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Daily Trading Ranges, Refreshed [Unlocked]

Editor's note: This is a complimentary look at Daily Trading Ranges, our daily proprietary buy and sell levels on major markets, commodities and currencies. This note was originally published September 22, 2014 at 07:32 in Daily Trading Ranges. Click here to learn more.

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BULLISH TRENDS

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BEARISH TRENDS

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MONDAY MORNING RISK MONITOR: MOSTLY GREEN

Takeaway: Green still dominates our screen (for now) as both the short and intermediate trends are sequentially improved across the risk complex.

Current Best Ideas:

 

MONDAY MORNING RISK MONITOR: MOSTLY GREEN - 19 

 

Key Callouts:

 

* XLF Macro Quantitative Setup – The short-term setup in Financials looks bearish as our Macro team’s quantitative setup in the XLF shows 0.9% upside to TRADE resistance and 1.9% downside to TRADE support.

 

* 2-10 Spread – Last week the 2-10 spread tightened to 201 bps, -4 bps tighter than a week ago, but remains wider by 7 bps vs the prior month. 

 

* CRB Commodity Price Index – The CRB index fell -1.5%, ending the week at 279 versus 284 the prior week. As compared with the prior month, commodity prices have decreased -3.3% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

Financial Risk Monitor Summary

 • Short-term(WoW): Positive / 2 of 12 improved / 0 out of 12 worsened / 10 of 12 unchanged

 • Intermediate-term(WoW): Positive / 6 of 12 improved / 2 out of 12 worsened / 4 of 12 unchanged

 • Long-term(WoW): Negative / 2 of 12 improved / 2 out of 12 worsened / 8 of 12 unchanged

MONDAY MORNING RISK MONITOR: MOSTLY GREEN - 15

 

1. U.S. Financial CDS -  Swaps tightened for 24 out of 27 domestic financial institutions. The biggest moves among the large caps came from MS and C ,where swaps tightened by 4 and 3 bps, respectively. 

 

Tightened the most WoW: TRV, XL, HIG

Widened the most WoW: UNM, AON, COF

Tightened the most WoW: MMC, AXP, C

Widened the most MoM: AGO, RDN, MBI

 

MONDAY MORNING RISK MONITOR: MOSTLY GREEN - 1

 

2. European Financial CDS - Swaps mostly tightened in Europe last week as 25 banks saw swaps tighten vs just 11 that widened. Conspicuous moves came from Banco Espirito Santo in Portugal (+55 bps w/w to 385 bps) and Sberbank of Russia (+9 bps w/w to 340 bps). 

 

MONDAY MORNING RISK MONITOR: MOSTLY GREEN - 2

 

3. Asian Financial CDS - Asia was mixed on the week with China tightening, India widening and Japan mixed.

 

MONDAY MORNING RISK MONITOR: MOSTLY GREEN - 17

 

4. Sovereign CDS – Sovereign swaps were largely unchanged last week. Italy and Spain tightened by 1 and 4 bps, respectively, while the US, France and Portugal widened by 1, 2 and 4 bps. 

 

MONDAY MORNING RISK MONITOR: MOSTLY GREEN - 18

 

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5. High Yield (YTM) Monitor – High Yield rates fell 1.6 bps last week, ending the week at 5.86% versus 5.88% the prior week.

 

MONDAY MORNING RISK MONITOR: MOSTLY GREEN - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 1.0 points last week, ending at 1877.

 

MONDAY MORNING RISK MONITOR: MOSTLY GREEN - 6

 

7. TED Spread Monitor – The TED spread fell 0.2 basis points last week, ending the week at 22 bps this week versus last week’s print of 22.16 bps.

 

MONDAY MORNING RISK MONITOR: MOSTLY GREEN - 7

 

8. CRB Commodity Price Index – The CRB index fell -1.5%, ending the week at 279 versus 284 the prior week. As compared with the prior month, commodity prices have decreased -3.3% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

MONDAY MORNING RISK MONITOR: MOSTLY GREEN - 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 tightened by 1 bps to 13 bps.

