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The Dollar's (New) Public Enemy #1

Takeaway: Hedgeye TREND resistance for US Dollar Index is $81.29

The new Public Enemy #1 to the purchasing power of Americans (Janet Yellen enter stage right) will be front and center in Washington this Thursday. Will she eliminate economic gravity expectations for the U.S. to ever taper?

 

Ever?

 

Will the foreign exchange market reverse all of last week’s US Dollar's gains? Hedgeye TREND resistance for US Dollar Index is $81.29

 

The Dollar's (New) Public Enemy #1 -  USD

 

Trade :: Trend :: Tail Process - These are three durations over which we analyze investment ideas and themes. Hedgeye has created a process as a way of characterizing our investment ideas and their risk profiles, to fit the investing strategies and preferences of our subscribers.

  • "Trade" is a duration of 3 weeks or less
  • "Trend" is a duration of 3 months or more
  • "Tail" is a duration of 3 years or less

Anything longer than 3 years is unpredictable


SHORT ON LONG IDEAS OR LONGING FOR SHORTS? WE CAN HELP.

Takeaway: Our [new] innovative quantitative tools can help you consistently generate alpha on both the long and short side of the US equity market.

SUMMARY

A few months back, we published a note tilted, “MACRO MEETS MICRO: ARE YOU HUNTING WHERE THE FISH ARE IN THE US EQUITY MARKET?” in which we introduced our US equity market screening application.

 

The model is designed to triangulate sell-side, buy-side and insider sentiment on a particular stock, recording deviations in those metrics (from the sample) in order to systematically produce a list of names that may be under or over-owned; we consider that to be a good starting point to dig into the long or short side of a particular ticker(s) from a bottom-up perspective.

 

In the months since publishing that note, we’ve greatly expanded upon the model, sourcing valuable feedback from our institutional client base. Noteworthy changes include:

 

  • Expanding the sample of tickers from the S&P 500 to the Russell 3000 Index, with the latter representing ~98% of publically-traded equity market cap;
  • Tracking MoM deltas to see which tickers moved the most with respect to the scores assigned to it from the model, as big moves in sentiment over a reasonably short time frame may signal a meaningful change in the underlying fundamental trends; and
  • Adding in-depth summary statistics to the backtest results.

 

Please CLICK HERE to download the Excel file containing the latest refresh of the model and its summary results. For more information on how the model works, the associated backtest statistics or strategies for how best to apply it to your specific investment process or mandate, please review the following three sections.

 

***Email us if this is something you’d like to see more often or to have the sample customized for a specific coverage universe.***

 

1. HOW THE MODEL WORKS

The model is setup as a quantitative screen that assigns +/-1 point for a specific ticker's reading being in excess of [1x] standard deviations from the sample mean, for each of the following three metrics:

 

  • Sell-side Sentiment: Bloomberg Consensus Ratings (1-5 point scale): -1pt if the figure is in excess of +1x standard deviations relative to the mean of the broader sample; +1pt if the figure is less than -1x standard deviations relative to the mean of the broader sample; 0pts if within [1x] standard deviations of the mean.
  • Buy-side Sentiment: Short Interest as a % of Float: +1pt if the figure is in excess of +1x standard deviations relative to the mean of the broader sample; -1pt if the figure is less than -1x standard deviations relative to the mean of the broader sample; 0pts if within [1x] standard deviations of the mean. We cap the readings at 15% to dampen the variance of the sample in order to produce a more robust collection of deviations.
  • Insider Sentiment: 6M % Change of Insider Ownership: +1pt if the figure is in excess of +1x standard deviations relative to the mean of the broader sample; -1pt if the figure is less than -1x standard deviations relative to the mean of the broader sample; 0pts if within [1x] standard deviations of the mean. We cap the readings at +100% to dampen the variance of the sample in order to produce a more robust collection of deviations.

 

The model produces scores for each ticker ranging from -3 to +3 on an integer scale. For example, a reading of +3 signals extreme negative sentiment amongst both the sell-side (+1) and buy-side (+1) amid extreme insider buying (+1), while a reading of -3 would signal extreme positive sentiment amongst both the sell-side (-1) and buy-side (-1) amid extreme insider selling (-1).

