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European Banking Monitor: Financials CDS Holds Flat on the Week After Widening

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email 




European Financial CDS - Swaps were mixed in Europe last week, but little changed overall. We've been keeping a close eye on Sberbank as our proxy for overall geopolitical risk. After rising steadily for several weeks, it cooled off notably this past week dropping 65 bps w/w to 315 bps. 


European Banking Monitor: Financials CDS Holds Flat on the Week After Widening  - chart1 Financials CDS


Sovereign CDS – Sovereign swaps were little changed on the week with most countries moving 0-1 bps. Portugal and Japan were the outliers at +3 bps each. 


European Banking Monitor: Financials CDS Holds Flat on the Week After Widening  - chart2 sovereign cds

European Banking Monitor: Financials CDS Holds Flat on the Week After Widening  - chart3 sovereign CDS

European Banking Monitor: Financials CDS Holds Flat on the Week After Widening  - chart4 sovereign CDS


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 2 bps to 11 bps.


European Banking Monitor: Financials CDS Holds Flat on the Week After Widening  - chart5 Euribor OIS Spread


Matthew Hedrick



Ben Ryan



TODAY’S S&P 500 SET-UP – October 6, 2014

As we look at today's setup for the S&P 500, the range is 42 points or 1.52% downside to 1938 and 0.61% upside to 1980.                                                      













  • YIELD CURVE: 1.88 from 1.88
  • VIX closed at 14.55 1 day percent change of -9.96%


MACRO DATA POINTS (Bloomberg Estimates):

  • Fed issues labor mkt conditions index, Sept.
  • Bank of Japan issues monetary policy statement
  • 11:30am: U.S. to sell $24b 3M bills, $24b 6M bills
  • 8:30pm: Fed’s George speaks in Albuquerque, N.M.



    • Senate, House out of session
    • 8:15am: Treasury Sec. Jack Lew speaks at Peterson Institute
    • 9:30am: Supreme Court scheduled to issue orders
    • 11:30am: Energy Sec. Ernest Moniz discusses Obama climate plan at Council on Foreign Relations
    • 3pm: Lew presides over FSOC open mtg, w/participants incl. Fed Chairwoman Yellen; Comptroller of the Currency Curry; CFPB Director Cordray; SEC Chair White; FDIC Chairman Gruenberg; CFTC Chaiman Massad; FHFA Dir. Watt; NCUA Chairman Matz



  • Hewlett-Packard Said to Plan Split Into Two Separate Companies
  • Hong Kong Protest Numbers Dwindle as Talks Bring Calm to City
  • Becton, Dickinson Agrees to Buy CareFusion in $12.2b Deal
  • Ebola Patient Fights to Live as Health Workers Are Under Watch
  • H&R Block Says Bank’s Sale Delayed Pending Regulatory Approval
  • Walt Disney, Time Warner Are Said to Renew TV Contracts With NBA
  • Euro Disney to Carry Out EU1b Disney-backed Refinancing
  • Tesla Said to Join Race to Provide Automated-Driving Functions
  • Samsung to Build $15b Chip Plant as Phone Profit Ebbs
  • Expand Trading Safeguards to Include Brokerages, SEC Members Say
  • Supreme Court Begins Term With 8 Cases on Labor, Employment
  • Macau Sept. Casino Revenue Falls 11.7%, Most in Five Years
  • Norway Would Probably Pay to Maintain Stake After Yara-CF Deal
  • S&P 500 Companies Spend Almost All Profits on Buybacks, Payouts
  • German Factory Orders Plunge Most Since 2009 in August
  • Ukraine Nears Creation of Eastern Buffer With Cease-Fire Vow
  • Lloyds Plans to Cut Thousands of Jobs to Lower Costs, Times Says



    • Container Store (TCS) 4:01pm, $0.11



  • Platinum Falls Below $1,200 to Five-Year Low as Hedge Funds Sell
  • Brent Crude Rises From 27-Month Low as WTI Gains on Dollar Drop
  • Coffee Jumps to Highest Since January 2012 on Brazil Concerns
  • Soybeans Rebound as Slump May Kindle Demand; Corn Also Advances
  • Gold Speculators Extend Longest Retreat Since 2010: Commodities
  • Gold Rises From Lowest 2014 Price; Platinum Reaches 5-Year Low
  • Copper to Zinc Rise in London as Reduced Prices Attract Buyers
  • Ivory Coast’s Farmers Plan Cocoa Investment as Prices Climb
  • Tumbling Oil Prices Punish Hedge Funds Betting on Gains: Energy
  • European Milk Price Reported by LTO Fell 0.8% in Aug. YoY
  • Panamax Ship Rates Seen Rising to $17,000 a Day Next Year
  • Swaziland’s Sugar Output Seen Rising 20% by 2019 on More Growers
  • Brent Drop More Speculative Than Physical-Driven: Morgan Stanley
  • Rubber Growers to Seek Vietnam, Myanmar Support to Boost Prices
  • Brent Near $90 as Saudis OSP Cuts Test OPEC Unity: Julian Lee


























The Hedgeye Macro Team

















CHART OF THE DAY: Deflating #Bubbles in #Quad4


CHART OF THE DAY: Deflating #Bubbles in #Quad4  - 10.06.14 Deflating Bubbles

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Deflation's Good Fortune

“See your disappointments as good fortune – one plan’s deflation is another’s inflation.”

