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MONDAY MORNING RISK MONITOR: STAYING IN THE FOXHOLE

Takeaway: The XLF is down 6.3% m/m and the outlook remains negative.

Current Best Ideas:

 

MONDAY MORNING RISK MONITOR: STAYING IN THE FOXHOLE - 19 2 

 

Key Takeaway:

Our last three weekly risk monitors have been titled:

 

"Danger Zone" - 10/13/14

"Don't Get Complacent" - 10/6/14

"Risk is Rising" - 9/29/14

 

The XLF is down 6.3% on a m/m basis and was down 1.2% last week. A confluence of factors are responsible including European growth slowing, US growth concerns, and, more recently, apprehension about Ebola spreading globally. We've been flagging rising risk for the last 3 weeks (see our note titles above). This morning, the short-term outlook remains challenging. For reference, our Macro team’s quantitative setup in the XLF shows 0.9% upside to TRADE resistance and 2.8% downside to TRADE support. The risk monitor is suggesting a bearish intermediate term outlook. 

 

Financial Risk Monitor Summary

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

 • Intermediate-term(WoW): Negative / 4 of 12 improved / 6 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: STAYING IN THE FOXHOLE - 15 2

 

1. U.S. Financial CDS -  Swaps tightened for 17 out of 27 domestic financial institutions on the week. Large cap US Financials were little changed over the course of the week with an average change of zero bps. On a m/m basis, however, swaps are wider by 10 bps. Morgan Stanley is leading the charge higher, rising by 13 bps on the month and 3 bps on the week.

 

Tightened the most WoW: TRV, CB, ALL

Widened the most WoW: GNW, PRU, LNC

Tightened the most WoW: ACE, CB, AON

Widened the most MoM: AXP, AIG, MS

 

MONDAY MORNING RISK MONITOR: STAYING IN THE FOXHOLE - 1 2

 

2. European Financial CDS - Swaps were sharply wider in Europe last week. Much of the weakness was driven by Greek banks, which widened by an average 85 bps on the week.

 

MONDAY MORNING RISK MONITOR: STAYING IN THE FOXHOLE - 2

 

3. Asian Financial CDS - Indian bank swaps were the most changed on the week, rising by an average of 7 bps on the week. Chinese bank swaps remain the most changed on the month.

 

MONDAY MORNING RISK MONITOR: STAYING IN THE FOXHOLE - 17

 

4. Sovereign CDS – European Sovereign swaps widened notably last week. Portugal and Spain saw swaps widen 28 and 18 bps, respectively. Meanwhile, Italian and French swaps were wider by 14 and 10 bps. The US and Japan also widened by 2 and 4 bps. 

 

MONDAY MORNING RISK MONITOR: STAYING IN THE FOXHOLE - 18

 

MONDAY MORNING RISK MONITOR: STAYING IN THE FOXHOLE - 3

 

MONDAY MORNING RISK MONITOR: STAYING IN THE FOXHOLE - 4

 

5. High Yield (YTM) Monitor – High Yield rates fell 10.1 bps last week, ending the week at 6.02% versus 6.12% the prior week.

 

MONDAY MORNING RISK MONITOR: STAYING IN THE FOXHOLE - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 8.0 points last week, ending at 1854.

 

MONDAY MORNING RISK MONITOR: STAYING IN THE FOXHOLE - 6

 

7. TED Spread Monitor – The TED spread fell 1.4 basis points last week, ending the week at 20.8 bps this week versus last week’s print of 22.2 bps.

 

MONDAY MORNING RISK MONITOR: STAYING IN THE FOXHOLE - 7

 

8. CRB Commodity Price Index – The CRB index fell -1.7%, ending the week at 273 versus 277 the prior week. As compared with the prior month, commodity prices have decreased -3.0% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

MONDAY MORNING RISK MONITOR: STAYING IN THE FOXHOLE - 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 9 bps.

