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Keith's Macro Notebook 12/22: Yen | Russia | Sentiment

 

Hedgeye CEO Keith McCullough shares the top three things in his macro notebook this morning.


MONDAY MORNING RISK MONITOR: GROWING HEADWINDS

Takeaway: Central banks stepped in last week to stanch the bleeding but fundamental headwinds are growing.

Current Ideas:

MONDAY MORNING RISK MONITOR: GROWING HEADWINDS - 19

 

Key Takeaway:

Last week saw another wild ride as the market entered the week with rising concerns about the fallout of falling oil and a potential Russian collapse, but exited the week on a higher note in response to the Fed and ECB talking about delaying rate hikes and potentially purchasing assets, respectively. The XLF closed +2% on the week while most of the CDS gauges, on average, ended little changed on the week. 

 

Looking ahead, headwinds prevail. Rising concerns around credit quality fallout in oil-sensitive areas are coupled to ongoing pressure in yield spreads. Translation: rising revenue pressure in conjunction with growing provision expense.

 

 

Financial Risk Monitor Summary

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

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

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

  

MONDAY MORNING RISK MONITOR: GROWING HEADWINDS - 15

 

1. U.S. Financial CDS -  Swaps tightened for 21 out of 27 domestic financial institutions as the stock market rose on news that the Federal Reserve would not raise interest rates in the near future. Of institutions whose CDS widened, Genworth Financial widened the most (+30 bps) on its announcement that it has not yet completed its annual review of long-term care insurance active life margins.

 

Tightened the most WoW: PRU, MTG, ACE

Widened the most WoW: GNW, MBI, AGO

Tightened the most WoW: MMC, ACE, CB

Widened the most MoM: GNW, AGO, GS

 

MONDAY MORNING RISK MONITOR: GROWING HEADWINDS - 1

 

2. European Financial CDS - Swaps mostly widened in Europe last week, but results were somewhat mixed.  15 institutions' CDS tightened while 21 widened. Russia's Sberbank CDS continued to widen, increasing by 16 bps.  Sberbank's risk profile is well into the red with CDS at 583 bps.  

 

MONDAY MORNING RISK MONITOR: GROWING HEADWINDS - 2

 

3. Asian Financial CDS mostly widened last week with Japan's Sumitomo Mitsui leading the group (+3 bps, +4.9%).  Chinese CDS showed the smallest moves, which contrasts danger signals shown elsewhere such as the interbank rate, which rose +48 bps, and the price of Chinese steel, which fell -1.6% during the week.

 

MONDAY MORNING RISK MONITOR: GROWING HEADWINDS - 17

 

4. Sovereign CDS – Sovereign swaps mostly tightened over last week, particularly across Europe. The catalyst for tightening was the Fed signaling it would not raise rates in the near future, and the ECB signaling it is ready to pursue asset purchases.

 

MONDAY MORNING RISK MONITOR: GROWING HEADWINDS - 18

 

MONDAY MORNING RISK MONITOR: GROWING HEADWINDS - 3

 

MONDAY MORNING RISK MONITOR: GROWING HEADWINDS - 4

 

5. High Yield (YTM) Monitor – High Yield rates fell 18.5 bps last week, ending the week at 6.63% versus 6.82% the prior week.

 

MONDAY MORNING RISK MONITOR: GROWING HEADWINDS - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 5.0 points last week, ending at 1848.

 

MONDAY MORNING RISK MONITOR: GROWING HEADWINDS - 6

 

7. TED Spread Monitor – The TED spread fell 0.8 basis points last week, ending the week at 21.7 bps this week versus last week’s print of 22.49 bps.

 

MONDAY MORNING RISK MONITOR: GROWING HEADWINDS - 7

 

8. CRB Commodity Price Index – The CRB index fell -2.7%, ending the week at 240 versus 247 the prior week. As compared with the prior month, commodity prices have decreased -10.4% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

MONDAY MORNING RISK MONITOR: GROWING HEADWINDS - 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 was unchanged at 8 bps.

 

MONDAY MORNING RISK MONITOR: GROWING HEADWINDS - 9

 

10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index rose 48 basis points last week, ending the week at 3.13% versus last week’s print of 2.65%. 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: GROWING HEADWINDS - 10

 

11. Chinese Steel – Steel prices in China fell 1.6% last week, or 47 yuan/ton, to 2832 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: GROWING HEADWINDS - 12

 

12. 2-10 Spread – Last week the 2-10 spread tightened to 152 bps, -2 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR: GROWING HEADWINDS - 13

 

13. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 2.0% upside to TRADE resistance and 1.1% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: GROWING HEADWINDS - 14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 

 


Call Invite | Putting Companies Through a Linguistic Polygraph Test (Statement Analysis)

Takeaway: We're hosting a call tomorrow, December 23 at 11am EST with Mark McClish, creator of the Statement Analysis system.

