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MONDAY MORNING RISK MONITOR | BRAZIL & CHINA

Takeaway: Brazil burns while China goes back to the Central Bank well one more time. Chinese GDP growth dovetails with Brazilian Sov CDS at 455 bps.

Key Takeaway:

Brazil appears to be coming apart at the seams. Sovereign CDS have widened to +455 bps, up another +14 bps last week. The move is remarkable not just because of its speed and magnitude (swaps have doubled since June), but also because not much else in EM following suit. While most of EM was widening from the summer through the early Fall, the trend over the last ~4wks has been tightening, whereas Brazil continues to widen.  

More broadly, most of our heatmap below has shifted from red to green based on the latest data. One broader theme underpinning the move is the central bank action from China last week. The positive reaction came despite the country's third quarter GDP coming in at 6.9%, the slowest rate since the financial crisis. Chinese slowing continues to be a point of concern for us, and we advise caution against relying on central-bank-stimulated optimism.

MONDAY MORNING RISK MONITOR | BRAZIL & CHINA - pinocchio

 

Current Ideas:

MONDAY MORNING RISK MONITOR | BRAZIL & CHINA - RM19

 

Financial Risk Monitor Summary

• Short-term(WoW): Positive / 6 of 12 improved / 1 out of 12 worsened / 5 of 12 unchanged
• Intermediate-term(WoW): Positive / 7 of 12 improved / 2 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 | BRAZIL & CHINA - RM15

 

1. U.S. Financial CDS – Swaps tightened for 21 out of 27 domestic financial institutions. CDS for Genworth financial tightened the most, by -55 bps to 577, while CDS for MBIA widened the most, by +60 bps to 752.

Tightened the most WoW: MMC, HIG, AIG
Widened the most/ tightened the least WoW: MBI, AGO, SLM
Tightened the most WoW: ALL, MMC, ACE
Widened the most MoM: LNC, GNW, MBI

MONDAY MORNING RISK MONITOR | BRAZIL & CHINA - RM1

 

2. European Financial CDS – Swaps mostly tightened in Europe last week. Likely aiding the decrease in risk perception was a better than expected reading from the EU's PMI composite flash. Additionally, as expected, the ECB signaled no rate changes at its October policy meeting.

MONDAY MORNING RISK MONITOR | BRAZIL & CHINA - RM2

 

3. Asian Financial CDS – CDS for Chinese banks tightened following the PBOC's cutting interest rates and the reserve-requirement ratio. The central bank's move followed Chinese third quarter GDP coming in below 7% in the October 18 reading. CDS in India also tightened significantly, between 10 and 17 bps.

MONDAY MORNING RISK MONITOR | BRAZIL & CHINA - RM17

 

4. Sovereign CDS – Sovereign Swaps mostly tightened over last week. Spanish and Italian sovereign swaps tightened the most, both by -13 bps.

MONDAY MORNING RISK MONITOR | BRAZIL & CHINA - RM18

 

MONDAY MORNING RISK MONITOR | BRAZIL & CHINA - RM3

 

MONDAY MORNING RISK MONITOR | BRAZIL & CHINA - RM4


5. Emerging Market Sovereign CDS – Brazilian CDS rose another +14 bps last week to 455 bps. For context, that's roughly a doubling since the summer. What's particularly notable is that the rest of the EM complex is actually trending tighter over the last few weeks.

MONDAY MORNING RISK MONITOR | BRAZIL & CHINA - RM16

MONDAY MORNING RISK MONITOR | BRAZIL & CHINA - RM20

6. High Yield (YTM) Monitor – High Yield rates fell 15 bps last week, ending the week at 7.39% versus 7.54% the prior week.

MONDAY MORNING RISK MONITOR | BRAZIL & CHINA - RM5

7. Leveraged Loan Index Monitor  – The Leveraged Loan Index rose 3.0 points last week, ending at 1849.

MONDAY MORNING RISK MONITOR | BRAZIL & CHINA - RM6

8. TED Spread Monitor  – The TED spread rose 1 basis point last week, ending the week at 32 bps this week versus last week’s print of 31 bps.

MONDAY MORNING RISK MONITOR | BRAZIL & CHINA - RM7

9. CRB Commodity Price Index – The CRB index fell -3.1%, ending the week at 194 versus 200 the prior week. As compared with the prior month, commodity prices have decreased -1.0%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

MONDAY MORNING RISK MONITOR | BRAZIL & CHINA - 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 2 bps to 12 bps.

