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MONDAY MORNING RISK MONITOR: STAY DEFENSIVE

Takeaway: Tightening spreads and widening interbank risk measures should have investors keeping the defensive team on the field.

********** High Frequency Trading Conf Call This Thursday **********

We will be hosting a conference call with former SEC Commissioner Roel Campos this Thursday, May 22nd at 2pm EST to weigh in on the current structure of the equity and derivative markets and how regulation around High Frequency Trading (HFT) may come down from regulators.

 

Mr. Campos served as one of the five commissioners of the Securities and Exchange Commission under Chairmans' William Donaldson and Christopher Cox from 2002 to 2007 and was instrumental in crafting the Commission's National Market System (Reg NMS) framework. Mr. Campos recently testified in front of the House Financial Services Committee in February of this year in a Hearing entitled "Equity Market Structure: A Review of SEC Regulation NMS."

 

CLICK HERE to add this Hedgeye Speaker Series call to your Outlook calendar; otherwise, the dial in instructions are also below:

 

Participant Dialing Instructions

 

Thursday May 22nd at 2 pm EST:

  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 189818#

 

This call should be of interest to investors in the following stocks:

NDAQ, CME, ICE, GS, MS, BLK, & JPM

 

 

Current Best Ideas:

 

MONDAY MORNING RISK MONITOR: STAY DEFENSIVE - 19

 

Key Callouts:

Two important callouts this week include the yield spread compression and the rising Euribor-OIS spread.

 

* 2-10 Spread – Last week the 2-10 spread tightened to 216 bps, -8 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

* Euribor-OIS Spread – The Euribor-OIS spread widened by 2 bps to 19 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.  

 

Financial Risk Monitor Summary

 • Short-term(WoW): Negative / 0 of 12 improved / 6 out of 12 worsened / 6 of 12 unchanged

 • Intermediate-term(WoW): Positive / 5 of 12 improved / 4 out of 12 worsened / 3 of 12 unchanged

 • Long-term(WoW): Positive / 3 of 12 improved / 2 out of 12 worsened / 7 of 12 unchanged

 

MONDAY MORNING RISK MONITOR: STAY DEFENSIVE - 15

 

1. U.S. Financial CDS -  Swaps widened for 21 out of 27 domestic financial institutions, but were wider by just 2 bps week-over-week.

 

Tightened the most WoW: ACE, ALL, CB

Widened the most WoW: COF, AXP, PRU

Tightened the most WoW: PRU, MET, GS

Widened the most/ tightened the least MoM: BAC, SLM, GNW

 

MONDAY MORNING RISK MONITOR: STAY DEFENSIVE - 1

 

2. European Financial CDS - Swaps were notably widener in Europe last week, but remain modestly tighter month-over-month.  Greek banks, which have seen their swaps tighten steadily for months now widened sharply. 

 

MONDAY MORNING RISK MONITOR: STAY DEFENSIVE - 2

 

3. Asian Financial CDS - Indian banks were notably tighter last week, coming in by an average of 39 bps and are now tighter by almost as much on a month-over-month basis. 

 

MONDAY MORNING RISK MONITOR: STAY DEFENSIVE - 17

 

4. Sovereign CDS – Sovereign swaps widened last week. Italian sovereign swaps widened by 11% (11 bps to 113) and Portuguese sovereign swaps widened by 18% (27 bps to 180).

 

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MONDAY MORNING RISK MONITOR: STAY DEFENSIVE - 3

 

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5. High Yield (YTM) Monitor – High Yield rates fell 2.2 bps last week, ending the week at 5.51% versus 5.53% the prior week.

 

MONDAY MORNING RISK MONITOR: STAY DEFENSIVE - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 3.0 points last week, ending at 1869.

 

MONDAY MORNING RISK MONITOR: STAY DEFENSIVE - 6

 

7. TED Spread Monitor – The TED spread rose 1.0 basis points last week, ending the week at 21.1 bps this week versus last week’s print of 20.11 bps.

 

MONDAY MORNING RISK MONITOR: STAY DEFENSIVE - 7

 

8. CRB Commodity Price Index – The CRB index fell -0.4%, ending the week at 306 versus 307 the prior week. As compared with the prior month, commodity prices have decreased -1.8% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

MONDAY MORNING RISK MONITOR: STAY DEFENSIVE - 8

 

9. Euribor-OIS Spread – 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. The Euribor-OIS spread widened by 2 bps to 19 bps.

