prev

MONDAY MORNING RISK MONITOR: EERILY QUIET?

Takeaway: The short-term upside in XLF trumps downside 4 to 1 this morning. The risk measures we track continue to point onward and upward, for now.

Key Takeaways:

In summary, thus far August remains a remarkably quiet month. Too quiet? Perhaps, but it's hard to put a finger on what the market could be missing with its extreme calm. Risk gauges at the Sovereign, bank and systemic banking levels all remain benign globally. The only red on our summary screen below is the WoW move in High Yield rates (+12 bps) and the upward sloping longer-term trendline in the Shifon Index (Chinese overnight lending rate). 

 

US financial credit default swaps were modestly tighter. European financial swaps were also broadly, though narrowly, improved (average -6 bps). High yield rates posted another modest up week, rising 12 bps, following a +5 bps WoW change in the previous week. That said, MoM, rates are still down by 3 bps. The TED spread was lower (-2 bp), Euribor-OIS was flat and the Shifon Index tightened by 9 bps.

 

* European Financial CDS - Overall, the EU banking system continues to slowly heal. Systemic risk measures of Europe's banking system, such as Euribor-OIS, have been benign now for almost a year, having fully renormalized back in Sep/Oct 2012. The median European bank tightened by 6 bps last week and is tighter by 16 bps vs the previous month. 

 

* XLF Macro Quantitative Setup – Short-term XLF upside trumps downside by 4 to 1. Our Macro team’s quantitative setup in the XLF shows 2.8% upside to TRADE resistance and 0.7% downside to TRADE support.

 

Financial Risk Monitor Summary

 • Short-term(WoW): Positive / 5 of 13 improved / 1 out of 13 worsened / 7 of 13 unchanged

 • Intermediate-term(WoW): Positive / 7 of 13 improved / 0 out of 13 worsened / 6 of 13 unchanged

 • Long-term(WoW): Positive / 2 of 13 improved / 1 out of 13 worsened / 10 of 13 unchanged

 

MONDAY MORNING RISK MONITOR: EERILY QUIET? - 15

 

1. U.S. Financial CDS -  Credit default swaps for U.S. financials were broadly, but narrowly, lower last week. The average and median decline was 1 and 3 bps, respectively. The two companies that posted increases were Assured Guaranty (AGO) and MBIA (MBI). Overall, swaps tightened for 23 out of 27 domestic financial institutions.

 

Tightened the most WoW: AON, AXP, WFC

Widened the most WoW: MBI, AGO, PRU

Tightened the most MoM: MTG, GS, MS

Widened the most MoM: AGO, MBI, MMC

 

MONDAY MORNING RISK MONITOR: EERILY QUIET? - 1

 

2. European Financial CDS - The median European bank tightened by 6 bps last week and is tighter by 16 bps vs the previous month. Overall, the EU banking system continues to slowly heal. Systemic risk measures of Europe's banking system, such as Euribor-OIS, have been benign now for almost a year having fully renormalized back in Sep/Oct 2012.

 

MONDAY MORNING RISK MONITOR: EERILY QUIET? - 2

 

3. Asian Financial CDS - Chinese and Indian bank swaps moved wider last week by an average of 12 bps and 18 bps, respectively. Japanese banks swaps tightened by an average of 3 bps.

 

MONDAY MORNING RISK MONITOR: EERILY QUIET? - 17

 

4. Sovereign CDS – Sovereign credit default swaps were mixed, though largely uneventful last week. Italy and Spain tightened by 7 and 9 bps, respectively, while Portugal widened by 4 bps. Elsewhere there was very little movement. 

 

MONDAY MORNING RISK MONITOR: EERILY QUIET? - 18

 

MONDAY MORNING RISK MONITOR: EERILY QUIET? - 3

 

MONDAY MORNING RISK MONITOR: EERILY QUIET? - 4

 

5. High Yield (YTM) Monitor – High Yield rates rose 12.1 bps last week, ending the week at 6.35% versus 6.23% the prior week.

 

MONDAY MORNING RISK MONITOR: EERILY QUIET? - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index fell -0.3 points last week, ending at 1805.56.

