in Barcelona.  The new project, to be called “BCN World,” will start with a single resort with 1,100 hotel beds, a casino, and a theater.  Longer term, the objective is for BCN World to have six resorts.  The first property is scheduled to open for business in 2016. 

HCA

Health Care sector head Tom Tobin has identified a number of tailwinds in the near and longer term that act as tailwinds to the hospital industry, and HCA in particular. This includes: Utilization, Maternity Trends as well as Pent-Up Demand and Acuity. The demographic shift towards more health care – driven by a gradually improving economy, improving employment trends, and accelerating new household formation and births – is a meaningful Macro factor and likely to lead to improving revenue and volume trends moving forward.  Near-term market mayhem should not hamper this  trend, even if it means slightly higher borrowing costs for hospitals down the road. 

Three for the Road

TWEET OF THE DAY

RUSSIA: -0.43% continues lower, -16.5% YTD and remains one of our fav shorts

@KeithMcCullough

QUOTE OF THE DAY

Your time is limited, so don’t waste it living someone else’s life.

–Steve Jobs

STAT OF THE DAY

Record bond-fund redemptions in the month ended June 24 surpassed the previous high of $41.8 billion set in October 2008, according to TrimTabs. In the most-recent period, investors pulled $52.8 billion from bond mutual funds and $8.9 billion from ETFs.


MONDAY MORNING RISK MONITOR: ASIA REMAINS THE PLACE TO WATCH

Takeaway: While China's deteriorating situation took a breather last week, India remains a total mess.

Key Takeaways:

Asia remains the most interesting focal area for global risk right now. After roughly a month of negative headlines and deteriorating conditions, China's situation has stabilized (for now). We saw a sharp reversal in Chinese bank swaps - the first since the crisis began. Meanwhile, Indian banks continue to look awful. The three major Indian banks are now all at or near 300 bps on their CDS and the rise has been remarkable. We think not enough attention is being paid to this situation. We've also been calling out High Yield as a key focal area. Fortunately, it finally settled out this past week, but it's less-often mentioned cousin, levered loans, continues to sell off.

 

* Asian Financial CDS - China & India divergence continues to grow. Chinese bank swaps reversed course last week, tightening significantly WoW, while Indian bank swaps continue to blow out. India's three major banks are all now above or near the 300 bps "Lehman line". Japanese banks were relatively uneventful on the week, posting small average increases.

 

* Leveraged Loan Index Monitor – The Leveraged Loan Index fell -6.8 points last week, ending at 1783.36.

 

* High Yield (YTM) Monitor – High Yield rates fell 1.3 bps last week, ending the week at 6.62% versus 6.63% the prior week.

 

* 2-10 Spread – Last week the 2-10 spread widened 28 bps to 220 bps. 

 

* XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 2.6% upside to TRADE resistance and 0.7% downside to TRADE support.

 

* Sovereign CDS – Sovereign swaps globally last week, with the exception of France, which saw its swaps widen 2 bps to 80 bps. Germany was unchanged at 32 bps. Japan tightened by 8 bps to 78 bps. 

 

Financial Risk Monitor Summary

 • Short-term(WoW): Positive / 5 of 13 improved / 0 out of 13 worsened / 8 of 13 unchanged

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

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

 

MONDAY MORNING RISK MONITOR: ASIA REMAINS THE PLACE TO WATCH - 15

 

1. U.S. Financial CDS -  It was a mixed week for U.S. Financials, although overall more reference entities tightened than widened. On balance, swaps tightened for 21 out of 27 domestic financial institutions we track. The large cap U.S. banks were largely uneventful with the largest move coming from MS (-7 bps).

 

Tightened the most WoW: PRU, MET, MMC

Widened the most WoW: AGO, MTG, JPM

Widened the least WoW: MMC, SLM, MET

Widened the most MoM: MBI, RDN, GS

 

MONDAY MORNING RISK MONITOR: ASIA REMAINS THE PLACE TO WATCH - 1

 

2. European Financial CDS - Swaps were generally tighter among European banks last week, mirroring the trend we saw in EU sovereigns. We've been calling out Sberbank of Russia as a laggard in recent weeks with the commodity crack-up casting a shadow over its outlook. Last week we saw some reprieve for Russia's largest bank with swaps tightening 27 bps to 250 bps.

 

MONDAY MORNING RISK MONITOR: ASIA REMAINS THE PLACE TO WATCH - 2

 

3. Asian Financial CDS - China & India divergence continues to grow. Chinese bank swaps reversed course last week, tightening significantly WoW, while Indian bank swaps continued to blow out. India's three major banks are all now above or near the 300 bps "Lehman line". Japanese banks were relatively uneventful on the week, posting small average increases.

 

MONDAY MORNING RISK MONITOR: ASIA REMAINS THE PLACE TO WATCH - 17

 

4. Sovereign CDS – Sovereign swaps globally last week, with the exception of France, which saw its swaps widen 2 bps to 80 bps. Germany was unchanged at 32 bps. Japan tightened by 8 bps to 78 bps. 

 

MONDAY MORNING RISK MONITOR: ASIA REMAINS THE PLACE TO WATCH - 18

 

MONDAY MORNING RISK MONITOR: ASIA REMAINS THE PLACE TO WATCH - 3

 

MONDAY MORNING RISK MONITOR: ASIA REMAINS THE PLACE TO WATCH - 4

 

5. High Yield (YTM) Monitor – High Yield rates fell 1.3 bps last week, ending the week at 6.62% versus 6.63% the prior week.

 

MONDAY MORNING RISK MONITOR: ASIA REMAINS THE PLACE TO WATCH - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index fell -6.8 points last week, ending at 1783.36.

 

MONDAY MORNING RISK MONITOR: ASIA REMAINS THE PLACE TO WATCH - 6

 

7. TED Spread Monitor – The TED spread rose 1.0 basis points last week, ending the week at 24.01 bps this week versus last week’s print of 22.975 bps.

 

MONDAY MORNING RISK MONITOR: ASIA REMAINS THE PLACE TO WATCH - 7

 

8. Journal of Commerce Commodity Price Index – The JOC index fell -3.1 points, ending the week at -4.43 versus -1.4 the prior week.

 

MONDAY MORNING RISK MONITOR: ASIA REMAINS THE PLACE TO WATCH - 8

 

9. Euribor-OIS Spread – The Euribor-OIS spread tightened 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: ASIA REMAINS THE PLACE TO WATCH - 9

 

10. ECB Liquidity Recourse to the Deposit Facility – Overnight deposits rose 7.1 billion 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: ASIA REMAINS THE PLACE TO WATCH - 10

 

11. Markit MCDX Index Monitor – Last week spreads tightened 12 bps, ending the week at 94.3 bps versus 106 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: ASIA REMAINS THE PLACE TO WATCH - 11

 

12. Chinese Steel – Steel prices in China fell 0.9% last week, or 32 yuan/ton, to 3358 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: ASIA REMAINS THE PLACE TO WATCH - 12

 

13. 2-10 Spread – Last week the 2-10 spread widened 28 bps to 220 bps. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR: ASIA REMAINS THE PLACE TO WATCH - 13

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 2.6% upside to TRADE resistance and 0.7% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: ASIA REMAINS THE PLACE TO WATCH - 14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT



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