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MONDAY MORNING RISK MONITOR: DANGER ZONE

Takeaway: Lots of red on the risk monitor again this week. We've been flagging rising risk for the last few weeks. The outlook remains negative.

Current Best Ideas:

 

MONDAY MORNING RISK MONITOR: DANGER ZONE - 19 

 

Key Takeaway:

Our last two weekly risk monitors have been titled:

 

"Don't Get Complacent" - 10/6/14

"Risk is Rising" - 9/29/14

 

Our Risk Monitor note was born in 2011 out of the recognition that - as Dan Och famously once said - "If you don't do macro, macro will do you". Its relevance obviously waxes and wanes depending on the environment, but the point of the product has never changed. It's intended to be an early (or at least concurrent) warning system as it measures a number of high-level macro signals across asset classes and geographies.

 

For the last few weeks we've been flagging rising risk dynamics across the complex of indicators we track and last week we finally got a material sell-off. The XLF dropped 3% last week and is now down 3.5% on a month-over-month basis. This week, the risk monitor looks similar to how it has the last few weeks: Red. Red permeates the summary table below suggesting it's not just a recent US equities phenomenon but rather a multi-asset class/geography problem. In other words, correlations are rising globally as the sell off gathers momentum. 

 

 

Financial Risk Monitor Summary

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

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

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

MONDAY MORNING RISK MONITOR: DANGER ZONE - 15 2

 

1. U.S. Financial CDS -  Swaps widened for 19 out of 27 domestic financial institutions. The widening was modest at +4 bps, on average, but that brings the month-over-month change up to +9 bps, on average. The large cap banks are higher by 7 bps (+11 %) on the month now. We'll see what earnings season has in store beginning tomorrow.

 

Tightened the most WoW: ACE, AON, XL

Widened the most WoW: TRV, SLM, C

Tightened the most WoW: ACE, XL, MMC

Widened the most MoM: SLM, WFC, BAC

MONDAY MORNING RISK MONITOR: DANGER ZONE - 1 2

 

2. European Financial CDS - Swaps were notably wider across Spanish Banks and Russia's megabank, Sberbank. We are intrigued with Russia as falling oil prices coupled with the effects of ongoing Western sanctions appear to having a significant weakening effect on Russia's economy. The average CDS profile across the EU bank complex is moving in the opposite direction of Euribor-OIS, our preferred gauge of systemic risk for the European banking system. In other words, while the systemic risk measure appears to be declining, the average individual risk measure across European banks is rising. Stay tuned.

 

MONDAY MORNING RISK MONITOR: DANGER ZONE - 2

 

3. Asian Financial CDS - Indian banks saw swaps tighten on the week, as did two out of three of the big Chinese banks. Much of Japan was unchanged on the week, except Mizuho which widened +4 bps to 56 bps.

 

MONDAY MORNING RISK MONITOR: DANGER ZONE - 17

 

4. Sovereign CDS – Sovereign swaps were mixed with Spain widening the most at +6 bps to 79 bps. On balance, however, the average change for the week was just +1 bp. 

 

MONDAY MORNING RISK MONITOR: DANGER ZONE - 18

 

MONDAY MORNING RISK MONITOR: DANGER ZONE - 3 2

 

MONDAY MORNING RISK MONITOR: DANGER ZONE - 4 2

 

5. High Yield (YTM) Monitor – High Yield rates rose 17.4 bps last week, ending the week at 6.12% versus 5.95% the prior week.

 

MONDAY MORNING RISK MONITOR: DANGER ZONE - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 4.0 points last week, ending at 1862.

 

MONDAY MORNING RISK MONITOR: DANGER ZONE - 6

 

7. TED Spread Monitor – The TED spread fell 0.3 basis points last week, ending the week at 22.1 bps this week versus last week’s print of 22.36 bps.

 

MONDAY MORNING RISK MONITOR: DANGER ZONE - 7

 

8. CRB Commodity Price Index – The CRB index fell -0.8%, ending the week at 276 versus 278 the prior week. As compared with the prior month, commodity prices have decreased -2.5% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

MONDAY MORNING RISK MONITOR: DANGER ZONE - 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 10 bps.

 

MONDAY MORNING RISK MONITOR: DANGER ZONE - 9

 

10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index rose 3 basis points last week, ending the week at 2.56% versus last week’s print of 2.53%. 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: DANGER ZONE - 10

 

11. Chinese Steel – Steel prices in China rose 0.1% last week, or 4 yuan/ton, to 2921 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: DANGER ZONE - 12

 

12. 2-10 Spread – Last week the 2-10 spread tightened to 186 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: DANGER ZONE - 13

 

13. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.2% upside to TRADE resistance and 1.7% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: DANGER ZONE - 14 2

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – October 13, 2014


As we look at today's setup for the S&P 500, the range is 64 points or 1.16% downside to 1884 and 2.20% upside to 1948.                                                         

                                                                      

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: 1.86 from 1.86
  • VIX closed at 21.24 1 day percent change of 13.22%

 

MACRO DATA POINTS (Bloomberg Estimates):

