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MONDAY MORNING RISK MONITOR | SLOWDOWN ON THE HOMEFRONT?

Takeaway: Risk came home last week as what had been fears primarily around Chinese contagion became fears of a domestic slowdown.

MONDAY MORNING RISK MONITOR | SLOWDOWN ON THE HOMEFRONT? - HC

 

Key Takeaway:

Last week, what had been predominantly an international risk focus became a global one with the slowdown in China converging with an especially soft U.S. jobs report for September. We've been flagging in our weekly initial jobless claims note that the US economy is late cycle. The September NFP report obviously raises the stakes.

 

Beyond the weak U.S. jobs report, the latest Chinese PMI reading showed the fastest deterioration since March 2009 and Japanese industrial production fell short of expectations last week. In response, CDS spreads widened globally and high yield credit deteriorated further with the YTM rising by 51 bps to 8.16% - the highest level since 2012 - while the 10-year Treasury yield came in sharply. #Risk-Off

 

Risk indicators in our heatmap below are decidedly negative on the short and intermediate term. Long-term indicators remain mixed.

Current Ideas:


MONDAY MORNING RISK MONITOR | SLOWDOWN ON THE HOMEFRONT? - RM19

 

Financial Risk Monitor Summary

• Short-term(WoW): Negative / 1 of 12 improved / 4 out of 12 worsened / 7 of 12 unchanged
• Intermediate-term(WoW): Negative / 1 of 12 improved / 8 out of 12 worsened / 3 of 12 unchanged
• Long-term(WoW): Negative / 2 of 12 improved / 2 out of 12 worsened / 8 of 12 unchanged

MONDAY MORNING RISK MONITOR | SLOWDOWN ON THE HOMEFRONT? - RM15

 

1. U.S. Financial CDS – Swaps widened for 20 out of 27 domestic financial institutions as the jobs report came in at a disappointing 142k jobs added in September. Meanwhile, the challenges continue to mount for Sallie Mae (SLM) as the CDS blew out by a further +105 bps to 732 bps, coinciding with the CFPB announcing it will explore new regulations for student loan servicers.


Tightened the most WoW: ALL, CB, ACE
Widened the most WoW: MS, C, LNC
Tightened the most WoW: CB, ALL, ACE
Widened the most MoM: SLM, LNC, MMC

MONDAY MORNING RISK MONITOR | SLOWDOWN ON THE HOMEFRONT? - RM1

 

2. European Financial CDS – Swaps mostly widened in Europe last week with the average move at 5 bps.

MONDAY MORNING RISK MONITOR | SLOWDOWN ON THE HOMEFRONT? - RM2

 

3. Asian Financial CDS – Asian CDS widened across the board last week. Fanning the flames was a Chinese PMI reading showing the fastest deterioration since March 2009 and Japanese industrial production falling short of expectations.

MONDAY MORNING RISK MONITOR | SLOWDOWN ON THE HOMEFRONT? - RM17

 

4. Sovereign CDS – Sovereign swaps were mixed over last week. Portuguese sovereign swaps tightened the most, by -5 bps to 174, while Japanese swaps widened the most, by +5 bps to 46.

MONDAY MORNING RISK MONITOR | SLOWDOWN ON THE HOMEFRONT? - RM18

 

MONDAY MORNING RISK MONITOR | SLOWDOWN ON THE HOMEFRONT? - RM3

 

MONDAY MORNING RISK MONITOR | SLOWDOWN ON THE HOMEFRONT? - RM4


5. Emerging Market Sovereign CDS – Brazilian swaps tightened an impressive -41 bps W/W to 447 bps, but outside of Brazil most of the EM space saw swaps widen. 

MONDAY MORNING RISK MONITOR | SLOWDOWN ON THE HOMEFRONT? - RM16

MONDAY MORNING RISK MONITOR | SLOWDOWN ON THE HOMEFRONT? - RM20

6. High Yield (YTM) Monitor – High Yield rates rose 51 bps last week, ending the week at 8.16% versus 7.65% the prior week.

MONDAY MORNING RISK MONITOR | SLOWDOWN ON THE HOMEFRONT? - RM5

7. Leveraged Loan Index Monitor  – The Leveraged Loan Index fell 18.0 points last week, ending at 1839.

MONDAY MORNING RISK MONITOR | SLOWDOWN ON THE HOMEFRONT? - RM6

8. TED Spread Monitor  – The TED spread fell 2 basis points last week, ending the week at 33 bps this week versus last week’s print of 34 bps.

MONDAY MORNING RISK MONITOR | SLOWDOWN ON THE HOMEFRONT? - RM7

9. CRB Commodity Price Index – The CRB index rose 0.9%, ending the week at 194 versus 192 the prior week. As compared with the prior month, commodity prices have decreased -1.3%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

MONDAY MORNING RISK MONITOR | SLOWDOWN ON THE HOMEFRONT? - 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 10 bps.

