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RTA Live: September 21, 2015

 

 


EVENT – P & Web IV: What You Need to Know

Takeaway: Join us Thursday, September 24th at 12pm and 2pm EDT for a two-part event on the implications of Web IV on P.

The Web IV decision will be a pivotal event for P, with the potential to derail its business model.  The decision will be issued no later than December 15th, and we may get an early read this week in the Register's response to the CRB Judges' questions.  

 

We will be hosting a two-part event on Thursday, September 24th at 12pm and 2pm EDT to discuss both the bull and bear cases.

  1. P: Webcaster IV = Powder Keg (12pm EDT) – Our bearish thesis discussing the implications of the Web IV outcome on P’s business model.
  2. Speaker Series: David Oxenford, Counsel to Webcasting Companies (2pm EDT) – Fire-Side Chat on the relevant Web IV statutes and the Services' arguments.

 

KEY TOPICS WILL INCLUDE

 

P: Webcaster IV = Powder Keg (12pm EDT)

  • Challenging Business Model: Limited operational leverage despite operating under lower Pureplay rates
  • Pandora vs. SoundExchange: A review of the Web IV proceeding, the key tenets of each of their arguments, and why P is losing the key debate
  • Powder Keg: We’ll detail a range of potential outcomes, and the limited wiggle room P has without having to restructure its business model
  • Web IV Catalyst Calendar: The Register’s response is a near-term risk for both bulls/bears, but is not a binary event; it’s tilted against P (i.e. treading water vs. drowning)

 

Speaker Series: David Oxenford, Counsel to Webcasting Companies regarding CRB proceedings (2pm EDT)

  • Introductory Discussion: Explanation of the relevant statutes regarding the Web IV proceeding (including where may be wrong)
  • Services vs. SoundExchange: Discussion regarding the Services’ primary arguments in the Web IV proceeding
  • Anonymous Q&A: 30-minute session to field your questions

 

Dialing instructions will be provided Thursday morning.  Let us know if you have any questions beforehand.   

 

Hesham Shaaban, CFA


@HedgeyeInternet 

 


MONDAY MORNING RISK MONITOR | RISK IS GROWING

Takeaway: High yield rates and the TED Spread are both signaling that risk is rising despite the Fed's decision to remain at bay.

Key Takeaway:

While equities were broadly weak on the Fed's decision to keep rates unchanged, CDS tightened around the globe. That said, counterparty risk, as measured by the TED spread, rose notably last week on the Fed's decision. The TED Spread increased by +5 bps to 36 bps. Additionally, High Yield rates increased by +21 bps to 7.30%. 


Current Ideas:


MONDAY MORNING RISK MONITOR | RISK IS GROWING - RM19

 

Financial Risk Monitor Summary

• Short-term(WoW): Negative / 3 of 12 improved / 3 out of 12 worsened / 6 of 12 unchanged
• Intermediate-term(WoW): Negative / 4 of 12 improved / 5 out of 12 worsened / 3 of 12 unchanged
• Long-term(WoW): Negative / 1 of 12 improved / 2 out of 12 worsened / 9 of 12 unchanged

MONDAY MORNING RISK MONITOR | RISK IS GROWING - RM15

 

1. U.S. Financial CDS – While the stock market fell following the Fed's meeting, the perceived risk of default for domestic financial institutions declined last week. Swaps tightened for 18 out of 27 domestic financial institutions.

Tightened the most WoW: HIG, WFC, CB
Widened the most WoW: MMC, LNC, GNW
Tightened the most WoW: CB, AGO, ALL
Widened the most MoM: SLM, MMC, LNC

MONDAY MORNING RISK MONITOR | RISK IS GROWING - RM1

 

2. European Financial CDS – Similar to the U.S., European equities fell last week. However, CDS mostly tightened with an average change of -8 bps.

 

MONDAY MORNING RISK MONITOR | RISK IS GROWING - RM2

 

3. Asian Financial CDS – Bank swaps tightened broadly in the Asian region, especially in China and India. Chinese banks' CDS all tightened by -11 bps, Indian banks' CDS between -6 and -7 bps.

MONDAY MORNING RISK MONITOR | RISK IS GROWING - RM17

 

4. Sovereign CDS – Sovereign swaps mostly tightened over last week. Portuguese sovereign swaps tightened the most, by -11 bps to 160.