 

MONDAY MORNING RISK MONITOR: STAY DEFENSIVE - 9

 

10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index rose 13 basis points last week, ending the week at 2.35% versus last week’s print of 2.22%. 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: STAY DEFENSIVE - 10

 

11. Chinese Steel – Steel prices in China fell 1.6% last week, or 52 yuan/ton, to 3,258 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

 

MONDAY MORNING RISK MONITOR: STAY DEFENSIVE - 12

 

12. 2-10 Spread – Last week the 2-10 spread tightened to 216 bps, -8 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR: STAY DEFENSIVE - 13

 

13. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.8% upside to TRADE resistance and 1.4% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: STAY DEFENSIVE - 14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


Not a Hope in Hell

Client Talking Points

UST 10YR

A 2.51% yield starts the week off down after a lot of people said bond yields couldn’t go lower yet. Newsflash: JGB 10-year yields are at 0.58%. If we go 0% forever, there is a precedent. 2.61% TAIL risk resistance = on. Consensus for the 10-year yield is 3.32% for year end - not a hope in hell that happens if inflation continues to slow growth expectations.

OIL

Inflation in the oil price of +2.3% last week sees WTIC up another +0.6% this morning, just in time for Memorial Day weekend when Americans are being taxed six-ways to Sunday from rent to food. #InflationAccelerating.

ITALY

The MIB Index smoked for a -2.9% drop this morning in a rather abrupt move as Italian stocks have given back ½ their year-to-date gains on the “Sell in May and go away” trade – that’s very much on in US growth (Russell 2000) exposures as well.

Asset Allocation

CASH 30% US EQUITIES 0%
INTL EQUITIES 6% COMMODITIES 20%
FIXED INCOME 20% INTL CURRENCIES 24%

Top Long Ideas

Company Ticker Sector Duration
HOLX

Hologic is emerging from an extremely tough period which has left investors wary of further missteps. In our view, Hologic and its new management are set to show solid growth over the next several years. We have built two survey tools to track and forecast the two critical elements that will drive this acceleration.  The first survey tool measures 3-D Mammography placements every month.  Recently we have detected acceleration in month over month placements.  When Hologic finally receives a reimbursement code from Medicare, placements will accelerate further, perhaps even sooner.  With our survey, we'll see it real time. In addition to our mammography survey. We've been running a monthly survey of OB/GYNs asking them questions to help us forecast the rest of Hologic's businesses, some of which have been faced with significant headwinds. Based on our survey, we think those headwinds are fading. If the Affordable Care Act actually manages to reduce the number of uninsured, Hologic is one of the best positioned companies.

OC

Construction activity remains cyclically depressed, but has likely begun the long process of recovery.  A large multi-year rebound in construction should provide a tailwind to OC shares that the market appears to be underestimating.  Both residential and nonresidential construction in the U.S. would need to roughly double to reach post-war demographic norms.  As credit returns to the market and government funded construction begins to rebound, construction markets should make steady gains in coming years, quarterly weather aside, supporting OC’s revenue and capacity utilization.

LM

Legg Mason reported its month ending asset-under-management for April at the beginning of the week with a very positive result in its fixed income segment. The firm cited “significant” bond inflows for the month which we calculated to be over $2.3 billion. To contextualize this inflow amount we note that the entire U.S. mutual fund industry had total bond fund inflows of just $8.4 billion in April according to the Investment Company Institute, which provides an indication of the strong win rate for Legg alone last month. We also point out on a forward looking basis that the emerging trends in the mutual fund marketplace are starting to favor fixed income which should translate into accelerating positive trends at leading bond fund managers. Fixed income inflow is outpacing equities thus far in the second quarter of 2014 for the first time in 9 months which reflects the emerging defensive nature of global markets which is a good environment for leading fixed income houses including Legg Mason.

Three for the Road

TWEET OF THE DAY

76% of people reject socialist policy (to hike min wage to $25/hr) in Switzerland #WellDone @KeithMcCullough

QUOTE OF THE DAY

"If you'll not settle for anything less than your best, you will be amazed at what you can accomplish in your lives." - Vince Lombardi

STAT OF THE DAY

AT&T has agreed to acquire America's biggest satellite television provider, DirecTV, in a deal worth almost $50 billion. (CNN)


Un-friending US Growth

This note was originally published at 8am on May 05, 2014 for Hedgeye subscribers.

“There is no friendship in trade.”

-Cornelius Vanderbilt

 

Un-friending US Growth - facebook thumbs down

 

Forget about what Facebook (FB) did on Friday. In one of the more epic 2 hour moves I have ever seen, the US bond market un-friended the US growth bulls, big time.

 

At 8:30AM the lagging of all lagging economic indicators (the monthly US unemployment rate) was met with some of the funniest tweets my contra-stream has ever seen: “Boom!” (as in this is  great report), “Bye bye Bond Market”, “Stocks gonna rip!”, etc.