Call Details:

Toll Free Number:

Toll Number:

Conference ID/Password: 13597957

Materials: CLICK HERE

 

“Statement Analysis is the most accurate way of determining if a person is lying in a verbal or written statement. A person cannot give a lengthy deceptive statement without revealing that it is a lie. This is because people's words will betray them.”

-Mark McClish, creator of the Statement Analysis method

 

HOW WE ARE USING STATEMENT ANALYSIS

Reading conference call/analyst meeting transcripts is a key part of the analyst’s job.    We all use words to define our reality, and our choice of words can be revealing.  The premise of Statement Analysis is that a person’s choice of specific words can reveal when there might be an attempt at deception.  This Statement Analysis exercise looks exclusively at a company’s written and verbal statements.  Using these hidden clues, we can dig deeper into a company’s public pronouncements for signals of potential concerns in a company’s reporting.

 

TIMING OF THE CALL

On December 23rd at 11am we will be hosting a conference call on Statement Analysis and how we apply it to our own financial analysis.  On the call will be Mark McClish, creator of the Statement Analysis system and a federal law enforcement official for the past 26 years. We will provide the names of the companies discussed on the day of the call.

 

MARK MCCLISH BIO

In 1990, Mark was promoted to the position of Inspector/Instructor at the U.S. Marshals Service Training Academy located at the Federal Law Enforcement Training Center in Glynco, GA. He taught at the Training Academy for nine years serving as the lead instructor on interviewing techniques. He used this time to study deceptive statements and conduct research on deception. Based on his findings, he created the Statement Analysis techniques for detecting deception in a verbal and written statement. While assigned to the Training Academy Mark was also the lead defensive tactics instructor for the Marshals Service.

 

Mark retired from the Marshals Service in 2009 and started Advanced Interviewing Concepts. His company provides interviewing skills training and assists investigators in analyzing statements.

 

WHAT WE INTEND TO ACCOMPLISH ON THE CALL

On the call we will focus on:

  • Why Statement Analysis is important.
  • Mark’s process and findings.
  • Provide analysis on select companies. 
  • Identify areas within specific corporate releases that bear closer scrutiny, and
  • Compare company comments with their financial statements.

 

The call will last about an hour including time for Q&A.

 

 

Howard Penney

Managing Director

 

Fred Masotta

Analyst


Early Look

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Call Invite | Putting Companies Through a Linguistic Polygraph Test (Statement Analysis)

Takeaway: We're hosting a call tomorrow, December 23 at 11am EST with Mark McClish, creator of the Statement Analysis system.

Call Details:

Toll Free Number:

Toll Number:

Conference ID/Password: 13597957

Materials: CLICK HERE

 

“Statement Analysis is the most accurate way of determining if a person is lying in a verbal or written statement. A person cannot give a lengthy deceptive statement without revealing that it is a lie. This is because people's words will betray them.”

-Mark McClish, creator of the Statement Analysis method

 

HOW WE ARE USING STATEMENT ANALYSIS

Reading conference call/analyst meeting transcripts is a key part of the analyst’s job.    We all use words to define our reality, and our choice of words can be revealing.  The premise of Statement Analysis is that a person’s choice of specific words can reveal when there might be an attempt at deception.  This Statement Analysis exercise looks exclusively at a company’s written and verbal statements.  Using these hidden clues, we can dig deeper into a company’s public pronouncements for signals of potential concerns in a company’s reporting.

 

TIMING OF THE CALL

On December 23rd at 11am we will be hosting a conference call on Statement Analysis and how we apply it to our own financial analysis.  On the call will be Mark McClish, creator of the Statement Analysis system and a federal law enforcement official for the past 26 years. We will provide the names of the companies discussed on the day of the call.

 

MARK MCCLISH BIO

In 1990, Mark was promoted to the position of Inspector/Instructor at the U.S. Marshals Service Training Academy located at the Federal Law Enforcement Training Center in Glynco, GA. He taught at the Training Academy for nine years serving as the lead instructor on interviewing techniques. He used this time to study deceptive statements and conduct research on deception. Based on his findings, he created the Statement Analysis techniques for detecting deception in a verbal and written statement. While assigned to the Training Academy Mark was also the lead defensive tactics instructor for the Marshals Service.

 

Mark retired from the Marshals Service in 2009 and started Advanced Interviewing Concepts. His company provides interviewing skills training and assists investigators in analyzing statements.

