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The Russian Bear

Client Talking Points

RUSSIA

Just when it was looking like it was safe to get back in the water. The Ukraine suddenly matters (a lot) to investors, with Europe off 2-3% and S&P 500 futures down ~20 handles. World markets are doing to Vladimir Putin what Barack Obama can't. The Russian stock market is getting absolutely hammered down -13.8%. It's swan dived to -24.2% year-to-date. Got correlation risk?

U.S.

In other non-Crimean news, US GDP #GrowthSlowing sequentially (from 4.12% in Q313 to 2.37% in Q413) is only the beginning of the Down Dollar (USD down another -0.7% last week, and down 3 of the last 4 weeks), Down Rates (UST 10yr Yield -38bps YTD) thing. Both US monetary and fiscal policy going dovish on the margin is just fantastic! Because, without going to sub 2% US GDP growth and plus 2% made-up-reported-inflation growth, how the heck else could the Keynesians blame Russia?

S&P 500

To be clear, we don’t go with the whole how markets and GDP “feel” thing. You can overpay to get that from someone else. While the S&P 500 was up a whopping +0.6% for 2014 YTD (it’s March fyi), it's mainly the inflation and #GrowthSlowing parts of the market leading: Healthcare (XLV) +7.2% Utilities (XLU) +6.5% Basic Materials +1.9%. The most meaningful parts of the economic cycle (the consumption economy) are actually down YTD: Consumer Staples (XLP) -1.5%. Financials (XLF) -0.7% Industrials (XLI) 0.4%.

Asset Allocation

CASH 44% US EQUITIES 0%
INTL EQUITIES 8% COMMODITIES 16%
FIXED INCOME 14% INTL CURRENCIES 18%

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. 

LVS

Las Vegas Sands has transformed into that rare stock that should appeal to “Growth,” “Value”, and “Dividend/Cash Flow” investors alike.  The stock now yields higher than the S&P 500 (43% sequential quarterly dividend increase), and the company is buying back $200 million + in stock a quarter, yet still retains a pristine balance sheet.  The significant capital deployment opportunities can be funded out of annual free cash flow of nearly $4 billion. Management has indicated they are willing to raise leverage 1.5x which would still keep them well below industry average and if directed toward dividends, would result in a yield of over 6%.  And we haven’t gotten to the $10-14 billion in mall assets that could be monetized. We know of no other stocks in consumer land that provide this combination of cash flow, growth, cash return to shareholders, and value levers.

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.

Three for the Road

TWEET OF THE DAY

EUROPE: train wreck morning w/ war markets like Poland -4.9%, Hungary -4.5%, Austria -3.9% @KeithMcCullough

QUOTE OF THE DAY

You must obey the law, always, not only when they grab you by your special place. -Vladimir Putin

STAT OF THE DAY

Rising tension over Ukraine slammed Russian financial markets Monday, prompting the central bank to hike interest rates as the ruble plunged. The ruble, already one of the weakest currencies so far this year, fell as much as 3% versus the U.S. dollar before posting a small recovery. The ruble has declined by more than 10% this year as Russia experiences a significant slowdown and weak future growth prospects. (CNN)


MONDAY MASHUP: DRI, YUM, NDLS AND MORE

MONDAY MASHUP: DRI, YUM, NDLS AND MORE - watchhh

 

 

Events This Week

3/03       DRI business update call

3/04       IRG earnings call at 5:00pm

3/05       BOBE earnings call at 10:00am

3/06       JMBA earnings call at 5:00pm

3/06       GMCR annual general meeting

 

 

Recent Research

2/24       STOP THE RED LOBSTER SPINOFF

2/25       BLMN: BEAT & GUIDE DOWN

2/27       DARDEN RESTAURANTS HEDGEYE POLL

2/28       COMMODITY CHARTBOOK

 

 

Recent News Flow

FLASH UPDATE: DRI  guides 3Q14 EPS down 11 cents to $0.82 and estimates that lower sales and extreme winter weather will contribute to approximately seven cents of this decline. In addition, management released same-restaurant sales estimate for 3Q, which include Olive Garden down 5.4%, Red Lobster down 8.8%, Longhorn up 0.3% and SRG down 0.7%. Despite this, management reaffirmed its prior FY14 guidance which includes a 15-20% YoY decline in diluted EPS. We continue to like Darden on the long side with the expectation that the activist will be successful in forcing significant change.

