The S&P 500 still has the widest risk range our model has generated since 2008.
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The range is 1,835-2,017 with the more probable level being the downside one (-7.7% from Friday’s close), given that the Fed could be tightening into a 0.1% GDP environment here in Q3 (our low-end scenario with the high end being at 1.5% and the Atlanta Fed tracking 1.2%).
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On The Macro Show this morning, Hedgeye CEO Keith McCullough articulated his frustration at consensus’ lack of risk management after the recent market correction. He also shares some sage investing advice from an institutional subscriber following a meeting last week with this leading global investor.
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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.
Two quick changes to our LONG bench we wanted to make you aware of, we removed MJN and added HSY. We will be releasing a note on these changes later today.
8/28/15 GIS | Time to Close this Deal
8/21/15 UNFI | GOING AGAINST THE GRAIN
RECENT NEWS FLOW
Monday, August 31
BETR | Initiated neutral at Goldman Sachs (underwriter of the IPO), price target $18. Current price is $13.31, we see downside from here and continue to have it on our SHORT bench.
Friday, August 28
GIS | Rumors continue to swirl around the divestiture of the Green Giant assets (click here for Hedgeye article)
Wednesday, August 26
THS | Upgraded to overweight from equal-weight at Stephens, target increased to $85 from $75. Treehouse seems to be the leader in the deal for the Ralcorp assets.
Tuesday, August 25
KHC | Recalled turkey bacon products (click here for article)
Monday, August 24
POST | Reinstated outperform at BMO Capital Markets, target is $72
Food and organic stocks that we follow outperformed the XLP last week. The XLP was down -0.1% last week, the top performer from our list was Amira Natural Foods (ANFI) posting an increase of +29.1%. Worst performing company on our list was ConAgra (CAG), which was down -2.8%.
From a quantitative perspective, the XLP is bearish on a TRADE and TREND duration.
Food and Organic Companies
Consolidated Consumer Staples Valuation
After the volatile market last week, valuations remain near two standard deviations above the five year average EV/EBITDA multiple.
Keith’s Three Morning Bullets
- FEDERAL RESERVE – Fischer opted for dovish comments on Friday, making his Saturday comments more hawkish – I guess they look at the S&P Futures now before saying anything of consequence (today he’d be dovish); Fed Fund futures have ramped back up to 38% on a SEP hike probability – reminder: the Fed has never hiked into a slowdown
- COMMODITIES – dovish = commodity reflation; hawkish = commodity #Deflation – so the deflation TREND is right back on this morning w/ Oil, Copper, and Russia down -2-3%; WTI’s risk range blew out to $36.99-45.32 on Friday, all but ensuring that massive volatility remains in this asset class
- SP500 – still has the widest risk range my model has generated since 2008 at 1 with the more probable level being the downside one (-7.7% from Friday’s close), given that the Fed could be tightening into a 0.1% GDP environment here in Q3 (our low-end scenario with the high end being at 1.5% and the Atlanta Fed tracking 1.2%)
Please call or e-mail with any questions.
Takeaway: Dovish comments from the Fed and a favorable US GDP reading led short-term risk perception to cool, but intermediate term risk remains high.
The VIX has "cooled off" to ~26 following an intraday surge above 50 last week - the highest reading since early 2009. Global markets bounced on Wednesday following comments from Federal Reserve President William Dudley that a September rate hike now seems less compelling and a favorable revision to US GDP (+3.7% vs +2.3%) restored a degree of confidence. Risk warnings in our heatmap below eased off for the week with slightly more green than red in the short term. However, looking at the intermediate term, risk perception remains one-sided in favor of the negative; eight out of twelve measures are red. From our standpoint, nothing has changed fundamentally. The key risk metrics we watch in China remain on the same negative trend.
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 / 2 of 12 improved / 8 out of 12 worsened / 2 of 12 unchanged
• Long-term(WoW): Positive / 3 of 12 improved / 2 out of 12 worsened / 7 of 12 unchanged
1. U.S. Financial CDS – Swaps tightened for 14 out of 27 domestic financial institutions on positive GDP data and dovish comments from Fed President William Dudley. U.S. GDP came in at 3.7% in the second quarter, and Mr. Dudley commented that the case for a September rate increase is now less compelling.
Tightened the most WoW: ALL, CB, ACE
Widened the most WoW: BAC, C, MS
Tightened the most WoW: CB, ACE, AXP
Widened the most MoM: GNW, MET, GS
2. European Financial CDS – Swaps mostly tightened in Europe last week as a global market recovery began on Wednesday.
3. Asian Financial CDS – Swaps were a mixed bag across Asian Financials last week. Chinese banks were mostly tighter, while Japanese banks widened.
4. Sovereign CDS – Sovereign Swaps were little changed over last week. Spanish swaps widened the most, by +3 bps to 101.
5. Emerging Market Sovereign CDS – Emerging market swaps mostly tightened last week. Russian swaps saw the largest move, tightening by -45 bps to 375.
6. High Yield (YTM) Monitor – High Yield rates fell 3 bps last week, ending the week at 7.37% versus 7.40% the prior week.
7. Leveraged Loan Index Monitor – The Leveraged Loan Index fell 4.0 points last week, ending at 1862.
8. TED Spread Monitor – The TED spread fell 4 basis points last week, ending the week at 27 bps this week versus last week’s print of 31 bps.
9. CRB Commodity Price Index – The CRB index rose 1.7%, ending the week at 197 versus 194 the prior week. As compared with the prior month, commodity prices have decreased -2.7%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.
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 10 bps.
11. Chinese Interbank Rate (Shifon Index) – The Shifon Index fell 7 basis points last week, ending the week at 1.77% versus last week’s print of 1.85%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.
12. Chinese Steel – Steel prices in China fell 2.5% last week, or 58 yuan/ton, to 2273 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity and, by extension, the health of the Chinese economy.
13. 2-10 Spread – Last week the 2-10 spread widened to 146 bps, 4 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.
14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 4.0% upside to TRADE resistance and 7.4% downside to TRADE support.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT
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