 

WHAT WE INTEND TO ACCOMPLISH ON THE CALL

On the call we will focus on:

  • Why Statement Analysis is important.
  • Mark’s process and findings.
  • Provide analysis on select companies. 
  • Identify areas within specific corporate releases that bear closer scrutiny, and
  • Compare company comments with their financial statements.

 

The call will last about an hour including time for Q&A.

 

 

Howard Penney

Managing Director

 

Fred Masotta

Analyst


THE HEDGEYE MACRO PLAYBOOK

Takeaway: The current degree of momentum deterioration at the single stock level is well shy of the OCT '07 bull-market top, implying further upside.

THEMATIC INVESTMENT CONCLUSIONS

Long Ideas/Overweight Recommendations

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

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)

 

QUANT SIGNALS & RESEARCH CONTEXT

More Upside for the S&P 500?: One of the conventional “isms” of stock market analysis is that benchmark indices tend to peak well after broad-based signs of deterioration have emerged “underneath the hood”, so to speak.

 

There’s a number of ways to measure market breadth on a trending basis (e.g. % of stocks making new highs, % of stocks correcting, % of stocks crashing, etc.), but we thought we’d focus on a very simple measure(s) in order to hone in on where we might be in the context of the U.S. stock market cycle. Such honing in is especially critical in the context of what some have termed the “7-year itch”: 2000 bull-market top => 2007 bull-market top => 2014 bull-market top?

 

In the charts below, we show the percentage of Russell 3000 constituent stocks that were below their respective 50-day and 200-day moving averages at critical closing price highs in the S&P 500 since mid-2007, ultimately comparing recent peaks with what we have seen historically. Obviously simple moving averages are what they are – i.e. simple – but to the extent we're only using them to measure momentum and NOT to manage risk, we think they are an appropriate measure for our study.

 

The key takeaway is that the current degree of momentum deterioration at the single stock level is well shy of the October 2007 bull-market top, which would tend to support any belief that this current bull market has further upside. How much upside is a conclusion we unfortunately cannot draw from this (or any other) analysis, but at the very least it remains directionally bullish – for now.

 

July 19, 2007 peak:  a considerable degree of negative momentum, with just shy of half of all stocks below their 50DMAs:

 

THE HEDGEYE MACRO PLAYBOOK - BMBI 7 19 07

 

October 9, 2007 peak: a substantial degree of negative momentum, with over half of all stocks below their 50DMAs and nearly 60% of stocks below their 200DMAs:

 

THE HEDGEYE MACRO PLAYBOOK - BMBI 10 9 07

 

April 23, 2010 peak: a substantial degree of positive momentum, with the overwhelming majority of stocks above their 50DMAs and 200DMAs:

 

THE HEDGEYE MACRO PLAYBOOK - BMBI 4 23 10

 

April 29, 2011 peak: a substantial degree of positive momentum, with the overwhelming majority of stocks above their 50DMAs and 200DMAs:

 

THE HEDGEYE MACRO PLAYBOOK - BMBI 4 29 11

 

April 2, 2012 peak: a substantial degree of positive momentum, with the overwhelming majority of stocks above their 50DMAs and 200DMAs:

 

THE HEDGEYE MACRO PLAYBOOK - BMBI 4 2 12

 

September 14, 2012 peak: a substantial degree of positive momentum, with the overwhelming majority of stocks above their 50DMAs and 200DMAs:

 

THE HEDGEYE MACRO PLAYBOOK - BMBI 9 14 12

 

September 18, 2014 peak: a considerable degree of negative momentum, with just shy of half of all stocks below their 50DMAs and 200DMAs:

 

THE HEDGEYE MACRO PLAYBOOK - BMBI 9 18 14

 

December 5, 2014 peak: a noteworthy degree of negative momentum, with nearly 40% of all stocks below their 200DMAs:

 

THE HEDGEYE MACRO PLAYBOOK - BMBI 12 5 14

 

Last price: a noteworthy degree of negative momentum, with nearly 40% of all stocks below their 200DMAs:

 

THE HEDGEYE MACRO PLAYBOOK - BMBI CURRENT

 

Again, this analysis does not imply a considerable degree of further upside for the SPX; nor does it imply that we are now broadly bullish on the U.S. equity market.

 

That being said, we remain bullish on the sectors and style factors that have tended to outperform in historical instances of #Quad4 (i.e. healthcare, consumer staples, utilities, REITs and mega-caps) and this analysis would support an expectation of positive absolute returns for those exposures from here to the extent that market beta remains positive.