-Jean Cocteau


After another tough week of #bubbles popping in the US stock market, there was some good fortune in being long bonds!

Deflation's Good Fortune - Super TLT cartoon 10 01 2014


Back to the Global Macro Grind…


Golf clap for the no-volume bounce to lower-highs in US Equities on Friday. Is it just me, or was there some irony in the US government printing a rosy picture of jobs in America on the last employment report before the mid-term elections?


The thing about conspiracy theories is that sometimes they are true. Regardless, the lagging of lagging economic indicators (the US unemployment rate) can now only go one way from here – up. That’s a good thing, if you are long the long end of the bond market.


With mostly everything Global Equities and Commodities deflating last week, here’s what long-term Treasuries looked like:


1. US Treasury 10yr yield down another -9 basis points week-over-week

2. US Treasury 10yr yield now down -59 basis points, or -19.5%, for 2014 YTD

3. Total Return of the iShares 20yr Bond Fund (TLT) +18% (vs. Russell 2000 -5.1% YTD)


The other disappointing thing that happens when the long-end of the curve (bond yields) falls is that this thing called the Yield Spread compresses. Yield Spread is the long end of the curve (10yr yield) minus the short-end (2yr yield). That compressed another 8 basis points to +188bps wide (-77 basis points YTD).


Both Yield Spread and the Long-end of The Curve are leading indicators for the rate of change in US economic growth. Whereas things like non-farm payrolls and the unemployment rate are what we call lagging indicators.


“So”, if you’re a cyclical investor like me, you want to be shorting what we call “early cycle slowdown” (and/or #bubble) stocks and commodities at the end of an economic cycle (i.e. when the lagging indicators look good). And you want to be re-allocating your capital to cash and bonds all the while.


Back to the deflations in stocks last week – it was a global affair:


1. Russell 2000 deflated for the 5th week in a row, -1.3% to -5.1% YTD

2. SP500 deflated for the 2nd week in a row, -0.8% to +6.5% YTD

3. European stocks (EuroStoxx600) were down another -2.1% to +2.1% YTD

4. Emerging Market Equities (MSCI) were -2.6% to down -0.5% YTD

5. Russian stocks continued to crash, -5.5% on the week to -24.3% YTD


I know – what could possibly go wrong…


If we look one layer underneath the crust of the US equity market selloff, in S&P Sector Style terms here’s what happened:


1. Energy stocks (XLE) got slammed another -4.1% on the week to DOWN now for the YTD (-0.4%)

2. Basic Material stocks (XLB) deflated -3.9% on the week to +4.8% YTD

3. Consumer Staples stocks (XLP) outperformed, closing +0.8% on the week to +5.7% YTD


Unlike the first half of 2014 (when the Hedgeye GIP Model had us in #Quad3, where inflation was accelerating and growth slowing), the 2nd half has us in #Quad4 where both growth and inflation are slowing. That’s bad for commodities and their commodity linked equities and good for Consumer Staples.


With the US Dollar up another +1.2% last week, here’s what happened to commodities:


1. CRB Commodities Index -1.4% on the week to down that much now for the YTD

2. Oil (WTI crude) was down -4.1% on the week to -3.9% YTD

3. Gold dropped another -1.9% on the week to -1.1% YTD


No, being long Gold isn’t as bad as being long the small cap US equity #bubble. But it was deflating nevertheless.


The thing about the deflation becoming a good thing for the consumer spirit inflating is that it comes on a lag too. Coffee and cattle prices were up +11% and +4%, respectively, last week (they’re +72% and +43% YTD, respectively!) so don’t expect to get a price cut at Starbucks or Chipotle any time soon.


Fully loaded with rent at all time highs (anyone get a rent reduction due to REIT deflation last week?) and real wages sucking wind (oh, that was in the jobs report too), that’s the real problem with US GDP – almost 2/3 of the country is already in an early cycle recession.