 

2/24       DRI Starboard Value announced its intent to call a special shareholder meeting to halt the spin-off of Red Lobster.

2/24       BAGL President and CEO Jeff O’Neil resigned; Michael Arthur was immediately named as interim President and CEO and the search for a permanent replacement is underway.

2/28       TAST was upgraded to strong buy at Raymond James with a price target of $10.

2/28       TriArtisan Capital Partners, in conjunction with Sentinel Capital Partners, is expected to purchase TGI Fridays.  The final terms of the deal are currently unknown.

2/29       THI Tim Horton’s announced its intent to buyback up to 1.47m under its share repurchase program.

3/01        YUM was featured in Barron’s this weekend.  Barron’s is bullish on the company’s strategy in China and expansion into other emerging markets.  Barron’s thinks YUM can deliver stronger earnings growth than the street is currently expecting and placed an $85 price target on the company.

3/01        NDLS, PBPB were featured in The Trader column in Barron’s this weekend.  The author was notably negative on these two names, citing weak comp growth and extreme valuations.  The article also pointed out that CMG, for example, continues to deliver exceptional comp growth and looks cheap by comparison.

 

 

Macro U.S. Consumption

Last week was a strong week for consumer stocks, with the XLY up 2.5% versus the SPX up 1.3%.  Despite this, the Hedgeye U.S. Consumption Model is flashing predominantly red with only 3 of the 12 metrics we track flashing green.  These data points are consistent with our bearish view on the casual dining industry as people are struggling to find the time, money and motivation to get out of the house and spend at these restaurants.  Earnings revisions, highlighted in a couple of charts later in the post, are also consistent with this view.  Despite the majority of casual dining restaurants seeing their earnings estimates notably revised downward, the stocks have held up fairly strong.  It appears to us as though price is not currently tracking fundamentals.

 

MONDAY MASHUP: DRI, YUM, NDLS AND MORE - 2

 

From a quantitative set-up, the sector is bullish on an intermediate term TREND duration.

 

MONDAY MASHUP: DRI, YUM, NDLS AND MORE - 3

 

 

Below we look at the performance of restaurant companies relative to the XLY and recent trends in earnings revisions estimates.

 

Casual Dining Restaurants

Top 5 Week-Over-Week Divergent Performances:

Positive Divergence: KONA +9.3%, DFRG +8.0%, BLMN +7.9%, BWLD +7.1%, RT +5.8%

Negative Divergence: RUTH -11.5%, BAGL -8.0%, DRI -2.4%, CBRL -1.1%, TXRH -0.5%

 

Notable 1-Month Earnings Revisions:

Positive Revision: RRGB +1.6%, RT +1.0%, BWLD +1.0%

Negative Revision: BJRI -23.7%, KONA -11.8%, BBRG -6.9%, DIN -5.2%, BLMN -4.3%

 

MONDAY MASHUP: DRI, YUM, NDLS AND MORE - 4

MONDAY MASHUP: DRI, YUM, NDLS AND MORE - 5

 

 

Quick Service Restaurants

Top 5 Week-Over-Week Divergent Performances:

Positive Divergence: TAST +10.2%, DPZ +5.4%, PZZA +4.3%, KKD +3.3%, SONC +1.8%

Negative Divergence: GMCR -13.3%, WEN -5.7%, SBUX -4.7%, MCD -3.9%, PNRA -3.6%

 

Notable 1-Month Earnings Revisions:

Positive Revision: JACK +3.1%, DPZ +1.0%, YUM +0.9%, BKW +0.3%

Negative Revision: TAST -8.1%, BAGL -5.9%, PNRA -4.8%, PLKI -4.6%, PZZA -3.5%

 

MONDAY MASHUP: DRI, YUM, NDLS AND MORE - 6

MONDAY MASHUP: DRI, YUM, NDLS AND MORE - 7

 

 

Howard Penney

Managing Director


Just Charts: A Rare Weekly Sector Outperformance

Consumer Staples remains the worst performing sector year-to-date, down -1.5%, however the sector did outperform the broader market last week, rising +1.8% versus the S&P500 at +1.3%, and for the first time all year the XLP outperformed the SPX on a week-over-week basis!

