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MONDAY MORNING RISK MONITOR: TAKING A SHORT-TERM BREATHER

Takeaway: Rates rising seems to be taking some wind out of the sails for the sector in the short term, but ultimately we think it will be a positive.

Key Takeaways:

 

* High Yield  – High Yield continues to rise, adding another 11 bps last week and closing at 6.46%, up from 6.35%. After troughing briefly on July 22nd at 5.91%, rates have been steadily climbing since. Our firm's view on rates is that they'll continue to grind higher making higher highs and higher lows. Historically, we've seen Financials far more correlated with high yield than they are currently. This is a good sign, as the market is differentiating systemic credit risk from risk of rising rates.

 

* 2-10 Spread – Last week the 2-10 spread widened 21 bps to 249 bps. The 2-10 spread is now at its widest since July 28, 2011. We continue to regard this as a longer-term positive. Historically, movements at the long end of the curve has preceded Fed Funds moves by an average of 8-14 months. While it's certainly possible this time could take longer, the bottom line is that rising short rates will help Financials and wider the curve gets the greater the probability that short rates will move within 12 months.

 

* Chinese Steel – Steel prices in China posted another healthy increase last week, rising a further 1.5%. As China stands out to us as one of the primary global risk externalities capable of derailing the ongoing recovery, we regard the rising price of Chinese steel as an important referendum on the risk posed by a Chinese crisis. 

 

Financial Risk Monitor Summary

 • Short-term(WoW): Positive / 5 of 13 improved / 3 out of 13 worsened / 5 of 13 unchanged

 • Intermediate-term(WoW): Positive / 6 of 13 improved / 2 out of 13 worsened / 5 of 13 unchanged

 • Long-term(WoW): Positive / 4 of 13 improved / 0 out of 13 worsened / 9 of 13 unchanged

 

MONDAY MORNING RISK MONITOR: TAKING A SHORT-TERM BREATHER - 15

 

1. U.S. Financial CDS -  Swaps widened broadly for U.S. financials last week, though none of the moves were overly noteworthy.  The largest move among big caps was a 6 bps widening at JPMorgan, where a flurry of negative media/headlines weighed on both equity and credit sentiment in the short-term. The rest of the U.S. financials, however, were largely unchanged with the exception of certain high-beta names like MBIA, MTG & RDN.

 

Tightened the most WoW: AON, PRU, TRV

Widened the most WoW: MBI, JPM, RDN

Tightened the most WoW: MTG, PRU, MS

Widened the most MoM: MBI, AGO, CB

 

MONDAY MORNING RISK MONITOR: TAKING A SHORT-TERM BREATHER - 1

 

2. European Financial CDS - British, Italian and German banks all widened last week. Sberbank of Russia widened another 6 bps last week to 239 bps. 

 

MONDAY MORNING RISK MONITOR: TAKING A SHORT-TERM BREATHER - 2

 

3. Asian Financial CDS - Indian banks widened further while Chinese banks tightened. The MoM change in Indian bank swaps is becoming noteworthy. The three major banks of India are now wider by 50-55 bps (~20%) vs one month prior. Japanese financials were largely unchanged WoW.

 

MONDAY MORNING RISK MONITOR: TAKING A SHORT-TERM BREATHER - 17

 

4. Sovereign CDS – Italy and Spain tightened last week by 6 and 7 bps, respectively, while France and Japan both widened by 2 bps. The rest of the world's major markets were unchanged. 

 

MONDAY MORNING RISK MONITOR: TAKING A SHORT-TERM BREATHER - 18

 

MONDAY MORNING RISK MONITOR: TAKING A SHORT-TERM BREATHER - 3

 

MONDAY MORNING RISK MONITOR: TAKING A SHORT-TERM BREATHER - 4

 

5. High Yield (YTM) Monitor – High Yield rates rose 11.4 bps last week, ending the week at 6.46% versus 6.35% the prior week.

 

MONDAY MORNING RISK MONITOR: TAKING A SHORT-TERM BREATHER - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index fell 2 points last week, ending at 1803.

 

MONDAY MORNING RISK MONITOR: TAKING A SHORT-TERM BREATHER - 6

 

7. TED Spread Monitor – The TED spread rose 1.1 basis points last week, ending the week at 22.3 bps this week versus last week’s print of 21.2 bps.

