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MONDAY MORNING RISK MONITOR | THE DEATH STAR

Takeaway: The Fed is fulfilling its destiny as the Death Star aimed at US and Global Growth. Meanwhile, the EU put up 30 bps of growth in 3Q15.

MONDAY MORNING RISK MONITOR | THE DEATH STAR - RM11

 

Key Takeaway:

Three major stimuli drove a marked increase in risk last week: a rising expectation for a Fed rate hike into an already slowing growth environment, European GDP growth coming in at a meager 0.3%, and Portugal's government effectively falling. Most notably, concerns over credit risk ballooned last week with the high yield YTM rising by +42 bps to 7.84% and the Euribor-OIS spread widened by +4 bps to 15 bps. Beyond this, the growing conviction for a December Fed rate hike has the dollar up and commodities down 4.8% on the week and 7.4% on the month. This is further exacerbating EM weakness in places like Brazil and Russia.

 

Short-term risk measures were mostly negative last week while intermediate-term measures were more positive and long-term measures were mixed.


Current Ideas:


MONDAY MORNING RISK MONITOR | THE DEATH STAR - RM19

 

Financial Risk Monitor Summary

• Short-term(WoW): Negative / 2 of 12 improved / 5 out of 12 worsened / 5 of 12 unchanged
• Intermediate-term(WoW): Positive / 6 of 12 improved / 4 out of 12 worsened / 2 of 12 unchanged
• Long-term(WoW): Negative / 2 of 12 improved / 2 out of 12 worsened / 8 of 12 unchanged

MONDAY MORNING RISK MONITOR | THE DEATH STAR - RM15

 

 

1. U.S. Financial CDS – Swaps widened for 15 out of 27 domestic financial institutions. Bond insurers MBIA and Assured Guaranty CDS widened by 71 bps and 23 bps respectively on concerns that Puerto Rico is approaching default. Meanwhile, swaps for MGIC and Radian widened by 19 and 18 bps, respectively.

Tightened the most WoW: LNC, COF, JPM
Widened the most WoW: MBI, MTG, AGO
Tightened the most WoW: MMC, BAC, JPM
Widened the most MoM: ACE, RDN, CB

MONDAY MORNING RISK MONITOR | THE DEATH STAR - RM1

 

2. European Financial CDS – Swaps mostly widened in Europe last week as 3Q15 Eurozone GDP growth came in at only 0.3%. Portuguese and Greek CDS were outliers, as usual.

MONDAY MORNING RISK MONITOR | THE DEATH STAR - RM2

 

3. Asian Financial CDS – Swaps among Asian financials were mixed last week. Indian swaps were mostly wider on concerns over a rate hike by the U.S. Federal Reserve.

MONDAY MORNING RISK MONITOR | THE DEATH STAR - RM17

 

4. Sovereign CDS – Portuguese sovereign swaps widened by +45 bps to 215 as the country's government failed to pass its legislative program through the left-dominated parliament. Outside of Portugal, however, sovereign swaps were little changed. 

MONDAY MORNING RISK MONITOR | THE DEATH STAR - RM18

 

MONDAY MORNING RISK MONITOR | THE DEATH STAR - RM3

 

MONDAY MORNING RISK MONITOR | THE DEATH STAR - RM4


5. Emerging Market Sovereign CDS – Emerging market swaps mostly widened last week on concerns over a stronger dollar from a possible Fed rate hike. Brazilian sovereign swaps widened the most, by +29 bps to 434.
MONDAY MORNING RISK MONITOR | THE DEATH STAR - RM16

MONDAY MORNING RISK MONITOR | THE DEATH STAR - RM20

6. High Yield (YTM) Monitor – High Yield rates rose 42 bps last week, ending the week at 7.84% versus 7.42% the prior week.

MONDAY MORNING RISK MONITOR | THE DEATH STAR - RM5

7. Leveraged Loan Index Monitor  – The Leveraged Loan Index fell 8.0 points last week, ending at 1837.

MONDAY MORNING RISK MONITOR | THE DEATH STAR - RM6

8. TED Spread Monitor  – The TED spread fell 2 basis points last week, ending the week at 24 bps this week versus last week’s print of 26 bps.

MONDAY MORNING RISK MONITOR | THE DEATH STAR - RM7

9. CRB Commodity Price Index – The CRB index fell -4.8%, ending the week at 185 versus 194 the prior week. As compared with the prior month, commodity prices have decreased -7.4%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

MONDAY MORNING RISK MONITOR | THE DEATH STAR - 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 4 bps to 15 bps.

