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MONDAY MORNING RISK MONITOR: MOVING TO HIGHER GROUND

Takeaway: Domestic indicators reflect growing risk aversion. High yield is blowing out while cash seeks safety (Treasuries).

Current Best Ideas:

 

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Key Callouts:

In spite of the mounting tensions abroad, the risk parameters that are showing the most strain are domestic. For instance, high yield rates soared last week, rising 27 bps. Meanwhile, the 2-10 yield spread continues to compress, shaving another 6 bps to end the week at 200 bps. The only relief comes from falling commodity prices as the CRB was down 1.3% last week and is now down 4.6% on the month. Meanwhile, internationally, Sberbank widened by 35 bps to 265 bps as the condemnation of Russia grows.

 

* High Yield – High Yield rates rose 27.3 bps last week, ending the week at 5.70% versus 5.43% the prior week.

 

* 2-10 Spread – Last week the 2-10 spread tightened to 200 bps, -6 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

* CRB Commodity Price Index – The CRB index fell -1.3%, ending the week at 297 versus 301 the prior week. As compared with the prior month, commodity prices have decreased -4.6% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

 

Financial Risk Monitor Summary

 • Short-term(WoW): Negative / 1 of 12 improved / 3 out of 12 worsened / 8 of 12 unchanged

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

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

 

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1. U.S. Financial CDS -  Swaps were fairly uneventful in the US with a median change of 0 bps. Large banks tightened by an average 4 bps as concerns around EU contagion receded while bank earnings came in modestly better than expected. Overall, swaps widened for 14 out of 27 domestic financial institutions.

 

Tightened the most WoW: AGO, MBI, MS

Widened the most WoW: ALL, ACE, AON

Widened the least/ tightened the most WoW: TRV, CB, SLM

Widened the most MoM: MBI, AGO, WFC

 

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2. European Financial CDS - Swaps across Europe were narrowly changed with one exception: Russia's Sberbank, which widened +35 bps to 265 bps. 

 

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3. Asian Financial CDS - Bank swaps across Asia were modestly higher last week, rising by an average 3 bps. India saw a slightly larger increase at +8 bps.

 

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4. Sovereign CDS – Sovereign swaps were little changed last week as the largest move came from Italy at +3 bps, while the average move was 0 bps. 

 

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5. High Yield (YTM) Monitor – High Yield rates rose 27.3 bps last week, ending the week at 5.70% versus 5.43% the prior week.

 

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6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 1 point last week, ending at 1883.

 

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7. TED Spread Monitor – The TED spread rose 0.3 basis points last week, ending the week at 21.9 bps this week versus last week’s print of 21.56 bps.

 

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8. CRB Commodity Price Index – The CRB index fell -1.3%, ending the week at 297 versus 301 the prior week. As compared with the prior month, commodity prices have decreased -4.6% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

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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 tightened by 1 bps to 13 bps.

 

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10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index fell 4 basis points last week, ending the week at 3.25% versus last week’s print of 3.29%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.

 

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11. Chinese Steel – Steel prices in China rose 0.4% last week, or 12 yuan/ton, to 3144 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: MOVING TO HIGHER GROUND - 12

 

12. 2-10 Spread – Last week the 2-10 spread tightened to 200 bps, -6 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR: MOVING TO HIGHER GROUND - 13

 

13. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.6% upside to TRADE resistance and 0.5% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: MOVING TO HIGHER GROUND - 14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


MONDAY MASHUP: EARNINGS KICKOFF

Investment Ideas

The table below lists our Investment Ideas as well as our Watch List -- a list of potential ideas that we are in the process of evaluating.  We intend to update this table regularly and will provide detail on any material changes.

