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Just Charts: Early Merger Winds

In this note, we look at the largest companies by market cap in the Consumer Staples space from both a quantitative perspective and fundamental aspect where we offer one.  As you will see over time, sometimes our fundamental view does not align with the quantitative setup (though not often).

 

Consumer stocks are off to a tough start in 2014.  From a quant setup Keith McCullough said over the weekend that “I’d short 80% of this market cap.”  As you can see from the charts below, there is a bearish set up for the largest names in Consumer Staples. 

 

We generally believe that the group is way over-owned and loaded with premium valuations in a US consumption growth slowing world.  To that end, the most recent data on Disposable income per capita is making new lows and the high frequency Bloomberg weekly consumer comfort index has not seen any real improvement over the past 6 months.

 

Uniliver started the current earnings season saying that “first-quarter underlying sales will rise at the low-end of 3 percent to 5 percent guidance.”  The biggest issues for Uniliver is stemming from the slowdown in emerging markets, although according to the company Europe is showing few signs of improvement as consumers remain wary.

 

The sector received the spotlight this morning with news that Mondelez (MDLZ) appointed Nelson Peltz of Trian Partners to its board.  Trian is the fourth largest shareholder of MDLZ (2.33%) and was very public in July 2013 issuing a white paper encouraging the company to merge with PepsiCo and spin off its beverage business. This announcement, which heightens animal spirits based on Peltz’s track record of restructuring companies to unlock shareholder value, follows the BEAM acquisition by Suntory last week and offer exciting merger winds from a group that otherwise has had a slow start to the new year. 

 

We will be hearing from PG and KMB on Wednesday and next week begins the earnings deluge.  

 

Just Charts: Early Merger Winds  - 1 21 2014 12 27 53 PM

 

Just Charts: Early Merger Winds  - chart2

 

Just Charts: Early Merger Winds  - 14

 

Just Charts: Early Merger Winds  - 13

 

 

BULLISH


BUD – looks almost identical to DEO – big beta trade that’s starting to come undone for the group overall (XLP is bearish TRADE now, and that’s new); $101.24 is TREND support; above that bullish; below it bearish

Just Charts: Early Merger Winds  - chart3

 

DEO – after failing to breakout to higher-highs (vs the DEC 2013 closing highs), now the TREND line of $126 is under attack here and that is new (and bearish if it breaks)

Just Charts: Early Merger Winds  - chart4

 

 

KMB – next to MDLZ its one of the few stocks on this list I’d buy if blindfolded w/ no research; part of that is that the stock was so bad that its in a classic @Hedgeye bearish to bullish reversal (might not last, but looks good as long as $103.02 TREND support holds)

Just Charts: Early Merger Winds  - chart5

 

 

MDLZ – best looking name on your roster; still in a Bullish Formation (bullish TRADE, TREND, and TAIL) with immediate-term TRADE support of 34.65 being the important line to use as a momentum stop

Just Charts: Early Merger Winds  - 6

 

 

MO – doesn’t look nearly as bad as PM, so an interesting pair there, but that can change if MO’s TREND support breaks (36.69, so its close by); just broke its immediate-term TRADE line of 37.41 in 2014 too

Just Charts: Early Merger Winds  - 7

 

BEARISH

 

GIS – if you told me to, I’d short this stock on the open tomorrow; brand new bearish TREND developing with $49.55 being TREND resistance

Just Charts: Early Merger Winds  - 8

 

 

KO – just broke its TREND line too (that’s new), with TREND support of 39.96 now being resistance, if you have bearish catalysts, good chance this stock retests the OCT 2013 lows

Just Charts: Early Merger Winds  - 9

 

PEP – doesn’t look as bad as KO, but pretty close – looks a lot like sector beta for XLP that just flagged bearish in the last few weeks; TREND line of $82.74 broke

Just Charts: Early Merger Winds  - 10

 

 

PG – looks like GIS; if you tell me to short this, I will. What was TREND support at 81.29 is now a freshly established wall of resistance; no support for this stock to $74-75

Just Charts: Early Merger Winds  - 11

 

 

PM – continues to look horrible on both an absolute and relative basis. TAIL risk resistance remains in place overhead at 86.63; no support to the SEP 2013 closing lows.