 

Weighing on the sector, the Hedgeye U.S. Consumption Model is flashing predominantly red, as only 3 of the 12 metrics are flashing green.

 

Just Charts: A Rare Weekly Sector Outperformance - 1

 

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 Rare Weekly Sector Outperformance - 2

 

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 19.2x)
  • 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, but expanded to -28.6 versus -30.6 in the prior week

Just Charts: A Rare Weekly Sector Outperformance - 3

Just Charts: A Rare Weekly Sector Outperformance - 4

 

 

Top 5 Week-over-Week Divergent Performances:


Positive Divergence:  SAFM +5.7%; NUS +4.3%; SAM +3.4%; HSH +2.8%; CHD +2.8%

Negative Divergence: HSY -1.7%; CPB -1.5%; MNST -1.1%; ABI -1%; FLO -0.9%

 

 

Last Week’s Research Notes

 

Earnings Calls This Week (in EST):

 

Monday (3/3): NUS 11am

Tuesday (3/4): -

Wednesday (3/5): BF/B 10am

Thursday (3/6): -

Friday (3/7): -

 

 

Matt Hedrick

Food, Beverage, Tobacco, and Alcohol

 

Howard Penney

Household Products

 

 

(o)

 

 

Quantitative Setup

 

In the charts 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).

 

 

BUD – market beta can be a marvelous thing (until it goes bearish again); BUD rallies back above its TREND line (barely) of $103.52

Just Charts: A Rare Weekly Sector Outperformance - 5

 

DEO – unlike BUD, DEO tried to recapture $127.29 TREND support but failed

Just Charts: A Rare Weekly Sector Outperformance - 6

 

KO – bearish TREND firmly intact up at $39.97; one of the better looking big cap shorts on my quant screens

Just Charts: A Rare Weekly Sector Outperformance - 7

 

PEP – doesn’t look worse than KO, but it still looks bad – bearish TREND resistance intact up at $82.09

Just Charts: A Rare Weekly Sector Outperformance - 8

 

GIS – bearish to bullish reversal had some confirmation signals last week; watching TREND support of $49.27 closely

Just Charts: A Rare Weekly Sector Outperformance - 9

 

MDLZ – trying hard to recover its year-end markup momentum, but having some issues; needs to hold TREND support of 33.39 to remain bullish in our model

Just Charts: A Rare Weekly Sector Outperformance - 10

 

KMB – still the best looking long on our list; bullish TREND support intact with an immediate-term TRADE risk range to manage of 107.23-110.93 for now

Just Charts: A Rare Weekly Sector Outperformance - 11

 

PG – in spite of the market’s v-bottom beta bounce in FEB, Procter remains broken with TREND resistance overhead at 80.19

Just Charts: A Rare Weekly Sector Outperformance - 12

 

MO – despite last week’s ramp (on no volume), Altria remains bearish TREND @Hedgeye w/ resistance = $37.11

Just Charts: A Rare Weekly Sector Outperformance - 13

 

PM – still one of the ugliest quantitative setups in all of big cap consumer; TREND resistance remains overhead at 83.46

Just Charts: A Rare Weekly Sector Outperformance - 14


Hedgeye Statistics

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

  • LONG SIGNALS 80.28%
  • SHORT SIGNALS 78.51%

European Banking Monitor: Ukrainian Maelstrom

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .

 

---

 

Not So Fast:

Just when it was looking like it was safe to get back in the water. The Ukraine suddenly matters (a lot) to investors, with Europe off 2-3% and S&P 500 futures down ~20 handles. We've been, on the margin, arguing for a more defensive posturing in light of what had been rising interbank, systemic risk measures, rising commodity prices and falling yield spreads. The concerns were initially prompted by the EM fears that surfaced roughly a month ago. Since then we've been erring on the side of caution while the XLF has grinded a few percent higher. This morning, serendipitously, that call appears to have been right. The reality is that through the end of last week some of the risk measures we track were starting to flash the all clear, but in light of the Ukraine situation, we'll hold the line. It doesn't hurt to wait and watch in the short term.  