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Recent Notes

07/14/14 MONDAY MASHUP: YUM ON DECK

07/15/14 YUM: THOUGHTS INTO THE PRINT

07/17/14 YUM: EARNINGS RECAP

07/18/14 CMG: THOUGHTS INTO THE PRINT

07/18/14 DRI: PERPETUALLY MISGUIDED (FOR 46 MORE DAYS)

 

Events This Week

Monday, July 21st

  • CMG earnings call 4:30pm EST

Tuesday, July 22nd

  • DFRG earnings call 8:30am EST
  • DPZ earnings call 10:00am EST
  • MCD earnings call 11:00am EST

Wednesday, July 23rd

  • CAKE earnings call 5:00pm EST

Thursday, July 24th

  • DNKN earnings call 8:00am EST
  • BJRI earnings call 5:00pm EST
  • SBUX earnings call 5:00pm EST

Friday, July 25th

  • No events

 

Chart of the Day

MONDAY MASHUP: EARNINGS KICKOFF - chart2

 

Recent News Flow

Monday, July 14th

  • EAT Brinker was upgraded to overweight at JP Morgan with a $52 PT.
  • RRGB announced it is two weeks away from opening its newest restaurant on Long Island.

Tuesday, July 15th

  • MCD Janney released a report noting the growing long-term threat McDonald's is facing from privately owned Chick-fil-A.
  • RRGB completed an acquisition of 32 franchised restaurants in the U.S. and Canada for approximately $40 million in cash.
  • DRI Starboard delivered a letter to the Board of Darden, calling for new leadership and a series of operational improvements.

Wednesday, July 16th

  • BOBE delivered a letter to stockholders stating their case for the Board's director nominees at the annual meeting on August 20th, 2014.

Thursday, July 17th

  • CAKE The Cheesecake Factory announced that its licensee, S.A.B. de C.V., opened its first restaurant in Mexico (Guadalajara, Jalisco).
  • TAST Carrols Restaurant announced its agreement to acquire 21 Burger King restaurants from Kessler Group, Inc.
  • MCD announced a quarterly cash dividend of $0.81 payable on September 16, 2014 to shareholders of record on September 2, 2014.

Friday, July 18th

  • No news

 

Sector Performance

The XLY (+0.2) underperformed the SPX (+0.5%).  Both casual dining (-1.6%) and quick service (-0.7%) stocks, in aggregate, undperformed the XLY Index.

MONDAY MASHUP: EARNINGS KICKOFF - chart3

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Consumption

The Hedgeye U.S. Consumption Model is signaling bullish, with 7 out of 12 metrics flashing green.

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XLY Quantitative Setup

From a quantitative perspective, the sector remains bullish on an intermediate-term TREND duration.

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Casual Dining Restaurants

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Quick Service Restaurants

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Howard Penney

Managing Director

 

Fred Masotta

Analyst


HOPE FADES

Client Talking Points

EUROPE

Bounced to lower-highs late last week, but all of the majors failed @Hedgeye TREND resistance. DAX is down  -0.9% this morning and its TREND line = 9759; Italy’s MIB Index down -1.1% (TREND resistance = 21192).

GOLD

After correcting to higher-lows last week = +0.3% this morning to $1314 with no resistance to $1324, then $1345 – the best way to play our inflation slowing U.S. growth theme in Q3 is long Gold, TIP, and the long bond.

UST 10YR

UST 10YR yield ticks down to 2.47% this morning as our model signals a series of lower-highs. The Yield Spread (10yr – 2yr) is dipping below 200bps for the first time in 2014 today, new lows (another #Q3Slowing signal for USA).

Asset Allocation

CASH 20% US EQUITIES 6%
INTL EQUITIES 10% COMMODITIES 20%
FIXED INCOME 24% INTL CURRENCIES 20%

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

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.

Three for the Road

TWEET OF THE DAY

INDIA: our favorite equity market in the East = +23% YTD

@KeithMcCullough

QUOTE OF THE DAY

Gratitude is the sign of noble souls.

-Aesop

STAT OF THE DAY

Despite dropping -0.1% last week, Food Prices (CRB Food Index) are still up +19.1% YTD.


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Moments of Discontinuity

This note was originally published at 8am on July 07, 2014 for Hedgeye subscribers.

“Each circle of time has a great moment of discontinuity.”

-The Fourth Turning

 

No, the stock market is not the economy. And the bond market is not the stock market. Everything is relative to its own rate of change. On that score, I think the US economic cycle is about to meet another great moment of discontinuity.

