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MONDAY MORNING RISK MONITOR: CALMER THAN A WEEK AGO BUT STILL UNCERTAIN

Takeaway: Waiting and watching for now while the EM situation shows greater signs of clarity.

Summary:

Last week we flagged the rising Euribor-OIS and TED spread as areas of concern. Historically these have been solid indicators that the market is moving from a risk on to risk off mentality and it's our view that it's best to stand aside when these gauges of interbank systemic risk are rising. It would appear for now that that widening may have proved short-lived as both gauges have this week returned to generally benign levels. That said, we're not quite comfortable sounding the "all clear" signal just yet. For one thing, VIX levels remain elevated and for another, we think the EM scare that initially prompted the nervousness is unlikely to have blown over just as quickly as it emerged. With our Macro team’s quantitative setup in the XLF showing just 1.9% upside to TRADE resistance and 4.1% downside to TRADE support, we think it makes sense to wait and watch at this juncture.

 

Key Points:

2-10 Spread – Last week the 2-10 spread widened to 238 bps, 6 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 tightened by 3 bps to 13 bps. 

 

CRB Commodity Price Index – The CRB index rose 1.9%, ending the week at 290 versus 284 the prior week. As compared with the prior month, commodity prices have increased 6.4% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

 

TED Spread – The TED spread fell 6.4 basis points last week, ending the week at 15 bps this week versus last week’s print of 21.36 bps.

 

 

Financial Risk Monitor Summary

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

 • Intermediate-term(WoW): Negative / 2 of 13 improved / 9 out of 13 worsened / 2 of 13 unchanged

 • Long-term(WoW): Positive / 5 of 13 improved / 0 out of 13 worsened / 8 of 13 unchanged

 

MONDAY MORNING RISK MONITOR: CALMER THAN A WEEK AGO BUT STILL UNCERTAIN - 15

 

1. U.S. Financial CDS -  US Banks and non-bank Financials were almost universally tighter last week with the modest exceptions of Sallie Mae (+2 bps) and Travelers (+5 bps). The large cap US banks were all tighter, with MS, C and BAC tightening by 10-11 bps while GS and JPM tightened by 9 and 8 bps, respectively. 

 

Tightened the most WoW: C, BAC, GNW

Widened the most WoW: TRV, SLM, MET

Tightened the most WoW: AGO, MBI, MTG

Widened the most MoM: TRV, MET, AIG

 

MONDAY MORNING RISK MONITOR: CALMER THAN A WEEK AGO BUT STILL UNCERTAIN - 1

 

 

 

2. European Financial CDS - Outside of Greece, most of Europe's banking system saw swaps tighten last week. Spanish, Italian and French banks led the charge lower, followed closely by Germany's banks. Greek banks were wider by ~30 bps on a w/w basis.

 

MONDAY MORNING RISK MONITOR: CALMER THAN A WEEK AGO BUT STILL UNCERTAIN - 2

 

3. Asian Financial CDS - Chinese and Indian banks posted modest w/w tightening in swaps, while Japanese Financials were essentially unchanged. 

 

MONDAY MORNING RISK MONITOR: CALMER THAN A WEEK AGO BUT STILL UNCERTAIN - 17

 

4. Sovereign CDS – Sovereign swaps were tighter across the globe last week with the exception of Germany, where they widened by one basis point. 

 

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MONDAY MORNING RISK MONITOR: CALMER THAN A WEEK AGO BUT STILL UNCERTAIN - 3

 

MONDAY MORNING RISK MONITOR: CALMER THAN A WEEK AGO BUT STILL UNCERTAIN - 4

 

5. High Yield (YTM) Monitor – High Yield rates were unchanged last week at 6.02%, but are up 7 bps vs the previous month. 

 

MONDAY MORNING RISK MONITOR: CALMER THAN A WEEK AGO BUT STILL UNCERTAIN - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 1.0 points last week, ending at 1848.

 

MONDAY MORNING RISK MONITOR: CALMER THAN A WEEK AGO BUT STILL UNCERTAIN - 6

 

7. TED Spread – The TED spread fell 6.4 basis points last week, ending the week at 15 bps this week versus last week’s print of 21.36 bps.