Just Charts: Early Merger Winds  - 12

 

 


Ukraine’s Political Corruption #StatusQuo

There’s more headline risk in the Ukraine today after reports of a long weekend of Molotov cocktail throwing from opponents of President Viktor Yanukovych’s government and beat-downs from the riot police to quell the protests.  But has anything changed in the streets since the original protests in late November 2013 around the government’s decision to turn to the Kremlin for “support” and reject a trade agreement with the EU? 

 

No.

 

In fact, Yanukovych has increased his grip on the people by issuing ten repressive laws limiting freedoms of speech and assembly last Wednesday. They include: 

  • Jail terms for anyone blockading public buildings
  • Ban on the wearing of masks or helmets at demonstrations
  • Ban on any unauthorized tents in public areas, and
  • A crime to make slanderous remarks about a government official

In a statement yesterday evening, Yanukovych said that "now, when peaceful actions are turning into mass unrest, accompanied by riots and arson attacks, the use of violence, I am convinced that such phenomena are a threat not only to Kiev but to the whole of Ukraine."

 

Below is an article we wrote on 12/18/2013 titled “Putin’s Silver Spoon” that contextualizes the protests and provides our outlook on the Ukrainian political situation. Since our position hasn’t changed since we penned the article, we’ve reproduced it below for those that did not get a chance to read it. 

 

As an update to one measure of risk, directly below we updated our chart on the 5YR CDS spread.

 

Ukraine’s Political Corruption #StatusQuo - zz. ukraine

 

Ukraine’s Political Corruption #StatusQuo - z. jofa gear

 

------------

12/18/13 01:55 PM EST

Putin’s Silver Spoon

 

Yesterday Russian President Vladimir Putin announced an agreement to loan the Ukraine $15 Billion and reduce the cost of natural gas exports by one-third. Will this quell the weeks of protests against Ukrainian President Viktor Yanukovych’s government?

 

While publically there was no talk of the Ukraine joining Putin’s custom union (for trade) – which already includes Kazakhstan and Belarus and is a contentious issue for the “Western” protesters – make no mistake that with this agreement Russia has reconfirmed its dominance over the Ukraine, and with it won a key geopolitical victory. For the Ukraine, it spells years, if not decades, before real reform (political and economic) may be realized.

 

Our Position: despite heavy foot power (protests) against President Yanukovych over the last four weeks, we do not expect dissent to topple government leadership that is orientated to the East (Russia). This view is built on several factors, including the unwillingness of the EU to fully commit to bringing the Ukraine into the EU, or conversely meet the sway of Putin to fold the Ukraine under its geographic empire. What Russia can provide in funds (both directly and through gas subsidies) we don’t foresee the EU attempting to match, and this balance of payments should reinforce existing strong levels of political corruption (beyond just the President), supported by a sizable proportion of the populous that identifies with the East. Further, unlike during the Orange Revolution, there is no clear organized opposition (merely disparate dissenters), all of which suggests to us that while protests may continue, there’s low probability that Yanukovych’s rule is toppled (especially following the deal with Russia) and a high probability that the Ukraine maintains its alliance with the Kremlin for the foreseeable future.

