European Banking Monitor: Financials Swaps Widen

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 mostly widened in Europe last week, although the median change was only 2.3%.  Portugal's Banco Espirot Santo swaps led the rise, gaining 48 bps to end the week at 500 bps.  Sberbank of Russia and Austria's Erste Group Bank followed, gaining 33 bps and 10 bps respectively.


European Banking Monitor: Financials Swaps Widen - chart1 Euro Financials CDS


Sovereign CDS – Sovereign swaps mostly tightened over last week. German sovereign swaps tightened by -6.8% (-1 bps to 19 ) and Italian sovereign swaps widened by 0.8% (1 bps to 138).  Japanese CDS widened by 10.7% (+6 bps to 60) on news that Japan is in recession and Prime Minister Shinzo Abe will delay a tax hike by one year.  The delay has caused investors to worry about the country's solvency.


European Banking Monitor: Financials Swaps Widen - chart2 sovereign CDS


European Banking Monitor: Financials Swaps Widen - chart3 sovereign CDS11 24 2014 8 54 38 AM


European Banking Monitor: Financials Swaps Widen - 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 1 bps to 9 bps.


European Banking Monitor: Financials Swaps Widen - chart5 euribor.ois spread


Matthew Hedrick



Ben Ryan







Monday Mashup: YUM, RUTH and More

Monday Mashup: YUM, RUTH and More - 1


Recent Notes

11/17/14 Monday Mashup: LOCO, BLMN and More

11/18/14 MCD: An Activist's Dream? Not So Fast.

11/19/14 Jack and Qdoba

11/20/14 DRI: Still Lacking Direction

11/21/14 Please Join Hedgeye for Holiday Cocktails & Appetizers


Events This Week

Tuesday, November 25th

  • CBRL earnings call 11am EST


Chart of the Day

Monday Mashup: YUM, RUTH and More - 2


Recent News Flow

Monday, November 17th

  • LOCO commenced a proposed public follow-on offering of its common stock.  The lead book-running managers (Jefferies and Morgan Stanley) in the IPO waived a lock-up restriction for shares held by certain selling stockholders, including some directors and officers of El Pollo Loco.
  • RUTH announced its agreement to sell Mitchell's Restaurants to Landry's for $10 million.  In the deal, Landry's will receive 18 Mitchell's Fish Market restaurants as well as three Cameron's Steakhouse restaurants.  RUTH purchased Mitchell's Restaurants in February 2008 for $92 million.
  • CMG The Chipotle Cultivate Foundation awarded a $500,000 grant to the International Rescue Committee in show of its continued support.  The grant is intended to help finance the expansion of IRC's MicroProducer Academy, which aims to help "refugee farmers adapt existing agricultural skills to an urban American environment and marketplace, all while improving their access to healthy, locally grown foods."
  • WEN announced the return of its Bacon Portabella Melt on Brioche for a limited-time.  The sandwich will be available for a recommended price of $4.99.

Tuesday, November 18th

  • BOBE initiated buy at APB Financial with a $75 PT.
  • PLKI announced the release of four new Coca-Cola Limited Edition Holiday Collector Cups.  The cups will be free with any 32 oz. beverage purchase and will be available through December 31st.
  • BJRI announced the opening of its newest restaurant in Fort Meyers, FL (Gulf Coast Town Center).  The 7,300 sq. ft. restaurant seats approximately 225 guests.  This marks BJ's 11th restaurant opening this year and its 19th restaurant in Florida.

Wednesday, November 19th

  • JMBA launched Jamba eGifting, which allows customers to purchase Jamba Juice gift cards online. 