 

 

European Financial CDS - Aside from a few minor exceptions, European bank swaps were tighter last week, compressing by an average 3 bps (2 bps median decline). The month-over-month change in Europe is more impressive, as much of the Continent's banking system is now seeing double digit M/M declines.

 

European Banking Monitor: Ukrainian Maelstrom - zz. bankss

 

Sovereign CDS – Sovereign swaps across Europe tightened notably last week, while the rest of the world was largely uneventful with the US and Japan widening just one basis point. 

 

European Banking Monitor: Ukrainian Maelstrom - zz. sov 1

 

European Banking Monitor: Ukrainian Maelstrom - zz. sov2

 

European Banking Monitor: Ukrainian Maelstrom - zz. sov3

 

Euribor-OIS Spread – The Euribor-OIS spread tightened by 1 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. 

 

European Banking Monitor: Ukrainian Maelstrom - zz. euribor

 

Matthew Hedrick

Associate


Retail Callouts (3/3): JCG, SHLD, MW, JOSB, WMT, DKS, HD, FAST

Takeaway: Fast Retailing buying JCrew? GPS? Fake SHLD data breach. MW/JOSB finally dating. WMT makes it easier for people to not go in their stores.

EVENTS TO WATCH

  • RSH - Earnings Call: Tuesday 3/4, 10:00am
  • WMT - Raymond James Conference: Tuesday, 3/4 10:25am

 

COMPANY NEWS

 

9983, Jcrew - J. Crew in Talks to be Sold to Japan's Fast Retailing

(http://online.wsj.com/news/articles/SB10001424052702304709904579411430342472924?mg=reno64-wsj)

 

  • "The owners of J. Crew Group Inc. are in talks to sell the clothing retailer to Japan's Fast Retailing Co. for as much as $5 billion, a deal that would help the Asian company fulfill its ambition of becoming a global retailing powerhouse."
  • "Fast Retailing, which owns the Uniqlo apparel chain, approached J. Crew's management about potentially buying the private-equity-owned business, said people familiar with the matter. J. Crew is seeking upward of $5 billion for the business, one of the people said. It remained unclear whether Fast Retailing would pay that much and whether the two sides have yet discussed a price."

 

Takeaway: Fast Retailing has long been on the lookout for major US mall assets. One of the key players consistently in the running has been GPS. While that didn't sit too well with us, the reality is that others believed it. Fast Retailing is one of the few companies out there with a) the desire to own something as big as GPS, and b) the access to capital to get it done. Looks like that one is off the table for now (and for a very long time).  

 

SHLD - Sears Holdings Statement

(http://searsholdings.mediaroom.com/index.php?s=16310&item=137273)

 

  • "There have been rumors and reports throughout the retail industry of security incidents at various retailers, and we are actively reviewing our systems to determine if we have been a victim of a breach.   We have found no information based on our review of our systems to date indicating a breach."

 

Takeaway: Sears is so easy to pick on, but that doesn’t make it right to fabricate rumors about data security and integrity.

 

WMT - Sam's Club tests online subscription service

(http://www.fierceretail.com/story/sams-club-tests-online-subscription-service/2014-02-28)

 

  • "Sam's Club is testing a new online service called 'My Subscriptions' which allows shoppers to have repeat-purchase items delivered to their homes automatically. The goal of the program is to save customers time by renewing their stash of household and personal care items on an ongoing cycle."

 

Takeaway: This is a tough one. On one hand, we see why Sam's is doing this, and it makes sense -- minimize the time between purchases of essential items. But on the flip side, the comp at warehouse clubs is driven not just by regular purchases of consumer staples, but by all the discretionary items that consumers buy that they didn't otherwise plan to buy -- simply because they see something interesting at a good price on the shelves. Simply put, they've got to get people in the stores. We were similarly perplexed when Wal-Mart started beta-testing its 'curbside pickup' program, where people order online and pickup at the front of the store. Again, WMT needs to boost traffic and therefore discretionary purchases. 

