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MONDAY MORNING RISK MONITOR: KEEP YOUR EYES ON RUSSIA

Takeaway: Russia looks increasingly unstable as Sberbank moves into dangerous CDS territory.

Current Ideas:

MONDAY MORNING RISK MONITOR: KEEP YOUR EYES ON RUSSIA - 19.2

 

Key Takeaway:

Russia remains a major area of global risk exposure. Russia's largest bank, Sberbank, which holds roughly half of all retail deposits for the country, is now trading at over 400 bps on its credit default swaps. The "danger zone" is generally regarded as anything north of 300 bps. With oil continuing to plunge following OPEC's move to drive marginal shale producers out of business, the embedded risk in Russia's banking system is growing quickly. Consider this simple example. Energy still accounts for 20-25% of Russia's GDP, and energy prices have fallen ~30% in the last two months. Multiplying those two weightings would imply that Russia's economy is at risk of suffering a decline of 6-7.5%. Compare that with the 8.2% decline experienced by the US Economy in 4Q08 during the height of the US Great Recession.

 

The XLF rose 0.78% last week, as stocks rose globally, outperforming the S&P 500, which rose 0.2%.  The Global Dow rose 0.07%.  Financials are performing well in 2014 at +11.6%, right in the middle of sector performance with Healthcare the highest (+25.6%) and Energy the lowest (-9.8%).

 

Financial Risk Monitor Summary

 • Short-term(WoW): Positive / 6 of 12 improved / 1 out of 12 worsened / 5 of 12 unchanged

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

 • Long-term(WoW): Positive / 2 of 12 improved / 0 out of 12 worsened / 10 of 12 unchanged

 

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1. U.S. Financial CDS -  Swaps showed broad tightening last week with CDS for 25 out of 27 domestic financial institutions tightening.    

 

Tightened the most WoW: CB, MMC, AIG

Widened the most/ tightened the least WoW: UNM, GS, WFC

Tightened the most MoW: MMC, ACE, AIG

Widened the most MoM: GNW, TRV, UNM

 

MONDAY MORNING RISK MONITOR: KEEP YOUR EYES ON RUSSIA - 1 2

 

2. European Financial CDS - Swaps also were mostly tighter in Europe last week. At the median, European swaps tightened by -8.5%.  Only Greek and Russian bank CDS widened modestly: Greece by about 3.1% and Russia by 2.5%. We would call out Russia's Sberbank, which is now north of 400 bps, reflecting the rising risk in the Russian economy. 

 

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3. Asian Financial CDS, similar to other global markets, tightened last week. The Chinese stock market had its best week in four years, and the Bank of China showed the second biggest tightening in the Asian market.

 

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4. Sovereign CDS – Sovereign swaps mostly tightened over last week. Spanish sovereign swaps tightened by -12.5% (-13 bps to 91 ) and American sovereign swaps widened by 8.9% (1 bps to 18).

 

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5. High Yield (YTM) Monitor – High Yield rates rose 3.4 bps last week, ending the week at 6.14% versus 6.10% the prior week.

 

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6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 1.0 points last week, ending at 1882.

 

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7. TED Spread Monitor – The TED spread fell 0.4 basis points last week, ending the week at 22.1 bps this week versus last week’s print of 22.49 bps.

 

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8. CRB Commodity Price Index – The CRB index fell -4.5%, ending the week at 254 versus 266 the prior week. As compared with the prior month, commodity prices have decreased -6.7% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

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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 2 bps to 8 bps.

 

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10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index fell less than 1 basis point last week, ending the week at 2.58%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.

 

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11. Chinese Steel – Steel prices in China fell 0.6% last week, or 17 yuan/ton, to 2948 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

 

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12. 2-10 Spread – Last week the 2-10 spread tightened to 170 bps, -11 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

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13. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.5% upside to TRADE resistance and 0.9% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: KEEP YOUR EYES ON RUSSIA - 14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


December 1, 2014

December 1, 2014 - Slide1

 

BULLISH TRENDS

December 1, 2014 - Slide2

December 1, 2014 - Slide3

December 1, 2014 - Slide4

December 1, 2014 - Slide5

 

BEARISH TRENDS

 

December 1, 2014 - Slide7 

December 1, 2014 - Slide8

December 1, 2014 - Slide9

December 1, 2014 - Slide10

December 1, 2014 - Slide11

December 1, 2014 - Slide12
December 1, 2014 - Slide13

 


Oil, Russia and Italy

Client Talking Points

OIIL

If consensus didn’t have inflation expectations (instead of #quad4 deflation), oil wouldn’t be moving like this; with the refreshed risk range of $63.86-71.12, realize that a lot of bad things happen to levered equities (MLPs) and high yield debt, even if this crash in oil “bounces” back to the top-end of my range.

RUSSIA

Ruble down 6% since Friday (-40% year-to-date) making this the biggest FX crash since 1998 (global macro market #Intereconnectedness mattered then, and it should now) – Russian stocks -3.4% to -32.1% year-to-date.

