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Hedgeye's Morning Macro Call with CEO Keith McCullough 12/8

CEO Keith McCullough takes a look at global markets and the economy and explains why he remains concerned.

***This is a complimentary peek behind-the-macro-scenes of our daily Morning Macro Call for institutional subscribers.***


MONDAY MORNING RISK MONITOR: FROM RUSSIA WITH LOVE

Takeaway: Russia remains front and center on our global risk management focus list this morning.

Current Ideas:

MONDAY MORNING RISK MONITOR: FROM RUSSIA WITH LOVE - 19.2

 

Key Takeaway:

From a risk management standpoint, we remain very focused on the rising risk of a Russian banking crisis. In a nutshell, Western sanctions are driving capital out of the country causing the Ruble to weaken. Falling oil prices are compounding the problem. The CEO of Sberbank, Russia's largest bank with 46% deposit share, said back on November 14th that if the Russian economy were to decline by more than 1.2% in 2015 Sberbank would need the State to bail it out. Sberbank's CDS tacked on another 97 bps over the week, rising to 503 bps this week.

 

Russia's GDP was most recently growing at 0.7% Q/Q annualized. Energy contributes between 20-25% of GDP and oil prices are down by ~30%. This implies a drag on GDP of -6-8% as we roll into 2015. In other words, if sanctions aren't removed and oil prices don't bounce, the Ruble should continue to lose value and Russia will need to bail out its banking system at a time when it's already hemorrhaging cash ($100bn/year) from falling oil prices. That makes for a nasty mix with US equities at/near all time highs. 

 

Financial Risk Monitor Summary

 • Short-term(WoW): Negative / 3 of 12 improved / 3 out of 12 worsened / 6 of 12 unchanged

 • Intermediate-term(WoW): Positive / 6 of 12 improved / 4 out of 12 worsened / 2 of 12 unchanged

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

 

 

MONDAY MORNING RISK MONITOR: FROM RUSSIA WITH LOVE - 15.3

 

1. U.S. Financial CDS -  Swaps widened for 13 out of 27 domestic financial institutions.  Genworth Financial widened the most, continuing to exhibit volatility after the company's early November announcement that a review of its claims reserves and goodwill would result in a combined charge of over a billion dollars pre-tax.  Travelers tightened the most.

 

Tightened the most WoW: TRV, ACE, AGO

Widened the most WoW: GNW, C, MMC

Tightened the most WoW: MMC, CB, ACE

Widened the most/ tightened the least MoM: AON, XL, GS

 

MONDAY MORNING RISK MONITOR: FROM RUSSIA WITH LOVE - 1

 

2. European Financial CDS - Swaps mostly tightened in Europe last week with an average -4.7% move.  There were a few extreme movers in the region.  Russia continued to show extreme widening WoW: +97 bps, +23.9%.  Sberbank's CDS at 503 bps flag reflects the rising risk in the Russian economy.  Portugal's Banco Espirito Santo tightened to most last week (-88 bps, -17.8%) as Portuguese authorities near a sale of a few of the collapsed bank's parts.

 

MONDAY MORNING RISK MONITOR: FROM RUSSIA WITH LOVE - 2

 

3. Asian Financial CDS mostly widened last week with a median 2.9% move.  Significant tightening in India skewed the average move down to -0.4%. 

 

MONDAY MORNING RISK MONITOR: FROM RUSSIA WITH LOVE - 17

 

4. Sovereign CDS – European Sovereign Swaps mostly tightened over last week. Italian sovereign swaps tightened by -10.7% (-14 bps to 115 ) and American sovereign swaps widened by 10.3% (2 bps to 18).  American CDS displayed a divergence from the stock market's (S&P 500) flat performance for the week.