 

MONDAY MORNING RISK MONITOR: MOSTLY GREEN - 9

 

10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index fell 1 basis point last week, ending the week at 2.841% versus last week’s print of 2.853%. 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: MOSTLY GREEN - 10

 

11. Chinese Steel – Steel prices in China rose 0.8% last week, or 25 yuan/ton, to 2999 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: MOSTLY GREEN - 12

 

12. 2-10 Spread – Last week the 2-10 spread tightened to 201 bps, -4 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR: MOSTLY GREEN - 13

 

13. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.9% upside to TRADE resistance and 1.9% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: MOSTLY GREEN - 14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


THE HEDGEYE MACRO PLAYBOOK

Takeaway: The Hedgeye Macro Playbook is a daily 1-page summary of our core ETF recommendations, investment themes and noteworthy quantitative signals.

CLICK HERE to view the document.

 

Best of luck out there,

 

Darius Dale

Associate: Macro Team


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Monday Mashup: PBPB, TAST and More

Investment Ideas

The table below lists our Investment Ideas as well as our Idea Bench -- 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: PBPB, TAST and More - chart1

 

Notable Callouts

We are removing short PBPB from both our Best Ideas and Investment Ideas list.  Note to follow shortly.

 

Recent Notes

09/15/14 Monday Mashup: SBUX, LOCO and More

09/18/14 Short SBUX Call Today @11AM

09/18/14 Short SBUX Call Replay


Events This Week

Tuesday, September 23rd

  • JMBA Wedbush California Dreamin Consumer Conference 1:20 pm EST
  • DENN Wedbush California Dreamin Consumer Conference 2:30pm EST
  • KONA Wedbush California Dreamin Consumer Conference 2:30pm EST

 

Chart of the Day

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Recent News Flow

Monday, September 15th

  • DRI upgraded to outperform at CLSA with a $51 PT.
  • THI announced preliminary 3Q14 quarter-to-date same-store sales of +3.6% in Canada and +7.0% in the U.S.
  • RRGB announced it is two weeks away from opening its newest restaurant in Illinois.
  • DRI filed an investor presentation regarding operating initiatives underway at Olive Garden and other restaurants.

Tuesday, September 16th

  • JMBA introduced made-to-order Energy Bowls in stores nationwide. "Jamba's new Energy Bowls are a nutritious blend of real, whole fruit and soymilk or fresh Greek yogurt, topped with an assortment of dry toppings and fresh fruits."
  • DNKN announced its commitment to 100% sustainable palm oil for all Dunkin' Donuts U.S. restaurants by 2016.
  • SONC announced its FY15 outlook which includes EPS growth guidance at the high end of its 14-20% long-term target, positive same-store sales in the low single digit range, drive-in-level margin improvement of between 50 to 100 bps and more.

Thursday, September 18th

  • DRI sent a letter to shareholders urging them to vote the BLUE proxy card "FOR ALL" of Darden's nominees.  In the letter, Darden fired shots at two of its former employees - former Olive Garden President Brad Blum and former Olive Garden executive Bob Mock - who are currently working in advisor roles to activist Starboard Value.
  • MCD increased its quarterly dividend by 4.9% to $0.85 from $0.81.
  • TAST exercised its right of first refusal to purchase 30 Burger King restaurants in eastern North Carolina for a total purchase price of $20 million payable in cash.  Carrols plans to sell these properties and lease them back for net proceeds of $13 to $14 million.  Assuming the low end of that range implies that TAST is buying 30 locations for $7 million or approximately $233,333 per unit.

 

Sector Performance

The SPX (+1.3%) outperformed the XLY (+0.2%) as both casual dining and quick service stocks, in aggregate, outperformed the XLY.