ITALY

Amidst a broad base of slowing global economic data this morning (Japanese Auto Sales -13.5% year-over-year for NOV!), Italy reminds ECB President Mario Draghi that he has not been able to ban recessions; Italy Q3 GDP -0.5% year-over-year and the Italian stock market -1.3% remains bearish TREND despite huge QE expectations going into ECB on Thursday.

Asset Allocation

CASH 64% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 0%
FIXED INCOME 30% INTL CURRENCIES 6%

Top Long Ideas

Company Ticker Sector Duration
EDV

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.

TLT

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).

XLP

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

TWEET OF THE DAY

Bulls will point to Cyber Monday as saving grace to poor brick&mortar sales. They'd better be right. No room for error at these valuations.

@HedgeyeRetail

QUOTE OF THE DAY

Only those who dare to fail greatly can ever achieve greatly.

-Robert. F. Kennedy

STAT OF THE DAY

CRB Commodities Index had a -5.5% weekly loss to -9.2% year-to-date and Silver moved into crash mode, dropping -5.5% on the week to -20.4% year-to-date.


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CHART OF THE DAY: Slide #53 from Our Q4 Macro Themes Deck

 

CHART OF THE DAY: Slide #53 from Our Q4 Macro Themes Deck - chart1


Deflation's Nemesis

“Deflation is every central bank’s nemesis…”

-James G. Rickards

 

After a wonderful Thanksgiving weekend, I know that’s what some of you are thinking about this morning – some deflation of that inflating waist-line. I sure am! Everything related to a perpetual inflation expectation of commodity prices is too.

 

The aforementioned quote from Jim Rickards has critical follow on thoughts to consider about #deflation: “… because it is difficult to reverse, impossible to tax, and makes sovereign debt unpayable by increasing the value of real debt.” (The Death of Money, pg 214)

 

Think about that from a levered upstream-Energy MLP’s perspective (Linn Energy, LINE), and you’ll get the risk management point. Deflating the oil price is difficult to reverse, impossible to “dividend”, and makes the value of their financial leverage a major concern.

Deflation's Nemesis - Deflation cartoon 10.02.2014

 

Back to the Global Macro Grind

 

With MLP’s (Master Limited Partnerships) down -3.4% on the week (Alerian MLP ETF), the #OldWall will yawn, and say something like “it’s already priced in” and it “outperformed”, uh, Russia (RSX), last week.

 

Roger that.

 

And the biggest currency crisis since 1998 (Russian Rubles -6% since Friday’s close, crashing -40% YTD) and its interconnected crashing of the Russian stock market (down another -3.4% this morning after dropping -8% last week to -32.5% YTD) is #NoWorries too…

 

Admittedly, the perma-bull case for global growth and inflation expectations is getting more entertaining at this point. The worse real-economic data and #deflationary realities get, the higher the Weimar Nikkei goes! (Japanese auto sales -13.5% y/y in NOV)

 

Away from the “Dow” being +0.1% last week, there was a lot of money to be made on the bear side of it all:

 

  1. West Texas Crude Oil continued to crash, -13.5% on the week to -28.1% YTD
  2. Energy Stocks (XLE) dropped -9.8% on the week to -9.8% YTD
  3. Basic Materials (XLB) deflated -3.0% on the week to +6.4% YTD
  4. Greek stocks (Athens Index) lost another -3.1% to -17.2% YTD
  5. CRB Commodities Index got tattooed for a -5.5% weekly loss to -9.2% YTD
  6. Silver moved into crash mode, dropping -5.5% on the week to -20.4% YTD

 

I know. No one has any exposure to any of this. Diversified 401ks have an 80% allocation to SPY and 20% to Apple (AAPL).

 

On the bullish side of wacky wide asset class performance #divergences last week:

 

  1. Consumer Discretionary (XLY) stocks, mean reverted to the upside, and led gainers +2.5% to +7.5% YTD
  2. Consumer Staples (XLP) stocks continued their fantastic year, +1.8% on the week to +14.7% YTD
  3. Oh, and our #fav Macro Long for 2015 (Long Bonds) ripped to fresh 6 week highs, in TLT, EDV, etc. terms

 

As you can see in the Chart of The Day (slide 53 of our Q4 Macro Themes Deck) we have Consumer Staples (XLP) and the Long Bond (TLT) on the long side and nothing on the short side of Consumer Discretionary, so we were cool with that.

 

After $107 oil not being a headwind to their thesis in Q2, the perma-bull thesis drift expectation has quickly moved to “Oil Down is good for the consumer” and we get that (so we’re not short XLY), but that doesn’t mean the bull thesis is going to play out.

 

BREAKING: “Black Friday Fizzles – Retail Sales Down -11%” –Bloomberg

 

Spending tumbled an estimated 11 percent over the weekend, the Washington-based National Retail Federation said yesterday. And more than 6 million shoppers who had been expected to hit stores never showed up.”

