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RTA Live: August 24, 2015

 
 


MONDAY MORNING RISK MONITOR | A SEA OF RED---CHINA WORRIES ABOUND

Takeaway: Bonfire of the risk indicators => commodities, junk bonds/leveraged loans, anything EM. US Interbank rates starting to widen: Foxhole time.

Key Takeaway:

Here are the key things to keep an eye on:

 

Front Burner Disasters:

1. Commodities torched for another -3.7% W/W drop, bringing the M/M change to -6.7%

2.  Junk Bonds rip another +19 bps W/W to 7.40% and are higher by +41 bps M/M.

3. Leveraged Loans shed 4 points to 1866 W/W and are down 18 pts M/M.

4. EM Sovereign Swaps: Russia +45 bps W/W to 420 bps. Brazil +25 bps to 330 bps. Indonesia and Thailand: +28 bps & + 22 bps, respectively.

 

Back Burner Simmers:

1. US TED Spread (US Interbank rate):  +7 bps to 31 bps - biggest 1 week move in years. 

2. Shifon Index (Chinese Interbank rate): +18 bps W/W to 185 bps. Almost a double from mid-June lows of ~100 bps.

 

Last week, global markets roasted on concerns over Chinese economic growth and concerns over a broader Asian collapse. Most notably, CDS widened broadly, the price of oil hit a new low, high yield YTM blew out by another +19 bps, the TED spread spiked by +7 bps, and the Chinese interbank rate rose by +18 bps. As we show in the heatmap below, market risk is tilted heavily negative in the short and intermediate durations, while the long-term balance remains positive (for now). 

 

Current Ideas:

We're adding BlackRock (BLK) to our Best Ideas Short Bench.

 

MONDAY MORNING RISK MONITOR | A SEA OF RED---CHINA WORRIES ABOUND - Ideas 2

 

Financial Risk Monitor Summary

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

 • Intermediate-term(WoW): Negative / 3 of 12 improved / 8 out of 12 worsened / 1 of 12 unchanged

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

 

MONDAY MORNING RISK MONITOR | A SEA OF RED---CHINA WORRIES ABOUND - RM15

 

1. U.S. Financial CDS -  Swaps widened for 18 out of 27 domestic financial institutions. The average change was +6 bps as concerns over Chinese growth shook global markets.

 

Tightened the most WoW: CB, ACE, ALL

Widened the most WoW: WFC, BAC, RDN

Tightened the most WoW: ACE, AXP, CB

Widened the most MoM: GNW, RDN, MET

 

MONDAY MORNING RISK MONITOR | A SEA OF RED---CHINA WORRIES ABOUND - RM1

 

2. European Financial CDS - Swaps mostly widened among European Banks last week as global worries over growth in China rose. Russia's Sberbank swaps widened by +30 bps to 479 as the price of oil fell to $40 as of Friday's close. Additionally, with the political volatility of Greece's prime minister planning to resign, that country's banks' swaps widened between +327 bps and +2,910 bps.

 

MONDAY MORNING RISK MONITOR | A SEA OF RED---CHINA WORRIES ABOUND - RM2

 

3. Asian Financial CDS - While swaps across the region were mixed, last week's focus was growth concerns in China, where financial CDS widened between 11 bps and 12 bps.

 

MONDAY MORNING RISK MONITOR | A SEA OF RED---CHINA WORRIES ABOUND - RM17

 

4. Sovereign CDS – Sovereign Swaps were largely unchanged last week. The largest moves (+/- 1 bp) came from French, Italian, and Japanese swaps. 

 

MONDAY MORNING RISK MONITOR | A SEA OF RED---CHINA WORRIES ABOUND - RM18

 

MONDAY MORNING RISK MONITOR | A SEA OF RED---CHINA WORRIES ABOUND - RM3

 

MONDAY MORNING RISK MONITOR | A SEA OF RED---CHINA WORRIES ABOUND - RM4

 

5. Emerging Market Sovereign CDS – Emerging market swaps widened sharply last week. Russian sovereign swaps widened the most, by +45 bps to 420. Brazil was close behind at +25 bps to 330 bps.

 

MONDAY MORNING RISK MONITOR | A SEA OF RED---CHINA WORRIES ABOUND - RM16

 

MONDAY MORNING RISK MONITOR | A SEA OF RED---CHINA WORRIES ABOUND - RM20

 

6. High Yield (YTM) Monitor – High Yield rates rose 19 bps last week, ending the week at 7.40% versus 7.21% the prior week.