 

MONDAY MORNING RISK MONITOR | SLOWDOWN ON THE HOMEFRONT? - RM9

 

11. Chinese Interbank Rate (Shifon Index) –  The Shifon Index rose 8 basis points last week, ending the week at 1.99% versus last week’s print of 1.91%. 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 | SLOWDOWN ON THE HOMEFRONT? - RM10

 

12. Chinese Steel – Steel prices in China fell 0.5% last week, or 10 yuan/ton, to 2187 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 | SLOWDOWN ON THE HOMEFRONT? - RM12

 

13. 2-10 Spread – Last week the 2-10 spread tightened to 141 bps, -6 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR | SLOWDOWN ON THE HOMEFRONT? - RM13

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.4% upside to TRADE resistance and 2.9% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR | SLOWDOWN ON THE HOMEFRONT? - RM14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 

 


CHART OF THE DAY: A U.S. Economic Cycle Reality Check

Editor's Note: This is a chart and brief excerpt from today's Early Look written by Hedgeye CEO Keith McCullough. Click here for more information on how you can become a subscriber for $1 a day.

 

CHART OF THE DAY: A U.S. Economic Cycle Reality Check - z dd Chart of the Day

 

"...While I’m sure the Old Wall storytelling will be epic this morning on “why the jobs number wasn’t that bad” … and “stocks closed up on the day… the bottom is in…”, blah blah blah… allow me to re-interrupt with economic cycle-reality ... The jobs number sucked… and labor data will continue to suck into year-end."

 


Labor's Tragedy

“Without labor, nothing prospers.”

-Sophocles

 

Tragedy comes from the Greek word tragoidia. “It is a form of drama based on human suffering that invokes in its audience an accompanying catharsis (or pleasure) in the viewing.” (Wikipedia)

 

Sound like the US jobs market? Thankfully, I don’t need to channel my inner Greek Tragedian anymore to make a call  that US Employment is A) #LateCycle and B) #Slowing. That’s now marked-to-market, in US Treasury Yield terms.

 

Both September Non-Farm Payrolls (NFP) and Private Payrolls (PP) slowed to their weakest rate-of-change growth rate of 2015. If your bottom-up work showed that August was slowing. Well done. They revised AUG to the lowest nominal NFP gain of the year too.

Labor's Tragedy - Jobs cartoon 06.05.2015

 

Back to the Global Macro Grind

 

While I’m sure the Old Wall storytelling will be epic this morning on “why the jobs number wasn’t that bad” … and “stocks closed up on the day… the bottom is in…”, blah blah blah… allow me to re-interrupt with economic cycle-reality:

 

  1. The jobs number sucked… and labor data will continue to suck into year-end
  2. Both the US Dollar and Rates hit oversold lows Friday morning (yes, markets discount pending news)
  3. After signaling immediate-term TRADE oversold, stocks got squeezed off those morning lows too

 

Sucked? Yes. See our Chart of The Day:

 

  1. SEP Non-Farm Payrolls slowed to 1.97% year-over-year vs. the cycle peak of 2.34% in FEB
  2. SEP #Slowing = 7th straight month of slowing and < 2% growth for the 1st time in 13 months
  3. NFPs of 136k and 142k (AUG and SEP, respectively) have crashed -32% from the NOV peak of 423k

 

Btw, if they didn’t suck, you wouldn’t have seen a re-test of the YTD lows for the SP500 (Friday pre 10AM)  as the 10yr yield dove to 1.93%... But, but, but… if only everyone would have been positioned for this 3-6 months ago.

 

“So”, let’s take a step back and review what really happened week-over-week, within the context of the last 6 months:

 

  1. US Dollar Index -0.4% week-over-week and -1.6% in the last 6 months
  2. SP500 +1.0% week-over-week and -5.6% in the last 6 months
  3. Russell 2000 -0.8% week-over-week and -12.6% in the last 6 months

 

Oh, wow, Russell down with the US Dollar and US economy slowing. Imagine that. Over 80% of the Russell’s revenues are tethered to US domestic revenue expectations (*note: not “China”).

