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MONDAY MORNING RISK MONITOR: FADING THE GEOPOLITICAL (FOR NOW)

Takeaway: The signals are now bullish in the short-term and mixed on an intermediate term basis.

Current Best Ideas:

 

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Key Callouts:

The XLF put in a good showing last week, rising 2.4%, but that brings the month-over-month change to just +0.4%. Not much to get excited about. Much of the geopolitical risk that was pushing risk premia out last month is now in retreat. This is evident across the EU, Sovereign and US Financials CDS complex as well as in the move in high yield (tighter by 8 bps on the week). 

 

On an intermediate term basis, there are now 5 measures that are positive while 4 are negative. One of the few areas that continues to retreat aggressively is the 2-10 spread, now tracking 10 bps tighter on the week at 191 bps.

 

Financial Risk Monitor Summary

 • Short-term(WoW): Positive / 4 of 12 improved / 0 out of 12 worsened / 8 of 12 unchanged

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

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

 

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1. U.S. Financial CDS -  Swaps tightened for 25 out of 27 domestic financial institutions. Led by WFC (-6 bps) the large cap financials were tighter by an average of 4 bps. Specialty finance also saw big swings with Sallie Mae tightening by 20 bps on the week to 228 bps.

 

Tightened the most WoW: TRV, CB, ACE

Widened the most/ tightened the least WoW: AXP, GNW, GS

Tightened the most WoW: RDN, AGO, WFC

Widened the most MoM: GNW, AXP, MET

 

MONDAY MORNING RISK MONITOR: FADING THE GEOPOLITICAL (FOR NOW) - 1

 

2. European Financial CDS - Swaps mostly tightened in Europe last week, dropping by an average of 6 bps on the week. Swaps are now tighter by 5 bps on a m/m basis. Even Sberbank, a proxy for the geopolitical turmoil of the Russia/Ukraine situation, tightened by 11 bps on the week, but remains over 300 bps at 316 bps.

 

MONDAY MORNING RISK MONITOR: FADING THE GEOPOLITICAL (FOR NOW) - 2

 

3. Asian Financial CDS - Default swaps across the Asian financials complex were generally tighter with the most improvement coming from India, where they tightened by an average of 8 bps. 

 

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4. Sovereign CDS – Sovereign swaps tightened around the world last week, except in the US, where they widened by 1 bp to 18 bps. Portuguese sovereign swaps tightened by -10.9% (-20 bps to 161 bps).

 

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5. High Yield (YTM) Monitor – High Yield rates fell 8.3 bps last week, ending the week at 5.61% versus 5.69% the prior week.

 

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6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 6.0 points last week, ending at 1878.

 

MONDAY MORNING RISK MONITOR: FADING THE GEOPOLITICAL (FOR NOW) - 6

 

7. TED Spread Monitor – The TED spread rose 1.1 basis points last week, ending the week at 21.5 bps this week versus last week’s print of 20.41 bps.

 

MONDAY MORNING RISK MONITOR: FADING THE GEOPOLITICAL (FOR NOW) - 7

 

8. CRB Commodity Price Index – The CRB index fell -0.9%, ending the week at 289 versus 291 the prior week. As compared with the prior month, commodity prices have decreased -3.2% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

MONDAY MORNING RISK MONITOR: FADING THE GEOPOLITICAL (FOR NOW) - 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 was unchanged at 15 bps.

 

MONDAY MORNING RISK MONITOR: FADING THE GEOPOLITICAL (FOR NOW) - 9

 

10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index fell 4 basis points last week, ending the week at 2.85% versus last week’s print of 2.89%. 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: FADING THE GEOPOLITICAL (FOR NOW) - 10

 

11. Chinese Steel – Steel prices in China fell 0.8% last week, or 26 yuan/ton, to 3092 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: FADING THE GEOPOLITICAL (FOR NOW) - 12

 

12. 2-10 Spread – Last week the 2-10 spread tightened to 191 bps, -2 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR: FADING THE GEOPOLITICAL (FOR NOW) - 13

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – August 25, 2014


As we look at today's setup for the S&P 500, the range is 30 points or 1.08% downside to 1967 and 0.43% upside to 1997.                              

