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TUESDAY MORNING RISK MONITOR: STAYING IN THE BUNKER FOR NOW

Takeaway: While the S&P 500 and XLF have risen from their early February lows, we prefer to wait for more tangible signs of underlying improvement.

Summary:

Every week we try and take a step back and ask a big-picture, simple question: is the risk environment rising or falling for Financials investors? A few weeks back we argued that it had begun rising. This morning we see in the data a continuation of that trend. This week we highlight four categories, three of which are showing further signs of worsening, while one is improving. The three areas of growing concern are the TED Spread, Euribor-OIS and the CRB Index. The one area of improvement is the 2-10 spread. For now, we continue to prefer to remain on the sidelines as we wait, in particular, for the green light from the systemic, interbank risk measures.

 

Key Points:

* 2-10 Spread – Last week the 2-10 spread widened to 243 bps, 5 bps wider than a week ago. 

 

* Euribor-OIS Spread – The Euribor-OIS spread widened by 2 bps to 15 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. 

 

* TED Spread Monitor – The TED spread rose 7.1 basis points last week, ending the week at 22.1 bps this week versus last week’s print of 14.99 bps.

 

* CRB Commodity Price Index – The CRB index rose 2.1%, ending the week at 293 versus 287 the prior week. As compared with the prior month, commodity prices have increased 5.3% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

Financial Risk Monitor Summary

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

 • Intermediate-term(WoW): Negative / 0 of 13 improved / 7 out of 13 worsened / 6 of 13 unchanged

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

 

TUESDAY MORNING RISK MONITOR: STAYING IN THE BUNKER FOR NOW - 15

 

1. U.S. Financial CDS -  Swaps tightened for 27 out of 27 domestic financial institutions. The US large cap banks were all tighter last week with BAC putting up the best w/w performance. Overall, however, the strongest relative improvements came from the US insurers. 

 

Tightened the most WoW: TRV, PRU, MBI

Tightened the least WoW: AON, MMC, AXP

Tightened the most WoW: AGO, MBI, PRU

Widened the most MoM: C, SLM, MET

 

TUESDAY MORNING RISK MONITOR: STAYING IN THE BUNKER FOR NOW - 1

 

2. European Financial CDS - With the narrow exception of Greece, European banks were broadly tighter last week. Europe's banks are now generally showing progress on a month-over-month basis.  

 

TUESDAY MORNING RISK MONITOR: STAYING IN THE BUNKER FOR NOW - 2

 

3. Asian Financial CDS - Most of Asia's Financials were tighter last week, though with a few notable exceptions such as IDB Bank of India (+32 bps).

 

TUESDAY MORNING RISK MONITOR: STAYING IN THE BUNKER FOR NOW - 17

 

4. Sovereign CDS – Sovereign swaps were mixed last week with the US showing the largest percentage change with a 3 bps tightening, while Spain saw its swaps widen by 5 bps. Overall, it was a fairly quiet week. 

 

TUESDAY MORNING RISK MONITOR: STAYING IN THE BUNKER FOR NOW - 18

 

TUESDAY MORNING RISK MONITOR: STAYING IN THE BUNKER FOR NOW - 3

 

TUESDAY MORNING RISK MONITOR: STAYING IN THE BUNKER FOR NOW - 4

 

5. High Yield (YTM) Monitor – High Yield rates fell 15 bps last week, ending the week at 5.86% versus 6.02% the prior week.

 

TUESDAY MORNING RISK MONITOR: STAYING IN THE BUNKER FOR NOW - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index was unchanged last week at 1848.

 

TUESDAY MORNING RISK MONITOR: STAYING IN THE BUNKER FOR NOW - 6

 

7. TED Spread Monitor – The TED spread rose 7.1 basis points last week, ending the week at 22.1 bps this week versus last week’s print of 14.99 bps.

 

TUESDAY MORNING RISK MONITOR: STAYING IN THE BUNKER FOR NOW - 7

 

8. CRB Commodity Price Index – The CRB index rose 2.1%, ending the week at 293 versus 287 the prior week. As compared with the prior month, commodity prices have increased 5.3% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

TUESDAY MORNING RISK MONITOR: STAYING IN THE BUNKER FOR NOW - 8

 

9. Euribor-OIS Spread – The Euribor-OIS spread widened by 2 bps to 15 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. 

 

TUESDAY MORNING RISK MONITOR: STAYING IN THE BUNKER FOR NOW - 9

 

10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index fell 60 basis points last week, ending the week at 3.67% versus last week’s print of 4.27%. 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: STAYING IN THE BUNKER FOR NOW - 10

 

11. Markit MCDX Index Monitor – Last week spreads tightened 10 bps, ending the week at 77 bps versus 87 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: STAYING IN THE BUNKER FOR NOW - 11

 

12. Chinese Steel – Steel prices in China fell 1.6% last week, or 56 yuan/ton, to 3348 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: STAYING IN THE BUNKER FOR NOW - 12

 

13. 2-10 Spread – Last week the 2-10 spread widened to 243 bps, 5 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

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14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.4% upside to TRADE resistance and 1.2% downside to TRADE support.