 

MONDAY MORNING RISK MONITOR: FROM RUSSIA WITH LOVE - 18

 

MONDAY MORNING RISK MONITOR: FROM RUSSIA WITH LOVE - 3

 

MONDAY MORNING RISK MONITOR: FROM RUSSIA WITH LOVE - 4

 

5. High Yield (YTM) Monitor – High Yield rates rose 19.3 bps last week, ending the week at 6.33% versus 6.14% the prior week.

 

MONDAY MORNING RISK MONITOR: FROM RUSSIA WITH LOVE - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 10.0 points last week, ending at 1872.

 

MONDAY MORNING RISK MONITOR: FROM RUSSIA WITH LOVE - 6

 

7. TED Spread Monitor – The TED spread rose 0.2 basis points last week, ending the week at 22.3 bps this week versus last week’s print of 22.06 bps.

 

MONDAY MORNING RISK MONITOR: FROM RUSSIA WITH LOVE - 7

 

8. CRB Commodity Price Index – The CRB index fell -5.4%, ending the week at 252 versus 267 the prior week. As compared with the prior month, commodity prices have decreased -6.2% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

MONDAY MORNING RISK MONITOR: FROM RUSSIA WITH LOVE - 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 0 bps to 8 bps.

 

MONDAY MORNING RISK MONITOR: FROM RUSSIA WITH LOVE - 9

 

10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index rose 2 basis points last week, ending the week at 2.632% versus last week’s print of 2.608%. 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: FROM RUSSIA WITH LOVE - 10

 

11. Chinese Steel – Steel prices in China fell 1.1% last week, or 33 yuan/ton, to 2915 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: FROM RUSSIA WITH LOVE - 12

 

12. 2-10 Spread – Last week the 2-10 spread tightened to 166 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: FROM RUSSIA WITH LOVE - 13 2

 

13. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.3% upside to TRADE resistance and 3.3% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: FROM RUSSIA WITH LOVE - 14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


Retail Callouts (12/8): Key KSS 10Q Callouts, Hourly E-comm Analysis

Takeaway: KSS 10Q shows bifurcation store vs e-comm comp. Online shopping patterns suggests that retailers define peak periods by promotional cadence.

EVENTS TO WATCH

Retail Callouts (12/8): Key KSS 10Q Callouts, Hourly E-comm Analysis  - 12 8 chart2

 

 

COMPANY HIGHLIGHTS

 

KSS - 10Q: e-Commerce

Takeaway: KSS released its 10Q on Friday. The most notable takeaway is 31.6% growth in the online channel. Despite the big jump we still saw a sequential deceleration on the 2yr because of the replatform during 2Q13.  Specifically, when we look at the quarterly comp composition (chart 2), we see that after backing out the e-commerce growth, it implies that the store comp was -4%, matching new lows. Juicy and Izod aren't really having the desired effect for the bulls. KSS remains our top short.

 

 Retail Callouts (12/8): Key KSS 10Q Callouts, Hourly E-comm Analysis  - 12 8 chart1

 

Retail Callouts (12/8): Key KSS 10Q Callouts, Hourly E-comm Analysis  - 12 8 chart3

 

Black Friday Weekend Online Shopping

(http://www.sli-systems.com/resources/press-releases/cyber-monday-1000-pm-est-revealed-peak-online-holiday-shopping-hour)

 

Takeaway: There's nothing investable about this chart, but we find the content to be fascinating. This shows the hourly trend in shopping online over the Black Friday weekend. Three takeaways…

  1. The holiday shopping season appears to being in earnest online at about 8pm on Thanksgiving night.
  2. The notion that Cyber-Monday is being 'pulled forward' to Black Friday does not appear to be true.  Yes, there is a step-up from Thanksgiving Day levels, but still nowhere compared to the spike we saw on Monday.
  3. Notice the huge drop-off from Cyber-Monday to Tuesday.  Is that because people all of a sudden don't want to shop? Absolutely not. That's when the online promotional spigot all but shuts down -- at least relative to what had been in place the preceding four days. This is the 'tail wagging the dog', in that consumers will shop when the promotions are there. When the deals go away, so do shoppers.