                                                                                                 

SECTOR PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

EQUITY SENTIMENT:

 

THE HEDGEYE DAILY OUTLOOK - 10

 

CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 1.89 from 1.91
  • VIX closed at 11.47 1 day percent change of -2.47%

 

MACRO DATA POINTS (Bloomberg Estimates):           

  • 8:30am: Chicago Fed Natl, July, est. 0.20 (prior 0.12)
  • 9:45am: Markit U.S. Composite PMI, Aug. prelim (prior 60.6)
  • 9:45am: Markit U.S. Services PMI, est. 58.0 (prior 60.8)
  • 10am: New Home Sales, July, est. 429k (prior 406k)
  • 10:30am: Dallas Fed Mfg, Aug., est. 12.8 (prior 12.7)
  • 11am: U.S. to announce plans for auction of 4W bills
  • 11:30am: U.S. to sell $29b 3M bills, $24b 6M bills

 

GOVERNMENT:

    • Senate, House out on August recess
    • FCC deadline for comments on proposed Comcast-Time Warner Cable merger
    • 1pm: Atlantic Council briefing on “Mexico’s Energy Reform: Ready to Launch” report

 

WHAT TO WATCH:

  • Roche to buy InterMune for $8.3b, adding lung drug
  • Roche said to have decided against bidding for rest of Chugai
  • CME opens electronic futures trading after 4-hour delay
  • Burger King mulls Tim Hortons deal in tax-saving Canada move
  • Occidental talks to Mubadala on $3b asset, PIW reports
  • Jackson Hole theme is labor markets can’t take higher rates
  • Pershing, Valeant say Allergan investors demand mtg on deal
  • Wal-Mart said to move India COO Mediratta to U.S. ops
  • Advaxis, Merck enter clinical trial pact for cancer treatment
  • Goldman’s new partner class unlikely to grow from 2012: WSJ
  • California quake to cost insurers up to $1b, Eqecat says
  • German business confidence drops for 4th month as risks rise
  • China urges U.S. to halt close air surveillance
  • Friends Life said to hire Goldman for sale of intl unit

 

EARNINGS:

    • OSI Systems (OSIS) 8:30am, $1.17
    • Prospect Capital (PSEC) 4pm, $0.32
    • Qihoo 360 (QIHU) 5pm, $0.67
    • Renren (RENN) 6pm, ($0.08)

               

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Brent, WTI Oil Prices Reverse Decline as Libya Tensions Persist
  • China Gold Imports Drop for Fifth Month on Weak Consumer Demand
  • Speculators Lower Gold Bull Wagers on Rate Outlook: Commodities
  • Soybeans Slump to Lowest Since 2010 as U.S. Crop Seen at Record
  • CME Opens Electronic Trading on Futures After Four-Hour Delay
  • Copper in New York Swings Near 3-Week High After Trading Delay
  • Palm Oil Prices Seen Rebounding in 4Q on Demand, CIMB’s Ng Says
  • Hedge Fund Crude Bets Tumble Amid Surging Global Supply: Energy
  • Kurdish Oil Shipments From Turkey Said to Resume as Tanker Loads
  • TOP Oil Market News: Brent Rebounds on Libya to Iraq; WTI Steady
  • Rhodium Rally Pushes Price Past Platinum, Gold: Chart of the Day
  • BNP Paribas Recommends Selling Oct. Singapore Fuel Oil Crack
  • California Quake Crumples Buildings With Scores Injured in Napa
  • Gold Falls as Dollar Advances on Fed Outlook; Silver Halts Drop

 

THE HEDGEYE DAILY OUTLOOK - 5

 

CURRENCIES


THE HEDGEYE DAILY OUTLOOK - 6

 

GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 4

 

EUROPEAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 7

 

ASIAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 8

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - 9

 

 

The Hedgeye Macro Team

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


Investing Ideas Newsletter

Takeaway: Current Investing Ideas: BOBE, FXB, GLD, HCA, HOLX, OC, OZM, RH and TLT.

Below are Hedgeye analysts’ latest updates on our nine current high-conviction long investing ideas. We also feature three recent institutional research notes that offer valuable insight into the markets and the global economy.

 

*Note: Please keep an eye on your inbox as we will send out CEO Keith McCullough’s updated levels for each idea at the beginning of this coming week.

Cartoon of the Week

Investing Ideas Newsletter     - Crazy bull cartoon 08.19.2014

IDEAS UPDATES

 

BOBEGreat news this week…After almost a year of pushing for change at Bob Evans, activist investor Sandell Asset Management is claiming a big victory. Earlier this week, Sandell won at least five seats on the board of the restaurant operator and food processor, based on preliminary results from the company’s annual shareholder meeting. This is precisely the sort of bullish catalyst that was central to our high conviction on BOBE.We will go into more granular detail next week on what Sandell's victory portends for shareholders.

 

FXB: We continue to believe that a more dovish monetary policy from the European Central Bank and Federal Reserve versus the Bank of England should be supportive of the British Pound versus the US Dollar and Euro. 

 

As we wrote in our original research note, essential to our thesis on FXB is expectations on economic growth and the policy stance of central bankers. If and when these expectations shift, so will we. Under the current set-up, we expect the Pound to be a relative winner, especially versus the USD and EUR and will remain on the long side here.

 

GLD: Janet Yellen’s comments on Wednesday were either taken as 1) marginally more hawkish all else being equal or 2) RELATIVELY less dovish than the forward-looking anticipation of the ECB’s next chess move. Taken in isolation, we definitely did not interpret her comments as suggesting any change to what we’ve believed all year.

