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MONDAY MORNING RISK MONITOR: DOMESTIC MOMENTUM CONTINUES

Takeaway: The US continues to look quite good from a risk standpoint while Europe is showing at least one interesting negative development.

Summary: US risk measures continue to wane with the exception of ongoing increases in commodity prices. The steepening yield curve is an ongoing tailwind for banks and bank stocks. In Europe, while the banks look good, we're keeping one eye on the Euribor-OIS spread as it's been widening for the last few weeks, albeit to still nominal levels of ~14 bps.

 

* 2-10 Spread – Last week the 2-10 spread widened to 261 bps, 10 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

* Euribor-OIS Spread – The Euribor-OIS spread widened by 2 bps to 14 bps.  

 

* CRB Commodity Price Index – The CRB index rose 1.4%, ending the week at 284 versus 280 the prior week. As compared with the prior month, commodity prices have increased 3.9% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

 

Financial Risk Monitor Summary

 • Short-term(WoW): Positive / 4 of 13 improved / 3 out of 13 worsened / 6 of 13 unchanged

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

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

 

MONDAY MORNING RISK MONITOR: DOMESTIC MOMENTUM CONTINUES - 15

 

1. U.S. Financial CDS -  The insurance complex was notably tigher last week while the large cap banks and specialty finance names were mixed. Overall, swaps tightened for 21 out of 27 domestic financial institutions.

 

Tightened the most WoW: TRV, LNC, HIG

Widened the most WoW: AXP, WFC, AGO

Tightened the most WoW: TRV, PRU, LNC

Widened the most/ tightened the least MoM: AGO, MBI, XL

 

MONDAY MORNING RISK MONITOR: DOMESTIC MOMENTUM CONTINUES - 1

 

2. European Financial CDS - Swaps mostly tightened in Europe's banking system last week with the average change -1 bp and the median -2 bps.

 

MONDAY MORNING RISK MONITOR: DOMESTIC MOMENTUM CONTINUES - 2

 

3. Asian Financial CDS - Indian banks were again tighter this week, though narrowly so. The performance across Japanese financials was similar. 

 

MONDAY MORNING RISK MONITOR: DOMESTIC MOMENTUM CONTINUES - 17

 

4. Sovereign CDS – Sovereign swaps mostly tightened over last week. French sovereign swaps tightened by -1.0% (-1 bps to 54 ) and Spanish sovereign swaps widened by 1.7% (3 bps to 157).

 

MONDAY MORNING RISK MONITOR: DOMESTIC MOMENTUM CONTINUES - 18

 

MONDAY MORNING RISK MONITOR: DOMESTIC MOMENTUM CONTINUES - 3

 

MONDAY MORNING RISK MONITOR: DOMESTIC MOMENTUM CONTINUES - 4

 

5. High Yield (YTM) Monitor – High Yield rates fell 3.9 bps last week, ending the week at 5.98% versus 6.02% the prior week.

 

MONDAY MORNING RISK MONITOR: DOMESTIC MOMENTUM CONTINUES - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 2.0 points last week, ending at 1836.

 

MONDAY MORNING RISK MONITOR: DOMESTIC MOMENTUM CONTINUES - 6

 

7. TED Spread Monitor – The TED spread fell 0.6 basis points last week, ending the week at 18.4 bps this week versus last week’s print of 19.04 bps.

 

MONDAY MORNING RISK MONITOR: DOMESTIC MOMENTUM CONTINUES - 7

 

8. CRB Commodity Price Index – The CRB index rose 1.4%, ending the week at 284 versus 280 the prior week. As compared with the prior month, commodity prices have increased 3.9% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

MONDAY MORNING RISK MONITOR: DOMESTIC MOMENTUM CONTINUES - 8

 

9. Euribor-OIS Spread – The Euribor-OIS spread widened by 2 bps to 14 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: DOMESTIC MOMENTUM CONTINUES - 9

 

10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index rose 7 basis points last week, ending the week at 4.00% versus last week’s print of 3.927%. 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: DOMESTIC MOMENTUM CONTINUES - 10

 

11. Markit MCDX Index Monitor – Last week spreads tightened -2 bps, ending the week at 89 bps versus 91 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: DOMESTIC MOMENTUM CONTINUES - 11


12. Chinese Steel – Steel prices in China fell 1.0% last week, or 37 yuan/ton, to 3507 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: DOMESTIC MOMENTUM CONTINUES - 12

 

13. 2-10 Spread – Last week the 2-10 spread widened to 261 bps, 10 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR: DOMESTIC MOMENTUM CONTINUES - 13

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.4% upside to TRADE resistance and 2.4% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: DOMESTIC MOMENTUM CONTINUES - 14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 

 

 



Trust Your Process

“Self trust is the first secret of success.”