 

Below we note historical background, critical developments, and analysis aided by sources in the region to contextualize the protests:

  • Protests Beyond Just A Trade Agreement. While Yanukovych’s decision last month (21 NOV) to reject a trade deal with the EU (that had been in the works for a number of years) sparked the largest protest since the Orange Revolution in 2004, the dissent is rooted in opposition to years of crony capitalism, centered around a small group of oligarchs and government heads profiting from the state at the hands of the population.
  • The Orange Revolution Failed. The 2004 Orange Revolution ushered in great hope for the ideals of the West: democracy and reform in the spirit of the EU institution, but the Revolution failed.  Yulia Tymoshenko, with her camera-friendly crown of blond locks, and Viktor Yushchenko, with his discolored and uneven face after being poisoned by the opposition in 2004, were strong faces and voices of the Orange Revolution. The protests led to the defeat of Yanukovych in a forced second run-off election that ushered in Yushchenko as President and Tymoshenko as his Prime Minister in early 2005. While their leadership brought great “hope” that the country could have its Berlin Wall or Solidarity moment, their stars faded quickly (along with hope of real reform) under the weight of a corrupt state.  
  • Tables Turned. By 2010, Yanukovych won back the Presidency. By this time, Tymoshenko was surrounded by controversy and suspicion over gas contracts that she arranged with Russia in 2009: allegedly she agreed to inflated gas prices (which hurt the nation and led to shutdowns) in return for political favors and personal profit. Even Yushchenko testified against her in 2011 and Yanukovych sentenced her to a 7 year term in 2011 – a position the EU decries as “unjust” without substantiating with refuting evidence. Yanukovych’s rule since his reelection has been marked by the further consolidation of power and wealth, going so far as to take out certain leading businessmen (and oligarchs), redistributing assets and leadership positions to an inner circle of family members and a close cadre of “extended” family.
  • Economic Plight. The economy has unraveled under Yanukovych. GDP has gone from its last high of +5% at the end of 2011 to -1.3% as of Q3 2013. Pressing is an underfunded government (deficit around -8.5% of GDP) with plunging foreign reserves.  The country is estimated to have $17 Billion of debt payments due in the next two years, hence the importance of a bridge loan from Russia/EU. The government’s mismanagement of the economy has also included a lack of infrastructure spending and investment, equating to the erosion of living standards, while chasing away foreign investment on fears of sovereign default.   
  • No Opposition Leadership over Divided Kiev. Recent demonstrations illustrate that unlike the Orange Revolution, there’s no united leadership in the opposition parties. The contenders are made up of: Arseny Yatseniuk (leads the party formerly headed by Tymoshenko), Vitaly Klitschko (a boxing champion that heads the Udar “punch” party), and Oleh Tyagnibok (a right-wing nationalist).  All of them claim to have not seen the protests coming.
  • Ukraine and Kiev Remain Divided. A country with a population of 46 million, the western half of the country aligns itself politically with the West (Europe) and has the highest concentration of native Ukrainian speakers, whereas the eastern half aligns itself with the East (Russia) and primarily speaks Russian as a first language.  Kiev, the capital and largest city, is located centrally to the north, and is itself a very divided city both politically and linguistically. The recent demonstrations suggest that protesters have numbered anywhere between 100K to 600K, but the city remains divided. Reports suggest the protests have a grass roots organization “feel” that lack strong polarizing leadership and have been mostly met by non violence from the government/police, with no recorded deaths.  While the protests have been taking place, as recently as December 3rd, Yanukovych’s government survived a no-confidence vote.
  • Russian Interests. Russia is looking out for its national security interests first and foremost and using its stranglehold on natural gas as a bargaining chip. If Ukraine is under the influence of the EU, Russia is vulnerable to the south. Ukraine also represents an important natural gas transit country for flows to Europe, and a Ukraine under Russian influence helps to solidify Putin’s desires for a trading union. Given that Putin has done nothing to diversify his own economy in the last 12 years, he’s left with few options to exert his political clout beyond straight arming former Soviet satellite countries into his sphere of influence.
  • EU Interests. For the EU, the Ukraine is of less importance from a security perspective, unless it is looking to invade Russia (unlikely). Like Turkey, the Ukraine is geographically at the fringe of Europe. Given the experiences of the Eurozone ‘crisis’ and tail of slow growth alongside political indecision (there are now 28 separate parliaments and 18 Eurozone countries), we do not envisage the EU yearning to add a historically highly corrupt government to its roster.  
  • Russia Terms. To plug the country’s balance of payments deficit (for an estimated 18-24 months) Ukraine will issue $15 billion of Eurobonds which Russia will purchase from its National Wellbeing Fund containing $88.1 billion – the first tranche of $3 billion is expected as soon as year-end. In addition, the discount given to the Ukraine on natural gas, from current prices of around $400 per thousand cubic meters (tcm) to $268.50 tcm, is worth another $3 billion in subsidy. While Yanukovych did not sign off on entering Putin’s custom union (which Kazakhstan and Belarus have joined and which reeks of attempts to get the old Soviet gang back together), expect that this deal didn’t come without terms. Besides the national security piece that Russia receives, our guess is Putin will run the Ukraine’s PR campaign – he will decide if and when the Ukraine should enter his custom’s union.