 

By 10:30AM, as you can see in the Chart of The Day, anyone who bought US growth stocks and sold what’s been working all year (Gold, Bonds, etc.) felt shame. #Tweetless

 

Un-friending US Growth - Chart of the Day

 

Back to the Global Macro Grind

 

To be crystal clear, with the 10yr US Treasury Yield -15% YTD to 2.58% and US GDP 0.11% in Q114, Mr. Macro Bond Market has completely nailed it in 2014.

 

Since everyone other than guys @ISI (who are trying to story-tell about 3-4% US Growth) understands the relationship between a rising bond market (falling bond yields) and falling growth expectations, the real-time price truth is on the tape.

 

With the Russell2000 (proxy for US Growth stocks) -3% YTD, what else is going on out there on the scoreboard?

  1. US Dollar down another -0.3% last week to $79.51 on the US Dollar Index (re-testing its YTD lows)
  2. The Currency Power Couple (Euro and Pound) were up another +0.3-0.4% last week to +1.9-3.0% YTD vs the Burning Buck
  3. European Stocks (EuroStoxx600) were up +1.3% last week (vs the Russell2000 +0.5%) to +2.9% YTD
  4. MSCI World Equity Index beat the Russell last week too, +1.2% = +1.8% YTD
  5. Canadian Stocks (TSX Composite Index) were up another +1.6% last week to +8.4% YTD

Blame Canada (who also had the “weather”, like the UK did – but didn’t spend the last 3 months blaming it like CNBC growth bulls have).

 

Now, if they can’t blame the weather for a 9-week high in US jobless claims (reported on Thursday, which isn’t a lagging jobs indicator), what precisely do you think they’ll start to blame as they cut their 2014 US GDP “forecasts”?

 

Alec, I’ll take US #InflationAccelerating for $500 (pre-tax!):

  1. Food Prices (CRB Foodstuffs Index) were up another +0.7% last week to a tasty +22.3% YTD
  2. Cattle Prices were up another +3.1% last week to +11.1% YTD
  3. Natural Gas Prices were up another +0.6% last week to +14.0% YTD

No worries though, the natural gas thing was all about the weather on the East Coast in February, right? If poor people being pulverized by food and shelter costs can’t afford the air conditioning this summer, tell them to go topless.

 

Cotton prices up another +1.1% last week to +12.3% YTD are prohibitive to wearing t-shirts anyway. After they eat an iPad, the median consumer in America (who makes $47,296.72 a year pre-tax and spends $42,996.83) can swallow Janet’s un-tapering reaction to slowing data, and like it.

 

Obviously this isn’t funny – an un-legislated Policy To Inflate (taxing 80% of Americans with QE on their cost of living) rarely is. Looking at the average American’s Spending Breakdown (slide 15 of our Q214 Macro Themes Deck):

  1. Housing = 29.2%
  2. Transportation = 17.6%
  3. Food = 12.5%

Yep, your un-elected Fed tells you all of that stuff is “non-core.” While food and shelter are primitive concepts for some, for most of us they are core costs. And since 30% of the country still rents, the all-time highs in US rents matters to real people with real costs too.

 

Oh yeah. I almost forgot to tie in the introduction of today’s note with the conclusion. Why is it that bond yields got slammed intraday on a “better than expected jobs report”? That’s easy. As opposed to being a backward-looking-editorial-passive-trend-follower, markets are forward looking.

 

My read-through on what both the bond and currency markets have been telling you for 4 months is that they’ll be telling you more of the same in the next 4 months. As growth slows, the Fed will get even easier à Dollar and Bond Yields fall further à  Inflation continues to accelerate, and real growth consensus is un-friended, faster.  

 

Our immediate-term Global Macro Risk Ranges are now as follows:

 

UST 10yr Yield 2.56-2.68%

SPX 1860-1888

RUT 1093-1133

USD 79.19-79.88

Gold 1291-1324

Corn 4.96-5.21

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer


investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

May 19, 2014

May 19, 2014 - Slide1

 

BULLISH TRENDS

May 19, 2014 - Slide2

May 19, 2014 - Slide3

May 19, 2014 - Slide4

May 19, 2014 - Slide5

May 19, 2014 - Slide6

May 19, 2014 - Slide7 

BEARISH TRENDS

May 19, 2014 - Slide8

May 19, 2014 - Slide9

May 19, 2014 - Slide10

May 19, 2014 - Slide11
May 19, 2014 - Slide12



Heisenberg, Please Explain

“Some questions have no answers to find.”