 

2. BACKTEST RESULTS

Interestingly enough, the model was initially setup as a contrarian screening tool and the -3 to +3 scale was setup with the assumption that names the model signaled as under or over-owned would subsequently mean revert from a performance perspective.

 

What we learned in the backtesting phase, however, is that names which “the market” loved the most were typically rewarded with subsequent outperformance of considerable magnitude over the intermediate-to-long term (as defined by 1Y forward returns). Moreover, names that the market disliked the most were typically punished with subsequent substantial underperformance. Furthermore, the hit rate of positive absolute performance is substantially higher for names which "the market" loved the most that it is for names in which "the market" greatly disliked. 

 

Additionally, names that the market “learned to love” in a short time (as defined by its score dropping -2pts over the span of one month) generally outperformed those that the marked “learned to hate” (as defined by its score growing +2 over the span of one month).

 

SHORT ON LONG IDEAS OR LONGING FOR SHORTS? WE CAN HELP. - Backtest Results  1

 

SHORT ON LONG IDEAS OR LONGING FOR SHORTS? WE CAN HELP. - Backtest Results  2

 

SHORT ON LONG IDEAS OR LONGING FOR SHORTS? WE CAN HELP. - Backtest Results  3

 

Using these results, we have decided to assign any ticker that scores a -3 or -2 as a compelling LONG idea and any ticker that scores as a +2 as a compelling SHORT idea going forward.

 

In summary, there appears to be some element of efficient markets present in these backtesting results. While this is certainly not the proper forum to debate the merits of the Efficient Market Hypothesis, we can reasonably conclude that “the market” itself can be a reliable tool for identifying good opportunities on both the long and short side.

 

It also lends support to our belief that momentum exists in the market place over the immediate term, intermediate term and long term durations, which is precisely why we use a three-factor quantitative risk management model to identify key levels of breakout/breakdown risk in specific securities and/or asset classes.

 

Lastly, the only potential draw-back to interpreting these results at face value is the lack of historical data beyond MAR ’10 (that’s as far as Bloomberg’s insider ownership change data goes back). While the mini-crises of summer 2010 and 2011 are certainly included in the sample, we’d ideally like to see how the model would perform across multiple market cycles (i.e. 2007-09 would be a good place to start).

 

All that being said, using end-of-month observations for each ticker in the Russell 3000 Index, we were able to produce 86,976 subsequent 1Y forward return data points to analyze spanning MAR ’10 to OCT ‘12. We’d argue that’s plenty robust enough of a sample to work with.

 

3. USING THE TOOL EFFECTIVELY

Offhand, we think there are two types of primary users for this tool:

 

  1. Fundamental Analysts: Sift through our list of long and short ideas to find names that you think are either cheap or expensive on your preferred metric(s), or those that have some industry-specific tailwinds or headwinds that you think will either benefit or hurt a particular name(s). We’re giving you names we think will work anyway, so marrying your own bottom-up analysis with our top-down analysis may yield superior performance results.
  2. Quants: Use our list of long and short ideas to run your own proprietary factoring on; again, we’re giving you names we think will work anyway, so layering your own proprietary factoring on top of our analysis may yield superior performance results. Moreover, we’re including our US Equity Market Style Factor Divergence Monitor to the extent you see a particular factor outperforming on a trending basis and you (or we) feel it is appropriate to chase or fade it. In the Excel download above, we’ve included all of the relevant style factor characteristics for each of the individual tickers; please note that the data is presented on a percentile basis to make it easier to determine how much a specific ticker is weighted to a given factor.

 

SHORT ON LONG IDEAS OR LONGING FOR SHORTS? WE CAN HELP. - Style Factor Divergence Monitor

 

Lastly, all interested parties should feel free to ping us for our proprietary risk management levels on any given ticker(s). As you know, we are hyper-focused on timing, so allowing us to flag names that are breaking out or breaking down from an immediate-term TRADE or intermediate-term TREND perspective should only enhance the probability of generating alpha from this process.

