prev

U.S. and Europe

Client Talking Points

UST 10YR

UST 10YR Yield is down another -9 basis points week-over-week, now down -19.5%, for 2014 year-to-date. Total Return of the iShares 20yr Bond Fund (TLT) is up +18% (vs. Russell 2000 -5.1% year-to-date). Yield Spread is the long end of the curve (10yr yield) minus the short-end (2yr yield), it compressed another 8 basis points to +188 basis points wide (-77 basis points year-to-date).

COMMODITIES

With the U.S. Dollar up another +1.2% last week, the CRB Commodities Index is down -1.4% on the week to down that much now for the year-to-date. Oil (WTI crude) was down -4.1% on the week to -3.9% year-to-date. Gold dropped another -1.9% on the week to -1.1% year-to-date.

EUROPE

After another -2.1% down week for the EuroStoxx600, European stocks are trying to bounce today. Russian stocks continued to crash, -5.5% on the week to -24.3% year-to-date.

Asset Allocation

CASH 60% US EQUITIES 2%
INTL EQUITIES 8% COMMODITIES 4%
FIXED INCOME 24% INTL CURRENCIES 2%

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

Morgan Stanley upgrades $BKW; downgrades $MCD...  not sure I understand this move

@HedgeyeHWP

QUOTE OF THE DAY

I believe that good things come to those who work.

-Wilt Chamberlain

STAT OF THE DAY

Front-month coffee is up 8.3% this morning and up +16.6% 5-Day, moisture in Brazilian Coffee Belt is 70-85% below normal.


October 6, 2014

October 6, 2014 - Slide1

 

BULLISH TRENDS

October 6, 2014 - Slide2

October 6, 2014 - Slide3

October 6, 2014 - Slide4

 

 

BEARISH TRENDS

October 6, 2014 - Slide5

October 6, 2014 - Slide6 

October 6, 2014 - Slide7

October 6, 2014 - Slide8

October 6, 2014 - Slide9

October 6, 2014 - Slide10


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

Associate

 

Ben Ryan

Analyst


Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.

THE HEDGEYE DAILY OUTLOOK

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.                                                      

                                                                         

SECTOR PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

EQUITY SENTIMENT:

 

THE HEDGEYE DAILY OUTLOOK - 10A

 

CREDIT/ECONOMIC MARKET LOOK:

  • 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.

 

GOVERNMENT:

    • 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

 

WHAT TO WATCH:

  • 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

 

EARNINGS:

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

 

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • 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 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



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%

SPX 1

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,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Deflation's Good Fortune - 10.06.14 Deflating Bubbles


GET THE HEDGEYE MARKET BRIEF FREE

Enter your email address to receive our newsletter of 5 trending market topics. VIEW SAMPLE

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.

next