Thursday, November 20th

  • YUM upgraded to buy at Janney Capital with an $88 PT.
  • CMG launched a new mobile app for smart phones and tablets that allows job applicants to apply from their phones.  The company reportedly received 5,000 mobile applications within the first week of its launch.
  • LOCO announced the pricing of its public follow-on offering by selling stockholders of 6 million shares of common stock at $27.00 per share.
  • HABT The Habit Restaurants IPO opened at $30 on the Nasdaq.  The 5 million share IPO was originally priced at $18.00 per share, above its expected $14.00 to $16.00 range.
  • CBRL announced it expects to serve approximately 1.4 million meals over the nine day Thanksgiving holiday season, noting that Thanksgiving is typically the busiest day of the year for its restaurants. 
  • SONC announced a multi-year endorsement agreement with the Oklahoma City Thunder, and NBA Superstar, forward Kevin Durant.  Durant is expected to serve as a national brand ambassador, to aid in the development of balanced menu, and to promote co-branded philanthropic efforts.
  • TXRH announced a quarterly dividend of $0.15 per share, payable on January 2, 2015 to shareholders of record by December 17, 2014.
  • BOBE announced a quarterly dividend of $0.31 per share, payable on December 15, 2014 to shareholders of record by December 1, 2014.
  • YUM announced the authorization of up to $1 billion in share repurchases through May 31, 2016.  The company has repurchased 9.4 million shares, totaling $691 million, year-to-date.
  • DENN announced the reopening of its remodeled Las Vegas Casino Royale restaurant.  It is historically Denny's highest volume company-owned restaurant and now features an updated look and feel with expanded capacity to accommodate approximately 300 guests.

Friday, November 21st

  • PZZA announced two new limited-time offers, the Philly Cheesesteak Pizza and the Red Kettle Cookie, that will be available on the menu from November 24 through December 28.


Sector Performance

  • The XLY (+1.2%) performed in-line with the SPX (+1.2%) last week, as both casual dining and quick service stocks, in aggregate, underperformed both benchmarks.


Monday Mashup: YUM, RUTH and More - 3


Monday Mashup: YUM, RUTH and More - 4


XLY Quantitative Setup

From a quantitative perspective, the sector remains bullish on an intermediate-term TREND duration.


Monday Mashup: YUM, RUTH and More - 5


Casual Dining Restaurants

Monday Mashup: YUM, RUTH and More - 6


Monday Mashup: YUM, RUTH and More - 7


Quick Service Restaurants

Monday Mashup: YUM, RUTH and More - 8


Monday Mashup: YUM, RUTH and More - 9


Howard Penney

Managing Director


Fred Masotta



Client Talking Points


The bull case for European Equities has successfully transitioned (for now) from growth accelerating to #GrowthSlowing + QE (consensus suggesting official QE announcement at the DEC 4th meeting); Spain’s 10yr breaking 2.0%.


The Long Bond read last week’s trifecta of Japan/Europe/China stimulating for what it was (global #GrowthSlowing) and remains in crash mode at 2.33% (down -23% year-to-date). We still like the Long Bond vs. RUT short.


The Russell 2000 was flat for the 3rd straight week last week with pretty much everything equities going straight up; immediate-term risk range there is now 1153-1188 (with 1188 being intermediate-term TREND resistance).

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). U.S. real GDP growth is unlikely to come in anywhere in the area code of consensus projections of 3-plus percent. And it is becoming clear to us that market participants are interpreting the Fed’s dovish shift as signaling cause for concern with respect to the growth outlook. We remain on other side of Consensus Macro positions (bearish on Oil, bullish on Treasuries, bearish on SPX) and still have high conviction in our biggest macro call of 2014 - that U.S. growth would slow and bond yields fall in kind.


We continue to think long-term interest rates are headed in the direction of both reported growth and growth expectations – i.e. lower. In light of that, we encourage you to remain long of the long bond. The performance divergence between Treasuries, stocks and commodities should continue to widen over the next two to three months. As it’s done for multiple generations, the 10Y Treasury Yield continues to track the slope of domestic economic growth like a glove. We certainly 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 YTD (ex-reinvesting interest).


The U.S. is in Quad #4 on our GIP (Growth/Inflation/Policy) model, which suggests that both economic growth and reported inflation are slowing domestically. As far as the eye can see in a falling interest rate environment, we think you should increase your exposure to slow-growth, yield-chasing trade and remain long of defensive assets like long-term treasuries and Consumer Staples (XLP) – which work decidedly better than Utilities in Quad #4. Consumer Staples is as good as any place to hide as the world clamors for low-beta-big-cap-liquidity.

Three for the Road


GOLD: -0.5% this am to $1195 with an immediate-term risk range of $1142-1212 $GLD



In matters of style, swim with the current; in matters of principle, stand like a rock.

-Thomas Jefferson


The Galaxy S5 sold 40% fewer units than projected, is said to have sold 12 million units in its first three months on sale which is roughly 4 million fewer than its predecessor. Sales were reportedly down over 50% in China (Wall Street Journal).


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Risky Business

“I have long understood that losing always comes with the territory when you wander into the gambling business, just as getting crippled for life is an acceptable risk in the line backer business.  They both are extremely violent sports, and pain is part of the bargain.  Buy the ticket, take the ride.”