 

MONDAY MORNING RISK MONITOR: EERILY QUIET? - 6

 

7. TED Spread Monitor – The TED spread declined 2.2 bps last week, ending the week at 21.2 bps this week versus last week’s print of 23.4 bps.

 

MONDAY MORNING RISK MONITOR: EERILY QUIET? - 7

 

8. CRB Commodity Price Index – The CRB index rose 0.5%, ending the week at 285 versus 284 the prior week. As compared with the prior month, however, commodity prices are down -0.5% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

MONDAY MORNING RISK MONITOR: EERILY QUIET? - 8

 

9. Euribor-OIS Spread – The Euribor-OIS spread was unchanged week-oer-week at 12 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: EERILY QUIET? - 9

 

10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index fell 9 basis points last week, ending the week at 3.1641 bps this week versus last week’s print of 3.2539 bps. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.

 

MONDAY MORNING RISK MONITOR: EERILY QUIET? - 10

 

11. Markit MCDX Index Monitor – Last week spreads widened by 1 bp, ending the week at 96 bps versus 95 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: EERILY QUIET? - 11

 

12. Chinese Steel – Steel prices in China rose 2.0% last week, or 70 yuan/ton, to 3517 yuan/ton. Since the start of July, Chinese steel prices have been gradually grinding higher. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

 

MONDAY MORNING RISK MONITOR: EERILY QUIET? - 12

 

13. 2-10 Spread – Last week the 2-10 spread tightened to 228 bps, -2 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR: EERILY QUIET? - 13

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 2.8% upside to TRADE resistance and 0.7% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: EERILY QUIET? - 14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


August 12, 2013

August 12, 2013 - 8 12 2013 8 57 23 AM


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – August 12, 2013


As we look at today's setup for the S&P 500, the range is 35 points or 0.73% downside to 1679 and 1.33% upside to 1714.                                             

                                                                                  

SECTOR PERFORMANCE


THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

EQUITY SENTIMENT:


THE HEDGEYE DAILY OUTLOOK - 10


CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 2.26 from 2.28
  • VIX closed at 13.41 1 day percent change of 5.34%

MACRO DATA POINTS (Bloomberg Estimates):

  • 11am: Fed to buy $1.25b-$1.75b notes in 2036-2043 sector
  • 11:30am: U.S. to sell $30b 3M bills, $25b 6M bills
  • 2pm: Monthly Budget Stmt, July, est. -$90b (prior -$69.6b)
  • 4pm: USDA issues supply/demand forecast for grain, oilseed
  • U.S. Weekly Rates Agenda

     GOVERNMENT:

    • Sec. of State John Kerry travels to LatAm
    • Defense Sec. Chuck Hagel travels in Southeast Asia
    • Washington Weekly Agenda

WHAT TO WATCH:

  • Rockwell Collins to buy Arinc from Carlyle for $1.39b
  • U.S. may announce charges this wk against former JPM traders
  • Dell investor Icahn seeks fast-track status for Delaware suit
  • Medtronic buys Cardiocom for $200m cash, WSJ Says
  • J.C. Penney board considers options against Ackman: WSJ
  • Apple to unveil next iPhone at Sept. 10 event, AllThingsD says
  • Japan’s economy slowed more than forecast in 2Q
  • Newcrest Mining has $5.7b full-yr loss after writedown
  • NBC to announce buy of Stringwire on Monday, NYTimes says
  • GM cutting presence in S. Korea amid labor costs: Reuters
  • Samsung losses to Apple give iPhone maker negotiation edge
  • Misra starts derivatives exchange as rival to Nasdaq, CME
  • Sony’s "Elysium" has sales of $30.5m, shy of forecasts
  • CFTC subpoenas metals warehousing firm, Reuters says
  • Singapore cuts export forecast as China damps recovery
  • Finra inquiring on role of analysts in IPO pitch meetings: NYT
  • Forstmann says it’s considering sale of IMG talent agency
  • Nova Capital buys Newell units for $214m, Sunday Times Reports
  • U.S. Weekly Agendas: Finance, Industrials, Energy, Health, Consumer, Tech, Media/Ent, Real Estate, Transports
  • North American M&A Agenda
  • Canada Weekly Agendas: Energy, Mining
  • U.S. Retail Sales, SAC, Cisco: Wk Ahead Aug. 10-17

