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Monday Morning Risk Monitor | Risk Measures Recede In The Latest Week

Takeaway: Europe shrinks from the risk spotlight while China remains a concern. Earnings have commandeered the short-term high frequency news flow.

Key Takeaway:

The confluence of the Greek bailout and generally better than expected earnings thus far (81% of Financials have beaten bottom line estimates through Friday) have caused risk measures to recede in the latest week. Our primary focus remains on China, where we watch for signs of further deterioration. 

 

Current Ideas:

Monday Morning Risk Monitor | Risk Measures Recede In The Latest Week - RM19

 

Financial Risk Monitor Summary

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

 • Intermediate-term(WoW): Positive / 5 of 12 improved / 2 out of 12 worsened / 5 of 12 unchanged

 • Long-term(WoW): Negative / 2 of 12 improved / 2 out of 12 worsened / 8 of 12 unchanged

 

Monday Morning Risk Monitor | Risk Measures Recede In The Latest Week - RM15

 

1. U.S. Financial CDS -  Swaps tightened for 20 out of 27 domestic financial institutions given positive earnings results and the Greek bailout deal. As of July 17, 81% of financials companies reported earnings above estimates for the second quarter.

 

Tightened the most WoW: PRU, AIG, MTG

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

Tightened the most WoW: CB, HIG, RDN

Widened the most MoM: MMC, MBI, AGO

 

Monday Morning Risk Monitor | Risk Measures Recede In The Latest Week - RM1

 

2. European Financial CDS - Swaps tightened sharply in Europe last week, largely driven by the development of the Greek bailout deal. Greek CDS tightened for the first time in weeks, although they remain wider on a month-over-month basis.

 

Monday Morning Risk Monitor | Risk Measures Recede In The Latest Week - RM2

 

3. Asian Financial CDS - CDS of Chinese and Japanese banks tightened last week while widening between 4 bps and 7 bps for Indian banks.

 

Monday Morning Risk Monitor | Risk Measures Recede In The Latest Week - RM17

 

4. Sovereign CDS – Sovereign Swaps mostly tightened over last week. Portuguese sovereign swaps tightened the most, by -34 bps to 161, followed by Italian swaps which tightened by -19 bps to 104.

 

Monday Morning Risk Monitor | Risk Measures Recede In The Latest Week - RM18

 

Monday Morning Risk Monitor | Risk Measures Recede In The Latest Week - RM3

 

Monday Morning Risk Monitor | Risk Measures Recede In The Latest Week - RM4

 

5. Emerging Market Sovereign CDS – Emerging market swaps were mixed last week. Brazilian sovereign swaps widened the most, by 8 bps to 264. Meanwhile, Russian swaps tightened the most, by -16 bps to 312.

 

Monday Morning Risk Monitor | Risk Measures Recede In The Latest Week - RM16

 

Monday Morning Risk Monitor | Risk Measures Recede In The Latest Week - RM20

 

6. High Yield (YTM) Monitor – High Yield rates were unchanged last week at 6.68%.

 

Monday Morning Risk Monitor | Risk Measures Recede In The Latest Week - RM5

 

7. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 4.0 points last week, ending at 1894.

 

Monday Morning Risk Monitor | Risk Measures Recede In The Latest Week - RM6

 

8. TED Spread Monitor – The TED spread fell 1 basis point last week, ending the week at 27 bps this week versus last week’s print of 28 bps.

 

Monday Morning Risk Monitor | Risk Measures Recede In The Latest Week - RM7

 

9. CRB Commodity Price Index – The CRB index fell -0.3%, ending the week at 215 versus 215 the prior week. As compared with the prior month, commodity prices have decreased -3.4%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

Monday Morning Risk Monitor | Risk Measures Recede In The Latest Week - 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 was unchanged at 11 bps.

 

Monday Morning Risk Monitor | Risk Measures Recede In The Latest Week - RM9

 

11. Chinese Interbank Rate (Shifon Index) –  The Shifon Index rose 7 basis points last week, ending the week at 1.28% versus last week’s print of 1.21%. 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 Measures Recede In The Latest Week - RM10

 

12. Chinese Steel – Steel prices in China rose 0.1% last week, or 2 yuan/ton, to 2112 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 Measures Recede In The Latest Week - RM12

 

13. 2-10 Spread – Last week the 2-10 spread tightened to 168 bps, -8 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

Monday Morning Risk Monitor | Risk Measures Recede In The Latest Week - RM13

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.3% upside to TRADE resistance and 2.4% downside to TRADE support.

 

Monday Morning Risk Monitor | Risk Measures Recede In The Latest Week - RM14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


The Macro Show Replay | July 20, 2015

 


CHART OF THE DAY: In Case You’re Keeping Score On The “Inflation is Back” Trade...