 Retail Callouts (12/8): Key KSS 10Q Callouts, Hourly E-comm Analysis  - 12 8 chart4

 

OTHER NEWS

 

DLIA - Teen Clothing Retailer Delia’s Files for Bankruptcy

(http://www.bloomberg.com/news/2014-12-08/teen-clothing-retailer-delia-s-files-for-bankruptcy.html)

 

BEBE - Bebe confirms data breach hit U.S. retail stores

(http://fortune.com/2014/12/05/bebe-data-breach/)

 

AMZN - Instacart Is Raising North Of $100 Million At A $2 Billion Valuation

(http://techcrunch.com/2014/12/05/instacart-2b-kleiner/)

 

Black Friday’s momentum sees slowdown with Canadian shoppers

(http://globalnews.ca/news/1710620/black-fridays-momentum-sees-slowdown-with-canadian-shoppers/?hootPostID=08fdc89710f27837f0f01230f0362993)

Retail Callouts (12/8): Key KSS 10Q Callouts, Hourly E-comm Analysis  - 12 8 chart5

 

AMZN - Amazon Gets $5 Million From N.Y. to Bring 500 Jobs to Manhattan

(http://www.wwd.com/retail-news/direct-internet-catalogue/amazon-gets-5-million-from-ny-to-bring-500-jobs-to-manhattan-8060133?module=hp-wirestories)

 

Nintendo Heads for Best Holiday in Years as Profit Seen Triplin

(http://www.bloomberg.com/news/2014-12-07/nintendo-heads-for-best-holiday-in-years-as-profit-seen-tripling.html

 

FIVE - Five Below names COO and retail veteran Joel Anderson as CEO

(http://www.chainstoreage.com/article/five-below-names-coo-and-retail-veteran-joel-anderson-ceo)

 

 

 


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#Deflation

Client Talking Points

EURO

After being burnt another -1.3% last week (-10.1% in the last 6 months), the Euro is making fresh year-to-date lows this morning at $1.22 vs. USD – via #StrongDollar, this is only going to perpetuate the #deflation. Swiss CPI is -0.1% year-over-year for NOV. 

OIL

Oil saw no bounce last week (-0.8% WTI week-over-week) and is down another -1.1% this morning to $65.10 with no immediate-term support to $62.21. In energy land, small/mid cap equity and high yield/junk do not like the #deflation risk.

UST 10YR

The UST 10YR Yield bounced on the 1st good jobs data in over a month (jobless claims rising), but we think it’s just another head-fake within the UST 10YR’s current 2.16%-2.34% immediate-term risk range; #deflation is going to freak the Fed out. 

Asset Allocation

CASH 60% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 0%
FIXED INCOME 33% INTL CURRENCIES 7%

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

We're going live with @KeithMcCullough on @HedgeyeTV at 830ET. Watch here:

https://www.youtube.com/watch?v=fVWiGdPpZas&feature=youtu.be

@Hedgeye

QUOTE OF THE DAY

The only lifelong, reliable motivations are those that come from within, and one of the strongest of those is the joy and pride that grow from knowing that you've just done something as well as you can do it.

-Lloyd Dobens

STAT OF THE DAY

Japanese Yens burned another -2.3% last week (lost -15.6% of their value in the last 6 months) and the U.S. Dollar Index rose another +1.1% on the week (+11.2% in the last 6 months).


December 8, 2014

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BULLISH TRENDS

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December 8, 2014 - Slide5

 

BEARISH TRENDS

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CHART OF THE DAY: #Quad4 Deflation

CHART OF THE DAY: #Quad4 Deflation - 12.08.14 Chart

 

Here's a little snapshot of our Q4 Macro Theme #Quad4Deflation: 1) US 5yr Breakevens dropped another -4 basis pts on the wk to 1.36% (crashing -26%, or -47bps, YTD) 2) CRB Commodities Index deflating another -0.8% last week to -9.9% YTD


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

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