-Hunter S. Thompson


The stock market business isn’t nearly as risky as being a NFL linebacker or, at least in some jurisdictions, being involved in the gambling business.  Nonetheless, being a stock market operator does not come without its risks.  Ironically, the most significant risk to being invested in the stock market currently is likely mismanaging the actions of central banks.


The most recent and significant action of course comes from the People’s Bank of China (PBOC) which cut the 1-year deposit rate by 25 basis points and 1-year lending rate by 40 basis points.  This was China’s first interest rate cut since June 2012.  For those that were long Chinese equities, this is a short term positive, but for those that were caught offside, not so much. 


Recent history shows rallies related to Chinese rate cuts have been very, very short lived.  In fact, six of the past seven cuts to interest rates and reserve requirements have been followed by declines in stock prices over the next two months.   Perhaps this is why according to Reuters this morning, “the Chinese leadership and PBoC are ready to cut interest rates again and also loosen lending restriction.”


The longer term challenge with seemingly arbitrary moves in central banking policy is the creation of excesses.  As Professor John Taylor from Stanford wrote in a recent paper, the biggest issue with abnormally dovish policy specifically (read: low rates) is the increased appetite for risk.  According to Taylor:


“Anther effect of extra low policy rates is on risk aversion. Using time series techniques Bekaert, Hoerova, and Duca (2012) found that this effect is empirically significant. They decompose the VIX into a risk aversion component and an uncertainty component. They then look at the cross autocorrelations between policy rates and these two components. Their empirical results show that “Lax monetary policy [below policy rule rates] increases risk appetite (decreases risk aversion) in the future, with the effect lasting for about two years and starting to be significant after five months.” These results provide a reason why a change in monetary policy might actually shift the tradeoff curve in Figure 2 back up—a channel to poor economic performance which is quite different than the risk aversion channel of Elliot and Baily (2009) or King (2012) and with much different policy implications.”


Net-net, non-rules based and extra low policy rate rates may actually have the unintended consequence of increasing risk and eventual economic underperformance.


Risky Business - z. EL 11.24 Mid pic


Back to the Global Macro Grind


This morning’s monetary policy rumor of the day is that the EU is set to announce a new fund this week that will use “financial engineering” in an effort to create at least €300B of additional investment.  The question, of course, is what is the point of more “financial engineering”?   In the chart of the day, we take a look at the yields on 10-year sovereign debt for Spain, Italy and Portugal, that highlights that cost of sovereign capital of all three are down meaningfully year-to-date and over the last three years.


Interestingly, at 2.04% and 2.25% for Spain and Italy respectively, their 10-year yields are both lower than the United States.  Clearly, then,  the government lending market is not the issue, so perhaps a magical €300B in incremental investment in the private sector will be what it takes to lift Europe out of its economic malaise?  Perhaps, and maybe Santa Claus does actually exist!


Speaking of unlikely global macro scenarios, how about the scenario that OPEC finally agrees on production targets and sticks to them?  Currently, according to reports, OPEC is over producing by about 500 – 600K barrels per day over its 30 million barrel per day target.   Already, Libya, Iran, Ecuador, and Venezuela have called on the cartel to cut production, but Saudi Arabia, the key swing producer, has little ability to measure whether other members of the cartel have cut production and the four aforementioned countries are hardly the most transparent.


While OPEC in theory can control supply (although in practice we aren’t so sure), the reality remains that the biggest issue is demand from the world’s largest consumer – the United States.   Currently, the U.S.’s oil imports from OPEC are the lowest they have been in 30 years.   Specifically, in August, OPEC’s share of U.S. oil imports dropped to 40% versus the 1976 peak of 88%.


With Brent Crude down over -27% in the YTD and WTI down over -22%, it is no surprise that OPEC is a bit rattled.  In the long run, this has the potential to be a decent tail wind for the U.S. economy, although in the short run, this quick and decisive move in oil may have some negative derivative impacts.