 

MONDAY MORNING RISK MONITOR: STAYING IN THE FOXHOLE - 9

 

10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index fell 9 basis points last week, ending the week at 2.47% versus last week’s print of 2.57%. 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: STAYING IN THE FOXHOLE - 10

 

11. Chinese Steel – Steel prices in China rose 3.5% last week, or 101 yuan/ton, to 3018 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: STAYING IN THE FOXHOLE - 12

 

12. 2-10 Spread – Last week the 2-10 spread tightened to 182 bps, -3 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR: STAYING IN THE FOXHOLE - 13

 

13. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.9% upside to TRADE resistance and 2.8% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: STAYING IN THE FOXHOLE - 14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – October 20, 2014


As we look at today's setup for the S&P 500, the range is 70 points or 3.01% downside to 1830 and 0.70% upside to 1900.                                             

                                                                                  

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: 1.83 from 1.82
  • VIX closed at 21.99 1 day percent change of -12.74%

 

MACRO DATA POINTS (Bloomberg Estimates):

  • 10am: Fed Governor Jerome Powell speaks on community banking in online forum
  • 11am: U.S. to announce plans for auction of 4W bills
  • 11:30am: U.S. to sell $24b 3M bills, $30b 6M bills

 

GOVERNMENT:

    • Senate, House out of session
    • FEC filing deadline for candidates, some Pacs, parties for Sept
    • 8am: NY Fed meeting on reforming culture, behavior in financial services; speakers include Sir David Walker at Barclays, UBS’s Axel Weber, JPMorgan’s Lee Raymond, Fed’s Daniel Tarullo, Morgan Stanley’s James Gorman
    • 1pm: Financial Services Roundtable, FBI, Secret Service conf. on cybersecurity
    • 2pm: FHFA Director Melvin Watt, HUD Secretary Julian Castro speak at Mortgage Bankers Assn conf.
    • 4:30pm: Freddie CEO Donald Layton, Fannie CEO Timothy Mayopoulos speak

 

WHAT TO WATCH:

  • IBM Agrees to Pay Globalfoundries $1.5 Billion to Take Chip Unit
  • Investors Plan $2.2b Bid for Adidas’s Reebok, WSJ Reports
  • Yahoo’s Mayer Faces Crucial Earnings Call Amid Investor Pressure
  • CEO Mayer Said to Refresh Turnaround Plan; Seek M&A: WSJ
  • Texas Ebola Cases Had Possible Contact With 300 People in U.S.
  • Spain Ebola Patient May Be Free of Virus After Negative Test
  • Cleco: Investor Group to Buy Cleco for $55.37/Shr in Cash
  • Fed to End Bond Buys This Month as Planned, Rosengren Says: WSJ
  • Obama May Seek an Iran Nuclear Deal Without Congress: NYT
  • Tesoro Acquires QEP Pipeline Assets in $2.5b Deal
  • McDonald’s Says Russia Inspecting More Than 200 Restaurants
  • Boeing Seeks Revised Schedule for $51b U.S. Aerial Tanker
  • Nutreco Agrees to Be Bought by SHV for About $3.4b
  • Sprint Job Reductions Will Include 452 at Kansas Headquarters
  • Marc Andreessen Resigns From EBay Board as PayPal Is Spun Off
  • Banks’ Range of Libor Calculation Methods May Be Standardized
  • Danone Hasn’t Yet Decided on Priorities for External Growth

 

AM EARNS:

    • Gannett (GCI) 8:30am, $0.55
    • Genuine Parts (GPC) 8:52am, $1.24
    • Halliburton (HAL) 7am, $1.10 - Preview
    • Hasbro (HAS) 6:30am, $1.45 - Preview
    • IBM (IBM) 7am, $4.32
    • Lennox Intl (LII) 8am, $1.41
    • Peabody Energy (BTU) 8am, $(0.66) - Preview
    • Valeant Pharma (VRX CN) 6am, $1.99 - Preview
    • VF Corp (VFC) 7am, $1.10 - Preview

 

PM EARNS:

    • Apple (AAPL) 4:30pm, $1.30 - Preview
    • BancorpSouth (BXS) 6:43pm, $0.33
    • Brookfield Canada (BOX-U CN) Aft-Mkt, C$0.41
    • Cadence Design Systems (CDNS) 4:05pm, $0.24
    • Celanese (CE) 5pm, $1.44
    • Chipotle Mexican Grill (CMG) 4:02pm, $3.83
    • CYS Investments (CYS) 4:05pm, $0.32
    • East West Bancorp (EWBC) 5:16pm, $0.60
    • Helix Energy Solutions (HLX) 5:30pm, $0.50
    • Hexcel (HXL) 4:05pm, $0.54
    • IDEX (IEX) 4:05pm, $0.84
    • Illumina (ILMN) 4:05pm, $0.56
    • Packaging Corp of America (PKG) 5pm, $1.26
    • Rambus (RMBS) 4:05pm, $0.13
    • Rent-A-Center (RCII) 4:25pm, $0.47
    • Steel Dynamics (STLD) 6pm, $0.44
    • Texas Instruments (TXN) 4:30pm, $0.71
    • Zions Bancorp (ZION) 4:10pm, $0.44