 

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XLY Quantitative Setup

From a quantitative setup, 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


Small Caps Struggling

Client Talking Points

RUSSELL 2000

The Russell 2000 sadly, closed down -1.4% on BABA day and is down that much for the year-to-date. The bubble in illiquid/small cap stocks (over 50x trailing earnings) will only be clear in hindsight, but we remain bearish of it in the meantime vs. big cap liquidity on the long side.

USD

The biggest ramp in USD since 1997 has embedded some serious correlation risk into macro markets – on a 30-day correlation basis (which the machines chase), USD and SPX have a positive correlation of +0.68, whereas Brent Oil and Gold have negative correlations of -0.86 and -0.95, respectively. USD big time overbought signal too.

COMMODITIES

Correlation to USD remains as obvious as the round trip move the CRB Index has had during 2014 – on a 90 and 120 day basis the USD correlations to the CRB Index are -0.81-0.83. In our GIP model, this is called a Quad 4 move (when both growth and inflation are slowing, at the same time = #deflation).

Asset Allocation

CASH 40% US EQUITIES 4%
INTL EQUITIES 16% COMMODITIES 4%
FIXED INCOME 32% INTL CURRENCIES 4%

Top Long Ideas

Company Ticker Sector Duration
EDV

The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). Now that we have our first set of late-cycle economic indicators slowing in rate of change terms (ADP numbers and the NFP number), it's time to really think through the upcoming moves of this bond market. We are doubling down on our biggest macro call of 2014 - that U.S. growth would slow and bond yields fall in kind.

TLT

Fixed income continues to be our favorite asset class, so it should come as no surprise to see us rotate into the Shares 20+ Year Treasury Bond Fund (TLT) on the long side. In conjunction with our #Q3Slowing macro theme, we think the slope of domestic economic growth is poised to roll over here in the third quarter. In the context of what may be flat-to-decelerating reported inflation, we think the performance divergence between Treasuries, stocks and commodities may actually be set to widen over the next two to three months. This view remains counter to consensus expectations, which is additive to our already-high conviction level in this position.  Fade consensus on bonds – especially as growth slows. As it’s done for multiple generations, the 10Y Treasury Yield continues to track the slope of domestic economic growth like a glove.

RH

Restoration Hardware remains our Retail Team’s highest-conviction long idea. We think that most parts of the thesis are at least acknowledged by the market (category growth, real estate expansion), but people are absolutely missing how all the pieces are coming together to drive such outsized earnings growth over an extremely long duration. The punchline of our real estate analysis is that a) RH stores could get far bigger than even the RH bulls seem to think, b) Aside from reconfiguring 66 existing markets, there’s another 19 markets we identified where the spending rate on home furnishings by people making over $100k in income suggests that RH should expand to these markets with Design Galleries, and c) the availability and economics on large properties for all these markets are far better than people think. The consensus is looking for long-term earnings growth of 28% -- we’re looking for 45%.  

Three for the Road

TWEET OF THE DAY

EUROPE: stoxx start the wk red w/ Greece -1.2% and Russia -1.2% leading losers

@KeithMcCullough

QUOTE OF THE DAY

The purpose of learning is growth, and our minds, unlike our bodies, can continue growing as long as we live.

-Mortimer Adler

STAT OF THE DAY

U.S. Healthcare Stocks (XLV) are up +1.7% on the week to +17% year-to-date.

 


The Velveteen Bear

This note was originally published at 8am on September 08, 2014 for Hedgeye subscribers.

“You become. It takes a long time.”

-Margery Williams

 

That’s a quote from one of the best children’s books I have ever read to my kids, The Velveteen Rabbit. It was also cited in Brene Brown’s recent #behavioral book, Daring Greatly (pages 110).

 

“Real isn’t how you are made… it’s a thing that happens to you.”

“Does it hurt?” asked the Rabbit. “Does it happen all at once, like being wound up – or bit by bit?”

“It doesn’t happen all at once,”  said the Skin Horse. “You become. It takes a long time.”