MONDAY MORNING RISK MONITOR | BRAZIL & CHINA - RM9

11. Chinese Interbank Rate (Shifon Index) – The Shifon Index rose 1 basis point last week, ending the week at 1.91% versus last week’s print of 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 | BRAZIL & CHINA - RM10

12. Chinese Steel – Steel prices in China fell 0.9% last week, or 19 yuan/ton, to 2138 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 | BRAZIL & CHINA - RM12

13. 2-10 Spread – Last week the 2-10 spread widened to 145 bps, 2 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

MONDAY MORNING RISK MONITOR | BRAZIL & CHINA - RM13

14. XLF Macro Quantitative Setup  – Our Macro team’s quantitative setup in the XLF shows 0.0% upside to TREND resistance and -5.9% downside to TRADE support.

MONDAY MORNING RISK MONITOR | BRAZIL & CHINA - RM14


Joshua Steiner, CFA



Jonathan Casteleyn, CFA, CMT


Retail Callouts (10/26): Retail Idea List, Holiday Free Shipping Wars Under Way, LULU, BBY, TGT

Takeaway: LULU to the top of our Short bench. Retail facing 3 margin headwinds heading into 4Q: Free Shipping, Labor Inflation, & Bloated Inventories

Hedgeye Retail Idea List

Retail Callouts (10/26): Retail Idea List, Holiday Free Shipping Wars Under Way, LULU, BBY, TGT - 10 26 15 chart1

 

We took LULU to the top of our Short bench this week. While the stock sold off with the market on Friday, we still think that there is a very high liklihood that last week's management change is a precursor to the CEO ultimately getting fired. While we think that's a bullish event, it would likely come along with another operational Black Eye (miss and guide down). When we have a better sense of the timing -- or if the stock heads higher from here -- we'll press this short meaningfully.

To see our note LULU | CEO IS ON THE BLOCK NEXT - CLICK HERE

 

BBY, TGT, WMT, AMZN - Best Buy starts the move to free holiday shipping this year, announcing free shipping with no minimum order through Jan. 2.

(http://www.ecommercebytes.com/cab/abn/y15/m10/i26/s03)

BBY has kicked off the Free Shipping wars as we'll call them this year with a $0 free shipping promotion that kicked off on Sunday. We can't think of many things on the Best Buy site that we would actually buy that fall below the old $35 threshold, but in the rare instance that a consumer wants to buy a $5 iPhone case (see example below), well now it ships for free.

 

Target was the biggest player in the space to turn to free shipping last year. Though we haven't seen a formal announcement from the company yet, a few promotional pieces make it appear that TGT will start a similar free shipping promotion running through the Holidays on November 1st. And we would not be surprised in the least to see several other retailers use this as an offensive weapon. Unfortunately, for almost everybody except the bullet-proof content-owners of the world (i.e. Nike) that math doesn't work and free shipping would be even more dilutive to margins. Even worse news is that if they don’t play ball, then there’s risk to the top line (i.e. if either KSS or JCP opts-in to the free-shipping game, they both lose). The way we see it, retail is facing three margin headwinds heading into the quarter 1) free shipping, 2) labor inflation, and 3 bloated inventory positions. 

Retail Callouts (10/26): Retail Idea List, Holiday Free Shipping Wars Under Way, LULU, BBY, TGT - 10 26 15 chart2

Retail Callouts (10/26): Retail Idea List, Holiday Free Shipping Wars Under Way, LULU, BBY, TGT - 10 26 15 chart3

 

LULU - Lululemon plans to expand the West Edmonton mall store which does $7000/SqFt.  Taking size from 3.600 SqFt to 7,000 SqFt

(http://www.retail-insider.com/retail-insider/2015/10/lululemon)

 

JCP - J.C. Penney cutting 300 of 3400 positions at HQ

(http://www.retailingtoday.com/article/jc-penney-letting-go-00-hq)

 

WMT - Wal-Mart continues pressure on vendors, looking to reduce SKUs and extend its payment windows.

(http://www.wsj.com/articles/wal-mart-shrinks-the-big-box-vexing-vendors-1445820469?alg=y)

 

Hudson's Bay Company Announces New Off-Price Concept with launch of Find @ Lord & Taylor

(http://investor.hbc.com/releasedetail.cfm?ReleaseID=938301)

 

TJX - The TJX Companies, Inc. Completes Acquisition of Australian off-Price Retailer Trade Secret

(http://investor.tjx.com/phoenix.zhtml?c=118215&p=irol-newsArticle&ID=2100900)

 

UA - Curry Two launched Saturday, and Dub Nation colorway to launch Tuesday

(http://footwearnews.com/2015/focus/athletic-outdoor/under-armour-curry-two-dub-nation-sneakers-release-photos-164459/)

Retail Callouts (10/26): Retail Idea List, Holiday Free Shipping Wars Under Way, LULU, BBY, TGT - 10 26 15 chart4


Earnings Season Update: Recession On Tap?

