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Morning Reads on Our Radar Screen

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

Keith McCullough – CEO

Capital Flight Drains Reserves as Rupee, Rupiah Fall (via Bloomberg)

Fukushima operator to seek foreign advice on toxic water (via Reuters)

Japan Sales-Tax Decision Due by Early October (KM note: Important macro catalyst … via Bloomberg)

Tweets printed by home-built ticker-tape machine (via BBC http://www.bbc.co.uk/news/technology-23812365)

 

Morning Reads on Our Radar Screen - Bovespa floor

 

Kevin Kaiser – Energy

Working Round the Clock Is a Poor Use of Time (via FT)

Nuverra Environmental: A Sinking Ship With Default Risk (KK note: Rare - a solid SeekingAlpha piece … via Seeking Alpha)

More U.S. oil is moving via truck, barge and train than at any point since 1981 (via WSJ)

 

Howard Penney – Restaurants

McDonald's Operator Tips Mighty Wings Return (via HuffPost)

Filmmaker Lucas-controlled trust buys USD10 million in Starbucks stake (via IVCPost)

 

Jonathan Casteleyn – Financials              

Fed Officials Rebuff Coordination Calls as QE Taper Looms (Contrary to popular belief when the Fed stops QE signaling a recovering USA it is GOOD for the global economy … via Bloomberg)

Server Crash Spurs 3-Hour Nasdaq Halt as Data Link Lost (JC note: Kudos to $NDAQ for not pointing fingers even though it sounds like $NYX system's started last week's issue  … via Bloomberg)


MONDAY MORNING RISK MONITOR: INDIA'S BANKING SYSTEM IS DETERIORATING AT AN ACCELERATING RATE

Takeaway: Keep and eye on Indian banks, as they're crossing decidedly into the danger zone, and doing so at an accelerating rate.

Key Takeaways:

 

* Indian Financial CDS - Indian banks are beginning to show some signs of serious stress. All three major banks have crossed the "Lehman Line" (+300 bps) and are showing no sign of retreat. Last week, they rose a further 49-69 bps, putting them all north of 350 bps currently. 

 

* High Yield – Rates rose another 9 bps last week, ending the week at 6.55% versus 6.46% the prior week. 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.

 

 

Financial Risk Monitor Summary

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

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

 • Long-term (WoW): Negative / 3 of 13 improved / 3 out of 13 worsened / 7 of 13 unchanged

 

MONDAY MORNING RISK MONITOR: INDIA'S BANKING SYSTEM IS DETERIORATING AT AN ACCELERATING RATE - 15

 

1. U.S. Financial CDS -  Morgan Stanley widened 8 bps last week, making it the ugly duckling. Most of the other large cap names were uneventful. Insurers were similarly little changed. MGIC saw its swaps widen by 33 bps to 449 bps, though Radian tightened by 2 bps. Overall, swaps widened for 19 out of 27 domestic financial institutions, though the average and median change WoW was +4 and +1 bps, respectively.

 

Tightened the most WoW: BAC, WFC, GS

Widened the most WoW: MMC, AXP, GNW

Tightened the most WoW: MET, PRU, AIG

Widened the most MoM: MBI, AGO, AXP

 

MONDAY MORNING RISK MONITOR: INDIA'S BANKING SYSTEM IS DETERIORATING AT AN ACCELERATING RATE - 1

 

2. European Financial CDS - Swaps were mostly wider last week on EU financials. One callout includes Sberbank of Russia backing up another 22 bps to 261 bps, now wider by 54 bps MoM. We continue to find this puzzling in light of the ongoing rise in crude oil. However, a possible explanation is the growing tension in the Syria/Middle East conflict.

 

MONDAY MORNING RISK MONITOR: INDIA'S BANKING SYSTEM IS DETERIORATING AT AN ACCELERATING RATE - 2

 

3. Asian Financial CDS - Indian banks are beginning to show some signs of serious stress. All three major banks have crossed the "Lehman Line" (+300 bps) and are showing no sign of retreat. Last week, they rose a further 49-69 bps, putting them all north of 350 bps. China and Japan were quiet last week.

 

MONDAY MORNING RISK MONITOR: INDIA'S BANKING SYSTEM IS DETERIORATING AT AN ACCELERATING RATE - 17

 

4. Sovereign CDS – Portugal was the only sovereign mover of note last week, widening 35 bps to 471 bps. Elsewhere around the world, swaps ranged from 1 bp tighter (Ireland) to 3 bps wider (Japan). 