 

MONDAY MORNING RISK MONITOR | A SEA OF RED---CHINA WORRIES ABOUND - RM5

 

7. Leveraged Loan Index Monitor – The Leveraged Loan Index fell 4.0 points last week, ending at 1866.

 

MONDAY MORNING RISK MONITOR | A SEA OF RED---CHINA WORRIES ABOUND - RM6

 

8. TED Spread Monitor – The TED spread rose 7 basis points last week, ending the week at 31 bps this week versus last week’s print of 24 bps.

 

MONDAY MORNING RISK MONITOR | A SEA OF RED---CHINA WORRIES ABOUND - RM7

 

9. CRB Commodity Price Index – The CRB index fell -3.8%, ending the week at 191 versus 199 the prior week. As compared with the prior month, commodity prices have decreased -6.7%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

MONDAY MORNING RISK MONITOR | A SEA OF RED---CHINA WORRIES ABOUND - 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 tightened by 1 bps to 10 bps.

 

MONDAY MORNING RISK MONITOR | A SEA OF RED---CHINA WORRIES ABOUND - RM9

 

11. Chinese Interbank Rate (Shifon Index) –  The Shifon Index rose 18 basis points last week, ending the week at 1.85% versus last week’s print of 1.67%. 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 | A SEA OF RED---CHINA WORRIES ABOUND - RM10

 

12. Chinese Steel – Steel prices in China fell 1.0% last week, or 24 yuan/ton, to 2331 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 | A SEA OF RED---CHINA WORRIES ABOUND - RM12

 

13. 2-10 Spread – Last week the 2-10 spread tightened to 142 bps, -5 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR | A SEA OF RED---CHINA WORRIES ABOUND - RM13

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows that Financials are now both broken TREND (intermediate term) and broken TRADE (short term). On a short term basis, there is 3.3% upside to TRADE resistance and 1.8% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR | A SEA OF RED---CHINA WORRIES ABOUND - RM14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 

 

 

 


Monday Mashup

Monday Mashup - CHARt 1

 

RECENT NOTES

8/21/15 WWAV | DON’T PANIC, BUY MORE…HAIN | PANIC, SHORT MORE

8/21/15 UNFI | GOING AGAINST THE GRAIN

8/20/15 LNCE | Black Book Presentation Replay

8/11/15 LNCE | GOING IN LONG

8/10/15 LWAY | Sitting on a Gold Mine with no Tools

 

RECENT NEWS FLOW

Friday, August 21

LWAY | Ramps up production at newly refurbished facility in Wisconsin (click here for article)

 

Thursday, August 20

SYY | Elects Nelson Peltz and Josh Frank to Board of Directors (click here for article)

MKC | Completes acquisition of Stubb’s (click here for article)

MDLZ | Ardent Mills acquires Mondelez Canadian flour milling facility (click here for article)

 

Wednesday, August 19

KO | Pays roughly $90mm for 30% stake in Suja, as the fresh juice craze continues (click here for article)

 

Tuesday, August 18

HSY | Announced pricing of $300mm 1.6% notes due 2018 and $300mm 3.2% notes due 2025 (click here for article)

CAG | Darren Serrao, Campbell veteran moving to ConAgra to newly created position, Chief Growth Officer (click here for article)

 

SECTOR PERFORMANCE

Food and organic stocks that we follow outperformed the XLP last week. The XLP was down -4.9% last week, the top performer from our list was United Natural Foods (UNFI) posting an increase of +7.8%. Worst performing company on our list was once again Amira Natural Foods (ANFI), which was down -55.2%.

Monday Mashup - CHARt 2

 

QUANTITATIVE SETUP

From a quantitative perspective, the XLP is bearish on a TRADE and TREND duration.

Monday Mashup - CHART 3

 

Food and Organic Companies

Monday Mashup - CHART 4

Monday Mashup - CHART 5

 

Consolidated Consumer Staples Valuation

The stocks we follow in the consumer staples sector faired okay compared to the rest of the market last week. Valuations remain near two standard deviations above the five year average EV/EBITDA multiple. We are most likely in store for further correction in the space.