 

MONDAY MORNING RISK MONITOR: CALMER THAN A WEEK AGO BUT STILL UNCERTAIN - 7

 

8. CRB Commodity Price Index – The CRB index rose 1.9%, ending the week at 290 versus 284 the prior week. As compared with the prior month, commodity prices have increased 6.4% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

MONDAY MORNING RISK MONITOR: CALMER THAN A WEEK AGO BUT STILL UNCERTAIN - 8

 

9. Euribor-OIS Spread – The Euribor-OIS spread tightened by 3 bps to 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: CALMER THAN A WEEK AGO BUT STILL UNCERTAIN - 9

 

10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index ended the week at 4.44%, up 164 bps month-over-month. 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: CALMER THAN A WEEK AGO BUT STILL UNCERTAIN - 10

 

11. Markit MCDX Index Monitor – Last week spreads tightened -3 bps, ending the week at 87 bps versus 90 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.

 

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12. Chinese Steel – Steel prices in China ended the week at 3,393 yuan/ton, which is down 57 yuan/ton on a month-over-month basis (-1.7%). We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

 

MONDAY MORNING RISK MONITOR: CALMER THAN A WEEK AGO BUT STILL UNCERTAIN - 12

 

13. 2-10 Spread – Last week the 2-10 spread widened to 238 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: CALMER THAN A WEEK AGO BUT STILL UNCERTAIN - 13

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.9% upside to TRADE resistance and 4.1% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: CALMER THAN A WEEK AGO BUT STILL UNCERTAIN - 14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


Reality Burns: Kevin Kaiser Keeps $BWP as a Hedgeye Best Idea Short

Takeaway: Kevin Kaiser nails it on the short side. Again.

In case you were wondering what that terrible, smoky smell is this morning, shares of Boardwalk Pipeline Partners (BWP) are getting incinerated. They are down over 38% as of this writing.

 

Hedgeye Energy Analyst Kevin Kaiser added BWP as a SHORT to our Best Ideas list on December 2, 2013.

 

The stock is down over 42% since then.

 

It pays to listen to Kaiser.

 

Reality Burns: Kevin Kaiser Keeps $BWP as a Hedgeye Best Idea Short - kk8

Join the Hedgeye Revolution.



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.

How Cool Is This New $AMZN App?

Takeaway: Amazon nails it (again).

Point Your iPhone at Something You Like, Amazon’s New App Buys It

 

Excerpt from Wired

  • "Today, Amazon is announcing a new feature inside its mobile shopping app that lets you scan items in your home using your smartphone’s camera and quickly order all of your packaged goods online. The new feature, called Flow, will be available inside Amazon’s shopping app for iOS. It’s iPhone-only for now, and the company isn’t saying when it will arrive on other smartphone platforms, or on the Kindle Fire."
  • "Instead of taking a photo of an item or scanning a barcode, Flow recognizes items via their shape, size, color, box text, and general appearance. Hold your iPhone up to a row of items on your shelf or counter, and within seconds of “seeing” it with the iPhone’s camera, every recognizable item is placed in queue that can be added to your Amazon cart."

How Cool Is This New $AMZN App? - amznboom

 

Takeaway from Hedgeye Retail Analyst Brian McGough: How cool is this new app? Look, whether you're a fan of Amazon or not, you can't help but admit that they are technologically leaps and bounds above anyone else out there. Of course, all the innovations they cook up might not stick, but we want a company we invest in to be innovating in every way imaginable. No one does it better than AMZN. And as it relates to this innovation…#nobrainer

Join the Hedgeye Revolution.


Smoking Dollar Implications

Client Talking Points

US DOLLAR

While U.S. stocks had their low-volume bounce to lower-highs on Friday, the real read-through on the jobs report was the US Dollar getting smoked. The greenback has moved back to bearish TREND in our model and was down -0.8% on the week. No bid again this morning. Meanwhile, the Euro and Pound continue to look stronger, as does European growth data, on the margin. We have been bullish on both, in particular the Pound.

OIL

A big rip in Oil inflation on the payroll miss. Brent was up +3% on the week and, more importantly, back to bullish TREND in our Hedgeye model. This is occurring alongside a commodity complex (CRB Index) that continues to crush any US stock index year-to-date (CRB up another +2.3% last week – CRB Food Index = +4.5% YTD). Inflation? It's a tax.

RUSSELL 2000

It was fun to watch the SPX bounce +0.5% to -2.8% year-to-date last week, but the Russell had zero fun. It was down another -1.3% to -4% year-to-date as #InflationAcclerating slows US growth expectations. The 10-year yield of 2.66% this morning continues to signal the same on growth.