 

MONDAY MORNING RISK MONITOR: INDIA'S BANKING SYSTEM IS DETERIORATING AT AN ACCELERATING RATE - 18

 

MONDAY MORNING RISK MONITOR: INDIA'S BANKING SYSTEM IS DETERIORATING AT AN ACCELERATING RATE - 3

 

MONDAY MORNING RISK MONITOR: INDIA'S BANKING SYSTEM IS DETERIORATING AT AN ACCELERATING RATE - 4

 

5. High Yield (YTM) Monitor – High Yield rates rose another 9 bps last week, ending the week at 6.55% versus 6.46% the prior week.

 

MONDAY MORNING RISK MONITOR: INDIA'S BANKING SYSTEM IS DETERIORATING AT AN ACCELERATING RATE - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 4.0 points last week, ending at 1800.

 

MONDAY MORNING RISK MONITOR: INDIA'S BANKING SYSTEM IS DETERIORATING AT AN ACCELERATING RATE - 6

 

7. TED Spread Monitor – The TED spread rose 1.1 basis points last week, ending the week at 23.4 bps this week versus last week’s print of 22.3 bps.

 

MONDAY MORNING RISK MONITOR: INDIA'S BANKING SYSTEM IS DETERIORATING AT AN ACCELERATING RATE - 7

 

8. CRB Commodity Price Index – The CRB index rose 0.3%, ending the week at 291 versus 290 the prior week. As compared with the prior month, commodity prices have increased 1.4% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

MONDAY MORNING RISK MONITOR: INDIA'S BANKING SYSTEM IS DETERIORATING AT AN ACCELERATING RATE - 8

 

9. Euribor-OIS Spread – The Euribor-OIS spread was again unchanged last 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: INDIA'S BANKING SYSTEM IS DETERIORATING AT AN ACCELERATING RATE - 9

 

10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index rose 15 basis points last week, ending the week at 3.36% versus last week’s print of 3.21%. 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: INDIA'S BANKING SYSTEM IS DETERIORATING AT AN ACCELERATING RATE - 10

 

11. Markit MCDX Index Monitor – Last week spreads widened 8 bps, ending the week at 96 bps versus 88 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: INDIA'S BANKING SYSTEM IS DETERIORATING AT AN ACCELERATING RATE - 11

 

12. Chinese Steel – Steel prices in China rose 1.2% last week, or 42 yuan/ton, to 3610 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: INDIA'S BANKING SYSTEM IS DETERIORATING AT AN ACCELERATING RATE - 12

 

13. 2-10 Spread – Last week the 2-10 spread tightened to 244 bps, -5 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR: INDIA'S BANKING SYSTEM IS DETERIORATING AT AN ACCELERATING RATE - 13

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.9% upside to TRADE resistance and 2.1% downside to TREND support.

 

MONDAY MORNING RISK MONITOR: INDIA'S BANKING SYSTEM IS DETERIORATING AT AN ACCELERATING RATE - 14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


JCP: Consumer Trend and Liquidity Conference Call

Takeaway: We're hosting a conference call on Thurs Aug 29th to discuss our consumer survey on JCP, and it's implication on liquidity.

JCP: Consumer Trend and Liquidity Conference Call - JCPdialin 08.29.13

 

Please join us for a conference call titled  "JCP: Where is The Consumer and The Cash?" on Thursday, August 29th at 11:00am EDT.The call will take an in-depth look at consumer trends and analyze J.C. Penney's (JCP) current liquidity situation.

 

   

THESIS:

We continue to have a net positive bias on JCP, but we cannot get fully on board while there is zero long term strategy at the company. We would look for an opportunity to get involved on the long side with the passage of time (and de-risking of the balance sheet), or a regime change to a new CEO – even if it means leaving a few dollars on the table.

 

 

CALL DETAILS WILL INCLUDE:  

  • We'll debut the results of our extensive consumer survey of JCP shoppers to gain insight into the following:
    • Why consumers left JCP (or spent less while they were there).
    • If they left, where did they take their business (KSS, M, GPS, Other, or Nowhere?)
    • Are they gone forever, or can JCP win them back?
    • What does JCP need to do to win back the business? Are they doing it under Ullman?
    • What do consumers think of redesigned stores, and does it impact their decision to return to JCP?
    • We will present our liquidity sensitivity analysis, and while JCP will cut it close at times, we don't think it is at risk of a material liquidity event.
    • Discuss how liquidity ties in to the timing of a shift to a permanent CEO.
    • Take a detailed look at Gross Margin, which is the one line on the P&L that we think could improve sooner than later.

  

 

DIAL-IN DETAILS:

  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 173225#
  • Materials: CLICK HERE (Slides will download approximately one hour prior to the start of the call) 

 

 

CONTACT

For question please email .   

