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MONDAY MORNING RISK MONITOR: STAYING IN THE BUNKER

Takeaway: Systemic risk measures offer some solace, but we'll keep our heads down for now.

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"Is FICC Fixable? A View From The Trading Desk"

Invitation to Conference Call Thursday

 

Please join us this Thursday, August 7th at 11 am EST for a call with the Head of Credit Trading at TCW to discuss bond trading trends.

 

Participant Dialing Instructions:

  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 919219#

We are hosting a conference call Thursday, August 7th at 11 am EST with Jerry Cudzil, the Head of Credit Trading at TCW. This call aims to help us understand, from the view of a major buy-side trading desk, the trends in Fixed Income, Currency, and Commodity trading (FICC). Specifically, we'll be focusing on:

  1. Cyclical or Secular?: The buy-side's perspective on whether FICC weakness is secular or cyclical.
  2. Share Shifts: Market share shifts that are occurring amongst the broker-dealer community in various markets.
  3. The Fed: How a post-QE bond market may look and the risk/reward setup in fixed income currently.

This call will be helpful to investors in broker dealer stocks and volume-related market structure companies: GS, MS, JPM, BAC, C, PJC, RJF, CME, ICE, NDAQ

 

 

Jerry Cudzil's Bio:

Mr. Cudzil is head of U.S. Credit Trading at the Trust Company of the West (TCW), overseeing the U.S. Fixed Income group’s trading of corporate and high-yield securities and derivatives. Prior to joining TCW in 2012, Mr. Cudzil was a high yield bond trader for Morgan Stanley and Deutsche Bank, specializing in project finance, aviation, and energy securities. He was previously a portfolio manager for Dimaio Ahmad Capital, managing the multi-strategy credit fund and aviation fund and leading the firm’s risk management team. Mr. Cudzil began his career as a corporate bond trader for Prudential Securities and has also traded investment and high yield debt for Credit Suisse and Goldman Sachs. Mr. Cudzil earned a BA in Economics from the University of Pennsylvania.

 

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Current Best Ideas:

 

MONDAY MORNING RISK MONITOR: STAYING IN THE BUNKER - 19

 

Key Callouts:

Last week saw one of the sharpest corrections in US equities in a few years.

 

Our last three weekly risk monitor headlines have read:

"Battening Down the Hatches" - 7/28/14

"Moving to Higher Ground" - 7/21/14

"Portuguese Risk" - 7/14/14

 

US Financial Equities are strongly correlated to junk bond yields and junk has been moving for a while. High yield was up +41.5 bps last week, rising to 6.07%, from 5.66%. On the month, high yield is now +74 bps. 

 

Rather than point out the obvious, we'll try and point out something that could be helpful: while there is broad-based weakness across US Financials (all 27 reference entities we track were wider on the week), the systemic interbank risk measures were unimpressed. TED Spread rose 1 bp to 22 bps and Euribor-OIS rose 1 bps to 15 bps. In other words, systemic risk appears to be stable, for now.   

Bigger picture, our view has been and remains that ongoing 2H14 macro headwinds from falling rates and decelerating home prices will continue to put pressure on the Financials complex.

 

Financial Risk Monitor Summary

 • Short-term(WoW): Negative / 1 of 12 improved / 5 out of 12 worsened / 6 of 12 unchanged

 • Intermediate-term(WoW): Negative / 1 of 12 improved / 7 out of 12 worsened / 4 of 12 unchanged

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

 

MONDAY MORNING RISK MONITOR: STAYING IN THE BUNKER - 15

 

1. U.S. Financial CDS -  Swaps widened for all 27 out of 27 domestic financial institutions on the week. The average increase was 11 bps (roughly 12%). Meanwhile, the corresponding equity prices were down by an average of 4% on the week.  