-Ralph Waldo Emerson

 

With a little more downtime than usual this past week I had the opportunity to crack open a few new books. One of them is a leadership book that’s been in my pile for almost a year now titled Unusually Excellent, by golf pro John Hamm.

 

The aforementioned quote is the opening line from Chapter One – Being Authentic, The Courage to Be Yourself. And it’s followed up by another insightful thought by Lao Tzu: “He who knows others is wise. He who knows himself is enlightened.”

 

Hamm’s core leadership framework has three parts: Credibility, Competence, and Consequence. In other words, be who you are, do what you do, and be accountable for the decisions you make. Trust your process in 2014 and people will probably trust you.

 

Back to the Global Macro Grind

 

When people ask me why I seem so confident in my process, it’s relatively easy to explain. My process embraces change and uncertainty. One of the simplest truths that I trust about this game is that my process will change as my business, markets, and economies do. It’s a lot easier being confident in that than a predetermined dogma, conclusion, or ideology.

 

Lots of people in the media have asked me what my “highest conviction calls are for 2014?” Instead of being put in a box, I just say that I’m very confident that I have no idea what will happen across a trivial twelve month period. Then the other side of the conversation gets quiet. And I assure them that its really ok. “I don’t know” is often the answer.

 

What I do know is that I’ll be up and at it, grinding away alongside my teammates, at the top of every risk management morning in 2014. Every day starts with information surprise – new economic data, market risks, price moves, etc. – it’s kind of like Christmas, but every morning, for Canadian-American macro market geeks.

 

On that score, last week was as interesting as any other week in 2013:

  1. US interest rates ripped back up to their YTD highs
  2. US stocks ripped back to their all-time highs

Even though this wasn’t the way consensus expectations drew it up with its “2013 predictions” at this time last year, all-time, as we like to say here @Hedgeye, is a long time.

 

With the Fed reacting (on a 3-month lag) to what markets have been pricing in all year (US GDP #GrowthAccelerating from 0.14% Q412 to 4.12% Q313), all we have witnessed here is a run-of-the-mill rotation out of fear (slow-growth yield chasing) and into growth itself:

  1. SP500 and Russell 2000 = +1.3% each last week to +29.1% and +36.7% YTD, respectively
  2. 10-year US Treasury Yield = +11 basis points to 3.00% (+124 basis points, or +70% YTD = #RatesRising)
  3. US Equity Fear (Volatility) = VIX down another -9.6% last wk to -30.9% YTD #crashing

All the while, underneath the hood, the month-to-date performance across asset classes and investment Style Factors continues to do what it constantly does – change:

  1. SP500 = +1.97% for DEC to-date
  2. Basic Materials (XLB) = +3.81% and Utilities (XLU) = -0.58% DEC to-date, respectively
  3. CRB Commodities Index (19 commodities) = +3.4 and Copper = +5.6% DEC to-date, respectively

In other words, as US #GrowthAccelerating hits its crescendo (rate of change on a 9-12 month basis), market expectations for INFLATION are finally starting to rise again. That’s new.

 

And yes, inflation expectations rising will eventually slow real (inflation adjusted) economic growth. But since the entire edifice of Certainty Forecasting that is Old Wall Street and Washington DC “economics” centrally plan and predict on a lag, threading the needle on when #GrowthSlowing might matter to market expectations is going to be one of the more important things I do.

 

Notwithstanding it’s 1-wk up move on the taper news, it’s important to acknowledge the real-time #GrowthSlowing factor that is the USD falling for 6 of the last 7 weeks. That, in our model, is what is perpetuating the resurgence of inflation expectations. While we were bearish on Commodities for over a year, Mr. Macro Market is telling us to go neutral on that, for now.

 

Got respect for Mr. Macro Market? My process does. This is a short-term market reality, but looking at the 15-day inverse correlation between the CRB Commodities Index and the USD right now, it’s jumping off my screen at -0.94. And with the Euro breaking out versus USD (see our Q413 #EuroBulls Macro Theme), Down Dollar (with taper!) is to be respected by our process as well.