 

MONDAY MORNING RISK MONITOR: TAKING A SHORT-TERM BREATHER - 7

 

8. CRB Commodity Price Index – The CRB index rose 3.9%, ending the week at 292 versus 282 the prior week. As compared with the prior month, commodity prices have increased 0.7% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

MONDAY MORNING RISK MONITOR: TAKING A SHORT-TERM BREATHER - 8

 

9. Euribor-OIS Spread – The Euribor-OIS spread was unchanged 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: TAKING A SHORT-TERM BREATHER - 9

 

10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index rose 37 basis points last week, ending the week at 3.28% versus last week’s print of 2.91%. 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: TAKING A SHORT-TERM BREATHER - 10

 

11. Markit MCDX Index Monitor – Last week spreads tightened, ending the week at 0 bps versus 96 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: TAKING A SHORT-TERM BREATHER - 11

 

12. Chinese Steel – Steel prices in China rose 1.5% last week, or 51 yuan/ton, to 3568 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: TAKING A SHORT-TERM BREATHER - 12

 

13. 2-10 Spread – Last week the 2-10 spread widened to 249 bps, 21 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR: TAKING A SHORT-TERM BREATHER - 13

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.5% upside to TRADE resistance and 0.2% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: TAKING A SHORT-TERM BREATHER - 14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT


August 19, 2013

August 19, 2013 - dtr

 

BULLISH TRENDS

August 19, 2013 - 10yrA

August 19, 2013 - spx

August 19, 2013 - nik

August 19, 2013 - dax

August 19, 2013 - dxy

August 19, 2013 - euro

August 19, 2013 - oil

 

BEARISH TRENDS

August 19, 2013 - VIX

August 19, 2013 - yen

August 19, 2013 - natgas
August 19, 2013 - gold

August 19, 2013 - copper


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – August 19, 2013


As we look at today's setup for the S&P 500, the range is 36 points or 0.84% downside to 1642 and 1.34% upside to 1678.                   

                                                                                                            

SECTOR PERFORMANCE


THE HEDGEYE DAILY OUTLOOK - 1A

 

THE HEDGEYE DAILY OUTLOOK - 2

 

EQUITY SENTIMENT:


THE HEDGEYE DAILY OUTLOOK - 10


CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 2.51 from 2.49
  • VIX  closed at 14.37 1 day percent change of -2.44%

MACRO DATA POINTS (Bloomberg Estimates):

  • 11am: Fed to purchase $1.25b-$1.75b in 2036-2043 sector
  • 11:30am: U.S. to sell $30b 3M, $25b 6M bills
  • 4pm: USDA crop conditions report
  • U.S. Weekly Rates Agenda

GOVERNMENT:

    • Obama to meet with regulators, discuss fin-reg overhaul
    • South Korea, U.S. begin joint military exercises taking place through Aug. 30
    • North Korea agrees to reunion talks after Gaesong pact
    • Washington Weekly Agenda

WHAT TO WATCH:

  • Blackstone said in talks to buy stake in Goldman unit
  • Banks seeking protection from govt. seizure of SAC assets: WSJ
  • SEC probes J.P. Morgan China hires, NYT reports
  • Alibaba in holders’ structure talks with HK Exchange: WSJ
  • Yahoo names Maynard Webb as chairman
  • Petrobras to sell $2.1b in oil, petrochemical assets
  • Apple seeks fingerprint reader patent in Europe: Patently Apple
  • JPMorgan seeking to sell 1 Chase Manhattan Plaza
  • Co. settles with pension funds over Lehman for $23m
  • CVC Capital buys Skrill Group for $800m
  • China July new home prices rise; big cities see record gains
  • Shire hires Lazard to repel takeover bid: Sunday Times
  • News Corp. probed in U.K. as corporate suspect: Independent
  • U.S. seeking appeal requiring Bernanke testimony on AIG
  • Abbott accused of racketeering in Depakote marketing
  • “The Butler” leads film sales w/ $25m for Weinstein
  • U.S. Weekly Agendas: Finance, Industrials, Energy, Health, Consumer, Tech, Media/Ent, Real Estate, Transports
  • Home sales probably rose to 3-yr high: Eco Weekly Preview
  • Jackson Hole, FOMC, Home Sales, Ifo: Wk Ahead Aug. 17-24

EARNINGS:

    • Bob Evans (BOBE) 4pm, $0.57
    • Intl Rectifier (IRF) 4pm, ($0.10)
    • Raven Industries (RAVN) 9am, $0.27
    • Urban Outfitters (URBN) 4pm, $0.48

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Corn-Crop Cuts by USDA Seen Premature as Goldman Predicts Record
  • Gold Bears Retreat as Prices Reach Two-Month High: Commodities
  • Copper Falls as Investors Await Cues on Fed’s Stimulus Stance
  • Gold Trades Below Two-Month High as Rally Spurs Investor Sales
  • Corn and Soybeans Advance as Dry Weather Threatens U.S. Yields
  • Sugar Tumbles as Fund Buying Fails to Spur Rally; Cocoa Retreats
  • WTI Crude Fluctuates as Goldman Raises Brent Forecasts on Supply
  • New Zealand Reveals Second Case of Tainted Milk Exports to China
  • Rebar Ends Near Highest in Four Months on China Demand Outlook
  • Gold Swap Rates Negative on Physical Supply Concerns: BI Chart
  • Tin Sales From Indonesia Drop Most in 18 Months on Purity Rules
  • Hedge Fund Bulls Make Late Exit From Natural Gas: Energy Markets
  • Scottish Independence Case Clouded by Oil Industry Growth Drag
  • Gold Seen Rallying by End of Year as Physical Demand Gains

THE HEDGEYE DAILY OUTLOOK - 5A

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - 6A

 

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

 

 

 

 

 

 

 

 

 

 

 

 


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Alpha Baby!