Asset Allocation

CASH 50% US EQUITIES 3%
INTL EQUITIES 5% COMMODITIES 16%
FIXED INCOME 10% INTL CURRENCIES 16%

Top Long Ideas

Company Ticker Sector Duration
FXB

We remain bullish on the British Pound versus the US Dollar, a position supported over the intermediate term TREND by prudent management of interest rate policy from Mark Carney at the BOE (oriented towards hiking rather than cutting as conditions improve) and the Bank maintaining its existing asset purchase program (QE). UK high frequency data continues to offer evidence of emergent strength in the economy, and in many cases the data is outperforming that of its western European peers, which should provide further strength to the currency. In short, we believe a strengthening UK economy coupled with the comparative hawkishness of the BOE (vs. Yellen et al.) will further perpetuate #StrongPound over the intermediate term.

DRI

Darden is the world’s largest full service restaurant company. The company operates +2000 restaurants in the U.S. and Canada, including Olive Garden, Red Lobster, LongHorn and Capital Grille. Management has been under a firestorm of criticism for poor performance. Hedgeye's Howard Penney has been at the forefront of this activist movement since early 2013, when he first identified the potential for unleashing significant value creation for Darden shareholders. Less than a year later, it looks like Penney’s plan is coming to fruition. Penney (who thinks DRI is grossly mismanaged and in need of a major overhaul) believes activists will drive material change at Darden. This would obviously be extremely bullish for shareholders and could happen fairly soon driving shares materially higher.

JPM

JPMorgan shares are currently trading with the most implied upside to fair value in our fair value model for money-center, super-regional and regional bank stocks. By our estimates, JPM shares have upside of 33% based on our regression of EVA (economic value added) – which looks at the spread between return on capital and cost of capital – and the current multiple to tangible book value. Over time, we have found that sizeable discounts and premiums mean revert toward fair value giving JPMorgan an embedded tailwind in 2014.

Three for the Road

TWEET OF THE DAY

GOLD: up another +0.5% to +5.5% YTD - Down Rates, Down Dollar = Inflation Slowing growth @KeithMcCullough

QUOTE OF THE DAY

"If you deliberately set out to be less than you are capable, you'll be unhappy for the rest of your life." - Abraham Maslow

STAT OF THE DAY

For the first time in over 20 years, rates on jumbo mortgages -- loans of more than $417,000, or $625,500 in pricier areas -- are at or below rates on conventional mortgages. Jumbo rates usually run one-quarter to one-half of a percentage point higher, but lenders eager for wealthier customers are making deals. (CNN)


Retail Callouts (2/10): DKS, AMZN, NKE, WWW, JCP,

Takeaway: DKS tells what we already know. Killer new AMZN app-think Shazam for retail products. Retailers whine about too much NKE product. WWW JCP

EVENTS TO WATCH OVER THE NEXT 24 HOURS

 

CVS - Earnings Call: Tuesday 2/11, 8:30am

 

COMPANY NEWS

 

DKS - DICK'S Sporting Goods Announces Better Than Expected Fourth Quarter Same Store Sales; Increases Fourth Quarter and Full Year 2013 Earnings Guidance

(http://phx.corporate-ir.net/phoenix.zhtml?c=132215&p=irol-newsArticle&ID=1898392&highlight=)

 

  • "The Company now expects consolidated earnings per diluted share of approximately $1.10 to 1.11 for the fourth quarter of 2013, compared to guidance of $1.04 to 1.07 provided on November 19, 2013. For the fourth quarter of 2012, consolidated earnings per diluted share were $1.03."
  • "Consolidated same store sales, adjusted for the shifted calendar, due to the 53rd week in fiscal 2012, increased approximately 7%, or approximately 6% on an unshifted basis, in the fourth quarter of 2013. The same store sales results compare to guidance provided on November 19, 2013 for a 3 to 4% increase, or a 2 to 3% increase on an unshifted basis."
  • "The improved outlook is due to better than anticipated fourth quarter same store sales and merchandise margin, partially offset by higher incentive compensation. The fourth quarter earnings guidance includes approximately $0.01 per diluted share benefit attributable to share repurchases in the fourth quarter of 2013 totaling $150 million."

 

Takeaway: One word…weather. Not many retailers and brands actually felt a positive impact from the extreme weather over the past two months. UnderArmour was one -- and DKS traded up in sympathy by up to 7% on that report. In the end, while this is good news for Dick's, it was largely expected.   

