Hedgeye CEO Keith McCullough shares the top three things in his macro notebook this morning.
Hedgeye CEO Keith McCullough shares the top three things in his macro notebook this morning.
Note: Using the z-score in the tables below as a coefficient of variation for standard error helps us flag the relative market positioning of the commodities in the CRB Index. It is not intended as a predictive signal for the reversion to trailing twelve month historical averages. For week-end price data, please refer to “Commodities: Weekly Quant” published at the end of the previous week. Feel free to ping us for additional color.
1. CFTC Net Futures and Options Positioning CRB Index: The Commodities Futures Trading Commission (CFTC) releases “Commitments of Traders Reports” at 3:30 p.m. Eastern Time on Friday. The release usually includes data from the previous Tuesday (Net Positions as of Tuesday Close), and includes the net positions of “non-commercial” futures and options participants. A “Non-Commercial” market participant is defined as a “speculator.” We observe the weekly marginal changes in the overall positioning of “non-commercial” futures and options positions to assess the directionally-biased capitulation risk among those with large, speculative positions.
2. Spot – Second Month Basis Differential: Measures the market expectation for forward looking prices in the near-term.
3. Spot – 1 Year Basis Differential: Measures the market expectation for forward-looking prices between spot and the respective contract expiring 1-year later.
*NOTE* Despite the sell-off in crude oil since the middle of the summer, the futures curve has become much steeper. Jan. 2016 BRENT contracts have widened relative to spot prices. The spot price-1yr differential has widened from around $1.00 at the beginning of October to over $5.00 currently ($5.23 currently). BRENT spot-1Yr. basis differential is the widest of any commodities in the CRB Commodities Index (Jan 2016 contracts are trading nearly +12% higher than Jan 2015 contracts (current spot). Despite the downward pressure on spot prices, the contango in the current curve will provide support to the upside on the expiry roll if the general shape remains the same.
4. Open Interest: Aggregate open interest measures the amount of opened positions in all actively traded futures contract months. Open interest can be thought of as “naked” or “directionally-biased” contracts as opposed to hedgers scalping and providing liquidity. Most of the open interest is created from large speculators or participants who are either: 1) Producers/sellers of the physical commodity hedging their cash market exposure or 2) Large speculators who are directionally-biased on price.
12/01/14 Monday Mashup: YUM, BLMN and More
12/02/14 Long YUM Call Today @10AM
12/03/14 BOBE: The Clock Is Ticking
Monday, December 8th
Tuesday, December 9th
Wednesday, December 10th
Thursday, December 11th
MCD reported a -2.2% decline in global same-store sales for the month of November, missing estimates of -1.9%. We'll have more out on this later today.
Monday, December 1st
Tuesday, December 2nd
Wednesday, December 3rd
Thursday, December 4th
Friday, December 5th
The SPX (+0.4%) outperformed the XLY (-0.4%) last week, as both casual dining and quick service stocks, in aggregate, outperformed the XLY.
From a quantitative perspective, the sector remains bullish on an intermediate-term TREND duration.
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Takeaway: In today's edition of the Macro Playbook, we reiterate our negative bias on Emerging Market asset class beta.
Long Ideas/Overweight Recommendations
Short Ideas/Underweight Recommendations
QUANT SIGNALS & RESEARCH CONTEXT
#EmergingOutflows Continues: Emerging markets continue to suck wind in Q4, in line with our #Quad4 theme. After making the switch from being broadly positive on EM asset class beta to adopting a broadly negative bias in late September, we continue to stress the merits of global capital allocators being underweight EM capital and currency market risk.
Since our 9/23 note titled, “EMERGING MARKETS: THE EM RELIEF RALLY IS LIKELY OVER”, the iShares MSCI Emerging Markets ETF (EEM) is down -3.9%, the WisdomTree Emerging Currency Fund (CEW) is down -5.2%, the iShares JPM EM USD Bond ETF (EMB) is down -1.1% and the Market Vectors EM Local Currency Bond ETF (EMLC) is down -5.8%. To put this performance in perspective, the EEM ETF was up +6.7% over the course of our bullish bias, which began in late March and the VWO (EEM less South Korea) was up +9%.
At the regional level, emerging Europe equities (GUR) are down -10.7% and emerging LatAm equities (GML) are down -12.5%, while emerging Asian equities (GMF) are up a paltry +1% since 9/23. The former returns are perpetuated by Russia (RSX) and Brazil (EWZ) crashing, down -14.9% and -20.7%, respectively, while the latter return is buoyed by gains in China (FXI up +7.4%; CHIX up +18.6%) and India (EPI up +4.2%).
Looking to our Tactical Asset Class Rotation Model (TACRM), we continue to see signals that suggest investors remain under pressure to rotate out of emerging markets, at the margins. A the primary asset class level, TACRM is still generating a “DECREASE EXPOSURE” signal for both EM Equities and Foreign Exchange; those signals have been intact since the weeks ended 10/3 and 9/5, respectively. Their Passive Trend Follower Asset Allocations of 13% and 2% are off -39% and -20% from their respective trailing 3M averages.
At the secondary asset class level, 9 of the bottom 16 Volatility-Adjusted Multi-Duration Momentum Indicator (VAMDMI) readings are explicit emerging market exposures: EM corporate debt (EMCB), Malaysia (EWM), Mexico (EWW), Asian local currency debt (ALD), EM local currency debt (EMLC), EM FX (CEW), Colombia (ICOL), EM USD debt (EMB) and Russia (RSX). Recall that TACRM’s VAMDMI metric adjusts for both volume and volatility, which strengthens the predictive value of the momentum signal (vs. a single-factor model like a SMA or EMA).
All told, lacking a clear catalyst to get positive, we continue to see further downside for EM asset class beta. Stay tuned for a more detailed presentation on emerging markets heading into 2015 after a year of demonstrable underperformance in 2014; the MSCI EM Index is down -1.7% YTD, underperforming the S&P 500 by 1400bps!
***CLICK HERE to download the full TACRM presentation.***
TRACKING OUR ACTIVE MACRO THEMES
#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: Party Hard? (12/8)
#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.
#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.
Best of luck out there,
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.
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.***
Takeaway: Russia remains front and center on our global risk management focus list this morning.
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
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
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.
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%.
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.
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.
6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 10.0 points last week, ending at 1872.
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.
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.
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.
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.
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.
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.
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.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT
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