 

MW, JOSB - Men's Wearhouse Announces Non-Disclosure Agreement With Jos. A. Bank

(http://ir.menswearhouse.com/press-releases/detail/1284)

 

  • "The Men's Wearhouse today confirmed that it entered into a non-disclosure agreement with Jos. A. Bank Clothiers on Saturday night, March 1, 2014, under which the companies have agreed to exchange certain confidential information and to work in good faith to evaluate a potential combination, and that Men's Wearhouse has received a draft merger agreement from Jos. A. Bank."
  • "Men's Wearhouse noted that its existing cash tender offer for $63.50 would provide Jos. A. Bank shareholders with a substantial premium and immediate value, and that as previously announced, Men's Wearhouse is prepared to increase its offer price to $65 per share if Jos. A. Bank can demonstrate or Men's Wearhouse can discover additional value through discussions or limited due diligence."

 

Takeaway: These two are finally sitting down to work out their marital problems. This thing has been such a circus side-show that our expectations are extraordinarily low for a resolution. But if we had to predict an the outcome with the greatest probability, we'd say MW takes out JOSB for $65.  If all else fails, JOSB loses a third of its market cap.

 

OTHER NEWS

 

DKS - Modell’s CEO impersonated Dick’s exec in spy scheme: suit

(http://nypost.com/2014/02/28/modells-ceo-impersonated-dicks-exec-to-spy-suit/)

 

  • "The CEO of the Big Apple-based Modell’s chain has been sued by big-box rival Dick’s Sporting Goods, which charges that Modell impersonated a Dick’s exec earlier this month as he spied on a store in Princeton, NJ."
  • "Modell...claimed to be a Dick’s senior vice president as he persuaded employees to give him access to the backroom of the store and grilled them about the business, the suit alleges."
  • "Modell told store workers he was scheduled to meet with Dick’s CEO Ed Stack at the store, and appeared to be particularly interested in a 'ship from store' program that delivers goods to customers’ homes from nearby locations, the suit said."

 

Takeaway: #funny

 

HD - Home Depot’s New President Said to Be Groomed as CEO

(http://www.bloomberg.com/news/2014-02-28/home-depot-s-new-president-said-to-be-groomed-as-ceo.html)

 

  • "Home Depot Inc.’s promotion of Craig Menear to president of its U.S. retail division is part of a succession plan for Chief Executive Officer Frank Blake, according to a person with knowledge of the situation."
  • "Menear, 56, is the leading candidate to become the next CEO of the largest U.S. home-improvement chain, said the person, who asked not to be named because the talks are private. There isn’t a timeline for the succession, the person said. Menear joined Home Depot in 1997 and served as executive vice president of merchandising before his promotion, the Atlanta-based company said yesterday in a statement."

 

 

 

 

 


MONDAY MORNING RISK MONITOR: UKRAINIAN MAELSTROM

Takeaway: While some of our key indicators are showing improvement, ongoing developments in the Ukraine support our call to stay on the sidelines.

*********************************************************************************** 

"Legging into Legg Mason"

Invitation to Best Ideas Long Conference Call Tomorrow

 

Please join us tomorrow, March 4th at 1 pm EST for a conference call detailing our newest Long idea in Financials, Legg Mason (LM).

 

Participant Dialing Instructions:

  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 824597#
  • Materials: CLICK HERE (Slides will be available approximately one hour prior to the start of the call)

*********************************************************************************** 

 

Not So Fast:

Just when it was looking like it was safe to get back in the water. The Ukraine suddenly matters (a lot) to investors, with Europe off 2-3% and S&P 500 futures down ~20 handles. We've been, on the margin, arguing for a more defensive posturing in light of what had been rising interbank, systemic risk measures, rising commodity prices and falling yield spreads. The concerns were initially prompted by the EM fears that surfaced roughly a month ago. Since then we've been erring on the side of caution while the XLF has grinded a few percent higher. This morning, serendipitously, that call appears to have been right. The reality is that through the end of last week some of the risk measures we track were starting to flash the all clear, but in light of the Ukraine situation, we'll hold the line. It doesn't hurt to wait and watch in the short term.  

 

Key Points:

* 2-10 Spread – Last week the 2-10 spread tightened to 233 bps, -9 bps tighter than a week ago, and the 10-year yield is down a further 4 bps this morning.

 

* Euribor-OIS Spread – The Euribor-OIS spread tightened by 1 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. 