 

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Gold Advances in New York on Dollar Weakness to Falling Stocks
  • Brent Crude Oil Trades Near Level Seen as OPEC Test; WTI Steady
  • Gold Bulls Lured Back for First Time in Two Months: Commodities
  • Copper Declines With Other Industrial Metals on China’s Slowdown
  • Hedge Funds Cut Bullish Bets on Crude as Prices Tumble: Energy
  • Sumitomo’s $1.55 Billion Loss Shows Shale Isn’t Booming for All
  • Citrine’s Hommert Sees ‘Good Upside’ for Nickel Next Year
  • Sugar Millers See Thai Cane Output Dropping Below 100 Mln Tons
  • Rubber Reaches 1-Month High as Malaysia Sees 10% Drop in Output
  • Fire Shuts U.K.’s Didcot B Power Station; No Risk Seen to Supply
  • Iron Ore Risks Extending Collapse as Supply Jumps, Moody’s Says
  • Modi Uses Oil Slump to Ease Curbs Deterring Exxon, Chevron
  • Deeper Oil Slump Seen as ‘Disaster’ Risk for Australian LNG
  • Goldman Sees Copper Underperforming Most Base Metals in 2015

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.28%
  • SHORT SIGNALS 78.51%

Seeing Red

“We will have to send soldiers into this party seeing red.”

-Bernard Montgomery

 

World War II #history rarely accuses British Army General Bernard Montgomery of having a confidence problem. He was often decisive and ruthless. In the end, he was also a winner.

 

On the eve of landing on the beaches of Normandy, Monty’s bravado reminded Churchill’s Chief of Staff (Lieutenant Hastings Ismay) of the eve of Agincourt (as depicted in Henry V):

 

“He which hath no stomach to this fight – let him depart.” (The Guns At Last Light, pg 11)

 

Seeing Red - EL Chart 2

 

Back to the Global Macro Grind

 

Seeing red, in single-factor price momentum terms, is not what everyone saw on Friday’s US stock market bounce. That’s because not everyone looks at risk on a multi-factor, multi-duration basis. But that doesn’t mean it ceases to exist.

 

Actually, the Russell 2000 was down on Friday, so even in single-factor terms, many saw red. Don’t forget that even though the Russell was up for the 1st week in 7, over 60% of stocks in the Russell 2000 are currently crashing (-20% from their 12-month highs).

 

Back to the multi-factor thing, we highly suggest you consider Mr. Macro’s market message on a baseline 3-factor basis – PRICE, VOLUME, and VOLATILITY. In those terms, this is what we saw on Friday’s “bounce”:

 

  1. PRICE – both the SPX and Russell failed at all 3 core levels of @Hedgeye resistance (TRADE, TREND, TAIL)
  2. VOLUME – Total US Equity Market Volume was -11% and -4% vs. its 1 and 3 month averages, respectively
  3. VOLATILITY – VIX was down on the day but +3.5% and +60.3% for the week and YTD, respectively

 

Price momentum is an easy concept for people to understand (it goes up or down – look at the chart, bro!). That’s why many still use what I affectionately refer to as Moving Monkeys (50 and 200 day) in order to contextualize price. Unfortunately, that is not a risk management process.

 

The direction of price obviously matters, but so does multi-factor context. Here’s what I mean by that:

 

  1. BULLISH – Price Up, Volume Up, Volatility Down
  2. BEARISH – Price Down, Volume Up, Volatility Up

 

Within the context of a bearish intermediate-term TREND @Hedgeye, Price UP, Volume DOWN, and trending (implied) Volatility UP is bearish too.

 

Setting aside our research view of US #GrowthSlowing, to get bullish and “buy-the-damn-dip” in US Equity beta, what I would need to see is the SP500 close above my immediate-term TRADE line of 1949 on accelerating VOLUME and a break-down in the VIX below my TRADE line of 15.03.

 

Those of you paying attention to my immediate-term risk ranges will note that these levels aren’t in the area code of today’s ranges. And, to a degree, that’s the point. If I look beyond 1-3 days in duration (to 3 weeks), I’m seeing a heightening probability of more red.