 

While that resonates with me as a husband, Dad, hockey coach, etc., it really hits the nail on the head in becoming a Velveteen Bear on the US stock market. I haven’t been this bearish since the fall of 2007. Getting really bearish is a process. It takes time.

The Velveteen Bear - v7

 

Back to the Global Macro Grind

 

After Europe moved back into crisis mode (easing, printing, praying) and we received the worst US jobs report in 7 months, you just have to buy the all-time-bubble high in SPY on that, right? Right. Maybe with other people’s money.

 

After almost (I reiterate, almost!) having its first-four-down-days in a row of 2014 on Friday, the SP500 rallied from down to up on the day, to close up a whopping +0.2% on the week. That’s 5 consecutive “up” weeks. #hooray

 

In other news, the Russell 2000 (which derives 80% of its revenues from the US) flashed yet another bearish divergence, closing down -0.4% on the week to pretty much flat for 2014 YTD.

 

To give US equity bulls credit, this is what I liked about last week:

 

  1. After the ECB torched the Euro, the US Dollar (vs. the Euro) was up another +1.4% on the week
  2. The US 10yr Treasury Yield rose +12 basis points on the week to 2.46%
  3. The Yield Spread (10yr minus 2yr) widened +10bps on the week to +195bps

 

Not only was that something to like last week, it was something I loved all of last year. Dollar Up, Rates Up – that’s what should drive a US growth bear insane.

 

Other than the Russell 2000, what I don’t like in 2014 is that a key component of the Dollar Up, Rates Up storyline is missing - rates are down, hard, in 2014:

 

  1. Inclusive of last week’s bounce to lower-highs, the 10yr yield is -19% (or -57bps) YTD
  2. For 2014 YTD the Yield Spread (10yr minus 2yr) is still crashing (-26%) or down -70bps

 

In conjunction with these classic early cycle slow-down macro signals (which most European growth bulls said weren’t growth slowing signals until the ECB reminded them how fast things were slowing), you’ve seen:

 

  1. Early Cycle Stocks (Housing, Consumer Cyclicals, Regional Banks, the Russell, etc.) underperform
  2. Slow-growth #YieldChasing Stocks (Utilities, REITS, Big Cap Dividend Stocks, etc.) outperform

 

In case you aren’t long something like Argentina (stock market up another +6.1% last week to +93.2% YTD) whose economy still sucks, and you’ve stayed with the long #YieldChasing thing:

 

  1. Utilities (XLU) were up another +0.8% last week to +14.9% YTD
  2. REITS (MSCI index) were up another +1.0% last week to +19.6% YTD

 

Seriously. Who needs to be long the spoos when you can be long the good stuff!

 

While Ocham’s Razor (boil it down, simplify) is a really sexy concept, you can’t over-simplify. While a stronger Dollar (burning Euro) has toned down some of the commodity #InflationAccelerating that we saw in the first half of 2014, at some point you have to ask yourself if it’s going to be incremental enough to stop an early cycle US slowdown that’s already in motion?

 

To contextualize that key risk management question, don’t forget that the US is 63 months into this economic expansion. And the jobs market (both ADP slowing for 2 consecutive months and last week’s jobs report), which is a classic late-cycle indicator that strengthened, well, at the end of the cycle… is starting to hint that the bond market has #Q3Slowing nailed.

 

If US jobs and housing data slows, at the same time, what do you think Janet is going to do next? That’s right. She’ll do A) what Draghi just did and B) the Japanese are going to keep trying – moarrr incremental easing… That’s bullish for bonds and anything stocks that looks like a bond. And that’s all your cuddly Velveteen US Growth Bear has to say about that.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr yield 2.32-2.46%

SPX 1994-2009

RUT 1151-1181

VIX 11.34-12.92

EUR/USD 1.29-1.32

Gold 1257-1298

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

The Velveteen Bear - Chart of the Day


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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