 

Happy hunting,

 

DD

 

Darius Dale

Associate: Macro Team


European Banking Monitor: Shrinking Risk

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 tightened broadly across European Financials last week. #EuroBulls remains alive and well in the banking sector as the EU Financials posted a mean and median tightening of 5 and 14 bps, respectively. The biggest improvements came from Greece, Spain, Italy and Portugal. The only negative divergence was again Sberbank of Russia, where swaps widened 7 bps to 219 bps on further commodity deflation.

 

European Banking Monitor: Shrinking Risk - yy.banks

 

Sovereign CDS – Sovereign swaps were tighter across the board except in the US, where swaps widened a modest 1 bp to 31 bps. The biggest improvements came from Portugal (-31 bps) and Spain (-13 bps). 

 

European Banking Monitor: Shrinking Risk - yy. cds1

 

European Banking Monitor: Shrinking Risk - yy.cds2

 

European Banking Monitor: Shrinking Risk - yy.cds3

 

Euribor-OIS Spread – The Euribor-OIS spread was unchanged at 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: Shrinking Risk - yy.euribor

 


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.33%
  • SHORT SIGNALS 78.51%

$AMZN + USPS = Win, Win, Win

Takeaway: This news announcement is a win-win-win all around.

Editor's note: Hedgeye Retail Sector Head Brian McGough sees good news all around on news that the US Postal Service has entered a partnership with online retail giant Amazon to deliver its packages on Sundays for the first time.

 

$AMZN + USPS = Win, Win, Win - amabez

 

From the Wall Street Journal:

  • "Amazon.com Inc. will begin delivering packages on Sundays in the nation's two largest cities later this month with...the United States Postal Service."
  • "Amazon said Sunday delivery will begin on Nov. 17 in Los Angeles and New York and expand next year to Dallas, New Orleans, Houston and Phoenix, among others. Amazon will bring packages from its warehouses to Postal Service locations on Saturday evening or Sunday morning. The agency will then deliver them to doorsteps."
  • "Sunday delivery will be available for all Amazon customers in markets where the program is available at no additional cost. Customers won't specify Sunday delivery; eligible items will show up on Sunday if that is when they are ready."

Takeaway: This is a win, win, win. Consumers win, for obvious reasons. Amazon wins, as it can advertise Sunday delivery for the first time ever (and does so on the cheap by taking advantage of the USPS when it's on the ropes). Finally, the beleaguered Post Office wins. This partnership with Amazon is a cash flow stream -- albeit a minor one -- that helps prolong its inevitable demise.  

 


MONDAY MORNING RISK MONITOR: RISING RATES AND SHRINKING RISK

Takeaway: Both the US & EU banking systems are leading the charge higher as systemic risk measures remain in check, rates rise and the CRB falls.

Risk Monitor / Key Takeaways:

Friday was a watershed day as rates rose and Financials rallied aggressively, the best performing sector in the market. Not surprisingly, we saw a close resemblance between Friday's performance and the broader performance from early May to early September, i.e. the positively correlated, rate-sensitive Financials that led the charge from May to Sep were back in force on Friday. The Financials are now again bullish across all 3 durations in our quantitative model. We provide a brief summary below of some of the notable callouts across the various risk measures we track.

 

* 2-10 Spread – Last week the 2-10 spread widened to 230 bps, 6 bps wider than a week ago. 

 

* Chinese Interbank Rate (Shifon Index) –  The Shifon Index fell 56 basis points last week, ending the week at 3.73% versus last week’s print of 4.289%.

 

* CRB Commodity Price Index – The CRB index fell -2.0%, ending the week at 274 versus 280 the prior week. As compared with the prior month, commodity prices have decreased -4.5% 

 

* High Yield (YTM) Monitor – High Yield rates rose 8.2 bps last week, ending the week at 6.03% versus 5.95% the prior week.

 

* European Financial CDS - Swaps tightened broadly across European Financials last week. #EuroBulls remains alive and well in the banking sector..