 

Our immediate-term Global Macro Risk Ranges are now (Top 12 ranges are in our Daily Trading Range product):

 

UST 10yr Yield 2.93-3.05%

SPX 1

VIX 11.06-13.83

USD 80.09-80.72

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Trust Your Process - 5Y Breakeven

 

Trust Your Process - 55


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THE M3: GREEK MYTHOLOGY; UNEMPLOYMENT

THE MACAU METRO MONITOR, DECEMBER 30, 2013

 

 

GREEK MYTHOLOGY CASINO UNAFFECTED BY HOTEL SEIZURE Macau Business

The seizure of the New Century Hotel and Casino has not affected the Greek Mythology Casino, according to one of the casino’s shareholders.  Junket investor Amax International Holdings Ltd told the Hong Kong Stock Exchange that the hotel and the casino were separate.  Amax says the casino is a tenant of the hotel. It has an equity interest in the casino’s operations.

 

EMPLOYMENT SURVEY FOR SEPTEMBER-NOVEMBER 2013 DSEC

Unemployment rate (1.9%) for September-November 2013 held stable from August-October.  Employment in the Gaming sector increased by 2.9% to 85,000.

 


December 30, 2013

December 30, 2013 - Slide1

 

BULLISH TRENDS

December 30, 2013 - Slide2

December 30, 2013 - Slide3

December 30, 2013 - Slide4

December 30, 2013 - Slide5

December 30, 2013 - Slide6

December 30, 2013 - Slide7

December 30, 2013 - Slide8

December 30, 2013 - Slide9

December 30, 2013 - Slide10

 

BEARISH TRENDS

December 30, 2013 - Slide11
December 30, 2013 - Slide12

December 30, 2013 - Slide13


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – December 30, 2013


As we look at today's setup for the S&P 500, the range is 42 points or 1.33% downside to 1817 and 0.96% upside to 1859.                

                                                                                                               

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: 2.62 from 2.61
  • VIX closed at 12.46 1 day percent change of 1.05%

MACRO DATA POINTS (Bloomberg Estimates):

  • 10am: U.S. Pending Home Sales M/m, Nov., est. 1% (pr -0.6%)
  • 10:30am: Dallas Fed Manufacturing Dec. (prior 1.9)
  • 3pm:  New York Fed releases Jan. Treasury purchase schedule
  • U.S. Rates Weekly Agenda
  • FX Weekly agenda

GOVERNMENT:

    • House, Senate not in session
    • Kerry sets plans to travel to Mideast on New Year’s Day
    • Extended jobless benefits ran out Dec. 28 for 1.3m people
    • China’s cash-for-votes scandal highlights graft challenge

WHAT TO WATCH:

  • Crocs CEO to retire as Blackstone takes $200m Stake
  • Obamacare enrollments reach 1.1m with surge in Dec.
  • Ford brand widens U.S. sales lead over Toyota
  • Sanofi multiple sclerosis drug fails to win FDA approval
  • Australia iron-ore exports curbed; ports close before storm
  • Mondelez to sell Snackwell’s stake to private-equity firm: WSJ
  • CFTC’s Gensler says regulators reached “right balance” on rules
  • Hyundai Motor replaces U.S. chief to revitalize 2014 sales
  • UBS unit among China brokers facing penalties for Dec. 20 trades
  • China local debt rises to $2.95 trillion amid economic risks
  • Chesapeake Energy paying to move gas it doesn’t have: WSJ
  • Merck working on plans to reshape R&D, WSJ reports

EARNINGS:

    • Cal-Maine Foods (CALM) 6:30am,  $1.30

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • WTI Trades Above $100 for Second Day as Oil Stockpiles Decline
  • Gold Declines on Way to Worst Year Since 1981 as Silver Drops
  • Copper Traders Bullish as Hedge Funds Bet on Gains: Commodities
  • World’s Biggest Iron-Ore Port Is Shut as Cyclone Nears Australia
  • Coffee Climbs in New York on Index Reweighting; Cotton Advances
  • Aluminum Reaches Eight-Week High as U.S. Rebound Spurs Buying
  • Corn Drops to One-Week Low as Rain Eases Argentine Crop Stress
  • Rubber Falls to Post Annual Decline as China Inventory Climbs
  • Rebar in Shanghai Drops to Two-Month Low as Inventory Climbs
  • Most-Accurate Oil Forecasters See Second Year of Losses: Energy
  • Natural Gas Gains on Forecast for Cold Start to New Year in U.S.
  • Sesa Sterlite Restarts Iron-Ore Mines, Easing Supplies in India
  • Natural Gas Consumption Likely Sluggish Into 2014: Bear Case
  • Cotton Prices Seen Declining as China Poised to End Stockpiling

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

 

 

 

 

 

 

 

 

 

 

 

 

 


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.

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