 

TUESDAY MORNING RISK MONITOR: STAYING IN THE BUNKER FOR NOW - 14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


Inflation? No Way In H-E-Double Hockey Sticks Right?

Takeaway: God forbid someone actually acknowledged the obvious.

Note to Janet Yellen and supreme central planners at the Fed: Whatever you do, don’t admit that there’s inflation.

 

Ever.

 

Inflation? No Way In H-E-Double Hockey Sticks Right? - inf5

 

Definitely don’t look at Natural Gas which is ripping another +5.2% higher to $5.48.

 

That's up almost 30% year-to-date.

 

Inflation? No Way In H-E-Double Hockey Sticks Right? - Natty

 

And definitely don’t look at the CRB Commodity Index. Or Gold.

 

Both continue to totally trounce major U.S. equity indices up +4.7% and +9.6% respectively year-to-date.

 

Inflation?

 

Nah

Join the Hedgeye Revolution.


Just Charts: A Boost From CAGNY?

This week begins the annual Consumer Analyst Group of New York (CAGNY) Conference from Boca Raton, Florida. Click here for a program of presenters this week.

 

Last week the Consumer Staples (XLP) sector finished up +2.2%, broadly in line with the S&P500 at +2.3%, however,  Consumer Staples is underperforming on a year-to-date basis, down -2.7% vs the S&P500 down -0.5%.  

 

The Hedgeye U.S. Consumption Model is flashing predominantly red, as only 5 of the 12 metrics are flashing green.

 

Just Charts: A Boost From CAGNY? - chart1

 

From a quantitative set-up the sector remains broken across the immediate term TRADE and intermediate term TREND durations, our language for a bearish medium term sector outlook. You’ll see a similar bearish setup for most of the largest names in Consumer Staples.

Just Charts: A Boost From CAGNY? - 222

 

We continue to believe that the sector is facing numerous headwinds, including:

  • U.S. consumption growth is slowing as inflation rises, in-line with the Macro team’s 1Q14 theme of #InflationAccelerating
  • The economies and currencies of the emerging market – once the sector’s greatest growth engine – remain weak with the prospect of higher inflation in 2014 eroding real growth
  • The sector is loaded with a premium valuation (P/E of 18.8x)
  • Less sector Yield Chasing as Fed continues its tapering program
  • The high frequency Bloomberg weekly U.S. Consumer Comfort Index has not seen any real improvement over the past 6 months despite a mild increase week-over-week

Just Charts: A Boost From CAGNY? - 333

 

Just Charts: A Boost From CAGNY? - chart4

 

 

Top 5 Week-over-Week Divergent Performances:


Negative Divergence: BNNY -11.8%; LO -3.1%; PEP -2.7%; DF -2.7%

Positive Divergence: THS +12.8%; SAM +8.2%; FLO +6.9%; CPB +6.7%; IFF +5.6%

 

 

The “Newsy” News Flow:


Nestle Shedding Some of L’Oreal – last week L’Oreal,  the world’s largest cosmetics maker, agreed to buy back 8% of its stock from Nestle, through a cash payment of €3.4 billion for 27.3 million shares and in exchange for half of its Galderma skincare JV for a further 21.2 million shares.

 

TreeHouse Foods Sues Green Mountain Coffee and Keurig on Anticompetitive Conduct -  last week THS charged GMCR and Keurig over anticompetitive acts to maintain a monopoly over the cups used in single-serve brewers. As the WSJ specifically points out: Green Mountain has announced that its Keurig 2.0 brewer, to be launched later this year, will contain an anticompetitive lock-out technology that will prevent the Keurig 2.0 brewers from functioning with cups supplied by unlicensed competitors. TreeHouse asserts that these actions are an attempt to eliminate consumer choice and to coerce Keurig 2.0 brewer owners into purchasing only Green Mountain owned or licensed K-cups. In addition, Green Mountain has announced plans to eliminate the current lineup of K-cup brewers, which function with competitive cups, to exclude competition and force consumers to purchase higher-priced Green Mountain cups. TreeHouse's lawsuit maintains that any supposed consumer benefits from the new technology are more than outweighed by the harm to competition and consumers by eliminating their choice and forcing them to pay higher prices for Green Mountain cups.