 

Widened the least WoW: UNM, XL, AGO

Widened the most WoW: GNW, AXP, PRU

Widened the least/ tightened the most WoW: AGO, MBI, UNM

Widened the most MoM: GNW, MTG, C

 

MONDAY MORNING RISK MONITOR: STAYING IN THE BUNKER - 1

 

2. European Financial CDS - Portugal and Russia saw their bank swaps widen sharply, again, on the week. Not suprisingly, Portugal's Banco Espirito Santo - after weeks of heavy negative news flow - received a bailout over the weekend from the Bank of Portugal. Depositors and senior creditors appear to be protected, but everything downstream in the capital structure looks to be a washout. Meanwhile, US sanctions continue to take a toll on Russian banks, as Sberbank swaps widened 69 bps w/w to 352 bps and are up 110 bps on the month. 

 

MONDAY MORNING RISK MONITOR: STAYING IN THE BUNKER - 2

 

3. Asian Financial CDS - Indian bank swaps widened by an average of 15 bps on the week, while Chinese banks widened by an average of 7 bps. Japanese financials were wider, on average, by 1 bp.

 

MONDAY MORNING RISK MONITOR: STAYING IN THE BUNKER - 17

 

4. Sovereign CDS – Sovereign swaps were wider in Portugal and Italy (+21 bps and +6 bps, respectively), but little changed elsewhere, and actually tightened 4 bps in Spain. The US and Germany were unchanged. 

 

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5. High Yield (YTM) Monitor – High Yield rates rose 41.5 bps last week, ending the week at 6.07% versus 5.66% the prior week.

 

MONDAY MORNING RISK MONITOR: STAYING IN THE BUNKER - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 8.0 points last week, ending at 1876.

 

MONDAY MORNING RISK MONITOR: STAYING IN THE BUNKER - 6

 

7. TED Spread Monitor – The TED spread rose 1.0 basis points last week, ending the week at 21.6 bps this week versus last week’s print of 20.61 bps.

 

MONDAY MORNING RISK MONITOR: STAYING IN THE BUNKER - 7

 

8. CRB Commodity Price Index – The CRB index fell -2.1%, ending the week at 292 versus 299 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.

 

MONDAY MORNING RISK MONITOR: STAYING IN THE BUNKER - 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 1 bps to 15 bps.

 

MONDAY MORNING RISK MONITOR: STAYING IN THE BUNKER - 9

 

10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index fell 14 basis points last week, ending the week at 3.20% versus last week’s print of 3.34%. 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: STAYING IN THE BUNKER - 10

 

11. Chinese Steel – Steel prices in China rose 0.2% last week, or 5 yuan/ton, to 3131 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: STAYING IN THE BUNKER - 12

 

12. 2-10 Spread – Last week the 2-10 spread widened to 202 bps, 4 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR: STAYING IN THE BUNKER - 13

 

13. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 3.1% upside to TRADE resistance and 0.3% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: STAYING IN THE BUNKER - 14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


Just Charts – The Move Lower

INVESTMENT IDEAS

The table below lists our current investment ideas as well as a list of potential ideas we are in the process of evaluating (watch list).  We intend to update this table regularly and will provide detail on any material changes.

Just Charts – The Move Lower - chart1

 

EVENTS THIS WEEK

8/5/14 ADM Earnings Call 9am EST

8/5/14 IFF Earnings Call 10am EST

8/6/14 MDLZ Earnings Call 10am EST

8/6/14 TAP Earnings Call 11am EST

8/6/14 NUS Earnings Call 11am EST

8/7/14 THS Earnings Call 9am EST

8/7/14 LNCE Earnings Call 9am EST

8/7/14 MNST Earnings Call 5pm EST

8/8/14 POST Earnings Call 9am EST

 

WEEK-OVER-WEEK PERFORMANCE

Consumer Staples fell -2.9% week-over-week versus the broader market (S&P500) at -2.7%.  XLP is up 1.1% year-to-date versus the SPX at 4.2%. XLP is the third worst performing sector in the ytd, ahead of Industrials (XLI) -0.9% and Consumer Discretionary (XLY) -1.8%.