-Niels Bohr

 

This weekend I changed things up a bit and started re-reading a play called Copenhagen which is based on a meeting of the physics minds of Niels Bohr and Werner Heisenberg in 1941.

 

Heisenberg, Please Explain - HeisenberBohr1

 

The timing of the play opening on Broadway (April of 2000 at the top in the US stock market) is interesting. I was a newbie on Wall Street back then. I didn’t know much more than I know now about why this time the bubble is “different.”

 

Copenhagen’s opening scene starts with four questions exchanged between Bohr and his wife, Margrethe:

 

Margrethe: “But why?”

 

Bohr: “You’re still thinking about it?”

 

Margarethe: “Why did he come to Copenhagen?”

 

Bohr: “Does it matter, my love? Now we’re all three of us dead and gone”

 

Back to the Global Macro Grind

 

But why do bond yields keep going down? Why is Old Wall consensus still expecting 3.32% for the 10yr US Treasury yield for 2014 when it’s currently trading at 2.51? Why did consensus come into 2014 expecting US Growth to accelerate, and inflation to fall? Does it matter, my friends?

 

These questions obviously have obvious answers – unless you are paid to anchor on estimates that are dead wrong, that is. As #InflationAccelerating slows real US growth expectations for 2014, some serious questions remain as to why Wall Street and Washington have not yet come to agree with gravity.

 

This is, of course, the upshot of Copenhagen – Heisenberg (not the Breaking Bad dude, but Walter White was named after him):

 

“No one understands my trip to Copenhagen. Time and time again I’ve explained it. To interrogators and intelligence officers, to journalists and historians. The more I’ve explained, the deeper the uncertainty has become…”

 

“So” embrace the uncertainty associated with how an unprecedented level of un-elected central planning is affecting the rate of change in both growth and inflation in the US economy. There is nothing linear about this.

 

In addition to US Bond Yields getting hammered last week, here’s what Mr. Macro Market had to say about US growth:

 

  1. Growth Stocks (Russell 2000) down another -0.4% last week to -5.2% for 2014 YTD (down -8.8% since March)
  2. Yield Spread (10yr yield of 2.51% minus the 2yr yield of 0.36%) compressed another 8 basis points on the week (-48 basis points YTD)
  3. Financials (XLF) were the worst performing sub-sector of the SP500 at -0.8% on the week to -0.5% YTD

 

In other words, as the long-end of the curve (10yr yield) dropped -10 basis points on the week (-51 basis points YTD), not only is that a leading indicator for US #GrowthSlowing, but it’s as good a proxy as any for bank earnings (net interest margin tracks the Yield Spread).

 

But why?

 

Everyone who has followed market history knows why. There isn’t a person in this profession who can tell you with a straight face that growth stocks, financials, and bond yields all declining at the same time is a bullish growth signal.

 

Neither can they tell you that food and oil prices accelerating is a consumer tax cut. Here’s the update on that:

 

  1. Oil price up another +2.3% last week (breaking out above @Hedgeye TAIL risk lines of resistance)
  2. Cattle prices up another +1% last week to +13.5% YTD
  3. REITS up another +0.4% last week to +14.6% YTD

 

Oh, you mean you don’t eat REITS? But you’re still thinking about chasing some slow-growth yield? Obviously cost of living is ripping in this country, and since 1/3 of Americans rent, they can eat that inflation – and like it, because as Heseinberg explained in Breaking Bad, “I say so.”

 

The only good news I can give you on the US stock market is that buy-side consensus is starting to figure out the #InflationAccelerating slows US consumption growth theme. Here’s the updated CFTC Non-Commercial net long/short positions in the Big Macro stuff that matters:

 

  1. SPX (Index + Emini) closed the wk with a net short position of -40,901 contracts (vs. an avg NET LONG position of +16,256 contracts over the last 6 months)
  2. 10YR Treasury has a net long position now of +23,948 contracts (vs an avg NET SHORT position of -81,337 contracts over the last 6 months)

 

Put another way:

 

  1. If you were long growth equities and short bonds 6 months ago, you were killing it (but about to get killed)
  2. If you made the turn (out of growth stocks into slow-growth bonds) in the last 6 months, you are still killing it

 

Just because consensus is moving the way of economic gravity doesn’t mean the move is done. In Breaking Bad, Walter White explained this reality quite effectively to Saul too: “We’re done when I say we’re done.” And that’s all Mr. Macro Market is going to have to explain about that.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.48-2.61%

SPX 1

RUT 1089-1111

USD 79.16-80.21

WTIC Oil 101.05-102.97

Gold 1

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Heisenberg, Please Explain - Chart of the Day


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