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RTA Live: July 6, 2015

Here is the replay of today's edition of RTA Live.

 


MONDAY MORNING RISK MONITOR | RISK IS RISING, BUT NOT WHERE YOU THINK

Takeaway: Instead of looking across the Atlantic, investors should be looking across the Pacific.

Key Takeaway:

While most US investors are looking at the big carnival in Greece and Europe this morning, we'd suggest they look in the other direction, towards China, where the real action is happening. 

 

Chinese equity prices are down ~30% in a month. In a month! Meanwhile, prices of Chinese steel continue to collapse (see our chart below) - an indicator we've long watched as a representation of the real underlying activity of China's economy - falling another 2.7% week-over-week. The bottom line is that real economy in China is under growing pressure and the stock market is now collapsing. 

 

As we pointed out last week, the real gauge of whether Europe poses risk to the US is best reflected in the overnight interbank lending markets. This risk can be measured in the TED Spread domestically and in Euribor-OIS in Europe. Neither of these measures have done much of anything on the Greece news. In other words, contagion fears are unfounded for now. If this changes, and those spreads begin to widen we'll be on top of it, but for now Greece/Europe are not pressing issues for the US Financials.

 

Current Ideas:

MONDAY MORNING RISK MONITOR | RISK IS RISING, BUT NOT WHERE YOU THINK - RM19 2

 

Financial Risk Monitor Summary

 • Short-term(WoW): Negative / 1 of 12 improved / 7 out of 12 worsened / 4 of 12 unchanged

 • Intermediate-term(WoW): Negative / 0 of 12 improved / 7 out of 12 worsened / 5 of 12 unchanged

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

 

MONDAY MORNING RISK MONITOR | RISK IS RISING, BUT NOT WHERE YOU THINK - RM15

 

1. U.S. Financial CDS -  Swaps widened for 19 out of 27 domestic financial institutions. Once again, financial protection providers MBIA and Assured Guaranty led the way, widening by +132 bps to 749 bps and by +59 bps to 396 bps respectively.

 

Tightened the most WoW: CB, MTG, RDN

Widened the most WoW: MBI, AGO, MMC

Widened the least/ tightened the most WoW: SLM, SLM, SLM

Widened the most MoM: MBI, MMC, AGO

  

MONDAY MORNING RISK MONITOR | RISK IS RISING, BUT NOT WHERE YOU THINK - RM1

 

2. European Financial CDS - Swaps mostly widened in Europe last week in anticipation of Greece's referendum. Over the weekend, that referendum took place, and Greek citizens voted to reject the terms of the bailout package offered by the country's creditors. The median and average changes in swap spreads were +12 bps and +160 bps, week-over-week. CDS for Greek institutions blew out by over 1000 bps each.

 

MONDAY MORNING RISK MONITOR | RISK IS RISING, BUT NOT WHERE YOU THINK - RM2

 

3. Asian Financial CDS - Swaps on Asia banks mostly widened last week with an average change of 2 bps.

 

MONDAY MORNING RISK MONITOR | RISK IS RISING, BUT NOT WHERE YOU THINK - RM17

 

4. Sovereign CDS – Sovereign Swaps mostly widened over last week, led by Italy, Spain, and Portugal on contagion worries. Those sovereigns' CDS widened by 24 bps to 134, 20 bps to 109 and 39 bps to 202 respectively.

 

MONDAY MORNING RISK MONITOR | RISK IS RISING, BUT NOT WHERE YOU THINK - RM18

 

MONDAY MORNING RISK MONITOR | RISK IS RISING, BUT NOT WHERE YOU THINK - RM3

 

MONDAY MORNING RISK MONITOR | RISK IS RISING, BUT NOT WHERE YOU THINK - RM4

 

5. Emerging Market Sovereign CDS – Emerging market swaps mostly widened last week. Movement was moderate; the most significant was the 3 bps widening in Chinese CDS to 93 bps.

 

MONDAY MORNING RISK MONITOR | RISK IS RISING, BUT NOT WHERE YOU THINK - RM16 2

 

MONDAY MORNING RISK MONITOR | RISK IS RISING, BUT NOT WHERE YOU THINK - RM20 

 

6. High Yield (YTM) Monitor – High Yield rates rose 24 bps last week, ending the week at 6.62% versus 6.38% the prior week.

 

MONDAY MORNING RISK MONITOR | RISK IS RISING, BUT NOT WHERE YOU THINK - RM5

 

7. Leveraged Loan Index Monitor – The Leveraged Loan Index fell 2.0 points last week, ending at 1891.

 

MONDAY MORNING RISK MONITOR | RISK IS RISING, BUT NOT WHERE YOU THINK - RM6

 

8. TED Spread Monitor – The TED spread was unchanged last week at 28 bps.

 

MONDAY MORNING RISK MONITOR | RISK IS RISING, BUT NOT WHERE YOU THINK - RM7

 

9. CRB Commodity Price Index – The CRB index rose 0.2%, ending the week at 225 versus 224 the prior week. As compared with the prior month, commodity prices have increased 0.9%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

MONDAY MORNING RISK MONITOR | RISK IS RISING, BUT NOT WHERE YOU THINK - RM8

 

10. 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 widened by 1 bps to 11 bps.