 

Positive Divergence:  SODA 9.2%; BG 8.6%; NWL 3.6%; REV 2.0%; ENR 1.1%

Negative Divergence:  HLF -20.4%; SAFM -9.7%; KRFT -6.1%; TSN -6.3%; BNNY -6.2%

RECENT NOTES 

From a quantitative set-up XLP is broken over the immediate term TRADE and intermediate term TREND durations.

Just Charts – The Move Lower - chart2

 

The Hedgeye U.S. Consumption Model shows 6 of the 12 U.S. Economic Indicators flashing green.

Just Charts – The Move Lower - z. consumptionpng

 

We continue to believe that the group 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, Q2 2014 theme of #ConsumerSlowing, and Q3 2014 theme of #Q3 Slowing
  • 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 (rescaled for cosmetic and not component reasons) has not seen any real improvement over the past 6 months, and fell to 36.3 versus 37.6 in the prior week

Just Charts – The Move Lower - chart4

Just Charts – The Move Lower - chart5

Just Charts – The Move Lower - chart6

QUANTITATIVE SETUP

In the charts below we look at the largest companies by market cap in the Consumer Staples space from a quantitative perspective.

 

BUD – bearish TREND = 110.43 resistance

Just Charts – The Move Lower - chart7

 

DEO – bearish TREND = 124.67 resistance

Just Charts – The Move Lower - chart8

 

KO – bearish TREND = 40.48 resistance

Just Charts – The Move Lower - 99

 

PEP –  bullish TREND = 87.24 support

Just Charts – The Move Lower - 10

 

GIS – bearish TREND = 52.19 resistance

Just Charts – The Move Lower - 11

 

MDLZ – bearish TREND = 36.99 resistance

Just Charts – The Move Lower - 12

 

KMB – bearish TREND = 109.73 resistance

Just Charts – The Move Lower - chart13

 

PG – bullish TREND = 79.22 support

Just Charts – The Move Lower - 14

 

MO – bearish TREND = 41.33 resistance

Just Charts – The Move Lower - 15

 

PM – bearish TREND = 84.22 resistance

Just Charts – The Move Lower - 16

 

Howard Penney

Managing Director

 

Matt Hedrick

Associate

 

Fred Masotta

Analyst


Monday Mashup: Full Slate of Earnings

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.

Monday Mashup: Full Slate of Earnings - chart1

Recent Notes

07/28/14 Monday Mashup: MCD, YUM and More

07/28/14 MCD: McLibel 2.0?

07/29/14 DRI: Light Gets In

07/31/14 YUM: Warning Shots Fired

Events This Week

Monday, August 4th

  • KONA earnings call 4:30pm EST
  • JMBA earnings call 5:00pm EST
  • TXRH earnings call 5:00pm EST

Tuesday, August 5th

  • TAST earnings call 8:30am EST
  • BLMN earnings call 9:00am EST
  • ARCO earnings call 10:00am EST
  • DAVE earnings call 4:30pm EST
  • FRGI earnings call 4:30pm EST
  • PBPB earnings call 5:00pm EST
  • CHUY earnings call 5:00pm EST

Wednesday, August 6th

  • PZZA earnings call 10:00am EST
  • THI earnings call 2:30pm EST
  • GMCR earnings call 5:00pm EST

Thursday, August 7th

  • WEN earnings call 9:00am EST
  • EAT earnings call 10:00am EST
  • JACK earnings call 11:30am EST
  • IRG earnings call 5:00pm EST

Friday, August 8th

  • MCD July sales and revenue release

Chart of the Day

Monday Mashup: Full Slate of Earnings - 2

Recent News Flow

Monday, July 28th

  • JMBA announced an expansive franchise recruiting campaign in key markets where they plan to accelerate growth, including Atlanta, Miami, Dallas and specific East Coast markets.
  • RRGB is celebrating its 500th new restaurant opening on Monday, August 4th when it opens in Milpitas, CA at the Great Mall of the Bay Area.
  • DRI completed its sale of Red Lobster to Golden Gate Capital.
  • PZZA announced it is celebrating the summer barbecue with its new Spicy Pulled Pork Pizza.
  • DAVE elected David Mastrocola as Chairman of the Board of Directors.  Mastrocola currently serves as Co-Founder and Advisory Chairman of Pleasant Lake Partners, LLC and previously served as a partner and Managing Director of Goldman Sachs.