Conclusion - Tipping East. The Ukraine remains a state uncomfortable with addressing its own sovereignty, preferring to be aligned. In our analysis, the Kremlin remains Yanukovych’s preferable partner over the EU given 1) Putin’s ability to quickly write a check (to cover the government’s liabilities), 2) his reelection aspirations for 2015 and ability to “win” cheaper, uninterrupted heat for the nation, 3) the cultural affinity to the East, including a significant percentage of the population that identifies with Russian rule and to some extent nostalgically yearns for a return to the Soviet days, 4) the likely harsher terms the EU and international organization could offer in exchange for loan packages, and 5) the lukewarm reception of the EU to fold the Ukraine into the EU.

 

If we look to the market for its risk assessment, as expected following yesterday’s deal Ukrainian CDS and sovereign credit yields dropped in a hurry. What’s interesting, however, comes from the second chart below that shows Ukraine’s 5YR Sovereign CDS pulled back on a historical basis (to its maximum based on Bloomberg data). Here it’s clear that while risk was being priced up into the event (1st chart), the absolute level is a moon shot from all-time highs in March 2009, a period when Western European nations had to negotiate with Russia over gas shut-down to their countries that was being pumped through the Ukraine. What this signals to us is that the EU community will only get its hands dirty in the interests of Ukraine when it stands to clearly and personally receive benefit. The “failures” of these protests for change and the muted response from the EU suggest to us that the Ukraine is far from what could be tipping point levels. Russia will remain its puppet master.

 

Ukraine’s Political Corruption #StatusQuo - z. 33

 

Ukraine’s Political Corruption #StatusQuo - z. 44

 

Matthew Hedrick

Associate

 



Early Look

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Bond + Equity Fund Flows, Refreshed

Takeaway: Both mutual funds and ETFs flagged fixed income inflows for the first week of the year with outflows across the board in equities.

This note was originally published January 16, 2014 at 08:03 in Financials. Click here for more information on how you can begin subscribing to Hedgeye research.

Investment Company Institute Mutual Fund Data and ETF Money Flow:

Bond + Equity Fund Flows, Refreshed - flows3 

Total equity mutual funds experienced moderate outflows for the first week of 2014 with $646 million flowing out of stock funds for the week ending January 8th. Within the total equity fund result, domestic equity mutual funds lost $3.3 billion, the biggest outflow in a month, with international equity funds posting a $2.7 billion inflow. This weekly loss of $646 million now serves as the running 2014 average and compares to the solid equity inflows experienced in 2013 which put up a $3.0 billion inflow per week. 

 

Fixed income mutual funds broke their dour stretch of 14 consecutive weeks of outflow with the first net subscription last week in three and a half months. In the week ending January 8th, total fixed income mutual funds produced a $2.6 billion inflow which broke out into a $2.9 billion inflow into taxable bonds and a $347 million outflow in tax-free bonds. This week's $2.6 billion inflow now serves as the 2014 weekly average which is an improvement for now against the 2013 weekly average in fixed income of a $1.5 billion outflow.