 

And on Down Dollar, Down Rates (2yr = 0.57%, 10yr 1.99%) – here’s how they achieved that SPY Up, Russell Down score:

 

  1. Basic Materials (XLB) +2.9% week-over-week (even though still -15.5% in the last 6 months)
  2. Energy Stocks (XLE) +2.5% week-over-week (even though still -17.8% in the last 6 months)
  3. Financials (XLF) -0.5% week-over-week, despite the “up tape” on Friday…

*note: more US domestic Financials exposure in the Russell than in the SP500

 

In other words, as #LateCycle growth expectations slow, Dollar Down = “reflation” of crashing prices and Rates Down = Financials Down. It’s really not that complicated. If you extend the analysis to International Equities:

 

  1. Dollar Down = Euro Up +0.2% wk-over-wk, and German DAX -1.4% on the wk (crashing -20.2% in the last 6 months)
  2. Dollar Down = Latam MSCI Equities +0.9% wk-over-wk (inline w/ SPY) but crashing -25% in the last 6 months
  3. Dollar Down = Brazilian Stocks (Bovespa) +4.7% wk-over-wk but still -11.6% in  the last 6 months

 

Yeah. Dollar Down on Super #LateCycle US growth slowing is sweet. It stops things from crashing vs. #StrongDollar, and beats up on the things everyone who thought it was “mid-cycle slowdown” is long of!

 

Post the US equity market squeeze, the best news for High Beta, Small Cap, US Equity Bears (ugly style factors) is that Consensus Macro hedge funds that shorted low (after being levered long higher) covered some of those hedges Friday afternoon.

 

The net SHORT position (CFTC non-commercial) in SP500 Index + Emini futures and options contracts moved from a YTD highs in the 2 weeks prior to -194,392 (that’s almost 32,000 contracts of less bearish positioning, week-over-week).

 

While the politicized and alleged US “labor market strength” remains a great tragedy in American storytelling, it will be interesting to see how fund manager performance problems morph from begging for a “rate hike” to cheering on more easing.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.94-2.09%

SPX 1
RUT 1070--1141
USD 95.25-96.70
EUR/USD 1.11-1.14

Gold 1125-1155

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Labor's Tragedy - z dd Chart of the Day


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The Macro Show Replay | October 5, 2015

 


Bad Jobs, Dollar Down & Rates Down

Client Talking Points

USD

Down USD on Friday as the rate of change in NFP hit another year-to-date. #Slowing low = EUR/USD up another +0.6% this morning testing $1.13 and the headline chase for everything “reflation” (from Glencore to Crude and Russian stocks) is on!

UST 2YR

After 7 consecutive failed “breakouts” > 0.75% in the 2YR, it got hammered. The UST 2YR was down -11 basis points last week and is down at 0.57% this morning (10YR = 1.99%) as Bond Bear hopes of a rate hike get blasted into 2016; rates were oversold Friday on the lows.

Stocks

But, but – “stocks are up” – sure, off those early Friday morning lows where both the Russell and S&P 500 tested year-to-date lows, and led largely by Basic Materials (XLB) reflation of +2.9% while Financials (XLF) were down with rates down  -0.5% on the week.

 

**Tune into The Macro Show with Hedgeye CEO Keith McCullough at 9:00AM ET - CLICK HERE

 

Asset Allocation

CASH 68% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 8%
FIXED INCOME 24% INTL CURRENCIES 0%

Top Long Ideas

Company Ticker Sector Duration
GIS

Our Consumer Staples team remains positive on General Mills coming out of the 2Q15 earnings call. We have been LONG GIS for the last six months and continue to have a favorable view of the company due to the following reasons:

  • Sequential improvement in cereal
  • Growth in Natural & Organic categories
  • Snacking
  • Cost cutting initiatives
  • M&A activity
PENN

Many of the regional gaming states will release September revenues next week and as we’ve written about, they should look a lot better than August. Overall same store revenue declined 5% in August (we had predicted –2%) but most of the decline was due to the calendar and a difficult comparison. For September we are projecting an increase of 2% YoY

 

Our Missouri tracker is forecasting September gaming revenues to be up 3.6% YoY. This is a 6% sequential improvement from August's YoY change of -2.5%. Meanwhile, Pennsylvania slot revenues were up 4% in September. Our thesis for a sequential rebound in September remains intact. We like PENN on the long side from these levels.

TLT

It was an important couple of weeks for those who were still wrestling with our lower-for-longer views. The brevity of the macro moves post-report Friday proves just how non-consensus that call remains in a year where the S&P 500 is down -8%. The scary thing with regard to Janet’s credibility is that bad news is now being priced in as bad news. Moreover, we believe this late-cycle weakness is likely to remain ongoing.  

Three for the Road

TWEET OF THE DAY

NEW VIDEO

"It’s Different This Time” Just Exploded https://app.hedgeye.com/insights/46680-mccullough-it-s-different-this-time-just-exploded… via @KeithMcCullough #markets

@Hedgeye

QUOTE OF THE DAY

Never try to solve all the problems at once — make them line up for you one-by-one.

Richard Sloma

STAT OF THE DAY

ITB (iShares U.S. Home Construction ETF) has seen average fourth quarter returns of +15% over the last five years.


October 5, 2015

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BULLISH TRENDS

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BEARISH TRENDS

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