MONDAY MORNING RISK MONITOR | RISK IS GROWING - RM18

 

MONDAY MORNING RISK MONITOR | RISK IS GROWING - RM3

 

MONDAY MORNING RISK MONITOR | RISK IS GROWING - RM4


5. Emerging Market Sovereign CDS – Emerging market swaps tightened last week. During the week, Indonesian swaps tightened the most, by -32 bps to 213. Also, Russian swaps tightened by -18 bps last week. That brings Russian CDS' month-over-month change to -68 bps, likely due in part to oil prices sustaining a slight rise over that period.

MONDAY MORNING RISK MONITOR | RISK IS GROWING - RM16

MONDAY MORNING RISK MONITOR | RISK IS GROWING - RM20

6. High Yield (YTM) Monitor – High Yield rates rose 21 bps last week, ending the week at 7.30% versus 7.09% the prior week.

MONDAY MORNING RISK MONITOR | RISK IS GROWING - RM5

 

7. Leveraged Loan Index Monitor – The Leveraged Loan Index fell 3.0 points last week, ending at 1867.

 

MONDAY MORNING RISK MONITOR | RISK IS GROWING - RM6

 

8. TED Spread Monitor – The TED spread rose 5 basis points last week, ending the week at 36 bps this week versus last week’s print of 31 bps.

 

MONDAY MORNING RISK MONITOR | RISK IS GROWING - RM7

 

9. CRB Commodity Price Index – The CRB index fell -0.8%, ending the week at 194 versus 196 the prior week. As compared with the prior month, commodity prices have increased 1.5%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

MONDAY MORNING RISK MONITOR | RISK IS GROWING - 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 10 bps.

 

MONDAY MORNING RISK MONITOR | RISK IS GROWING - RM9

 

11. Chinese Interbank Rate (Shifon Index) –  The Shifon Index was unchanged last week at 1.90%. 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 GROWING - RM10

 

12. Chinese Steel – Steel prices in China fell 0.8% last week, or 18 yuan/ton, to 2207 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 GROWING - RM12

 

13. 2-10 Spread – Last week the 2-10 spread tightened to 145 bps, -3 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 GROWING - RM13

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 4.1% upside to TRADE resistance and 2.6% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR | RISK IS GROWING - RM14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 

 


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CHART OF THE DAY: Performance Lessons of the Last 3 Months

Editor's Note: The chart and brief excerpt below are from today's Early Look written by Hedgeye CEO Keith McCullough. Click here if you're tired of lousy, consensus research and want to stay a step or two ahead of the macro herd.

 

CHART OF THE DAY: Performance Lessons of the Last 3 Months - zz chart day 09.21.15 chart

 

...That’s why, from a Style Factoring perspective, if all you’ve done in the last 3 months is downshift your portfolio’s Equity Beta (i.e. sell your cyclical and chart chasing betas), you’ve beaten most of your competition.

 

Here’s how “Low-Beta” (mean performance of the Top Quartile in the SP500 vs. the Bottom Quartile) has performed:

 

  1. One-week duration = +1.1% (vs. High Beta -0.6%)
  2. One-month duration = -4.7% (vs. High Beta -6.0%)
  3. Three-month duration = -2.3% (vs. High Beta -13.7%)

 


0% Contradiction

“Contradiction insights spark the emotional reaction.”

-Dr. Gary Klein

 

While “getting off of 0%” with a rate hike (into 2015 #GrowthSlowing) is something that the same crowd that didn’t want a rate hike (into 2013 #GrowthAccelerating) is a classic Wall Street contradiction, it’s consistent. Consensus begs for what it’s positioned for.

 

As Klein goes on to explain in Chapter 5 of Seeing What Others Don’t, “Contradiction insights send us on the road to a better story. They signal that there’s something seriously wrong with the story we’re currently telling ourselves.” (pg 61)

 

Fortunately, we humble observers of Mr. Macro Market’s signals have an opportunity to obtain insights into the rate of change in Global Economic Growth & Inflation, every day. The best story you can tell yourself is that you beat consensus.