 

On that note, Keith's immediate-term risk range for the SPX currently has upside to 2090 and the index remains bullish TREND and TAIL as well. Given the current "poor, but not terrible" state of trending market breadth, one could argue that we need to see a substantial degree of deterioration at the single stock level over the next ~20 point rally for any price near 2090 to be the ultimate crescendo of this raging bull market.

 

THE HEDGEYE MACRO PLAYBOOK - SPX

 

***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.

 

Does Your View on Rates Include the Risk of a “Reflexive Deflationary Spiral”? (12/19)

 

#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.

 

Moscow, We Have a Problem (12/16)

 

#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: “Hedge Fund Hotel” Edition (Part II) (12/8)

 

Best of luck out there,

 

DD

 

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 – keeping in mind that we have equal conviction in each security from an intermediate-term absolute return perspective.


Monday Mashup: BOBE, RT and More

Monday Mashup: BOBE, RT and More - 1

 

Recent Notes

12/15/14 Monday Mashup: DRI, BLMN and More

12/17/14 DRI: Expectations for a Recovery are Premature

12/18/14 Call Invite | Statement Analysis - Putting Companies Through a Linguistic Polygraph Test

12/18/14 DNKN Debacle & Parallels to SBUX

 

Events This Week

Tuesday, December 23rd

  • Hedgeye Call with Mark McClish at 11am EST (Putting Companies Through a Linguistic Polygraph Test)

 

Chart of the Day

Monday Mashup: BOBE, RT and More - 2

 

Recent News Flow

Monday, December 15th

  • BOBE announced CEO Steve Davis has stepped down by mutual agreement with the board, effective immediately.  The board has established an interim office of the chief executive (CFO Mark Hood, BEF President Mike Townsley) to provide ongoing leadership and oversight while they search for a new CEO.
  • DRI was upgraded to market perform from underperform at Telsey Advisory Group with a $54 PT.
  • COSI announced completion of its previously announced rights offering.  Cosi anticipates issuing 13.3 million common shares for gross proceeds of $20 million.

Tuesday, December 16th

  • RT preannounced same-restaurant sales and traffic declines of -1% and -1.3%, respectively.  This compares to same-restaurant sales guidance provided in early October of up +1-2% for the second fiscal quarter.  RT is scheduled to release full second quarter earnings on January 8, 2015.

Wednesday, December 17th

  • PBPB announced it has signed an agreement with a franchisee to develop Potbelly shops in London.  The company expects the franchisee to open 10 Potbelly shops in London over the next five years.
  • KKD announced Jim Morgan will transition from Executive Chairman of the Board to non-executive Chairman of the board, effective January 29, 2015.
  • WEN announced several changes to executive assignments among members of the current Senior Leadership Team that are designed to drive growth and restaurant development for the company.  You can read more about the changes here.
  • QSR announced the appointment of executive officers of Tim Hortons.  Elias Diaz-Sese, former president of BK AsiaPac, was appointed President, Tim Hortons.  Jill Granat, former Senior Vice President, General Counsel, and Secretary of Burger King Worldwide, was appointed General Counsel and Corporate Secretary, Tim Hortons.
  • LOCO celebrated the opening of its newest location at Copperfield in Houston, TX.

Thursday, December 18th

  • DNKN offered up disappointing guidance for both 4Q14 and FY15.  It expects Dunkin’ Donuts U.S. full-year same-store sales growth to be approximately +1.4% in 2014, below the current +1.8% consensus estimate.  This guidance implies that 4Q same-store sales are running in the +0.5-0.8% range, well below the current +2.2% consensus estimate.  In 2015, the company expects to deliver full-year same-store sales growth of +1-3% in the U.S and adjusted EPS of $1.88-1.91 (current consensus estimate is $2.02).
  • COSI holder AB Value Management filed to sell its total stake, 550K shares, through BTIG.  The transaction is expected to occur by December 30th.

 

Sector Performance

The SPX (+3.4%) outperformed the XLY (+1.2%) last week, as both casual dining and quick service stocks, in aggregate, underperformed the XLY Index.

Monday Mashup: BOBE, RT and More - 3

Monday Mashup: BOBE, RT and More - 4

 

XLY Quantitative Setup

The XLY continues to be bullish on an intermediate-term TREND duration.

Monday Mashup: BOBE, RT and More - 5

 

Casual Dining Restaurants

Monday Mashup: BOBE, RT and More - 6

Monday Mashup: BOBE, RT and More - 7

 

Quick Service Restaurants

Monday Mashup: BOBE, RT and More - 8

Monday Mashup: BOBE, RT and More - 9

 

Howard Penney

Managing Director

 

Fred Masotta

Analyst


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