 

* CRB Commodity Price Index – The CRB index rose 0.2% last week, ending the week at 302. As compared with the prior month, commodity prices have increased 6.7%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

* TED Spread – The TED spread fell 0.9 basis points last week, ending the week at 18.8 bps this week versus last week’s print of 19.7 bps.

 

* High Yield (YTM) – High yield rates fell 16.2 bps last week, ending the week at 5.60% versus 5.77% the prior week.

 

Financial Risk Monitor Summary

 • Short-term(WoW): Positive / 5 of 13 improved / 3 out of 13 worsened / 5 of 13 unchanged

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

 • Long-term(WoW): Positive / 5 of 13 improved / 1 out of 13 worsened / 7 of 13 unchanged

 

MONDAY MORNING RISK MONITOR: UKRAINIAN MAELSTROM - 15

 

1. U.S. Financial CDS -  Swaps tightened for 24 out of 27 domestic financial institutions. Wells Fargo and Allstate went wrong the way last week, but by a mere +1 bps, and GS was unchanged. Otherwise the US Financials were tighter across the board.

 

Tightened the most WoW: SLM, AGO, COF

Widened the most WoW: WFC, ALL, GS

Tightened the most WoW: BAC, PRU, AGO

Tightened the least MoM: TRV, AXP, AON

 

MONDAY MORNING RISK MONITOR: UKRAINIAN MAELSTROM - 1

 

2. European Financial CDS - Aside from a few minor exceptions, European bank swaps were tighter last week, compressing by an average 3 bps (2 bps median decline). The month-over-month change in Europe is more impressive, as much of the Continent's banking system is now seeing double digit M/M declines.

 

MONDAY MORNING RISK MONITOR: UKRAINIAN MAELSTROM - 2

 

3. Asian Financial CDS - It was another mixed, though largely unexceptional week for Asian financials. Two out of three Indian banks were notably tighter, while in China the Export-Import Bank widened by 11 bps. Across Japan, the only notable mover was Nomura at +11 bps.

 

MONDAY MORNING RISK MONITOR: UKRAINIAN MAELSTROM - 17

 

4. Sovereign CDS – Sovereign swaps across Europe tightened notably last week, while the rest of the world was largely uneventful with the US and Japan widening just one basis point. 

 

MONDAY MORNING RISK MONITOR: UKRAINIAN MAELSTROM - 18

 

MONDAY MORNING RISK MONITOR: UKRAINIAN MAELSTROM - 3

 

MONDAY MORNING RISK MONITOR: UKRAINIAN MAELSTROM - 4

 

5. High Yield (YTM) Monitor – High Yield rates fell 16.2 bps last week, ending the week at 5.60% versus 5.77% the prior week.

 

MONDAY MORNING RISK MONITOR: UKRAINIAN MAELSTROM - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 1.0 point last week, ending at 1850.

 

MONDAY MORNING RISK MONITOR: UKRAINIAN MAELSTROM - 6

 

7. TED Spread Monitor – The TED spread fell 0.9 basis points last week, ending the week at 18.8 bps this week versus last week’s print of 19.69 bps.

 

MONDAY MORNING RISK MONITOR: UKRAINIAN MAELSTROM - 7

 

8. CRB Commodity Price Index – The CRB index rose 0.2% last week, ending the week at 302. As compared with the prior month, commodity prices have increased 6.7%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

MONDAY MORNING RISK MONITOR: UKRAINIAN MAELSTROM - 8

 

9. Euribor-OIS Spread – The Euribor-OIS spread tightened by 1 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. 

 

MONDAY MORNING RISK MONITOR: UKRAINIAN MAELSTROM - 9

 

10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index fell 1 basis points last week, ending the week at 1.75% versus last week’s print of 1.76%. 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: UKRAINIAN MAELSTROM - 10

 

11. Markit MCDX Index Monitor – Last week spreads tightened -3 bps, ending the week at 73 bps versus 76 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 fell 1.0% last week, or 32 yuan/ton, to 3,302 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

 

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13. 2-10 Spread – Last week the 2-10 spread tightened to 233 bps, -9 bps tighter 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 0.2% upside to TRADE resistance of $21.75 and 1.7% downside to TREND support of $21.34.

 

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Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


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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