 

EARNINGS (all times ET, times are approximate):

    • Iamgold (IMG CN) 5:05pm, $0.09
    • InterOil (IOC) 4:30pm, $0.03
    • Legacy Oil + Gas (LEG CN) Aft-mkt, $0.08
    • Northern Tier Energy (NTI) 4:47pm, $0.47
    • NQ Mobile (NQ) 4:30pm, $0.20
    • Sina (SINA) 4:30pm, $0.12
    • Sysco (SYY) 8am, $0.54

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • China on Track to Overtake India as Gold Consumption Jumps 54%          
  • Hedge Funds Trim Gold Bets on Stimulus Speculation: Commodities
  • Gold Climbs to Highest This Month on Dollar, Technical Level
  • India Gold Premiums Seen Extending Climb to Record on Curbs
  • Copper Swings Between Gains and Drops After Japanese Growth Data
  • WTI Trades Near Four-Day High Amid Signs European Recession Over
  • Soybeans Rise Ahead of USDA Report That May Cut Stocks Outlook
  • Sugar Gains to 6-Week High as Brazil Favors Ethanol; Cocoa Falls
  • Oil Traders Sell Seeing End to Fed’s Cheap Money: Energy Markets
  • Platinum-Rhodium Ratio at Record High on Supply Risks: BI Chart
  • Cosco Cargo Ship Sets Sail in First Transit of Northeast Passage
  • German Utilities Hammered in Market Favoring Renewables: Energy
  • Newcrest May Extend Cost Cuts After $5.7 Billion Full-Year Loss
  • Olam Sees Potential for Indian Sugar Exports on Rupee to Surplus
  • Platinum ETF Holdings Rise 45% Ytd on Supply Concerns: BI Chart

THE HEDGEYE DAILY OUTLOOK - 5

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - 6

 

GLOBAL PERFORMANCE

 

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 4

 

EUROPEAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 7

 

ASIAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 8

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - 9

 

 

The Hedgeye Macro Team

 

 

 

 

 

 

 

 

 

 

 


real-time alerts

real edge in real-time

This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.

Japan Still Center Stage

Client Talking Points

JAPAN

We haven’t bought the Nikkei back just yet, but we probably will if this critical 13,331 TREND line holds. The Nikkei has of course been weak because the Yen has been strong. It’s been a counter TREND move that is starting to frustrate a lot of people. I'm getting a lot of questions on this and the US Dollar. The Yen is down -0.54% vs USD this morning.

USD

The US Dollar was down a full 1% last week. We bought it back on that move after it signaled immediate-term TRADE oversold right around $81.11 on the US Dollar Index. This level was tested in an early June selloff in USD (then the USD made a year-to-date high by early July), so the FX market can obviously whip people around. We are trying to be patient here, instead of drawing new 3-year conclusions on a 1-month low volume, summer move.

GOLD

Hedge funds cut their net long position by 27% in futures and options contracts last week to +48,103 net longs. So now Gold can go up again on that. Gold is up +1% this morning with Silver gaining +2.5%. The 10-year US Treasury yield is not budging though. So it will be important to watch Gold/10yr/USD, in unison, this week.

Asset Allocation

CASH 34% US EQUITIES 24%
INTL EQUITIES 19% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 23%

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

TREASURIES: not budging despite US Equity futures down = 2.59% 10yr yield @KeithMcCullough

QUOTE OF THE DAY

Whether you think you can or you think you can’t, you’re right.

– Henry Ford

STAT OF THE DAY

$91,000,000: Facebook's COO Sheryl Sandberg sold nearly 2.4 million shares of the social network's stock last week at an average price of $38 per share for approximately $91 million.


Island Economics

This note was originally published at 8am on July 29, 2013 for Hedgeye subscribers.

“An island cannot rule a continent.”

-Thomas Paine

 

I don’t know about you, but I find myself putting most consensus channels of market and “economic” information on mute these days. Life is simpler that way. Markets can be simpler too – if you take big government politics out of them.