 

In the ancient view, a new round of time does not emerge gradually from the last but only after the circle experiences a sharp break” (The Fourth Turning, pg 31). The Hedgeye Macro Model is hardly ancient, but Mr. Market’s respect for mean reversion within long-term cycles is.

 

Moments of Discontinuity - clock2

 

After a -2.9% GDP print in Q1, the Old Wall’s latest victory lap on US growth came in the form of a classic lagging economic indicator last week – headline employment data. Since our models focus primarily on rate of change, it wasn’t surprising to see the slope of private wage growth remain negative. #InflationAccelerating and real-wages tracking negative for the first time in two years should ensure #Q3Slowing.

 

Back to the Global Macro Grind

 

On Thursday afternoon, we shorted SPY for the 1st time (in Real-Time Alerts terms) since February 10th, 2014, on that. Well, maybe not only on that. You see, having a view on an economy within the Global Macro marketplace is pretty much useless unless you have some repeatable mechanism (read: #timing signal) that tells you when the probability of acting is falling into your favor.

 

With literally no volume trading in US Equities on Thursday (at the all-time highs), here’s the multi-factor, multi-duration, risk management signal I was looking at:

 

1. US DOLLAR – bouncing to lower-highs for the 1st time in 2 weeks, but still well below $81.17 TAIL risk line (USD Index)

2. US RATES – bouncing to lower-highs for the umpteenth time in 2014, but well below 2.81% TREND line resistance

3. VOLATILITY – front month VIX testing its all-time lows, closing at 10.32 (it has never held below 10, sustainably)

 

Yes, never (in mean reversion terms) remains a very long time. So it’s a lot easier to make the SELL call on US domestic consumption growth today than it was when the Old Wall didn’t agree with us 6 months ago.

 

But consensus wouldn’t want to do that now, would it? How about you? If I’m right, you are going to crush your competition (newsflash: your competition in US Growth Equities is called levered long beta), just like you did from January 1st to the May 2014 lows.

 

If I’m wrong, well, consensus is going to be really right.

 

Strapping on the accountability pants is fun right here and now because the more bearish you are on US growth in Q3, the more you can get invested (on the long side) in what is going to be perpetuating outflows from US domestic equity funds:

 

1. Long Inflation (Commodities, Energy Stocks, Gold, etc.)

2. Long Bonds + Anything That Looks Like A Bond (love those #GrowthSlowing Yield Chasers!)

3. Long Foreign Currencies + Emerging Market Stocks (vs USD short)

 

This is when making a macro call matters – when you get those rare Moments Of Discontinuity in markets where you can put a lot of money to work. Sounds crazy, but this is much like the moment you had on JAN 1 to buy Gold and Utilities (+10% and +12% YTD, respectively).

 

To be crystal clear on this, we aren’t calling for the next Lehman – we are using our process to make an ole school consumption-cycle call. When the cycle is in phase transition, you get paid to shift your Style Factoring for the part of the cycle that you are entering.

 

In our process-speak we call this moving from the 2nd quadrant to the 3rd (within a 4 quad model using 2-factors, Growth & Inflation). Not unlike how Strauss and Howe explain “four-phase time” of the seasons, this risk management framework helps us simplify the complex.

 

“Time’s circle moves not only from cold, to hot, to cold but also from growth to maturity to decay to death.”

-William Strauss and Neil Howe (The Fourth Turning)

 

And while the “decay to death” part is not what I wake up thinking about in the morning, it does happen. Countries and companies slow too - and so does the confidence The People have in things like central-planning and the stock market’s last price being the economy.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.50-2.67%

SPX 1946-1989

VIX 10.11-11.54

USD 79.73-80.35

Pound 1.69-1.71

Brent Oil 110.03-112.99

Gold 1310-1330

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Moments of Discontinuity - Chart of the Day


CHART OF THE DAY: Trim Those GDP Forecasts Baby!

Takeaway: We'll take the other side of consensus.

 

CHART OF THE DAY: Trim Those GDP Forecasts Baby! - Chart of the Day


Self-Confirming Info

“Because we naturally seek self-confirming information, we need discipline to consider the opposite.”