Editor's Note: The chart and excerpt below are from today's Early Look written by Hedgeye CEO Keith McCullough. For more info on how you can subscribe click here.

 

CHART OF THE DAY: In Case You’re Keeping Score On The “Inflation is Back” Trade... - ZZ 07.20.15 chart

 

In case you’re keeping score on the “inflation is back” trade, it’s not:

 

  1. US 5-year Forward Break-Evens dropped another 7 basis points last week to 1.56% (-18bps in the last month)
  2. Lumber and Paladium prices got pounded for -5.1% and -4.8% weekly losses (-8% and -14% respectively mth/mth)
  3. Energy (XLE) and Basic Materials (XLB) stocks were -1.4% and -0.1%, respectively, in an up US Equity tape

 


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Birdies and Bogeys

“Their only fault is that they give no possible excuse for a missed putt.”

-Bobby Jones

 

Today is the final day of The Open Championship at St. Andrews in Scotland where 22 year old Irish amateur Paul Dunne is going to put his best foot forward to be the 1st amateur to win the event since Bobby Jones did it in 1930.

 

Birdies and Bogeys - Bobby Jones Hoylake 450 341

 

At that level of golf (or competing at these levels in Global Macro markets), trying your best is rarely enough. On that score, I think Jack Nicklaus put it best after losing “The Duel In The Sun” to Tom Watson @Turnberry at the 1977 Open:

 

“I’m tired of giving my best and not having it be good enough.”

 

Back to the Global Macro Grind

 

Nicklaus’ was just being moody. His best was enough in 1978 when he won his 3rd Open Championship (also at St. Andrews, by 2 strokes), cementing himself as one of the all-time greats of the game.

 

I’m personally awestruck by greatness. It’s something we don’t see in our profession every day, but it’s certainly something we can find both in ourselves and the company we keep.

 

Whether it’s at the beach with your loved ones or in running your respective responsibilities at work today, give it your best to be the best that you can be. It’s not always going to be good enough, but it’s always worth the effort.

 

Last week’s US Dollar victory didn’t make winners of everything inversely correlated to it:

 

  1. US Dollar Index up another +1.9% on the week, taking it to +3.8% in the last month
  2. The Euro (vs. USD) was devalued by Draghi for another -3% weekly loss (-4.5% month-over-month)
  3. Canadian Loonies lost another -2.4% of their value, falling to -10.4% YTD
  4. Commodities (CRB Index) deflated another -1.7% (-4% in the last month, and -6.7% YTD)
  5. Oil (WTI) continued to get crushed by #StrongDollar (-3.5% on the wk, -15.7% month-over-month)
  6. Gold deflated another -2.2% taking its month-over-month loss to -3.8%

 

When I woke up this morning Gold was getting triple-bogey’d to its lowest level since February of 2010, reminding perma-Gold Bulls that #StrongDollar is nothing less than formidable as a #deflationary headwind.

 

But what if you just like being long things like Gold and Copper (the Doctor was down another -1.6% last week, taking its YTD loss to -11.7%) irrespective of 2-3 club wind? Mr. Macro Market will be happy to mark your score for you on that. Respect the wind.

 

And while it’s too bad there is no central-planning committee to #halt the entire commodities complex and their respective asset price links, there are plenty of bears still making money on inflation expectations gone bad.

 

In case you’re keeping score on the “inflation is back” trade, it’s not:

 

  1. US 5-year Forward Break-Evens dropped another 7 basis points last week to 1.56% (-18bps in the last month)
  2. Lumber and Paladium prices got pounded for -5.1% and -4.8% weekly losses (-8% and -14% respectively mth/mth)
  3. Energy (XLE) and Basic Materials (XLB) stocks were -1.4% and -0.1%, respectively, in an up US Equity tape

 

The “tape” wasn’t just up last week, for “New Tech” it was straight up! What Google (GOOGL +17%) did on the day on Friday was the equivalent of being -10 under (on the day) @TheOpenChampionship, in #alpha terms.

 

Our congratulations to anyone who A) had that position on in size (before the move) and/or B) who bought the Nasdaq the whole way down (as it was down 6 of the 7 weeks prior!). In sharp contrast to being long anything #CommodityDeflation:

 

  1. S&P Tech ETF (XLK) was +4.8% on the week, taking it back up to +5.1% YTD (after going flat on the 6 week correction)
  2. Nasdaq (QQQ) was +4.3% week-over-week to a healthy +10.1% for 2015 YTD

 

Since we missed the cut both ways on that (we didn’t have a call on Tech, either way) we’ll salute whoever did. That was just an awesome week of returns. We still like Healthcare stocks (XLV +12.6% YTD) and re-issued the buy signal in Housing (ITB) too.