We’re still in the early days of earnings season. Here’s a quick update on where we stand. As you can see below, it's not looking good.

 

Earnings Season Update: Recession On Tap? - earnings season

 

U.S. industrial firms are continuing to warn of a pullback in spending. Why? Because we're in a global industrial recession.

 

Click headline below to read full story.

 

Earnings Season Update: Recession On Tap? - wsj recession

 

Make no mistake. This year has been the best year for short selling since 2008 - every hedge fund should have capitalized on it. There is plenty of alpha out there for hedge funds to be capturing in 2015. Here are a few recent long/short ideas we've highlighted to our customers (see Pandora, Athenahealth and Boyd Gaming in respective order herehere and here.)

 

Hedgeye Macro analyst Darius Dale chimed in on these developments:

 

Earnings Season Update: Recession On Tap? - darius

 

Earnings Season Update: Recession On Tap? - darius 2

 

On a related note, I think hedgies shorting the lows and then chasing these highs will be one major reason why stocks crash again.


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Monday Mashup

Monday Mashup - CHART 1

 

RECENT NOTES

10/23/15 DMND | WHO WILL BE PICKING UP THE PIECES? LOOKS LIKE K

10/16/15 PEP | EXPANDING INTO SNACKS AND BREAKFAST?

10/16/15 REPLAY | THOUGHT LEADER CALL | LOOMING CRASH IN BEEF

10/01/15 CAG | IN THE BEGINNING

 

SECTOR PERFORMANCE

Food and organic stocks that we follow underperformed the XLP last week. The XLP was up +2.2% last week, the top performers on a relative basis from our list were Mead Johnson Nutrition (MJN) and Diamond Foods (DMND) posting increases of +5.8% and +5.2%, respectively. The worst performing company on a relative basis on our list was WhiteWave Foods (WWAV), which was down -8.6%.

Monday Mashup - CHART 2

 

XLP VERSUS THE MARKET

The XLP has fared better than most other sectors in the YTD time period. In the last five trading days, while the SPX was up +2.1%, the XLP was up +2.2%.

Monday Mashup - CHART 3

 

QUANTITATIVE SETUP

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

Monday Mashup - CHART 4

 

Food and Organic Companies

Monday Mashup - CHART 5

Monday Mashup - CHART 6

Monday Mashup - CHART 7

 

Keith’s Three Morning Bullets

If only Europe and China could ease every night before AMZN, GOOGL, and MSFT beat …

 

  1. EM – Emerging Markets didn’t like the Euro Devaluation last week, w/ EM MSCI Index closing -0.8% on the wk – reminder that there’s a $9T USD denominated debt #bubble that deflates on these tightening events (see our Q4 Macro Themes deck) – yes, Draghi ramping USD is deflationary – ask Oil -6.3% last week, or Energy Stocks (XLE -1.4%)
  2. EURO – oversold to the low-end of my $1.10-1.13 immediate-term risk range vs USD into week’s end. European Equities had their Viagra move (+6.8% week for the DAX, crushing all US indices with the Russell only +0.3%) and are showing no follow through this morning as Spain’s PPI deflates (again) to -3.6% y/y vs -2.2% last print
  3. 10YR – German 10yr = 0.51% and UST 10yr pulls right back to 2.07% this morning as the world wakes up to more deflation and #GrowthSlowing news – don’t forget that we get US GDP for Q3 this week and most of the sell side is still in la la land there

 

SPX immediate-term risk range = 1; UST 10yr Yield 1.98-2.09%

Please call or e-mail with any questions.

 

Howard Penney

Managing Director

 

Shayne Laidlaw

Analyst

 


Monday Mashup

Monday Mashup - CHART 1

 

RECENT NOTES

10/23/2015 DNKN | THE DONUT TRACKER

10/22/2015 MCD | THE ROAD TO $150

10/21/2015 CMG | THE NEW WORLD ORDER

10/21/2015 YUM | SO MANY LEVERS TO PULL

10/20/2015 SONC | NOT INSPIRING BUT COVERING

10/20/2015 MCD | TURNING THE CORNER

10/19/2015 CMG | MOVING IT TO THE SHORT BENCH

 

UPCOMING EVENTS

Monday Mashup - CHART 12

 

RECENT NEWS FLOW

Friday, October 23

DAVE | Welcomes back founder, Famous Dave Anderson as part of a reorganization of the C-suite and Board. Anderson previously left the company in 2004 following an appointment by George W. Bush to serve as Assistant Secretary of the U.S. Department of the Interior, Indian Affairs (ARTICLE HERE)

CBRL | Cracker Barrel holder Biglari Capital filed amended 13D; issues presentation arguing against company’s need for poison pill. Biglari reports a 19.7% stake in the filing (FILING HERE)

MCD | Upgraded to overweight from neutral at Piper Jaffray, target increased to $130 from $95. View our road to $150 in the link above.