Tuesday, July 29th

  • CAKE celebrated National Cheesecake Day by offering any slice for half price.

Wednesday, July 30th

  • No significant news.

Thursday, July 31st

  • BWLD was upgraded to buy at Sterne Agee with a $176 PT.
  • DRI announced a $500m accelerated buyback through Goldman Sachs and Wells Fargo.  A portion of the proceeds from the Red Lobster sale will be used to fund this.
  • BAGL announced a quarterly dividend of $0.13 per share.
  • WEN announced a quarterly cash dividend of $0.05 per share.

Friday, August 1st

  • PZZA increased its quarterly dividend to $0.14, up from $0.125.
  • CAKE opened a Cheesecake Factory restaurant in Reno, NV.
  • BOBE management and the board refuted Sandell's proposals in a recent company presentation, calling the activist's suggestions "shortsighted."

Sector Performance

The XLY (-1.8%) outperformed the SPX (-2.7%).  On average, casual dining stocks (-2.9%) underperformed and quick service stocks (-1.7%) outperformed the XLY Index.

Monday Mashup: Full Slate of Earnings - chart3

Monday Mashup: Full Slate of Earnings - chart4

XLY Quantitative Setup

From a quantitative perspective, the sector turned bearish on an intermediate-term TREND duration.

Monday Mashup: Full Slate of Earnings - chart5

Casual Dining Restaurants

Monday Mashup: Full Slate of Earnings - chart6

Monday Mashup: Full Slate of Earnings - chart7

Quick Service Restaurants

Monday Mashup: Full Slate of Earnings - chart8

Monday Mashup: Full Slate of Earnings - chart9

 

Howard Penney

Managing Director

 

Fred Masotta

Analyst


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 80.65%
  • SHORT SIGNALS 78.63%

Self-Confirming Info

This note was originally published at 8am on July 21, 2014 for Hedgeye subscribers.

“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 1959-1985

RUT 1133-1155

VIX 10.32-13.70

WTI Oil 100.50-103.41

Gold 1308-1345

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Self-Confirming Info - Chart of the Day


Chart of the Day: Fade Buy-Side Consensus

Chart of the Day: Fade Buy-Side Consensus - Chart of the Day

This chart shows that consensus is now net short the SPY. 


PERFORMANCE DIVERGENCES

Client Talking Points

CHINA

China was leading the East (in Equities) at +2.8% last week (vs Russell -2.6%). The Shanghai Composite rips another +1.7% this morning to +8.2% year-to-date after a Chinese Services PMI that slowed a touch month-over-month from 55.0 JUN to 54.2 JUL – we like China and India on the long side.

DAX

German stocks are leading losers this morning, down another -0.6% on the DAX to -4.2% year-to-date as every European equity market continues to signal bearish on our TREND signal. DAX risk range is 9150 to 9599, so testing the low-end of the range now.

COMMODITIES

If the CRB Index can’t bounce and recover 295-297 zone, we see no reason why we need to stay with the long commodities call we’ve had since the beginning of the year. Gold and Copper look fine; Oil doesn’t.

Asset Allocation

CASH 34% US EQUITIES 4%
INTL EQUITIES 16% COMMODITIES 10%
FIXED INCOME 26% INTL CURRENCIES 10%

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

GOLD: +0.1% to $1294 - immediate-term risk range tight at $1281-1304 $GLD

@KeithMcCullough

QUOTE OF THE DAY

It wasn't raining when Noah built the ark.

-Howard Ruff

STAT OF THE DAY

Cattle and Coffee were up another +0.9-7.4% last week to +29.3% and +64.2% year-to-date, respectively.


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