 

Back to the Global Macro Grind

 

Friday’s -1.6% drop in the SP500 came on massive volume. Total US Equity Market Volume (including dark pool) was up +24% and +26% vs. its 1-month and 1-year averages, respectively. That took the SP500 to -4.9% for the YTD and -8.1% from its YTD peak.

0% Contradiction - volume cartoon 5.20.2014

 

For the week, you might say nothing happened. Especially if you run the place, you can pretty much tell yourself whatever you want. Reality, however, is timestamped, across durations. Here’s last week’s score with a 1-month overlay as context:

 

  1. US Dollar Index flat on the week and down -1.9% in the last month
  2. Japanese Yen up another +0.5% on the wk (vs. USD) and +3.7% in the last month
  3. CRB Commodities Index -1.3% on the wk and -1.3% in the last month
  4. OIL (WTI) up another +0.7% on the wk and +4.2% in the last month
  5. Gold was the biggest macro winner last week = +3.2% on the wk and +2.0% in the last month
  6. Long-Bond (10yr Treasury) down -5 bps last wk to 2.13% (-6bps in the last month)
  7. SP500 down another -0.2% on the wk and -6.6% in the last month
  8. US Financial Stocks (XLF) -2.0% on the wk and -10.4% in the last month
  9. European Stocks (EuroStoxx600) -0.3% on the wk and -8.6% in the last month
  10. Emerging Market Stocks (MSCI Index) +3.1% on the wk and -2.4% in the last month

 

What you see here (on both a 1 week and 1 month duration) is that macro markets look a lot like they did when US and European growth slowed into the back half of 2011. The end of that move capitulated with both Gold and the Long Bond at all-time highs.

 

There’s plenty of contradiction in how the Federal Reserve depicts the #LateCycle US labor market and the “transitory” nature of both cyclical growth and inflation slowing, globally. At the same time, the market is pricing in something that looks like stagflation.

 

In other words, for the last month, you’ve made a lot more money:

 

A)     Buying Oil and Gold instead of the US and/or European stock markets

B)      Buying Long-term Bonds (and/or stocks that look like bonds) instead of “cheap” Financials

 

That said, you wanted to have timed the Fed punting on the “rate hike” right. Because being long Oil and Emerging Market related equities would have train wrecked your year. Don’t forget that US Energy Stocks (XLE) are -20.3% YTD.

 

Got timing?

 

I certainly hope you have a way to think about it. There’s contradiction in telling your investors that you are super long-term in nature but not completely aware of the super-secular headwinds to both growth and inflation, from a demographic perspective.

 

How about sentiment?

 

Building #behavioral models to help contextualize when consensus is positioned for reality (as opposed to fighting for the positions they’ve already built up – like “Long Financials because we have to raise rates eventually”) is also critical.

 

There are plenty of indications in non-commercial futures/options positioning that suggest that consensus is now bearish on growth. This typically happens AFTER market moves:

 

  1. SP500 (Index + Emini) net SHORT position hit its highest of the year last week at -240,720 contracts
  2. US Dollar net LONG position dropped another -13,666 contracts to its lowest of the year at +39,364 contracts

 

In other words, as US growth slows, both the US currency and equity market positioning reflect both the fundamentals and our proprietary signal (both USD and SP500 are signaling bearish on both our TRADE and TREND durations).

 

That’s why, from a Style Factoring perspective, if all you’ve done in the last 3 months is downshift your portfolio’s Equity Beta (i.e. sell your cyclical and chart chasing betas), you’ve beaten most of your competition.

 

Here’s how “Low-Beta” (mean performance of the Top Quartile in the SP500 vs. the Bottom Quartile) has performed:

 

  1. One-week duration = +1.1% (vs. High Beta -0.6%)
  2. One-month duration = -4.7% (vs. High Beta -6.0%)
  3. Three-month duration = -2.3% (vs. High Beta -13.7%)

 

Yes. The performance lessons of the last 3 months are more obvious than the last month. But my point here is that even if you missed shifting your portfolio 3-6 months ago, you could have reset and beat consensus in the last month anyway.

 

Sometimes there’s 0% contradiction in sentiment being bearish, when it should be.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.11-2.21%

SPX 1
Oil (WTI) 43.48-48.71

Gold 1120-1146

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

0% Contradiction - zz chart day 09.21.15 chart


The Macro Show Replay | September 21, 2015

 


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