 


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

MACAU SLOWS BUT STILL ON PACE

Macau daily table revenues averaged HK$886 million this past week, up 14% YoY, but down 11% WoW.  We are projecting full month GGR (including slots) YoY growth of 16-18%.  We have heard anecdotally that VIP win percentage was low this past week (especially at MGM) but is fairly normal for the full month.  Mass and VIP volumes continue to look very healthy.

 

In terms of market share, MGM took a big hit WoW but is still relatively in-line with trend.  LVS and MPEL remain above their respective 3 month trends.

 

MACAU SLOWS BUT STILL ON PACE - 1

 

MACAU SLOWS BUT STILL ON PACE - 2


AN EPIC MARKET CORRECTION?

Client Talking Points

UST 10YR

Consensus has been telling you over and over again that #RatesRising is going to kill the US stock market for about 9 months now. Well, it's certainly killing bonds, Emerging Markets, and slow-growth, low yielding, stocks maybe, but not US growth stocks. That style factor is why the QQQ and Russell outperformed the Dow again last week. It's 2.82% on the 10-year now with no resistance to 2.95%. This Hedgeye Q3 Macro Theme remains firmly intact.

COPPER

The Doctor has been royally squeezed. After 24 consecutive weeks of holding a net short positions (CFTC futures/options contracts), Copper’s net position ripped +104% last week to a net long position of +14,356. Gold’s net long position expanded +29% week-over-week to +73,216. People love chasing price. Fade that.

INDONESIA

If you want to be bearish on Equities, try the Asian (ex-Japan) trade. It was down -3.3% last week (down -8% year-to-date) vs QQQ +1.5%. Countries hostage to Burning Currency like Indonesia are moving -0.5% lower again this morning (now down -2.6% year-to-date). Let's call it what it is: #AsianContagion

Asset Allocation

CASH 30% US EQUITIES 26%
INTL EQUITIES 24% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 20%

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

Fear? US Equity Volatility (VIX) -2.7% last week, still crashing at -22.4% YTD @KeithMcCullough

QUOTE OF THE DAY

"The fight is won or lost far away from witnesses - behind the lines, in the gym, and out there on the road, long before I dance under those lights." -Muhammad Ali 
 

STAT OF THE DAY

Emerging-market stocks have lost more than $1 trillion since May. The MSCI Emerging Markets Index has fallen about 12 percent this year, compared with a 13 percent gain in the MSCI gauge of shares in advanced countries. (Bloomberg) #EmergingOutflows


Missing Something

This note was originally published at 8am on August 12, 2013 for Hedgeye subscribers.

“The market is smarter than you will ever be, with its combined knowledge of all participants. Pay attention to the signs. Be quick to admit that you’re wrong. Don’t be afraid to miss something.”

-Yra Harris, Praxis Trading

 

That quote comes from my “other” favorite book on markets, Inside the House of Money, which is a series of candid interviews with a number of highly-regarded Global Macro Risk Managers (Daniel Kahneman’s Thinking, Fast and Slow forms the other half of my 1A/1B compromise). Harris – a veteran of the trading floor pits at the CME for over three decades – had that to say about the merits of gleaning critical information from market prices.

 

I make it a point to pay as little attention as humanly possible to the #OldWall’s financial media outlets, so I don’t know much about Mr. Harris’ current views and biases on the markets. I do, however, know that we @Hedgeye subscribe to the same philosophy of recognizing that we’re not smarter than the market. Indeed, having been football or hockey jocks at an institution like Yale has taught us all we needed to learn about not being the “smartest guy in the room”.

 

Whether you’ve watched us compete in this game for the past five years or you’ve been trialing our research for five days, you’ll quickly arrive at the conclusion that last price tends to dictate our interpretation of the fundamentals. But, obviously, markets oscillate on a day-to-day and week-to-week basis, so we employ a three factor (i.e. price, volume and volatility) quant model to contextualize market trends across three distinct investment durations:

  1. TRADE: 3 weeks or less
  2. TREND: 3 months or more
  3. TAIL: 3 years or less

If a particular security or asset class is Bullish TRADE (i.e. last price is above the TRADE line), we’d argue that the market is in agreement with the positive fundamental view(s) emanating from the bull camp with respect to the most immediate-term of durations. The same can be said of Bullish TREND setups vis-à-vis the intermediate-term duration and Bullish TAIL setups vis-à-vis the long-term duration. The inverse of this interpretation (i.e. Bearish TRADE/TREND/TAIL) holds true as well.

 

We believe that it is our job as macro analysts to collect and piece together any relevant economic data with the intent of forming a fundamental view on a particular market or asset class. Often times, however, our biases don’t agree with said market’s risk management setup – i.e. the research is bullish when the market setup is bearish, or vice versa.