 

ETFs experienced mixed trends but essentially followed the direction of mutual funds with an outflow in passive equity funds and an inflow into bond ETFs. Stock ETFs lost $1.3 billion for the 5 day period ending January 8th with bond ETFs experiencing a $778 million inflow. 

 

The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a negative $5.4 billion spread for the week ($1.9 billion of total equity outflows versus $3.4 billion in fixed income inflows - negative numbers imply inflows for bonds). This result was the best week for total fixed income in 17 weeks and compared to the 52 week average of a $7.3 billion spread (positive spread to equities) but was well off of the 52 week high of $30.9 billion (positive spread to equities) and the smallest equity/debt weekly spread of -$9.2 billion (negative numbers imply a net inflow into bonds for the week).

 

We estimate that the strong return for stocks to end 2013 and the negative return for bonds to end last year may be resulting in an institutional re-balance to start 2014. In a hypothetical 60/40 portfolio of stocks/bonds, the returns in the broader averages of 30% in the S&P 500 and a negative 2% for the Barclay's Aggregate Index would mean an institutional portfolio would need to sell 6% of its stock holdings and buy 6% more in bonds, which may account for the year-to-date start in the asset classes (bonds outperforming stocks to start '14) with then mutual fund and ETF flows chasing this performance.


 

Bond + Equity Fund Flows, Refreshed - ICI chart11

 

 

For the week ending January 8th, the Investment Company Institute reported moderate equity outflows from mutual funds with $646 million flowing out of total stock funds. The breakout between domestic and world stock funds separated to a $3.3 billion outflow from domestic stock funds and a $2.7 billion inflow into international or world stock funds. These results for the most recent 5 day period now serve as the year-to-date average for 2014 being they are the first week of the New Year and compare to the 2013 results of a $451 million average weekly inflow into domestic funds and a $2.6 weekly subscription into international or world funds for a total of a $3.0 billion weekly inflow average for last year.

 

On the fixed income side, bond funds broke their streak of 14 consecutive weeks of outflow for the 5 day period ended January 8th, with inflows into bond products for the first time in over 3 months. The aggregate of taxable and tax-free bond funds booked a $2.6 billion inflow, the first net weekly inflow since the $1.7 billion that came into bond fund the week ending September 25th. Taxable bonds carried the load with a $2.9 billion inflow, which was net against another outflow in municipal or tax-free bonds of $347 million. Intermediate term trends in fixed income are still negative with taxable bonds having had outflows in 27 of the past 33 weeks and municipal bonds having had 33 consecutive weeks of outflow. 

 

Hybrid mutual funds, products which combine both equity and fixed income allocations, continue to be the most stable category within the ICI survey with another $880 million inflow in the most recent 5 day period, although the past 6 weeks have been below the recent 52 week average for 2013 of $1.5 billion per week. Hybrid funds have had inflow in 31 of the past 33 weeks.

 

 

Bond + Equity Fund Flows, Refreshed - ICI chart2

Bond + Equity Fund Flows, Refreshed - ICI chart3

Bond + Equity Fund Flows, Refreshed - ICI chart4

Bond + Equity Fund Flows, Refreshed - ICI chart5

Bond + Equity Fund Flows, Refreshed - ICI chart6

 

 

Passive Products:

 

 

Exchange traded funds had mixed trends within the same 5 day period ending January 8th but essentially followed the asset allocation flows within mutual funds last week. Equity ETFs posted a weak $1.3 billion outflow in the most recent 5 day period, breaking a streak of 7 consecutive weeks of positive equity ETF flow. The 2014 weekly average for stock ETFs is now this recent $1.5 billion outflow, which compares to last year's $3.4 billion weekly average inflow.