 

MONDAY MORNING RISK MONITOR | RISK IS RISING, BUT NOT WHERE YOU THINK - RM9

 

11. Chinese Interbank Rate (Shifon Index) –  The Shifon Index fell 20 basis points last week, ending the week at 1.16% versus last week’s print of 1.36%. 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 | RISK IS RISING, BUT NOT WHERE YOU THINK - RM10

 

12. Chinese Steel – Steel prices in China fell 2.7% last week, or 61 yuan/ton, to 2165 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 | RISK IS RISING, BUT NOT WHERE YOU THINK - RM12

 

13. 2-10 Spread – Last week the 2-10 spread tightened to 175 bps, -1 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR | RISK IS RISING, BUT NOT WHERE YOU THINK - RM13

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.6% upside to TRADE resistance and 2.2% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR | RISK IS RISING, BUT NOT WHERE YOU THINK - RM14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


The Macro Show Replay | July 6, 2015

 


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Euro, Yields and Oil

Client Talking Points

EURO

The Euro is down on the NO news and the risk range here is widening again to $1.09-1.13 which should be respected as it’s A) a leading indicator for rising volatility in FICC and B) an explicit #deflation risk on signal (think inflation expectations of things like Oil and low-quality peripheral debt). 

YIELDS

The credit risk trade is back on this morning with UST and German Yields down to 2.30% and 0.73% (vs. Italian and Portuguese 10YR Yields up +10-11bps to 2.34% and +3.02%, respectively) – don’t forget the slowing #LateCycle U.S. jobs report from Friday either please.

OIL

WTI Oil smashed for a -3.7% loss this morning and that’s after a -6.7% drop last week – down -44% year-over-year the #StrongDollarDeflation risk remains for most things levered to inflation expectations (including junk debt) – this is why big beta to “reflation” is in drawdown mode again.

 

**The Macro Show - CLICK HERE to watch today's edition at 8:30AM ET with CEO Keith McCullough and Macro Analyst Ben Ryan.

Asset Allocation

CASH 51% US EQUITIES 4%
INTL EQUITIES 8% COMMODITIES 4%
FIXED INCOME 30% INTL CURRENCIES 3%

Top Long Ideas

Company Ticker Sector Duration
KATE

We’re all-in on Kate Spade at current levels. The Hedgeye Retail team believes that comps are accelerating into the double digits in 2H, and we think that KATE’s margin guidance for this year will prove conservative. Ultimately, we think that numbers this year are 10% too low – a delta that widens to 20%+ next year, and to 50%+ by 2018 when we think KATE has $2.50 to $3.00 in earnings power. Using decelerating multiples as growth accelerates and the P&L matures gets us 50%+ upside in a year and a 2-3-bagger by 2018.

PENN

Our Gaming, Lodging and Leisure team reiterates its high-conviction thesis on Penn National Gaming. PENN remains one of our favorite names on the long side. It maintains the best new unit growth story in domestic gaming. PENN's property in Massachusetts has had an excellent start. We expect June to be as strong as May, setting up Q2 to be estimate-beating quarter for PENN.

TLT

The Hedgeye Growth, Inflation, Policy (GIP) model is signaling a move into QUAD 3 for the second half of 2015. This is a set-up for the domestic economy where growth is slowing and inflation is accelerating. We reiterate our intermediate to long-term bullish bias on long-duration Fixed Income and gold. Our back-testing results cast a favorable outlook for Long-Term Treasuries, REITs, and Gold with a favorable set-up as seen in the first three charts below. When growth is slowing (QUAD 3 and QUAD 4), long term rates tend to move lower.  The logic is simple:

  • #GrowthSlowing: As growth slows, a revision in forward-looking growth expectations manifest in lower yields
  • #InflationAccelerating: Commodity prices have made a significant move off of the 2015 lows as seen in the last chart below, and we expect the follow-through to play out in Q3 inflation readings. CPI readings track the commodity price sample used in chart #4 below very closely and CPI compares are easy in 2H 2015 vs. more difficult GDP comps (QUAD 3)       

 

Three for the Road

TWEET OF THE DAY

In today's Early Look "Oh, No!" I explain how Down Euro drives Global #Deflation Risk

@KeithMcCullough

QUOTE OF THE DAY

If a man does not know to what port he is steering, no wind is favorable to him.

Seneca

STAT OF THE DAY

Ranking and review site Niche.com identified which traditional colleges in the U.S. are the toughest to get into, Harvard was ranked #1 with an acceptance rate of 5.8%. 


CHART OF THE DAY: #GrowthSlowing? (Ignorance Is Bliss!)

Editor's Note: This is a chart and excerpt from today's morning market note written by Hedgeye CEO Keith McCullough. Click here to become a subscriber.

 

...No you didn’t. You didn’t think I’d do what all of the mainstream financial media (and most sell-side strategists) are doing this morning and ignore another rate-of-change #GrowthSlowing in US employment, did you?