 

Monday Mashup - CHART 6

 

Keith’s Three Morning Bullets

  1. CRASH – not an inappropriate word to use given that on the 3-month duration alone, Oil (-37%), China (-31%) Emerging Markets (-26%), and Long-term Sov Bond Yields have crashed. This is a literal crashing of both US and Global growth expectations – we’re still at ½ of consensus forecasts
  2. HIKE? – oh definitely – they should hike. “It’s just 25 basis points, Keith” – yep. Have at it. Let’s see what happens. This risk of being too tight during both the cyclical and secular slowdown was only obvious to those who had the bearish growth and inflation views. Jackson Hole = Thursday
  3. VIX – the main challenge with modeling accurate risk management levels right now is that volatility is undergoing a major Phase Transition across durations – hard to explain in 140 characters or less but very easy to see the series of higher-highs going back 2yrs

 

 


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This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.

Monday Mashup

Monday Mashup - CHART 1

 

RECENT NOTES

8/17/15 MCD | Create Your Taste Experience

8/11/15 SHAK | PLANTING FLAGS

8/10/15 July Restaurant Sales and Employment Trends

8/7/15 BOJA | BO’S DILEMMA

 

RECENT NEWS FLOW

Friday, August 21

MCD | Signed agreement to franchise 20 restaurants in remote Russian locations (click here for article)

Burgers | Casual dining restaurants boosting lunch sales with burgers (click here for article)

 

Thursday, August 20

MCD | Another survey supports the expansion of All Day Breakfast (click here for article)

 

Wednesday, August 19

QSR | Burger King is expanding delivery service in India, marking the fifth country that BK offers the service (click here for article)

 

Tuesday, August 18

YUM | Micky Pant named new Yum China CEO (click here for article)

NYC Restaurant Wage Hikes | Quick service restaurant owners in New York have filed objections to the proposal to raise minimum wage to $15 per hour (click here for article)

 

Monday, August 17

DFRG | Opened new Double Eagle steak house in Orlando, FL (click here for article)

SBUX | Expanded evening program with beer and wine (click here for article)

DRI | Named Bill Lenehan as CEO of proposed REIT, currently a member of the Darden board (click here for article)

 

SECTOR PERFORMANCE

Casual dining and quick service stocks, in aggregate, outperformed the XLY last week. The XLY was down -5.1%, top performers from casual dining were BBRG and RUTH posting an increase of 2.7% and 2.3%, respectively, while ARCO and GMCR led the quick service pack up 12.0% and 4.2%, respectively.

Monday Mashup - CHART 2

Monday Mashup - CHART 3

 

QUANTITATIVE SETUP

From a quantitative perspective, the XLY looks bearish from a TRADE and TREND perspective, TRADE support is 72.91.

Monday Mashup - CHART 4

 

CASUAL DINING RESTAURANTS

Monday Mashup - CHART 5

Monday Mashup - CHART 6

 

QUICK SERVICE RESTAURANTS

Monday Mashup - CHART 7

Monday Mashup - CHART 8

 

Keith’s Three Morning Bullets

  1. CRASH – not an inappropriate word to use given that on the 3-month duration alone, Oil (-37%), China (-31%) Emerging Markets (-26%), and Long-term Sov Bond Yields have crashed. This is a literal crashing of both US and Global growth expectations – we’re still at ½ of consensus forecasts
  2. HIKE? – oh definitely – they should hike. “It’s just 25 basis points, Keith” – yep. Have at it. Let’s see what happens. This risk of being too tight during both the cyclical and secular slowdown was only obvious to those who had the bearish growth and inflation views. Jackson Hole = Thursday
  3. VIX – the main challenge with modeling accurate risk management levels right now is that volatility is undergoing a major Phase Transition across durations – hard to explain in 140 characters or less but very easy to see the series of higher-highs going back 2yrs

 


The Macro Show Replay | August 24, 2015

 


August 24, 2015

August 24, 2015 - Slide1

 

BULLISH TRENDS

August 24, 2015 - Slide2

 

 

BEARISH TRENDS

August 24, 2015 - Slide3

August 24, 2015 - Slide4

August 24, 2015 - Slide5

August 24, 2015 - Slide6

August 24, 2015 - Slide7

August 24, 2015 - Slide8

August 24, 2015 - Slide9

August 24, 2015 - Slide10


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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