 

Across asset classes (multi-factor), here are the other big #Quad4 deflationary forces at work across multiple-durations (TRADE and TREND):

 

  1. European Equity deflation of -0.9% last week (-2.9% YTD EuroStoxx600) is bearish TRADE and TREND
  2. Emerging Market Equity deflation of -1.9% last week (-3.2% YTD MSCI) is bearish TRADE and TREND
  3. CRB Index deflation of -1.1% last week (-2.7% YTD) is bearish TRADE and TREND
  4. Oil (WTI) deflation of -3.3% last week (-11.1% YTD) is bearish TRADE and TREND
  5. Energy Equity (XLE) deflation of -1.1% last week (-6.6% YTD) is bearish TRADE and TREND

 

Then, of course, you have trivial risk signals like:

 

  1. US 10yr Treasury Yield crashing (-27% YTD) to 2.19% (bearish TRADE, TREND, and TAIL)
  2. US Treasury Yield Spread crashing (-31% YTD) to +182bps wide (10yr minus 2yr)
  3. And Credit Spreads starting to move off of their all-time lows as equity and commodity volatilities breakout

 

“So”, yes, I do see more red pending in US, European, and Emerging Market Equities in the coming weeks and months. And, no, I don’t think last week’s immediate-term capitulation was the bottom.

 

But consensus does! Here’s the updated net positioning of hedge funds in non-commercial CFTC futures/options terms:

 

  1. SP500 (Index + E-mini) got longer by +5,537 contracts to a net LONG position of +54,153 last week
  2. 10yr Treasury Bond saw shorts get -6,976 contracts shorter last week to a net SHORT position of -58,930
  3. Crude Oil bulls only gave up -14,225 contracts last week, keeping the net LONG position at +285,500 contracts!

 

In other words, consensus got longer of the US stock market, shorter of the Long Bond, and not nearly less-long enough of a crashing Oil price.

 

I know that some are frustrated out there with their performance. I can assure you that I’ve been there and had to deal with that. But there comes a time where you have to choose between being consensus and not seeing any more red in your P&L.

 

Our Immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.09-2.28%

SPX 1

RUT 1040-1101

VIX 20.46-28.92

WTI Oil 79.96-84.58

Gold 1211-1251

 

Best of luck out there this week,
KM

 

Seeing Red - CoD seeing red


October 20, 2014

October 20, 2014 - Slide1

 

BULLISH TRENDS

October 20, 2014 - Slide2

October 20, 2014 - Slide3

October 20, 2014 - Slide4

 

BEARISH TRENDS

October 20, 2014 - Slide5

October 20, 2014 - Slide6

October 20, 2014 - Slide7

October 20, 2014 - Slide8

October 20, 2014 - Slide9

October 20, 2014 - Slide10

October 20, 2014 - Slide11
October 20, 2014 - Slide12


Investing Ideas Newsletter

Takeaway: Current Investing Ideas: EDV, GLD, RH, TLT and XLP.

Below are Hedgeye analysts’ latest updates on our five current high-conviction long investing ideas and CEO Keith McCullough’s updated levels for each.

 

*Please note that we removed Legg Mason (LM) and Owens Corning (OC) this week from our Investing Ideas list.

 

We also feature two institutional research notes which offer valuable insight into the markets and economy.

 

Investing Ideas Newsletter     - II 

 

Trade :: Trend :: Tail Process - These are three durations over which we analyze investment ideas and themes. Hedgeye has created a process as a way of characterizing our investment ideas and their risk profiles, to fit the investing strategies and preferences of our subscribers.

  • "Trade" is a duration of 3 weeks or less
  • "Trend" is a duration of 3 months or more
  • "Tail" is a duration of 3 years or less

CARTOON OF THE WEEK

Beware the Bounce

Investing Ideas Newsletter     - bounce cartoon 10.17.14

Be wary of Friday's bounce in the stock market.

IDEAS UPDATES

TLT | EDV | XLP

THE DATA KEEPS ON COMING OUR WAY 


The week ending October 17th, 2014 was another supportive week for the slow-growth, yield-chasing trade we continue to recommend.

 

Domestically speaking, the data continues to come our way as we continue to anticipate a reactionary dovish policy response out of the Federal Reserve – particularly amid collapsing inflation expectations and a breakdown in commodity prices.