But both the Russell and the 10yr UST yield already signaled that to you, so you don’t have to be disappointed. This is our market life. It’s cyclical too. And our good fortunes are best inflated by allowing markets to help us looking forward, not in the rear-view.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.39-2.50%


RUT 1081-1132

DAX 9181-9489

VIX 13.34-17.31

USD 84.71-86.89

EUR/USD 1.25-1.28

Pound 1.59-1.62

WTIC Oil 89.13-93.14

NatGas 3.81-4.19

Gold 1185-1235

Copper 2.98-3.06


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Deflation's Good Fortune - 10.06.14 Deflating Bubbles

Friday's Frenzy

This note was originally published at 8am on September 22, 2014 for Hedgeye subscribers.

“Where  is the lightning to lick you with its tongue?”



That’s another great quote from the latest #behavioral book I have been cranking through – The Rise of Superman, by Stephen Kotler. It’s also the perfect aphorism for one of the most epic US stock market days I’ve witnessed in my career.


Did the thunder and lightning of the Ali-Bubble lick you on Friday? Rising like a phoenix to market caps greater than General Electric (GE) and WalMart (WMT), the BABA licked someone, big time, at $99.70 (top tick of the day).


But what’s dropping $25 billion dollars or so in a few hours of trading amongst friends? Never mind it dropping to $90 intraday. As long as you owned it at $68, you crushed it. “Behold” the IPO bubble. “He is the lightning; he is the frenzy.” –Nietzsche


Friday's Frenzy - 79


Back to the Global Macro Grind


All the while, amidst Friday’s frenzy, the rest of the global macro market did not cease to exist. After the SP500 had herself an epic outside reversal, the Long Bond (TLT) rallied and the Russell 2000 got licked for a -1.4% drop on the day.


In one of the more peculiar “secular bull” markets (or whatever they’ve been calling a market that’s gone up for 5 years), the Russell 2000 is now down for 3 consecutive weeks and -1.4% for 2014 YTD (vs. the slow-growth Long Bond TLT = +12.9% YTD).


“So”, now the question is, has the licking in illiquidity already begun?


Illiquidity, as in small caps that trade by appointment – but usually on big volume, on down days (when everyone has to get out at the same time)… if you have been long 1 of the 41% (stocks in the Russell that have had greater than 20% declines), you get what I mean.


Perhaps this is Mr. Macro Market’s message: if you’re going to get long of the frenzy, you should just buck up and go big cap like the BABA and the Facebook (FB). If you’re going to pay 18-28x revenues for something, you might as well be able to get out!


We call this small cap vs. large cap performance gap a Style Factor Divergence. When I worked at Magnetar Capital, our “book” would be characterized this way. If you were long “size” as a style factor, you’d be long big caps. I would definitely have that on right now.


In terms of protecting my personal net wealth, the biggest “size” bets I tend to gravitate to are:


  1. Cash
  2. Long-Term Treasuries
  3. Equity Short Sales


Not everyone rolls that way. Call me conservative, but when I hear the thunder rolling in, I don’t wait around for the performance-chasing lightning!


Here’s another big cap “size” bet that was working last week:


  1. US Healthcare Stocks (XLV) +1.7% on the week to +17% YTD
  2. Vs. MSCI REITS Index -0.3% on the week to +12.9% YTD


As many a big cap Portfolio Manager has reminded us this year, they love our Long Bond (TLT, EDV, etc.) call but can’t get really long of stocks-that-look-like-slow-growth bonds (Utilities and REITS) because they aren’t big cap stocks in their benchmark.


As a Global Macro Risk Manager, my benchmark is not losing money. You can dial up plenty a broker/banker to tell you what to chase on the long side. I’m the one you pay while they are sleeping. I’m the one who surveys the land before dawn.


Another interesting macro divergence last week was:


  1. European Stocks (EuroStoxx 600) +1.2% on the week to +6.2% YTD
  2. Emerging Market Stocks (MSCI Index) -0.5% on the week to +5.4% YTD


I call it interesting because I think you fade the fear on that trade too. In other words, you buy EM on the dip and sell European Equities on the bounce. My research team and I will explain why on our Q4 Macro Themes call, which we’ll host on October 2nd.


The upshot of our current call has mostly to do with phase transitions in both growth and inflation. We think that both the Russell 2000 and the 10yr bond yield (down 3bps last week and -45bps for 2014 YTD) look a lot like Europe and US inflation – slowing.


And while you may have never experienced thunder and lightning when everyone is tilted to the levered long side of a performance chasing boat, you have seen both growth and inflation slowing (at the same time) before. It was Q3 of 2008. Now that was a frenzy!


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.42-2.62%

SPX 1997-2016

RUT 1140-1158

VIX 11.66-14.12

Pound 1.62-1.64


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Friday's Frenzy - Chart of the Day


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. In today’s edition, we highlight:


  1.  Why investors should be raising cash
  2. For those investors who must remain fully invested, we highlight the rotation within Fixed Income & Yield Chasing to demonstrate how an investor may tilt their book in a defensive manner in preparation for continued #Quad4 deflation


Best of luck out there,


Darius Dale

Associate: Macro Team

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