 

 

Last Week’s Research Notes

 

Earnings Calls This Week (in EST):

 

Monday (2/17): Presidents’ Day

Tuesday (2/18): KO 9:30am

Wednesday (2/19): HLF 11am

Thursday (2/20): HRL 9am; NUS (TBD)

Friday (2/21): -

 

 

Quantitative Setup


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

 

 

Alcohol


BUD – big beta bounce last week (on much lower-volume signals than we saw for the stock on the way down in the weeks prior), but still bearish TREND = 102.93 resistance

Just Charts: A Boost From CAGNY? - 5555

 

DEO – same quantitative setup as BUD; big v-bottom bounce on decelerating volume signals (that’s bearish) with TREND resistance intact overhead = $127.06

Just Charts: A Boost From CAGNY? - chart6

 

 

Beverage


KO – looks the same as BUD and DEO; beta bounce on unconvincing volume signals last week – would have to recapture TREND line of $39.97 to change the bearish view

Just Charts: A Boost From CAGNY? - chart7

 

PEP – this chart is what BUD, DEO, and KO can look like again, in a hurry – no volume on the bounce to lower-highs, then wham! Straight back down on big time volume; TREND resistance intact = $81.99

Just Charts: A Boost From CAGNY? - chart8

 

 

Food


GIS – doesn’t look nearly as bad as the beverage names; TREND resistance recaptured last week (now its support at $48.79)

Just Charts: A Boost From CAGNY? - chart9

 

MDLZ – bounce on a better than bad volume signal last week recaptures TREND support of $33.63

Just Charts: A Boost From CAGNY? - chart10

 

 

Household Products


KMB – higher-highs last week on low-volume, but this Kimberly Clark remains the best looking name on this list (TREND support = $104.56)

Just Charts: A Boost From CAGNY? - chart11

 

PG – guides down on Venezuela – funny, but the chart isn’t; bearish TREND remains intact at $80.61

Just Charts: A Boost From CAGNY? - chart12

 

 

Tobacco


MO – v-bottom beta bounce on no volume; bearish TREND resistance remains intact for the dog breath chart up at $36.43

Just Charts: A Boost From CAGNY? - chart13

 

PM – same smelly dog-breath situation as MO; bearish TREND resistance firmly intact overhead at $84.02

Just Charts: A Boost From CAGNY? - chart14

 

 

Matt Hedrick

Food, Beverage, Tobacco, and Alcohol

 

Howard Penney

Household Products

 

(o)


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MACAU: ANOTHER STRONG CNY WEEK

While a slight slowdown sequentially, average daily table revenues for the past week climbed 45% over the same week last year.  ADTR grew only 8% versus the comparable post Chinese New Year week last year (2nd week – February 17-24th).  For the full month including slots, we think GGR could grow in the mid 20s% YoY.  Going forward, weekly ADTR is likely to slow dramatically and we expect March growth could fall to low double digit growth.

 

LVS continues to perform extremely well in February with market share considerably above recent trend.  While hold may be playing a role, we think volumes are very strong at the LVS properties.  Wynn and Galaxy are also trending higher while MPEL, MGM, SJM are well below.

 

MACAU: ANOTHER STRONG CNY WEEK - M1

 

MACAU: ANOTHER STRONG CNY WEEK - M22


[video] Keith's Macro Notebook 2/18: USD JAPAN NATURAL GAS


ICI Fund Flow Survey, Refreshed

Takeaway: An historic week within ETFs with record outflows in equities and record inflows into bonds...trends unchanged within mutual funds

Editor's note: This research note was originally published February 13, 2014 at 08:13 in Financials. For more information on how you can subscribe to Hedgeye click here.

Investment Company Institute Mutual Fund Data and ETF Money Flow

 

ICI Fund Flow Survey, Refreshed - iceflows2

 

In the most recent week, we saw a continuation of the tale of two tapes with equity inflow and fixed income outflow in mutual funds (retail) and a record reallocation within more institutionally based ETFs with record outflows in stock ETFs and record inflows into bond ETFs.

 

Total equity mutual funds experienced another week of inflow as the lagged effect of fund flow chasing performance from last year has been strong enough to offset near term worries about emerging markets. For the week ending February 5th, equity mutual funds had $1.8 billion of inflow, a deceleration from the $5.4 billion inflow the week prior but none-the-less a positive inflow in a tough macro news flow week. The $1.8 billion subscription for the week however was below the running year-to-date weekly average inflow of $4.3 billion for stock funds in 2014. 

 

Fixed income mutual funds conversely had net outflows during the most recent 5 day period, a continuation from the negative performance of 2013. In the week ending February 5th, total fixed income mutual funds experienced a $2.8 billion outflow, which broke out into a $3.0 billion redemption in taxable bonds and a $146 million inflow into tax-free bonds, the fourth straight week of inflow for munis. The 2014 weekly average for fixed income mutual funds now stands at a $75 million weekly outflow, an improvement from 2013's weekly average outflow of $1.5 billion but a far cry from the $5.8 billion weekly average inflow from 2012 (our view of the blow off top in the bond market).

