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.
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:
* 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
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
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).
3. Asian Financial CDS - Asia was mixed on the week with China tightening, India widening and Japan mixed.
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.
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.
6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 1.0 points last week, ending at 1877.
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.
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.
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.
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.
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.
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.
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.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT
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,
Associate: Macro Team
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.
We are removing short PBPB from both our Best Ideas and Investment Ideas list. Note to follow shortly.
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
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.
The SPX (+1.3%) outperformed the XLY (+0.2%) as both casual dining and quick service stocks, in aggregate, outperformed the XLY.
XLY Quantitative Setup
From a quantitative setup, the sector remains bullish on an intermediate-term TREND duration.
Casual Dining Restaurants
Quick Service Restaurants
Client Talking Points
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.
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.
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).
|FIXED INCOME||32%||INTL CURRENCIES||4%|
Top Long Ideas
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.
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.
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
QUOTE OF THE DAY
The purpose of learning is growth, and our minds, unlike our bodies, can continue growing as long as we live.
STAT OF THE DAY
U.S. Healthcare Stocks (XLV) are up +1.7% on the week to +17% year-to-date.
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