 

AMZN - Point Your iPhone at Something You Like, and Amazon’s New App Buys It

(http://www.wired.com/gadgetlab/2014/02/amazon-flow/)

 

  • "Today, Amazon is announcing a new feature inside its mobile shopping app that lets you scan items in your home using your smartphone’s camera and quickly order all of your packaged goods online. The new feature, called Flow, will be available inside Amazon’s shopping app for iOS. It’s iPhone-only for now, and the company isn’t saying when it will arrive on other smartphone platforms, or on the Kindle Fire."
  • "Instead of taking a photo of an item or scanning a barcode, Flow recognizes items via their shape, size, color, box text, and general appearance. Hold your iPhone up to a row of items on your shelf or counter, and within seconds of “seeing” it with the iPhone’s camera, every recognizable item is placed in queue that can be added to your Amazon cart."

 

Retail Callouts (2/10): DKS, AMZN, NKE, WWW, JCP, - chart2 2 10

 

Takeaway: Seriously, whether you're a fan of Amazon or not, you can help but admit that they are technologically leaps and bounds above anyone else out there. All the innovations that they cook up might not stick, but we want a company we invest in to be innovating in every way imaginable. No one does it better than AMZN. And as it relates to this innovation…#nobrainer.

 

WWW - Buzz: Hush Puppies, SeaVees & More

(http://www.wwd.com/footwear-news/markets/buzz-hush-puppies-seavees-more-7428945)

 

  • "St. Louis-based Elan Polo has inked a licensing agreement with Rockford, Mich.-based Wolverine World Wide Inc. for a fall line of men’s and women’s slippers under its Hush Puppies label. Grandoe Corp. most recently held the license, with last delivery for fall ’13."
  • "The new collection will include ballet flats and smoking slippers for women, as well as moccasins and booties for men...Set to deliver in August, the line will retail for $40 to $70. Distribution is targeted to department stores, e-tailers and independents."

 

Retail Callouts (2/10): DKS, AMZN, NKE, WWW, JCP, - chart3 2 10

Source: Wolverine Worldwide

 

Takeaway: WWW is one of our favorite names -- but the reality is that this is a non-event. Hush Puppies definitely matters, as it is in the top quartile of EBIT contributors out of all of WWW's brands. Furthermore, if it were a new license maybe there'd be something for us to sink our teeth into. But a replacement license for a category like slippers? It'll be accretive, but probably nothing to write home about. 

 

JCP - JCPENNEY SELECTS LOCAL TEAM TO DEVELOP LAND SURROUNDING PLANO HOME OFFICE

(http://ir.jcpenney.com/phoenix.zhtml?c=70528&p=irol-newsCompanyArticle&ID=1897643&highlight=)

 

  • "JCPenney announced today that it has entered into a new partnership to develop the vacant land around its Plano, Texas home office in the Legacy Business Park.  The new partnership will be managed by Team Legacy, a venture of the Karahan Companies, Columbus Realty, and KDC."
  • "The new project, Legacy West, consists of 240 acres at the southwest corner of the Dallas North Tollway and State Highway 121, and is considered a prime office and mixed-use development site in the heart of Legacy Business Park, one of the premier business parks in the country.  Legacy West will be a natural extension of Legacy Town Center, a mixed-use development presently located only on the east side of Dallas North Tollway."

 

Takeaway: As long as it is not costing JCP any capital, which it isn't, we're generally OK with it. If the development gives JCP a call option on monetizing assets (that are not restricted by way of the Goldman agreement) then it's an added plus.

 

BEBE - Exclusive: Bebe stores hires adviser for potential sale - sources

(http://www.reuters.com/article/2014/02/08/us-bebe-sale-idUSBREA1700120140208)

 

  • "Contemporary women's retailer Bebe Stores Inc is exploring a potential sale and is reaching out to private equity firms, according to people familiar with the matter on Friday."
  • "The Brisbane, California-based company...has hired Guggenheim Securities to help with the process, the people said, asking not be identified because the matter is not public."

 

Takeaway: Speaking of 'not public', we'd argue that BEBE should never have come public. After all, it's trading today at the same level it was during the summer it went public 16 years ago. Not exactly our definition of value-creation.