 

With rates down last week (-5 basis points for the US 10yr Yield to 2.35% last week on slowing top-down growth and inflation data) and costs for both builders and consumers deflating, I like ITB (US Housing) into the following catalysts this week:

 

  1. Existing Home Sales (June) on Wednesday
  2. New Home Sales (June) on Friday

 

Against the long Housing birdie putts, I still like short the Financials (which I had dead wrong last week – double bogey in spite of the rates call being right) and short the Industrials (XLI), which continue to be par for the 2015 US equity course.

 

Will give it our best this week and maintain a 0% net asset allocation to Commodities. Thanks to all of you who are giving so generously to the Hedgeye Cares Charity Golf Challenge (tomorrow) sponsored by The Lincoln Motor Company too.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.20-2.46%

SPX 2091-2130
USD 97.04-98.25
EUR/USD 1.07-1.10
Oil (WTI) 50.09-53.68

Nat Gas 2.65-2.95

Gold 1111-1151

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Birdies and Bogeys - ZZ 07.20.15 chart


July 20, 2015

July 20, 2015 - Slide1

 

BULLISH TRENDS

July 20, 2015 - Slide2

July 20, 2015 - Slide3

July 20, 2015 - Slide4

 

BEARISH TRENDS

July 20, 2015 - Slide5

July 20, 2015 - Slide6 

July 20, 2015 - Slide7

July 20, 2015 - Slide8

July 20, 2015 - Slide9

July 20, 2015 - Slide10

July 20, 2015 - Slide11


The USD, Gold and the DAX

Client Talking Points

USD

After appreciating another +1.9% last week, the #StrongDollar is now +3.8% in the last month and while the EUR/USD (and entire commodity complex) doesn’t like that, European Stocks do – Mario Draghi delivered the devaluation and should stay with it. 

GOLD

Getting crushed this morning, down another -1.7% (after dropping -2.2% last week) to $1115, its lowest level since FEB 2010; this is a fairly straightforward Global #Deflation signal. The U.S. 5YR forward Break-evens are down another -7 basis points last week to 1.56%.

DAX

Up +0.9% and +6.7% month-over-month post central planning ramp; risk range is wicked wide at 10,584-11,896 and the economic data continues to slow, in rate of change terms (producer prices -1.4% year-over-year JUN vs -1.3% MAY).

Asset Allocation

CASH 55% US EQUITIES 3%
INTL EQUITIES 6% COMMODITIES 0%
FIXED INCOME 26% INTL CURRENCIES 10%

Top Long Ideas

Company Ticker Sector Duration
GIS

The General continues to make tough calls as they work to further streamline their manufacturing footprint as part of Project Century. Last week, announcing the closure of two plants, one in West Chicago, IL and the other in Joplin, MO, eliminating approximately 620 positions in the process. West Chicago produced cereal and dry dinner products for the U.S. Retail organization, while the Joplin facility was acquired as part of the Annie’s acquisition and produced snacks. Because of union negotiations management is expecting these actions to be fully executed by fiscal 2019. We view this as a big positive for the company as they go to a more nimble asset light model, which will save on capex and allow it to be allocated to higher growth product platforms.

PENN

According to Gaming, Lodging and Leisure Sector Head Todd Jordan, additional state gaming agencies have reported revenues for the month of June. The good news here is that Penn National Gaming remains on track to beat second quarter estimates this Tuesday July 23rd. In addition, PENN will be hosting an investor day on July 24th. We will be there and communicate any noteworthy color and developments. Bottom line? The company remains one of our favorite names on the long side and boasts the best new unit growth story in domestic gaming.

TLT

After an awful retail sales print on Tuesday, the confluence of growth slowing data reared its ugly head Friday with a +0.1% year-over-year headline CPI print for June and a UofMich consumer sentiment reading that declined to 93.3 from 96.1 in May. Note that a +0.1% inflation rate is a heck of a long way from the Fed’s 2% target. These two prints were successful in taking the 10-Year Treasury yield down 10 basis points from Monday’s highs to finish the week at 2.35%. We remain one of the lonely bulls on Treasury bonds (bearish on yields) via TLT, EDV, VNQ.

Three for the Road

TWEET OF THE DAY

FRANCE: the CAC was +4.5% last wk, is +1% this morning and +7.5% month-over-month

@KeithMcCullough

QUOTE OF THE DAY

It takes less time to do a thing right than to explain why you did it wrong.

Henry Wadsworth Longfellow

STAT OF THE DAY

China’s gold reserves are up +57% from June 2009 to 1658 tons at the end of June 2015.


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