 

Bond ETFs experienced moderate inflows for the 5 day period ending January 8th with a $778 million subscription, an improvement from the week prior which lost $224 million and now also an improvement from the new annual comparison of a $234 million weekly inflow for 2013. Bond ETF trends have been perfectly mixed over the past 10 weeks, with 5 weeks of inflow and 5 weeks of outflow.

 

 

Bond + Equity Fund Flows, Refreshed - ICI chart7

Bond + Equity Fund Flows, Refreshed - ICI chart8

 

 

Net Results:

 

The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a negative $5.4 billion spread for the week which favors fixed income ($1.9 billion of total equity outflows versus $3.4 billion in fixed income inflows - negative numbers imply inflows for bonds). This result was the best week for fixed income in 17 weeks and compared to the 52 week moving average of a $7.3 billion spread (positive spread to equities) but was well off of the 52 week high of $30.9 billion (positive spread to equities) and the smallest equity/debt weekly spread of -$9.2 billion (negative numbers imply a net inflow into bonds for the week).

 

We estimate that the strong return for stocks to end 2013 and the negative return for bonds to end last year may be resulting in an institutional re-balance to start 2014. In a hypothetical 60/40 portfolio of stocks/bonds, the returns of the broader averages of 30% in the S&P 500 and a negative 2% for the Barclay's Aggregate Index would mean an institutional portfolio would need to sell 6% of its stock holdings and buy 6% more in bonds which may account for the year-to-date start in the asset classes (bonds outperforming stocks to start '14) with then mutual fund and ETF flows chasing this performance. 

 

 

Bond + Equity Fund Flows, Refreshed - ICI chart9

 

Bond + Equity Fund Flows, Refreshed - ICI chart10

 

 

Jonathan Casteleyn, CFA, CMT 

jcasteleyn@hedgeye.com 

 

Joshua Steiner, CFA

jsteiner@hedgeye.com

 


TUESDAY MORNING RISK MONITOR: THE INTERMEDIATE AND LONG TERM OUTLOOKS REMAIN FAVORABLE

Takeaway: The intermediate and long-term dynamics remain very favorable, though the short-term setup appears balanced between positive & negatives.

Summary: On a short-term basis, we see improvement and decline in roughly equal  measures, while over the intermediate term there remains the trend is clearly toward improvement by a ratio of two to one. The same can be said for the long-term, where improvement is outstripping decline by a ratio of four to one.

 

Financial Risk Monitor Summary

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

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

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

 

TUESDAY MORNING RISK MONITOR: THE INTERMEDIATE AND LONG TERM OUTLOOKS REMAIN FAVORABLE - 15

 

1. U.S. Financial CDS -  The week saw big improvement in mortgage insurers MTG and RDN, furthering their m/m trend of improvement. The big banks were modestly tighter, on average, continuing their trend over the past month as well.

Tightened the most WoW: MTG, RDN, AGO

Widened the most WoW: WFC, MET, CB

Tightened the most WoW: AON, MBI, AGO

Widened the most/ tightened the least MoM: AXP, WFC, XL

 

TUESDAY MORNING RISK MONITOR: THE INTERMEDIATE AND LONG TERM OUTLOOKS REMAIN FAVORABLE - 1

 

2. European Financial CDS - The most recent week saw swaps widen nominally in Europe's banking system, but the bigger takeaway remains the still-substantial tightening on a m/m basis. 

 

TUESDAY MORNING RISK MONITOR: THE INTERMEDIATE AND LONG TERM OUTLOOKS REMAIN FAVORABLE - 2

 

3. Asian Financial CDS - Indian banks continue their see-saw trend of late, this time tightening by 11-22 bps w/w. Meanwhile, on a m/m basis the Chinese banks continue to widen, rising by 24-28 bps. Japanese banks are mixed, though, on balance, unchanged on a m/m basis.