Currently, the gap between U.S. corporate bonds and Treasuries is at 124 basis points, near the widest level of the year.  Conversely, European corporate spreads are near their tightest levels.   Not surprisingly, the likely culprit is the price of oil as energy bonds are the largest industry grouping in the high yield market domestically.  Speaking of which, if you want any over levered short ideas in the Energy and MLP sector, definitely email us at , because we have a plethora.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.28-2.38%

SPX 2011-2066

RUT 1153-1188

USD 87.45-88.51

EUR/USD 1.23-1.25

WTI Oil 73.90-78.11


Keep our head up and stick on the ice,


Daryl G. Jones

Director of Research 


Risky Business - 11.24.14 Chart


Takeaway: In today's Macro Playbook, we chart the domestic growth slowdown across a variety of indicators. Defensives > cyclicals in the stock market.


Long Ideas/Overweight Recommendations

  1. iShares National AMT-Free Muni Bond ETF (MUB)
  2. iShares 20+ Year Treasury Bond ETF (TLT)
  3. Vanguard Extended Duration Treasury ETF (EDV)
  4. Health Care Select Sector SPDR Fund (XLV)
  5. Consumer Staples Select Sector SPDR Fund (XLP)

Short Ideas/Underweight Recommendations

  1. iShares Russell 2000 ETF (IWM)
  2. SPDR S&P Regional Banking ETF (KRE)
  3. iShares MSCI European Monetary Union ETF (EZU)
  4. iShares MSCI France ETF (EWQ)
  5. SPDR S&P Oil & Gas Exploration & Production ETF (XOP)




  • Global Growth Slowdown Continues: With Japan in a deep recession and both the ECB (Eurozone) and PBoC (China) confirming what the recent economic data has been suggesting (i.e. marked slowing), it’s a trivial matter to proclaim that global growth is slowing. What is less trivial to anyone who anchors on [outrageously incongruent] Consensus Macro and/or regional Fed surveys is that growth is slowing fairly markedly in the U.S. as well. In the spirit of not cherry-picking #GrowthSlowing data, we thought we’d take this opportunity to highlight a broad swath of U.S. economic data below. As it is plain to see, the vast majority of the key economic indicators are slowing quite ardently.
  • In Equities, We Still Like Defensives > Cyclicals: In the spirit of our #Quad4 theme – which is continues to be confirmed by both the data and the market [leadership] – we continue to favor the slow-growth, yield-chasing sectors and style factors that have worked for us all year in conjunction with our call for lower long-term interest rates. Such defensive equity exposures continue to sit atop the YTD performance table, trouncing the cyclical exposure which continues to be favored by the Consensus Macro community by a wide margin. One could drive the proverbial “truck” through the 1835bps spread between the YTD performance of Healthcare (XLV) and Consumer Discretionary (XLY)!




























***CLICK HERE to download the full TACRM presentation.***



#Quad4 (introduced 10/2/14): Our models are forecasting a continued slowing in the pace of domestic economic growth, as well as a further deceleration in inflation here in Q4. The confluence of these two events is likely to perpetuate a rise in volatility across asset classes as broad-based expectations for a robust economic recovery and tighter monetary policy are met with bearish data that is counter to the consensus narrative.


Early Look: Building Expectations (11/20)


#EuropeSlowing (introduced 10/2/14): Is ECB President Mario Draghi Europe's savior? Despite his ability to wield a QE fire hose, our view is that inflation via currency debasement does not produce sustainable economic growth. We believe select member states will struggle to implement appropriate structural reforms and fiscal management to induce real growth.


Top Ten Reasons to Stay Short the Euro (11/5)


#Bubbles (introduced 10/2/14): The current economic cycle is cresting and the confluence of policy-induced yield-chasing and late-cycle speculation is inflating spread risk across asset classes. The clock is ticking on the value proposition of the latest policy to inflate as the prices many investors are paying for financial assets is significantly higher than the value they are receiving in return.


#Bubbles: S&P500 Levels, Refreshed (11/18)


Best of luck out there,




Darius Dale

Associate: Macro Team


About the Hedgeye Macro Playbook

The Hedgeye Macro Playbook aspires to present investors with the robust quantitative signals, well-researched investment themes and actionable ETF recommendations required to dynamically allocate assets and front-run regime changes across global financial markets. The securities highlighted above represent our top ten investment recommendations based on our active macro themes, which themselves stem from our proprietary four-quadrant Growth/Inflation/Policy (GIP) framework. The securities are ranked according to our calculus of the immediate-term risk/reward of going long or short at the prior closing price, which itself is based on our proprietary analysis of price, volume and volatility trends. Effectively, it is a dynamic ranking of the order in which we’d buy or sell the securities today.

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 80.47%
  • SHORT SIGNALS 78.70%