-Chip Heath

 

That quote comes from a block and tackle #behavioral chapter in Decisive titled Consider The Opposite (pg 114). If I was ever seeking self-confirming evidence of US GDP #GrowthSlowing, this morning I’ve got plenty of headlines on that.

 

The cover of this week’s The Economist has a picture of an American jockey riding a turtle with a header that reads: “America’s Lost Oomph – Why It’s Long-Term Growth Rate Has Slowed.” And on Friday, the WSJ ran a story titled “Survey Shows Economists Trimming Growth Forecasts.”

Self-Confirming Info - cart

#Trimming? With both bond yields and the Russell 2000 US growth index falling back toward their YTD lows, isn’t the market telling us to go all-in US growth investing? No thanks. The only discipline that matters in considering the opposite of our research view is delivered to us daily via real-time market signals.

 

Back to the Global Macro Grind

 

The best part about The Economist and Wall Street Journal articles is that they attempt to explain US #GrowthSlowing with the wrong reasons. The Economist, in its classic Keynesian style, suggests that the Fed keeping rates at 0% remains critical to growth and that the government needs to both spend more and expand immigration. #MustPrintAndSpendMoarrr

 

My colleague Darius Dale comically summarized the WSJ article this way on Friday: “Net Exports are a solid negative ~2% of US GDP… not sure how “negative international events” can ever be the largest downside risk to US GDP growth. Consensus Macro can’t even get their story straight at this point.” #BlameTheWeather

 

In other words, those who were looking for +3-4% 1990s style US GDP growth 6 months ago should cite anything but what’s slowing 70% of the number (US Consumption = 70% of GDP). And, whatever they do, they shouldn’t blame The Policy To Inflate’s impact on real cost of living in America either.

 

In other self-confirming USA #Q3Slowing news, here’s what big macro markets signaled last week:

 

  1. Russell 2000 lost another -0.7% on the week, falling back to -1.0% for 2014 YTD
  2. US 10yr Treasury Yield dropped another -4bps on the week, and is down -55bps YTD
  3. Yield Spread (10yr minus 2yr) compressed another -7bps on the week to fresh YTD lows

 

Don’t kid yourself, the economists who are now cutting their GDP forecasts know exactly what falling bond yields and a compressing yield spread means. On the other side of that, this is what consumption growth bulls are saying:

 

  1. Food prices dropped -0.1% last week
  2. Natural Gas dropped -4.7% last week
  3. Gold dropped -2.1% last week

 

Too bad you can’t eat Gold. If you contextualize those three data points however:

 

  1. Food Prices (CRB Food Index) is still up +19.1% YTD
  2. Natural Gas has round tripped back to flat YTD
  3. Gold made another higher-low and is up again this morning to +9.3% YTD

 

So, from an asset allocation perspective, what would you rather be long YTD – Gold or the Russell? That one is too easy to answer. How about The Dow, Coffee, or Cattle?

 

  1. Dow Jones was +0.9% last week to +3.2% YTD
  2. Live Cattle prices were up +1.8% last week to +17.7% YTD
  3. Coffee prices were up another +6.8% last week to +47.2% YTD

 

I know. Instead of citing the all-time high in both US rents (34% of the country rents) and meat prices during BBQ season, let’s talk about the corn chart rolling over from its all-time bubble highs as a “deflationary force” when the Food Index is +19% YTD.

 

As for the SP500, which hasn’t been as much a focus for us in 2014 as the #GrowthSlowing style factors within the market, there are plenty of components that we like on the #InflationAccelerating (Energy, XLE +11.8% YTD) and slow-growth #YieldChasing (Utilities, XLU +12.6% YTD) front.

 

I even went smart beta last week and sent out the buyback signal on AAPL during its correction to what we call immediate-term TRADE oversold (within a bullish intermediate-term TREND). While I can’t feed my kids iPads, apples are eatable – and, compared to a $12 “gourmet burger”, relatively “cheap” too!

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.46-2.54%

SPX 1

RUT 1133-1155

VIX 10.32-13.70

WTI Oil 100.50-103.41

Gold 1

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Self-Confirming Info - Chart of the Day


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