  • 12:30pm: Fed’s Evans speaks in Indianapolis
  • U.S. Rates Weekly Agenda
  • FX Weekly Agenda

 

GOVERNMENT:

    • Govt offices closed for Columbus day
    • U.S. ELECTION WRAP: Oil in La. Runoff; Marriage in N.C.; Ebola
    • Washington Week Ahead

 

WHAT TO WATCH:

  • Steris to Buy Synergy Health for $1.9b in Move to U.K.
  • Fed Officials Warn Slowing World Growth Could Delay Rate Rises
  • Canadian Pacific Said to Be Rebuffed in Merger Overture to CSX
  • Fiat Chrysler Trades in New York as Challenger to Detroit Two
  • Ackman Targets Stake in U.S. Firm as Pershing Square IPO Drops
  • Deutsche Bank Falls on Report May Boost Legal Cost Provs. 30%
  • Sears’s Kmart Offers Free Credit Monitoring After Cyber Attack
  • Salesforce Unveils Wave Cloud Product for Data-Analytics Market
  • U.S. equity markets open, bond markets closed for Columbus Day
  • China Exports Rise More Than Estimated
  • Dallas Health Worker’s Ebola Raises Concern of Caregiver Safety
  • Mobs Confront Hong Kong Protesters Near Business District
  • Bayer Faces U.S. Legal Campaign Over Xarelto Blood Thinner: FAZ
  • GE Plane Leasing Unit Weighs Bid for Milestone: WSJ
  • Google’s YouTube ‘Monetizing’ Unauthorized Content: FT
  • Saudi Prince to Buy Shares in Euro Disney Rescue: Daily Mail

 

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Iraq Follows Saudi Price Cuts as Brent Slides With WTI Crude
  • Malaysia Seeks to Boost Palm Oil by Extending Tax-Free Shipments
  • Hedge Funds Miss Gold Gains After Cutting Wagers: Commodities
  • Top Rubber Trade Groups Pledge to Boost Prices From 2009 Low
  • Gold Advances to Four-Week High on Haven Demand as Silver Rises
  • Copper to Nickel Advance as China Trade Figures Top Estimates
  • China Copper Ore Imports Jump to Record as Smelters Boost Demand
  • MORE: China Vegetable Oil Imports Fall to Lowest Since May 2011
  • Rebar Rises Most in 2 Years as Spot Prices Gain Amid Output Drop
  • Tripartite Rubber Council May Meet in Early November: Uggah
  • Iron Price War Deepens Crisis in Ebola-Stricken Sierra Leone
  • U.S. Gasoline Falls to Lowest Since November, Lundberg Says
  • China Nickel Depletion Fuels LME Stockpile Growth, Norilsk Says
  • Speculators Push Oil Into Bear Market as Supply Rises: Energy

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


Legislating Deflation?

This note was originally published at 8am on September 29, 2014 for Hedgeye subscribers.

“There are far too many great men in the world; there are too many legislators.”

-Bastiat

 

Today in 1789, the 1st United States Congress adjourned. There were no political parties in Congress back then. Members of US Congress were grouped (informally) according to their voting records. There was at least some peer review and accountability in that.

 

As far as who was a “great” man back then, I personally can’t tell you for sure. My only certainty is that the more I try to understand #history through the lenses of different perspectives (books), the less I know.

 

I can tell you with 100% certainty that, of all the great men and women I know, not one is a legislator. The thing about great leaders is that they embrace their own imperfections and rarely feel certain about anything. Find me that in today’s political media and I will happily reconsider. Sadly, the deflation of my expectations continues to accelerate on that front.

 

Legislating Deflation? - founding fathers

 

Back to the Global Macro Grind

 

Deflation and depression aren’t cool feelings. I guess that’s why the Bush/Obama politicians who perpetuated the most recent decade of US economic growth surprising on the downside call the recession a #Great one.

 

There’s always spin from political incumbents who aren’t telling you the truth about economics.  The Federal Reserve is going to be spinning its wheels with a conflicted “World Economic Think Tank” from Germany called the Kiel Institute this week.

 

Their topic: “The Labor Market After The Great Recession.” Their problem: that both the US and Germany may very well be entering their next recessions. Yep. So let’s make sure US legislators get told what to do by left-leaning German states in preparation for that…

 

Deflated yet?

 

Back to real world leading economic indicators in Global Equity markets, here’s what happened last week:

 

  1. The illiquid small-cap #bubble component of the US stock market continued to deflate
  2. The Russell 2000 was down another -2.4% on the week and is now down for 4 consecutive weeks
  3. The more liquid (and “cheaper”) Dow and SP500 were down -1.0% and -1.4%, respectively
  4. US Industrial Stocks (XLI) led losers, falling -2.1% on the week and have lagged for the last 3 months
  5. REITS (MSCI Index) corrected another -1.9% as deflation in real estate prices continues in #Quad4
  6. Emerging Markets deflated another -2.7% and -4.2% on the wk for the MSCI EM and LATAM indexes, respectively

 