 

ETFs, a more institutionally oriented product, reflected the nascent risks in emerging markets and weaker U.S. economic data with record outflows in stock ETFs and conversely record inflows in fixed income ETFs. Stock ETFs lost a weekly record $27.4 billion in the 5 day period ending February 5th, the biggest weekly outflow in our data set spanning 18 months of information. Bond ETFs conversely booked the biggest weekly inflow in our information from Bloomberg putting up a $14 billion subscription. The 2014 weekly averages considering this latest data are now a $7.9 billion weekly outflow for equity ETFs and a $2.8 billion weekly inflow for fixed income ETFs. 

 

The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a negative $36.7 billion spread for the week (-$25.5 billion of total equity outflows versus the $11.1 billion inflow within fixed income; positive numbers imply inflows for stocks; negative numbers imply inflows for bonds). The 52 week moving average has been $6.5 billion (positive spread to equities), with a 52 week high of $30.9 billion (positive spread to equities) with this week setting the 52 week low of equity/debt weekly spread of -$36.7 billion (negative numbers imply a net inflow into bonds for the week). 

 

While the short term fund flow picture is showing drastic volatility with this week's historic outflow in ETFs, we highlight that the longer term picture within the mutual fund market continues to relay a rebound in stock funds to the detriment of fixed income funds. Looking at top line gross sales of all equity funds on a monthly basis, shows the continued trajectory higher to new record highs since 2007 through the end of last year. According to ICI data, all equity funds grossed $159 billion in sales in December 2013, a new high in all available data from 2007. Conversely, fixed income mutual funds continue to book lower highs in sales after peaking in early 2013. The most recent sales tallies in December (as January 2014 totals aren't available yet) amounted to $92 billion, well off the all-time high of $118 billion in fixed income monthly sales in January 2013. While net flows (what the industry normally focuses on) can be volatile on a short term basis, top line sales totals will eventually wash out short-term inflow or outflow and hence are a better indicator of which products have the most momentum. Thus these top-line sales trends still relay incrementally stronger demand for equities over fixed income in mutual funds for now.

 

 

ICI Fund Flow Survey, Refreshed - ICI chart 15

 

 

 

Most Recent 12 Week Flow in Millions by Mutual Fund Product:

 

 

ICI Fund Flow Survey, Refreshed - ICI chart 2

 

ICI Fund Flow Survey, Refreshed - ICI chart 3

 

ICI Fund Flow Survey, Refreshed - ICI chart 4

 

ICI Fund Flow Survey, Refreshed - ICI chart 5

 

ICI Fund Flow Survey, Refreshed - ICI chart 6

 

 

Most Recent 12 Week Flow Within Equity and Fixed Income Exchange Traded Funds:

  

 

ICI Fund Flow Survey, Refreshed - ICI chart 7

 

ICI Fund Flow Survey, Refreshed - ICI chart 8

 

 

Net Results:

 

 

The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a negative $36.7 billion spread for the week (-$25.5 billion of total equity outflows versus the $11.1 billion inflow within fixed income; positive numbers imply inflows for stocks; negative numbers imply inflows for bonds). The 52 week moving average has been $6.5 billion (positive spread to equities), with a 52 week high of $30.9 billion (positive spread to equities) with this week setting the 52 week low of equity/debt weekly spread of -$36.7 billion (negative numbers imply a net inflow into bonds for the week). 

 

 

ICI Fund Flow Survey, Refreshed - ICI chart 16

 

 

While the short term fund flow picture is showing drastic volatility with this week's historic outflow in ETFs, we highlight that the longer term picture within the mutual fund market continues to relay a rebound in stock funds to the detriment of fixed income funds. Looking at top line gross sales of all equity funds on a monthly basis, shows the continued trajectory higher to new record highs since 2007 through the end of last year. According to ICI data, all equity funds grossed $159 billion in sales in December 2013, a new high in all available data from 2007. Conversely, fixed income mutual funds continue to book lower highs in sales after peaking in early 2013. The most recent sales tallies in December (as January 2014 totals aren't available yet) amounted to $92 billion, well off the all-time high of $118 billion in fixed income monthly sales in January 2013. While net flows (what the industry normally focuses on) can be volatile on a short term basis, top line sales totals will eventually wash out short-term inflow or outflow and hence are a better indicator of which products have the most momentum. Thus these top-line sales trends still relay incrementally stronger demand for equities over fixed income in mutual funds for now.

 

 

ICI Fund Flow Survey, Refreshed - ICI chart 14

 

ICI Fund Flow Survey, Refreshed - ICI chart 13

 

 

 

Jonathan Casteleyn, CFA, CMT 

203-562-6500 

jcasteleyn@hedgeye.com 

 

Joshua Steiner, CFA

203-562-6500

jsteiner@hedgeye.com

 


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