 

Her follow-up in Jackson Hole on Friday provided confirmation. Frustrated that her comments on Wednesday were received as more hawkish, she emphasized that the unemployment rate was not a good indicator for the health of the labor market. While this tone doesn’t deviate drastically from what she has said previously, she emphasized the committee’s need to “remain cautious” about raising rates:

 

· Gold bounced +38 bps Friday (not attributing any causality here) down -2.0% on the week

· The ten-year yield ticked up 6 bps on the week after selling off from the post-speech Wednesday highs

· The dollar moved higher up 1.11% on the week

 

Monetary policy from the Fed, and globally for that matter, is predictable and easily anticipated. One of the components in our internal GIP Model (Growth, Inflation, Policy) has been pretty accurate in just front-running this predictability. With both the United States and Europe entering the scenario where growth and inflation are slowing simultaneously, which central bank president will bring more #cowbell? We’re not sure.

 

All else being equal, we expect Yellen to be more dovish than the market currently expects. On this confirming event we would expect the interaction between Gold, Treasuries, and the U.S. dollar to remain the same. The move in the EUR/USD down below 1.33 and the sell-off in gold suggest consensus expects some kind of easing measure from the ECB's Mario Draghi. We’ll stick long of gold here until we receive more confirmation on the outlook for the dollar in the next several weeks.

 

HCA & HOLX: We continue to monitor the impact of the Affordable Care Act on HCA and Hologic.  One of the biggest drivers has been the expansion of Medicaid.  Not all states have expanded coverage, but the list keeps getting longer. 

 

Here is a good briefing on the topic from Kaiser Family Foundation. 

 

For Hologic, approximately 15% of patients in an OB/GYN office are covered through Medicaid.  For those newly covered by the Affordable Care Act and a state expansion of Medicaid we would expect to see increased patient volume and consumption Hologic diagnostic tests including HPV and Pap, as well as Hologic surgical equipment, both of which performed well in the most recent quarter.  For HCA and other hospitals we have witnessed even more significant gains.  

 

But how much more improvement is still in front of us?  Could it already be over?  So far, we don’t think so, and we have a high frequency data series to track to tell us if we’re wrong. 

 

We think we are beginning to see the impact from these Medicaid expansions on a monthly data series we follow, a sub-component of the  Producer Price Index for Hospitals among for Medicaid patients.  The index itself is created from receipts collected from hospitals each month. What are data analysis shows is the very close relationship between a measure of pricing (PPI) and admissions volume at HCA.  As the pace of patient volume quickens it has typically coincided with an increase in the Medicaid pricing metrics.

 

Click to enlarge image. 

Investing Ideas Newsletter     - HCA Medicaid PPI

 

OC: As we have mentioned in previous notes, a more favorable environment stemming from economic indicators and an industry-wide roofing price increase may be a tailwind in the back half of 2014 for Owens Corning. We are now seeing some encouraging signs from some recent economic data. Demand indices are pointing to increasing momentum within the nonresidential construction industry. The Architecture Billings Index (ABI) Index for July hit 55.8, a 5% increase year-over-year. The July number ranks in the 93rd percentile. The Dodge Index recorded a 9 month high in July, increasing ~23% year-over-year to 125. The ABI and Dodge Construction indices are reinforced by strong ISM and Industrial Production prints for the summer – a more favorable environment compared to 1H 2014. 

Investing Ideas Newsletter     - oc7

 

OZM:  Shares of Och Ziff succumbed to some panic selling on Friday on issues that have been in the market for some time. Shares were down over 6% on the last day of trading on a Business Week article released the night prior on a topic that had already been disclosed by management in its financials and already released into the public domain by the Wall Street Journal in April.

 

The topic surrounds investments made by OZM in Africa in 2001 whereby Och invested in several mining loans. These loans made by OZM have become news fodder because they were invested in the African region during the time of an unpopular regime. Several other major Financial Services firms also made these loans and despite the unpopular timing and parties associated with these investments, OZM and their fund holders were completely paid back with appropriate interest.

 

The market fears that there may be reputational risk for OZM and other firms if regulators actually charge these companies with formal infractions. While it is tough at this juncture to decipher this impact, we point to the fact that outside this issue that Och has the fastest growth in the asset management industry and also a sector leading dividend, which allows for shareholders to gather returns while this discount burns off.

 

OZM shares are now again trading with no multiple on its incentive fees which are 40% of its annual net income. The last time OZM shares traded at no incentive fee multiple was 2011, when the stock was a $7 per share. So with the stock up over 70% since that time and a current dividend over 5% (with an opportunity for an additional 4% yield in the 4th quarter), we see a compelling entry point currently.