In what we call FICC (Fixed Income, Currencies, and Commodities), here’s what Mr. Macro Market said last week:

 

  1. Draghi’s (un-elected) Devalued Euro move continues with the EUR/USD down another -1.1% on the week
  2. US Dollar Index added to its most deflationary move since 1997, closing up the same that the Euro was down
  3. Canadian Dollars dropped -1.7% in kind, and the Japanese Yen fell another -0.2% on the week to $109.29 vs USD
  4. Commodities (CRB) Index held the 280 line (where it started 2014), closing +0.3% on the week
  5. Gold and Copper were +0.1% and -3.7% on the week, respectively (YTD: Gold +1% vs Copper -10%)
  6. UST 10yr Bond Yield dropped another -5 bps to 2.53%, down -17% YTD (or down 50bps)

 

That last thing (10yr yield falling) is one thing that the perma-US-growth-bulls have had a very hard time explaining (especially overlayed with the Russell). Since US #history tells you that falling bond yields are never a sign of accelerating growth, that’s for good reason.

 

Much like the politically partisan, perma-growth-bulls are very good at seeking data that confirms their bullish biases. Instead of talking about early cycle-stocks like Housing (ITB), Regional Banks (KRE), and Consumer Discretionary (XLY) being down for 2014 YTD, they’re now all experts on #Strong Dollar and “falling oil prices” (even though WTI crude was +2% last week to flat on the YTD).

 

I like #StrongDollar, but only as a leading indicator of US economic #GrowthAccelerating when long-term interest rates are RISING at the same time. Let me write that one more time in these terms: Dollar Up, Rates Up = Hedgeye Bullish On Growth!

 

That, of course, was why we loved US growth stocks in 2013 and had an equal amount of joy shorting the US bond market. This year, being the only decisively bi-partisan bull/bear risk managers you pay, we have had precisely the opposite position.

 

I’ll go through the why on Dollar Up, Rates Down (it’s called #Quad4 deflation) on our Q4 Global Macro Themes call this Thursday afternoon at 1PM EST. Institutional Investors, please ping sales@Hedgeye.com for access.

 

I’d like to extend an invite to any Member of The 113th US Congress who would like to learn something about where economic risks are going (rather than where they’ve been). I don’t hang with them, so I’d appreciate it if you passed it along to your local central planner.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.48-2.58%

SPX 1962-1994

RUT 1100-1136

VIX 13.53-16.13

EUR/USD 1.26-1.29

Gold 1209-1249

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Legislating Deflation? - 09.29.15 USD vs. 10 Yr


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October 13, 2014

October 13, 2014 - Slide1

 

BULLISH TRENDS

October 13, 2014 - Slide2

October 13, 2014 - Slide3

 

BEARISH TRENDS

October 13, 2014 - Slide4

October 13, 2014 - Slide5

October 13, 2014 - Slide6 

October 13, 2014 - Slide7

October 13, 2014 - Slide8

October 13, 2014 - Slide9

October 13, 2014 - Slide10

October 13, 2014 - Slide11
October 13, 2014 - Slide12


VIX, Oil and Gold

Client Talking Points

VIX

The front month fear has crashed to the upside (doubling since the Russell topped July 7th), closing +46% last week to +54.8% VIX year-to-date; immediate-term TRADE overbought within a risk range of 16.85-21.67, so U.S. stocks should bounce.

OIL

Oil is not bouncing; after ramming the rocks of #Quad4 deflation (-4.4% last week), WTI is down another -1.9% this morning and this is starting to get gnarly for both spec and low-quality small/mid cap stocks (and bonds) across the energy complex.

GOLD

Not the best place to be in #Quad4 (the Long Bond and Cash are), but definitely not the worst either – after closing +2.4% last week, Gold is +0.5% to $1230; +2% year-to-date vs. the Russell 2000 -9.5%; Dollar Down helping today.

Asset Allocation

CASH 70% US EQUITIES 0%
INTL EQUITIES 6% COMMODITIES 2%
FIXED INCOME 22% INTL CURRENCIES 0%

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

GERMANY: DAX +0.3% to -7.8% YTD #EuropeSlowing

@KeithMcCullough

QUOTE OF THE DAY

You may have to fight a battle more than once to win it.

-Margaret Thatcher

STAT OF THE DAY

We hope you had the Long Bond (TLT) on versus the Russell 2000 (short side) as the performance divergence in being long #GrowthSlowing hit its widest for 2014 year-to-date, ex-reinvesting interest, TLT = +18.3% year-to-date vs. Russell 2000 -9.5%.

 


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. In today’s edition, we highlight:

 

  1. The importance of raising cash or being #antifragile (i.e. long of volatility) amid #Quad4 asset price deflation
  2. Why a dovish Fed is more likely to spook investors, rather than encourage more passive, levered-long beta chasing
  3. How the broad-based weakness across global macro did exactly what we said it would eventually do: spill over into U.S. equities, which are now broadly breaking down across sectors and style factors
  4. Why the financials – both moneycenters and regional banks – are a good short here

 

Best of luck out there,

 

Darius Dale

Associate: Macro Team


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