 

Financial Risk Monitor Summary

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

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

 • Long-term(WoW): Positive / 3 of 13 improved / 1 out of 13 worsened / 9 of 13 unchanged

 

MONDAY MORNING RISK MONITOR: RISING RATES AND SHRINKING RISK - 15

 

1. U.S. Financial CDS -  Last week was largely uneventful for US banks and insurers as swaps were decidely mixed and little changed. Overall, swaps widened for 15 out of 27 domestic financial institutions, rising by a median 2 bps (though unch'd on an average basis). 

 

Tightened the most WoW: WFC, HIG, MBI

Widened the most WoW: CB, ALL, AXP

Tightened the most WoW: MTG, MS, AGO

Widened the most/ tightened the least MoM: GNW, GNW, TRV

 

MONDAY MORNING RISK MONITOR: RISING RATES AND SHRINKING RISK - 1

 

2. European Financial CDS - Swaps tightened broadly across European Financials last week. #EuroBulls remains alive and well in the banking sector as the EU Financials posted a mean and median tightening of 5 and 14 bps, respectively. The biggest improvements came from Greece, Spain, Italy and Portugal. The only negative divergence was again Sberbank of Russia, where swaps widened 7 bps to 219 bps on further commodity deflation.

 

MONDAY MORNING RISK MONITOR: RISING RATES AND SHRINKING RISK - 2

 

3. Asian Financial CDS - Asia was again mixed last week, but generally worse. Indian banks saw swaps at 2 out of 3 rise materially. Japanese banks were generally higher with the exception of Daiwa where swaps tightened 3 bps. Chinese banks were also mixed with two tightening 5 bps and one widening 4 bps.

 

MONDAY MORNING RISK MONITOR: RISING RATES AND SHRINKING RISK - 17

 

4. Sovereign CDS – Sovereign swaps were tighter across the board except in the US, where swaps widened a modestt 1 bp to 31 bps. The biggest improvements came from Portgual (-31 bps) and Spain (-13 bps). 

 

MONDAY MORNING RISK MONITOR: RISING RATES AND SHRINKING RISK - 18

 

MONDAY MORNING RISK MONITOR: RISING RATES AND SHRINKING RISK - 3

 

MONDAY MORNING RISK MONITOR: RISING RATES AND SHRINKING RISK - 4

 

5. High Yield (YTM) Monitor – High Yield rates rose 8.2 bps last week, ending the week at 6.03% versus 5.95% the prior week.

 

MONDAY MORNING RISK MONITOR: RISING RATES AND SHRINKING RISK - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 7.0 points last week, ending at 1828.

 

MONDAY MORNING RISK MONITOR: RISING RATES AND SHRINKING RISK - 6

 

7. TED Spread Monitor – The TED spread fell 1.4 basis points last week, ending the week at 18.6 bps this week versus last week’s print of 19.98 bps.

 

MONDAY MORNING RISK MONITOR: RISING RATES AND SHRINKING RISK - 7

 

8. CRB Commodity Price Index – The CRB index fell -2.0%, ending the week at 274 versus 280 the prior week. As compared with the prior month, commodity prices have decreased -4.5% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

MONDAY MORNING RISK MONITOR: RISING RATES AND SHRINKING RISK - 8

 

9. Euribor-OIS Spread – The Euribor-OIS spread was unchanged at 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: RISING RATES AND SHRINKING RISK - 9

 

10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index fell 56 basis points last week, ending the week at 3.73% versus last week’s print of 4.289%. 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: RISING RATES AND SHRINKING RISK - 10

 

11. Markit MCDX Index Monitor – Last week spreads widened 2 bps, ending the week at 86 bps versus 84 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: RISING RATES AND SHRINKING RISK - 11

 

12. Chinese Steel – Steel prices in China rose 1.4% last week, or 49 yuan/ton, to 3559 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: RISING RATES AND SHRINKING RISK - 12

 

13. 2-10 Spread – Last week the 2-10 spread widened to 230 bps, 6 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR: RISING RATES AND SHRINKING RISK - 13

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.6% upside to TRADE resistance and 1.5% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: RISING RATES AND SHRINKING RISK - 14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


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