 

Thomas Paine wrote “Common Sense” anonymously in 1776. It was only 48 pages long but one of the most influential writings in US history. As US historian, Joseph Ellis, recently wrote: “both the style and the substance of Common Sense were true to its title… replicating the vocabulary of conversations by ordinary Americans in taverns and coffeehouses…” (Revolutionary Summer, pg 11)

 

Sometime after filling up my tank with $4.24/gallon gas this weekend, I was reading that book at home. Then I got out of my chair and glazed over Obama’s comments about the next Fed Chairman in the NY Times. He said he wants a “Fed Chairman that can step back and look at that objectively and say, let’s make sure that we are growing the economy.” Then I started laughing.

 

Back to the Global Macro Grind

 

The final blow to anyone who is full of it is usually the truth. We see this in every aspect of our lives, so there’s no reason why any of these people who operate under the assumptions of big government Island Economics will be remembered by history any differently.

 

Although at varying paces, time tends to solve disconnects between fact and fiction. But in between now and then we have to deal with real-time market prices and expectations.

 

The expectations that the outgoing (and incoming) Fed Chairman is going to try to “grow the economy” with a weak currency are pervasive. Last week’s rumoring of either Larry Summers or Janet Yellen running the Fed had something to do with:

  1. America’s Purchasing Power (US Dollar) dropping -1.1% wk-over-wke
  2. Consensus buying the living daylights out of Gold futures and options contracts
  3. The net long position in Oil futures and options contracts hitting an all-time high

As history buffs like to remind short-term political types, all-time is a long time.

 

If the President of the United States thinks that having the all-time low (of any US President) in America’s Purchasing Power alongside the all-time high in gas prices is success, that’s just plain funny and sad all at the same time. #Half-BakedClassWarfareIsland

 

Mr. President, if you are more than just lip servicing people who are on fixed budgets, have Bernanke or Yellen get on 60 Minutes and announce to the world that the USA is raising interest rates next weekend. Both the Gold and Oil price will crash. And The People will like it.

 

Instead, here’s what futures and options contracts (i.e. our entire profession trying to front-run the Fed) are betting on:

  1. Total CFTC Commodities futures and options contracts were +7.4% wk-over-wk to +615,140 contracts
  2. Crude oil contracts were up another +10% wk-over-wk to +334,094 = all-time high
  3. Gold contracts ripped +26% wk-over-wk to +70,067 (up for 4 weeks in a row)

Yep. So much for the only bull case for Gold that made any short-term sense (that “everyone is short Gold”). Everyone is getting right levered long the Bernanke Bubble again! It’s still crashing YTD (-21.4%), but who cares? Isn’t this just great for the country?

 

To be clear, the opportunity to replace Bernanke with someone who doesn’t devalue the Dollar, monetize a record amount of US debt, and socialize crony banker losses, is one of the biggest President Obama has had in his career.

 

But does he get that?

 

I doubt it – that said, I did take my kids to see Monsters University yesterday, and that movie reminded me that there always is a chance! Meanwhile, Mr. Market is actually begging for a Fed head who gets having a #StrongDollar #RatesRising policy (i.e. a pro-growth policy):

  1. The Russell2000 is = +7.3% for the month-to-date, and +23.4% YTD
  2. Top 25% EPS Growth Stocks = +6.1% for the month-to-date, and +23.7% YTD
  3. Low Yield (growth) Stocks = +5.1% for the month-to-date, and +26.4% YTD

But, if Obama wants to get Summers or Yellen in there, we can always go back to the Island Economics that both he and Bush II had. How does a 0% rate of return on your hard earned savings accounts forever, $2000 Gold, and $160 Oil, sound?

 

Our immediate-term Risk Ranges are now as follows (*reminder: 12 Global Macro Risk Ranges are in our new Daily Trading Range product as well):

 

UST 10yr Yield 2.50-2.64%

SPX 1676-1700

Nikkei 13571-14601

USD 81.57-82.38
Brent 106.42-108.01

Gold 1260-1352

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Island Economics - vv. gas

 

Island Economics - vv. vp 29



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.

next