 

As you can see in today’s Chart of The Day (I did the Crayola coloring myself over the weekend), the peak in a classic #LateCycle US economic indicator (non-farm payroll growth) was 4 months ago (February 2015) at 2.34% year-over-year.

 

CHART OF THE DAY: #GrowthSlowing? (Ignorance Is Bliss!) - z 07.06.15 chart

 


Oh, No!

“Think left, and think right, and think low, and think high – oh, the thinks you can think up if you only try!”

-Dr. Seuss

 

Apologies in advance for keeping it too simple this morning, but after introducing single-shot Hedgeye Cartoons in the last year we may have to resort to full-form illustrative children’s books in order to explain this Greek debt drama.

 

Oh “No!”, you say? Or is that what they said? And now that’s just a visceral feeling about being levered long beta instead of rotating all of your stock market gains into Treasury Bonds as Global Equity market volatility breaks out to the upside?

 

Think about managing inflation expectations risk during #deflationary shocks. Think sell high and buy low.

Oh, No! - Greek debt cartoon 06.15.2015

**Join Keith McCullough live at 8:30am ET on The Macro Show. Just click here.

 

Back to the Global Macro Grind

 

As our new Hedgeye European Strategy Contributor, Daniel Lacalle, wrote in his risk management note about Greece last night (read it here): “The referendum is not the end of the Greek drama. It is the beginning of the real drama.”

 

And I’ll piggy back on that by linking the drama that is this clown Varoufakis to the real story in Global Macro markets this morning which is #Deflation.

 

To review how the #Deflation blew up many a levered long “guy” from July 2014 to January 2015:

 

  1. Euros were being burnt to a crisp as Draghi did whatever it took to “reflate” asset prices
  2. #StrongDollar was born out of that and the inverse-correlation trades perpetuated by it
  3. Almost everything Inflation Expectations (Oil, levered Energy stocks, Junk Debt, EM, etc.) deflated

 

And what are you seeing in marked-to-market terms this morning?

 

  1. Down Euro, after failing @Hedgeye TREND resistance of $1.13
  2. #StrongDollar breaking out again > @Hedgeye TREND support of $95.51
  3. Oil (WTI) -3.7% to $54.78, Peripheral Debt Down, Emerging Markets Down, etc.

 

Contextualizing this immediate-term reaction obviously matters, so let’s do that vs. last week’s moves:

 

  1. US Dollar Index +0.6% last week = +19.7% year-over-year
  2. Euro (vs. USD) -0.5% last week = -18.4% year-over-year
  3. Oil (WTI) -6.7% last week = -42.4% year-over-year
  4. Energy Stocks (XLE) -2.0% last week = -25.8% year-over-year
  5. Russian Stocks (RTSI) -2.5% last week = -33.9% year-over-year
  6. Emerging Market Stocks (Latin America) -0.9% last week = -25.9% year-over-year

 

Oh, and  don’t tell anyone, but Long-term Treasuries (one of the best hedges against Global #Deflation Risk) had a great end to the week (-8 basis points week-over-week and down another -8 beeps this morning to 2.30%) after a not-great US jobs report.

 

Oh, No!

 

No you didn’t. You didn’t think I’d do what all of the mainstream financial media (and most sell-side strategists) are doing this morning and ignore another rate-of-change #GrowthSlowing in US employment, did you?

 

As you can see in today’s Chart of The Day (I did the Crayola coloring myself over the weekend), the peak in a classic #LateCycle US economic indicator (non-farm payroll growth) was 4 months ago (February 2015) at 2.34% year-over-year.

 

Oh right. I am sure European and US equity beta has bounced “off the lows” again on some kind of a “summit” of central-market-planners in Europe tomorrow. So let’s stop with the US cycle slowing analysis and get back to the Greek drama:

 

  1. Italian Stocks (MIB Index) -2.8% lead losers this morning after deflating -5.4% last week
  2. Italian and Portuguese 10yr Yields are +10-11 basis points to 2.34% and 3.02%, respectively

 

Oh, that’s not Greek. That’s the Italian and Portuguese stuff. Right, right. I’m hearing things are fantastic in both of those places from a secular growth perspective and that their “credit” risk should trade in line with US Treasuries…

 

Or should they trade higher? Thinking lower? I thought every market risk eventually meant higher prices (after the central planning response)? “Oh, the thinks you can think up, if you only try!”

 

Our immediate-term Global Macro Risk Ranges are now (intermediate-term TREND views in brackets):

 

UST 10yr Yield 2.21-2.40% (bearish)

SPX 2043-2092 (bearish)
RUT 1 (bearish)
Nikkei 20004-20554 (bullish)
VIX 15.02-19.94 (bullish)
USD 95.51-97.42 (bullish)
EUR/USD 1.09-1.13 (bearish)
YEN 122.21-124.4.60 (bearish)
Oil (WTI) 54.53-57.94 (bearish)

Nat Gas 2.69-2.87 (neutral)

Gold 1161-1191 (neutral)
Copper 2.51-2.66 (bearish)

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Click to enlarge

Oh, No! - z 07.06.15 chart


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