 

TUESDAY MORNING RISK MONITOR: THE INTERMEDIATE AND LONG TERM OUTLOOKS REMAIN FAVORABLE - 17

 

4. Sovereign CDS – Sovereign swaps mostly tightened last week with the exception of Japan where they rose 2 bps. Portuguese sovereign swaps tightened by -7.6% (-22 bps to 269 ) and U.S. sovereign swaps were unchanged. Overall, the trend of ongoing improvement in European sovereign risk profiles continues.

 

TUESDAY MORNING RISK MONITOR: THE INTERMEDIATE AND LONG TERM OUTLOOKS REMAIN FAVORABLE - 18

 

TUESDAY MORNING RISK MONITOR: THE INTERMEDIATE AND LONG TERM OUTLOOKS REMAIN FAVORABLE - 3

 

TUESDAY MORNING RISK MONITOR: THE INTERMEDIATE AND LONG TERM OUTLOOKS REMAIN FAVORABLE - 4

 

5. High Yield (YTM) Monitor – High Yield rates fell 8.3 bps last week, ending the week at 5.83% versus 5.91% the prior week.

 

TUESDAY MORNING RISK MONITOR: THE INTERMEDIATE AND LONG TERM OUTLOOKS REMAIN FAVORABLE - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 3.0 points last week, ending at 1850.

 

TUESDAY MORNING RISK MONITOR: THE INTERMEDIATE AND LONG TERM OUTLOOKS REMAIN FAVORABLE - 6

 

7. TED Spread Monitor – The TED spread was unchanged last week at 20.4 bps.

 

TUESDAY MORNING RISK MONITOR: THE INTERMEDIATE AND LONG TERM OUTLOOKS REMAIN FAVORABLE - 7

 

8. CRB Commodity Price Index – The CRB index rose 1.3%, ending the week at 278 versus 275 the prior week. As compared with the prior month, commodity prices have decreased -1.1% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

TUESDAY MORNING RISK MONITOR: THE INTERMEDIATE AND LONG TERM OUTLOOKS REMAIN FAVORABLE - 8

 

9. Euribor-OIS Spread – The Euribor-OIS spread was essentially unchanged at 12 bps last week. 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. 

 

TUESDAY MORNING RISK MONITOR: THE INTERMEDIATE AND LONG TERM OUTLOOKS REMAIN FAVORABLE - 9

 

10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index rose 1 basis point last week, ending the week at 2.77% versus last week’s print of 2.76%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.

 

TUESDAY MORNING RISK MONITOR: THE INTERMEDIATE AND LONG TERM OUTLOOKS REMAIN FAVORABLE - 10

 

11. Markit MCDX Index Monitor – Last week spreads tightened -6 bps, ending the week at 77 bps versus 83 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.

 

TUESDAY MORNING RISK MONITOR: THE INTERMEDIATE AND LONG TERM OUTLOOKS REMAIN FAVORABLE - 11

 

12. Chinese Steel – Steel prices in China fell 0.8% last week, or 27 yuan/ton, to 3,419 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

 

TUESDAY MORNING RISK MONITOR: THE INTERMEDIATE AND LONG TERM OUTLOOKS REMAIN FAVORABLE - 12

 

13. 2-10 Spread – Last week the 2-10 spread tightened to 245 bps, -4 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

TUESDAY MORNING RISK MONITOR: THE INTERMEDIATE AND LONG TERM OUTLOOKS REMAIN FAVORABLE - 13

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.6% upside to TRADE resistance and 1.4% downside to TRADE support.

 

TUESDAY MORNING RISK MONITOR: THE INTERMEDIATE AND LONG TERM OUTLOOKS REMAIN FAVORABLE - 14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


JPM: ADDING J.P. MORGAN TO INVESTING IDEAS

Takeaway: We are adding JPM to Investing Ideas.

Hedgeye Financials Sector Head Josh Steiner has added JPM to Investing Ideas. 

 

We will send out a full report for subscribers detailing Steiner's bullish case for the stock later this week.

 

JPM: ADDING J.P. MORGAN TO INVESTING IDEAS - jpm1


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