 

In what seems like a rarity these days, Bloomberg is running something bearish as their #1 US “Economy” story today (mid-terms are over). But is it true? How can it be? I thought the all-time high in cost of living in America for 2014 was going to vanish instantaneously?

 

What if it doesn’t?

 

And what happens when the nasty side of commodity #deflation results in ramping job losses in two of the best hiring States in the last year (Texas and North Dakota). Is that why US jobless claims have been accelerating for 3 straight weeks alongside crashing oil?

 

Or is that why the Russell #Bubble (Russell 2000) has been literally FLAT, for 4 consecutive weeks? Pardon? I thought Bloomberg/CNBC was saying “stocks are up, everything is fine”? Here are the last 4 weekly closing prints for the Russell:

 

  1. 1173
  2. 1173
  3. 1172
  4. 1173

 

Big time bull market there, for the “folks.”

 

We’re going to have to see some bigger time reversals in both jobless claims and consumer spending in the next 4 weeks to reverse what bond yields (10yr crashing -28% YTD to 2.16%) have been to Russell “growth” investors all year long – their storytelling nemesis.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.16-2.28%

SPX 2038-2090

RUT 1153-1190

VIX 11.98-15.53

Yen 116.45-119.12
WTI Oil 63.86-71.12

Copper 2.80-2.98

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Deflation's Nemesis - chart1


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – December 1, 2014


As we look at today's setup for the S&P 500, the range is 52 points or 1.43% downside to 2038 and 1.09% upside to 2090.                                                    

                                                                           

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: 1.69 from 1.70
  • VIX closed at 13.33 1 day percent change of 10.44%

 

MACRO DATA POINTS (Bloomberg Estimates):

  • 9:45am: Markit US Mfg PMI, Nov. final, est. 55 (prior 54.7)
  • 10am: ISM Manufacturing, Nov., est. 58.0 (prior 59)
  • 11:30am: U.S. to sell $24b 3M, $26b 6M bills
  • 12:15pm: Fed’s Dudley speaks in New York
  • 1pm: Fed’s Fischer speaks in New York

 

GOVERNMENT:

    • Takata deadline to respond to 36 questions from NHTSA as part of air-bag investigation
    • 9:30am: Supreme Court issues orders on pending cases
    • 11am: Supreme Court hears arguments in free-speech case over threats made on social media

 

WHAT TO WATCH:

  • China Factory Gauge Drops as Shutdowns Add to Slowdown
  • Moody’s Japan Credit Rating Cut Is Blow to Abe Before Vote
  • Black Friday Fizzles With Consumers as Sales Tumble 11%
  • Black Friday Online Sales Jump 22% as Jobs, Gas Spur Shopping
  • Gold Tumbles on Swiss ‘No’ Vote; Silver Sinks to 5-Year Low
  • Vodafone Said to Weigh Liberty Tie-Up as CEO Plots Next Move
  • Alibaba-Backed Momo Seeks Up to $232m in IPO of Chat App
  • Wanda in Talks to Acquire Lions Gate, MGM in Hollywood Push
  • U.S. Fast-Food Workers Fighting for Higher Wages Plan to Strike
  • Wells Fargo Accused of Chicagoland Predatory Loans in Suit
  • Daimler to Invest EU12b-EU14b in Electric Cars: Welt am Sonntag
  • Zell Confirms Bid for Grocery Stores to Be Shed by Albertsons
  • ‘Hunger Games’ Installment Collects $56.9m at Box Office
  • Brad Pitt Movie Is Piracy Hit After Sony Studio Cyberattack
  • Macau’s Nov. Casino Revenue Falls for Sixth Straight Month
  • German Manufacturing Slump Pulls Euro Area Near Stagnation

 

EARNINGS:

    • Fifth Street Finance (FSC) 7am, $0.26
    • Thor Industries (THO) 4:15pm, $0.82

                                                                                                                               

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • OPEC Inaction Spurs Survival of Fittest as Oil Tumbles Below $65
  • Gold Advances With Silver as Traders Close Out Bearish Bets
  • Commodities Retreat to Five-Year Low as Oil Tumbles With Copper
  • Japan Dairies Losing Cost Battle as Abe Weakens Yen: Commodities
  • Swiss Gold Rejection Deals Blow to Investors Hurt by Slump
  • Surprise End to Indian Gold-Import Controls Seen Boosting Demand
  • Steel Rebar Declines on Weak Winter Demand, Higher Mill Output
  • Glencore, Merafe Sign Union Agreement to End Ferrochrome Strike
  • Iran Wary of Oil ‘Shock Therapy’ as OPEC Vies for Market
  • China Winning in OPEC Price War as Hoarding Accelerates: Energy
  • Miners ‘Covering Their Eyes’ as China Commodity Cliff Looms
  • Soybeans Extend Weekly Drop as Rains Boost South Amercian Crop
  • Amplats Sees 2014 Profit Down at Least 20% on Strike
  • Gold ETF Volatility Soars as Dollar, Oil Tame Inflation: Options

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


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