 

RH: We have spent a lot of time on the road discussing Restoration Hardware over the past four weeks, in particular, our recent 45-page deep dive on RH’s real estate. The distillation of our analysis is as follows:

  1. RH stores could (and probably should) get far bigger than even the RH bulls seem to think. 
  2. Aside from reconfiguring 66 existing markets, there are another 19 markets we have identified where the spending rate on home furnishings by people making over $100,000 in income suggests that RH should expand to these markets with Design Galleries.
  3. The availability and economics on large properties for all these markets are far better than people think.

This analysis supports our $11 earnings power in five years (double the consensus), as well as our view that that this stock is headed well above $200.

 

TLT: Staying Long the Long Bond...In an holiday shortened week (at least as far as investor participation was concerned) which saw a decent pop in domestic high-frequency growth data, hawkish FOMC minutes, a huge move in the DXY (+1.1%) and gold (-1.9%), we were delighted to see that our #1 investment idea of 2014 (i.e. long-term Treasuries) did, well, nothing.

 

Okay, well a -34 basis point week-over-week pullback might not feel like “nothing” if you’re long the TLT in size, but it’s got to feel like a victory in the context the aforementioned hawkish signals. That the long bond did not sell-off in what was arguably the most conducive week for that occurrence since early-JUN is telling in and of itself.

 

In fact, we’d argue the +1.2% two-day rally to close out the week into and through what we foresaw as dovish testimony out of Janet Yellen at Jackson Hole is a decent come-from-behind “win” for the home team.

 

Be it #GrowthSlowing on a prospective basis domestically or concurrently in the Eurozone – which weighs on rates across the region and increases the relative attractiveness of US Treasuries (see: a 3M chart of the EUR/USD) – we continue to see favorable catalysts for long-term Treasuries, at the margins.

 

As such, we are staying long the long bond!

 

* * * * * * * * * * 

 

Click on each title below to unlock the content.

 

Dick's (DKS): Uninvestable

Hedgeye retail analyst Brian McGough writes that "bigger picture," there is more bad news to come for the sporting goods retailer.

 Investing Ideas Newsletter     - dicks

 

Chip Stack Times: HPQ Tidbits and M&A Activity Heating Up Again

Hedgeye semiconductor analyst Craig Berger writes that M&A activities are heating up the chip sector as IFX goes shopping and buys IRF and explores the implications for other chip firms.

Investing Ideas Newsletter     - semis

 

ICI Fund Flows: U.S. Stock Funds Just Can't Get a Bid

Domestic stock funds put up their 16th consecutive week of outflow and are now entering the seasonally weakest period of the year.

Investing Ideas Newsletter     - bid


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This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.

Commodities: Weekly Quant

Commodities: Weekly Quant - chart 1 divergences

Commodities: Weekly Quant - chart 2 deltas

Commodities: Weekly Quant - chart 3 USD Correls

Commodities: Weekly Quant - chart 4 S P correls

Commodities: Weekly Quant - chart 5 volume metrics

Commodities: Weekly Quant - chart 6 volatility

Commodities: Weekly Quant - chart 7 cftc sentiment

Commodities: Weekly Quant - chart 8 1 month correls

Commodities: Weekly Quant - chart 9 3 month correls

Commodities: Weekly Quant - chart 10 6 month correls

Commodities: Weekly Quant - chart 11 1 year correls

Commodities: Weekly Quant - chart 12 3 year correls

 


The Week Ahead

The Economic Data calendar for the week of the 25th of August through the 29th of August is full of critical releases and events.  Attached below is a snapshot of some of the headline numbers that we will be focused on.

 

The Week Ahead - 08.22.14 Week Ahead


The Best of This Week From Hedgeye

Takeaway: Here's a quick look at some of the top videos, cartoons, market insights and more from Hedgeye this past week.

HEDGEYE TV

Q&A: Keith Answers Questions From Subscribers

In this Q&A portion of Tuesday's Morning Macro Call, Hedgeye CEO Keith McCullough discusses the Fed's next move, the U.S. housing market, and his continued bullishness on bonds.

Two Chip Stocks Feeding on the Apple iPhone 6 Frenzy

Hedgeye semi analyst Craig Berger highlights two new chip suppliers riding the coattails of Apple’s highly anticipated iPhone 6. 

CARTOON

Sitting Ducks?

The Best of This Week From Hedgeye - SittingDuck

 

Ain't No Hawk!

The Best of This Week From Hedgeye - JacksonHole cartoon

Think the Fed's going to suddenly strike a hawkish tone? Don't hold your breath.

CHART

$SPY Up 150% Since 3/09 Lows

The Best of This Week From Hedgeye - COD 8.22.14

POLL

Buying the iPhone 6?

Shares of Apple are hitting record highs, fueled largely on investor optimism that iPhone 6 sales are going to be blockbuster. 


Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

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