 

Wednesday, October 21

DRI | Announced that its Board has approved the tax-free spin-off of select real estate assets into Four Corners Property Trust (FCPT). Shares are expected to be distributed to Darden shareholders on November 9, 2015 (ARTICLE HERE)

DPZ | Launches purpose-built pizza delivery vehicle (ARTICLE HERE)

 

SECTOR PERFORMANCE

Casual Dining and Quick Service stocks that we follow widely underperformed the XLY last week. The XLY was up +1.7%, top performers on a relative basis from casual dining were BJRI and BBRG posting an increase of +10% and +0.4%, respectively, while ARCO and GMCR led the quick service group this week up +15.1% and +6.6%, respectively.

Monday Mashup - CHART 2

Monday Mashup - CHART 3

 

XLY VERSUS THE MARKET

The XLY has fared better than most other sectors in the YTD time period but as of late has been lagging slightly. In the last five trading days the SPX was up +2.1% and the XLY was up just +1.7%.

Monday Mashup - CHART 4

 

QUANTITATIVE SETUP

From a quantitative perspective, the XLY looks BULLISH from a TRADE and TREND perspective, TREND support is 76.57.

Monday Mashup - CHART 5

 

CASUAL DINING RESTAURANTS

Monday Mashup - CHART 6

Monday Mashup - CHART 7

Monday Mashup - CHART 8

 

QUICK SERVICE RESTAURANTS

Monday Mashup - CHART 9

Monday Mashup - CHART 10

Monday Mashup - CHART 11

 

Keith’s Three Morning Bullets

If only Europe and China could ease every night before AMZN, GOOGL, and MSFT beat …

 

  1. EM – Emerging Markets didn’t like the Euro Devaluation last week, w/ EM MSCI Index closing -0.8% on the wk – reminder that there’s a $9T USD denominated debt #bubble that deflates on these tightening events (see our Q4 Macro Themes deck) – yes, Draghi ramping USD is deflationary – ask Oil -6.3% last week, or Energy Stocks (XLE -1.4%)
  2. EURO – oversold to the low-end of my $1.10-1.13 immediate-term risk range vs USD into week’s end. European Equities had their Viagra move (+6.8% week for the DAX, crushing all US indices with the Russell only +0.3%) and are showing no follow through this morning as Spain’s PPI deflates (again) to -3.6% y/y vs -2.2% last print
  3. 10YR – German 10yr = 0.51% and UST 10yr pulls right back to 2.07% this morning as the world wakes up to more deflation and #GrowthSlowing news – don’t forget that we get US GDP for Q3 this week and most of the sell side is still in la la land there

 

SPX immediate-term risk range = 1; UST 10yr Yield 1.98-2.09%

 

Please call or e-mail with any questions.

 

Howard Penney

Managing Director

 

Shayne Laidlaw

Analyst

 


CHART OF THE DAY: 6 Market Consequences of #Draghi's Devaluation

 

CHART OF THE DAY: 6 Market Consequences of #Draghi's Devaluation  - 10.26.15 EL chart

 

Editor's note: This is an excerpt from today's Early Look written by Hedgeye CEO Keith McCullough, in which he recaps last week's market gyrations after ECB President Mario Draghi effectively devalued the euro.

 

On a week-over-week basis, with Draghi Devaluing the Euro -2.9% (vs. USD) here’s what happened in Global Macro markets:

 

  1. US Dollar Index ripped at +2.6% weekly gain, taking it to +7.5% YTD and +13.1% year-over-year
  2. Canadian Dollars deflated another -1.9% week-over-week to -11.7% YTD and -14.7% year-over-year
  3. Commodities (CRB Index) got tagged for a -2.9% #deflation on the week, -15.8% YTD, and -28.9% year-over-year
  4. Oil (WTIC) deflated another -6.3% week-over-week, crashing -24.8% YTD, and -44.1% year-over-year
  5. Copper deflated -2.3% on the week, taking it to -17.0% YTD, and still in crash mode -22.5% year-over-year

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