“I think I’m different. I’ve got alpha, baby.”

-Andy Kessler

 

That’s a quote from Andy Kessler’s foreword to the latest book that has surfaced to the top of my reading pile, Knowledge and Power, by “techno-utopian intellectual” (per Wikipedia), George Gilder.

 

“Everyone says that, of course, but most investors are all beta… when markets go up the beta warriors outperform, and when markets go down they get killed.” (Knowledge and Power, pg xii)

 

That sounds about right. If you want to see what the getting “killed” part looks like, check out the 2013 YTD returns of PMs who levered themselves up long of the bond market as it was traversing its all-time bubble highs.

 

Back to the Global Macro Grind

 

As a macro risk manager, most of your alpha is generated by not being long the stuff that is getting killed. From January to July, that meant not being long Gold, Silver, etc. Since May/June, that’s meant being out of Bunds, Gilts, and Treasuries.

 

No, we don’t have to wake up every morning and nail every tick in Apple (AAPL) to help you generate risk-adjusted alpha. Our primary risk management focus has always been aligned with Buffett’s 1st rule of investing – “Don’t lose money.”

 

I think I’m different because I’ve got the ability to cut an asset allocation to 0%. #OldWall banks and broker dealers won’t opt for that strategy because they need to support their new issue markets. Rule #1 (for them) is more like ABS (always be selling).

 

We have a 0% asset allocation right now to Fixed Income because it’s the 1st time we’ve ever had 2 of our top 3 Global Macro risk management themes focused squarely (and bearishly) on bonds:

  1. #RatesRising (http://app.hedgeye.com/media/595-ratesrising-q3-macro-theme-1)
  2. #DebtDeflation (http://app.hedgeye.com/media/597-debtdeflation-q3-macro-theme-2)

Since these are Q313 themes and the quarter is almost half over now, we’ve re-produced these themes with our new @HedgeyeTV videos (links attached) in order to re-communicate our strongest slides on the subject matter.

 

The latest addition to our senior research team, Director of Financials Research, Jonathan Casteleyn, also has a video up on the front page of our site titled “Bond Bear Market: Just Beginning.” So we think we’re being pretty clear on our view here.

 

So far, in July-August, Mr. Market agrees. Month-over-month, look at what’s happened to 3 major sovereign debts:

  1. US 10yr Treasury Yield = +36 basis points (+14%) to 2.85%
  2. Germany’s 10yr Bund Yield = +38 basis points (+25%) to 1.90%
  3. UK 10yr Gilt Yields = +43 basis points (+19%) to 2.70%

So, US stocks finally having a down-week for once notwithstanding, this is where the real negative alpha is eating into the standard #OldWall pie of asset allocations – via #DebtDeflation.

 

The economic data in the 3 aforementioned countries supports #RatesRising. Germany’s data has improved, sequentially, for the past few months and the UK’s data has been nothing short of fantastic relative to both absolute levels of years past and market expectations. In the USA, jobless claims shocking to the upside drove last week’s +25 basis point week-over-week move too.

 

Now that the SP500 has corrected -3.2% from its all-time closing high of 1709 in the first week of August, we have to ask ourselves (as we have many times this year) if we A) buy the equities dip or B) join the long list of #PTCs (professional top callers) who have had issues understanding that this is a growth investors market.

 

If you have a 0% asset allocation to US Fixed Income, your job gets a little less complex. If you just have to break-down the US Equity pieces of the Sector Style Factor pie, you’ll note that the slow-growth sectors still look the worst, especially for the month of August to-date:

  1. Utilities (XLU) lead losers at -4.4% MTD
  2. Healthcare (XLV) is -3.2% MTD
  3. Consumer Staples (XLP) is -2.7% MTD

In other words, with the SP500 -1.77% MTD, being “overweight” those slow-growth sectors is also a negative alpha position relative to something that’s growthier, like Tech (XLK), which is +0.3% for August to-date.

 

Don’t get me wrong, there are plenty of things out there that concern me about being long US growth equities. There always will be. But the market A) doesn’t care about my concerns and B) is a lot more concerned with the bubbles that are popping in anything fixed income and/or Yield Chasing that Bernanke #force-Fed people into over the last 5 years.

 

Getting out of the way of Bernanke’s Bubbles as they are popping – it’s the new alpha, baby!

 

Our immediate-term Risk Ranges are now:

 

UST 10yr 2.67-2.86%

SPX 1

VIX 13.21-15.22

USD 80.91-81.96

Yen 97.21-98.16

Gold 1

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Alpha Baby! - Chart of the Day

 

Alpha Baby! - Virtual Portfolio


THE WEEK AHEAD

The Economic Data calendar for the week of the 19th of August through the 23rd is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.

 

THE WEEK AHEAD - week


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