  • Food, energy and gas led the -0.1% MoM decline in PPI-FD in September with both core and headline decelerating -20bps sequentially to +1.6% YoY. 
  • In the face of aggregate income growth and strong initial claims, Retail Sales unexpectedly dropped MoM for the first time since JAN, showcasing broad deceleration across 11 of 13 industries.
  • U.S. housing data slowed as we watched Homebuilder Confidence, measured by NAHB’s HMI, decline to 55 in October, a drop of -5 points vs. the 9 year high reading of 59 recorded in SEPT. To be more clear, there has been a MoM decline across all three sub-indices in both current sales and current traffic, along with regional homebuilder confidence declining across all regions for the time since FEB.

Internationally speaking, in our 10/15 note titled, “Macro Medley: 0 for (Quad#4)” we highlighted how our global macro monitor is currently showcasing a near-universal negative trend of estimate revisions for both growth and inflation over the last quarter across both developed and EM markets.

 

With #EuropeSlowing, Japan slowing and China slowing simultaneously, we continue to expect slowing global growth to weigh on both business and investor confidence and reflexively perpetuate a negative feedback look in the domestic economy over the intermediate term.

 

In brief, you want to be long/overweight the asset classes and style factors that have weathered recent financial market volatility (i.e. Treasuries, munis, cash, and large-cap/high-yield/liquid equities), while remaining short/underweight its inverse (high beta, small cap illiquidity and early cycle leverage). That means remaining long of TLT, EDV, and XLP.

GLD 

We added gold (GLD) to investing ideas on the long-side back in May when the outlook for U.S. economic growth was in what we call a QUAD#3 set-up in our GROWTH, INLFATION, POLICY model. The extensive swath of economic data input was collectively signaling that growth was slowing with inflation accelerating. Commodities (and any commodity-linked asset classes), treasuries, and fixed assets inflate in this set-up.

 

With the turn now into QUAD#4, growth is still slowing and the slope of inflation is now DECELERATING. A QUAD#4 set-up does not (and will not) bode well for commodities, but we’re safe to say gold markets are driven by additional factors given its currency-like negative correlation to the dollar and U.S. treasury bonds. 

 

Investing Ideas Newsletter     - gold usd correls

 

With growth slowing in Europe as well, we have to keep an eye on further devaluation from ECB President Mario Draghi, but with the current set-up in the domestic economy, we would like to front-run the next Federal Reserve Policy move, and stick with our gold position.

  • GOLD vs. USD: Our GIP model is still front-running a full-year 2014 GDP print below consensus and fed estimates, and we expect downwardly revised growth estimates echoed with a more dovish tone from the Fed which will be BEARISH for the USD, and thus BULLISH for GOLD.

To exemplify the importance of front-running the Federal Reserve policy chatter, observe to the follow-through market moves after Janet Yellen’s commentary last Wednesday on the minutes release from the September 16-17th meeting:

 

“FURTHER GAINS IN THE DOLLAR COULD HURT EXPORTS AND DAMP INFLATION.”

 

a.k.a “we are not hawkish, and we’re not reverting on engrained beliefs on how monetary policy should intervene in the marketplace.”

 

Since her commentary, the market moves, and thus our reason for staying long of gold are self-explanatory:

  • GLD: +1.18%
  • UST 10-year yield: -5.0% to 2.19%
  • USD Index: -0.39%
  • CRB Index: -1.4% (divergence with Gold)                   

RH 

Earlier this week, we were reviewing a true comparable for Restoration Hardware. It's so hard to find a comp for RH. People look at West Elm, or Williams-Sonoma, but they're really different customers looking for a different aesthetic at a different price point.

 

But take a look at Arhaus (pronounced Our-House). It is by far and away the closest we've ever come to seeing the “Resto look” in a place that's not Resto. 

 

Granted, the prices are higher, the quality is lower, and the design is a 7 to RH's 10. It also lacks the size and scale to compete with RH's prices. But this is one to watch. 

 

* * * * * * * * * * 

 

Click on each title below to unlock the content.

 

Oil Has Further Downside Before The Bottom

The expectation for a supply/demand floor is not a catalyst for volatility-induced real-time market moves.

Investing Ideas Newsletter     - oil wells sunset full

 

Taxable Bond Bleeding Continues - BlackRock Puts Up Soft Equity Results

Dislocation at PIMCO continued last week with BlackRock signaling weak retail and institutional equity trends in yesterday's earnings.

Investing Ideas Newsletter     - blackrock full


investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

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