 

SKX - EXCLUSIVE-At hip Skechers, activist wants shakeup of stodgy board

(http://www.trust.org/item/20140207202050-ivzpx)

 

  • "Footwear maker Skechers USA Inc...all-male board of directors is insular and needs a 'complete and immediate overhaul' to avoid potential missteps, according to shareholder CtW Investment Group."
  • "In a letter to the board of California-based Skechers on Wednesday, CtW said the company's nine-member board 'suffers from lengthy tenures and a lack of gender diversity' and that some directors may have conflicts of interest that raise questions about their independence."
  • "'The CtW Investment Group urges a complete and immediate overhaul of Skechers U.S.A., Inc's board of directors in light of several serious governance risks,' it said, calling for changes ahead of its annual meeting later this spring."

 

Takeaway: We're not going to get into the gender debate here, but we agree fully that the SKX Board is the poster child for a 'good ol boys club'. Not a surprise then that SKX's value creation is only a hair better than BEBE's.

 

NKE - Got Sneaker Release Overload?

(http://www.wwd.com/footwear-news/retail/got-sneaker-release-overload-7427833?module=Footwear%20News-Retail-main)

 

  • "Limited-edition kicks create huge hype and bring shoppers in the door, but retailers are asking themselves whether the crowded sneaker release calendar might be too much of a good thing."
  • "Take this month: With the NBA All-Star Game, Black History Month, Valentine’s Day and the Chinese Year of the Horse all getting the special makeup treatment from brands — on top of the regular releases — there are dozens of launches in the works."
  • “'There are too many shoes and there are too many stories,' added Lester Wasserman, owner of sneaker shop West NYC in Manhattan. 'The more special shoes there are, the less special they each become.'” 
  • "It...means that strong product that doesn’t have the limited tag gets overlooked, to the detriment of the brands’ core lines."
  • “'Right now, we have a full-court press offense on the customer, with more shoes than they can shake a stick at,' he said. 'I just don’t see how that’s ultimately a sustainable model, at the current rate.'”

 

Retail Callouts (2/10): DKS, AMZN, NKE, WWW, JCP, - chart1 2 10

 

Takeaway: Note from HedgeyeRetail….Retailers, stop whining. You have a multitude of brands that are churning out better product than you have seen in your lifetime. Find a way to merchandise it, assort it, and sell it. Seriously, would you rather not have any product to sell?

 

GoPro - GoPro Files for IPO Confidentially

(http://online.wsj.com/news/articles/SB10001424052702304680904579368843314431918)

 

  • "GoPro Inc., a maker of wearable cameras that have fed a flood of YouTube videos, is laying the groundwork to go public. The San Mateo, Calif., company said Friday it had submitted a confidential filing for an initial public offering with the Securities and Exchange Commission."
  • "GoPro and its bankers are expected to begin pitching the deal to investors in the first half of this year, people familiar with the company's plans said. The deal will seek to raise roughly $400 million, though the final amount has yet to be decided, they said."
  • "The deal's pricing also is in flux, but the company will aim for a stock-market valuation well above the $2.3 billion it was pegged at in a 2012 fundraising round, these people said."

 

Takeaway: Cool technology, but not sure how defendable it is. The company is probably getting the right advice to strike while the iron is hot before patents expire and every other (better capitalized) electronics brand on the planet is producing knock offs. Seems kind of Skull Candy-ish to us.

 

Marc Jacobs - The New Marc by Marc (by Katie and Luella)

(http://www.wwd.com/fashion-news/designer-luxury/the-new-marc-by-marc-by-katie-and-luella-7422925)

 

  • "Marc Jacobs, the man as well as the company, is living in a post-Louis Vuitton world. It’s a pre-IPO world, if all goes according to plan for Jacobs and his business partner, Robert Duffy."
  • "The first means to that end is revamping Marc by Marc Jacobs, the revenue engine of the brand. According to Duffy, Marc by Marc Jacobs accounts for 70 percent of the entire business, which stood at $750 million in net sales last year and is on track to hit the billion-dollar mark 'soon,' said Duffy."
  • “'In the big picture of this new Marc Jacobs company, Marc by Marc Jacobs probably plays the biggest role,' said Duffy earlier this week. 'It’s the most profitable part of our business. The sky’s the limit. We’re really going to pull out all the stops for Marc by Marc Jacobs, which we haven’t in the past.' By Duffy’s own admission, he and Jacobs had “dropped the ball” when it came to the contemporary line, losing market share to the stiff competition in a category they once owned."

 

Takeaway: A Marc Jacobs IPO wouldn't be in the same league as Michael Kors, and probably not Tory Burch. But it would definitely be a legitimate deal that would attract our attention.

 


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