 

Prior to putting any risk on, investors generally have the option of dismissing the aforementioned setup as “being early” – at least until they get tapped on the shoulder! When, however, the position is already on the tape and has positive P&L and it starts to trend counter to one’s preexisting and subsequently reconfirmed fundamental view, we’d argue that said investor is late – i.e. he or she is #MissingSomething with respect to the fundamental story.

 

To better illustrate this lesson in Global Macro Risk Management, let us turn to a discussion of our preexisting bullish bias on the dollar-yen cross with respect to the intermediate-term TREND and long-term TAIL durations and on the Japanese equity market with respect to the intermediate-term TREND duration.

 

We’ve been out front of consensus making these calls – very loudly in the yen’s case – since SEP and NOV of last year, respectively, but, for those of you who may be new to the thesis, our subsequently reconfirmed fundamental view is as follows:

  1. While enthusiasm for the Abenomics agenda may come and go in the immediate-term, we believe investors are broadly underestimating the structural impact of imposing a +2% inflation target and +3% nominal growth target in Japan. To put that in context, the trailing 10Y averages for these metrics are -0.1% and -0.5%, respectively. Japanese policymakers have a lot of hay to bale on the monetary easing front if they are to even sniff their lofty targets within the proposed 2Y time frame.
  2. Assuming Japanese policy stays the course and our view that the US economy has finally turned the corner from a growth perspective is ultimately proven prescient, a compressing real interest rate differential will also put pressure on Japan’s currency from a capital flows perspective. Consensus expects real 2Y JGB rates to hit -2.5% by EOY 2014 (down meaningfully from -0.4% by EOY 2013); this compares to a forecast of -1.3% for real UST 2Y rates by EOY 2014 (down slightly from -1.1% by EOY 2013). More importantly, this inflection is also being confirmed in the swaps market: 2Y swap rates in Japan are now trading at -1.57% on a real basis (subtracting the 2Y breakeven rate from the swap rate); that compares to -0.88% for the US. As recently as mid-MAR, those metrics were meaningfully inverted at -0.10% and -1.98%, respectively!
  3. In the context of intermittent spikes in volatility in the bond and forex markets, we have maintained that the risk-adjusted outlook for Japanese stocks is decidedly less sanguine than consensus assumes given the reflationary tailwind of currency debasement. The caveat here is that this headwind can be offset via absolute returns that are now likely to be increasingly predicated on economic and fiscal reforms (corporate tax cuts, labor market deregulation, fiscal consolidation, etc.), as well as large-scale portfolio rebalancing by Japanese households. To that tune, only 6.8% of Japanese household financial assets are held in equities vs. 14.4% for the Eurozone and 32.8% for the US.

In spite of what we’ve outlined as arguably the most credible and well-articulated bull case for both the USD/JPY cross and Japanese equities, both are broken from an immediate-term TRADE perspective and flirting with breakdowns on our intermediate-term TREND duration as well. The risk management levels to watch on that front are as follows:

  • USD/JPY (last price = 96.77): Bearish TRADE = 97.72 and Bearish TREND = 97.13 (a few days young; needs to hold below TREND for a few weeks to confirm the move… if confirmed, we would certainly alter our fundamental bias)
  • Nikkei 225 (last price = 13,519): Bearish TRADE = 14,091 and Bullish TREND = 13,336

Profit taking, generally disappointing 2Q earnings and waning international investor sentiment for Abenomics are all credible theses that support a Bearish TRADE setup in both markets. We haven’t come across anything credible that would fundamentally support a confirmed Bearish TREND setup in the USD/JPY cross, which we believe will continue to determine the direction of the Nikkei until it eventually becomes obvious to Japanese equity investors that inflation is not growth (the trailing 1Y and 3Y correlation coefficients between these two markets are +0.96 and +0.97, respectively).

 

But, as highlighted above, just because we haven’t formed a coherent fundamental story that supports the quantitative risk management setup in both markets does not mean the underlying fundamentals themselves cease to exist.  So either we’re #MissingSomething or this is all just one big head-fake as weak hands are shaken out of the trade.

 

Let us know what you think.

 

Our immediate-term Risk Ranges are now as follows:

 

UST 10yr Yield 2.57-2.73%

SPX 1679-1714

DAX 8226-8449

VIX 11.72-13.94

Yen 95.91-98.38

Copper 3.17-3.32

 

Keep your head on a swivel,

DD

 

Darius Dale

Senior Analyst

 

Missing Something - Chart of the Day

 

Missing Something - Virtual Portfolio


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