MONDAY MORNING RISK MONITOR | THE DEATH STAR - RM9

11. Chinese Interbank Rate (Shifon Index) – The Shifon Index was unchanged vs last week, ending the week at 1.79%. 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 | THE DEATH STAR - RM10

12. Chinese Steel – Steel prices in China fell 2.1% last week, or 45 yuan/ton, to 2107 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 | THE DEATH STAR - RM12

13. 2-10 Spread – Last week the 2-10 spread tightened to 143 bps, -1 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

MONDAY MORNING RISK MONITOR | THE DEATH STAR - RM13

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 2.0% upside to TRADE resistance and 1.1% downside to TRADE support.

MONDAY MORNING RISK MONITOR | THE DEATH STAR - RM14


Joshua Steiner, CFA



Jonathan Casteleyn, CFA, CMT


Monday Mashup

Monday Mashup - CHART 1

 

RECENT NOTES

11/13/15 NUS | SHOW ME THE MONEY!

11/13/15 NUS | BLACK BOOK PRESENTATION REPLAY

11/10/15 HAIN | THE COMPETITIVE ISSUES ARE JUST BEGINNING

11/05/15 BDBD | ADDING IT TO THE LONG BENCH

 

SECTOR PERFORMANCE

Food and organic stocks that we follow underperformed the XLP last week. The XLP was down -2.7% last week, the top performers on a relative basis from our list were Amira Natural Foods (ANFI) and Dean Foods (DF) posting increases of +34.8% and +5.8%, respectively. The worst performing companies on a relative basis on our list were Flowers Foods (FLO) and Hain Celestial (HAIN), which were down -9.1% and -6.9%, respectively.

Monday Mashup - CHART 2

 

XLP VERSUS THE MARKET

Monday Mashup - CHART 3

 

QUANTITATIVE SETUP

From a quantitative perspective, the XLP is BEARISH 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

<CHART8>

 

Keith’s Three Morning Bullets

Both US and European Equity Beta signaled immediate-term oversold into Friday’s close:

 

  1. EURO – down another -0.4% vs. USD at $1.07 this morning with the more important line of support being the YTD low of $1.05. While Dudley’s latest comments on “inflation continues to run well below the Fed’s target” are new/dovish this am, the FX market is obviously focused on the tragic events in France
  2. KOSPI – last week was ugly for everything Global Growth Expectations and KOSPI continued to break-down overnight down another -1%, taking it’s month-over-month decline from OCT’s counter TREND bounce to -4.3%
  3. COPPER – fresh new lows (again) this morning as Copper’s #Deflation Crash continues, -1.1% to $2.12/lb – the 6 month crash in Copper is -26% vs. WTI Oil’s at -35% - the Fed would have to back off the DEC hike to arrest the #Deflation

 

SPX immediate-term risk range = 1; UST 10yr Yield 2.15-2.36%

 

Please call or e-mail with any questions.

 

Howard Penney

Managing Director

 

Shayne Laidlaw

Analyst

 


Hedgeye to Host First “Macrocosm” Investor Conference

Exclusive event will feature premier global investors and thought leaders

 

FOR IMMEDIATE RELEASE

 

STAMFORD, Conn., November 16, 2015 -- Hedgeye Risk Management announced today that it is hosting “Macrocosm: The Dock Debates” to be held at The Loading Dock in Stamford, CT on November 18th. The conference is the independent financial research and media firm’s first investor conference and will showcase premier thought leaders and investors from across the globe.

 

Hedgeye to Host First “Macrocosm” Investor Conference - z mac

 

A series of speakers and debates will illuminate key market and economic topics and themes that will impact investors over the near and longer term.

 

The Macrocosm Investor Conference will feature hedge fund managers including Greenlight Capital’s David Einhorn; Lucerne Capital’s Pieter Taselaar; and Critical Mass Partners’ Mike Taylor, as well as Michael Aronstein, Chairman and CEO of Marketfield Asset Management.

 

Additional speakers include James “Jim” Rickards, bestselling author of “Currency Wars” and “The Death of Money”; Daniel Lacalle, renowned European economist and author; Jurrien Timmer, director of Global Macro at Fidelity Investments and Neil Howe, a historian, economist and demographer credited with coining the term “Millennials” and best known for his work with William Strauss on social generations and generational cycles in American history.

 

Hedgeye CEO Keith McCullough will moderate each 30 minute debate. Approximately 15 minutes will be allotted after each presentation for Q&A from conference attendees. The interactive forum intends to give behind-the-scenes access to listen to and interact with some of the greatest minds across numerous fields.

 

“The breadth and depth of the topics we are going to cover at Macrocosm offer a unique learning opportunity that Wall Street simply can’t provide,” said McCullough. “We are bringing together some of the world’s greatest investing minds in a small, interactive setting designed to encourage a free flowing exchange of ideas.”

 

This conference is a private event and is closed to the media.

 

*For more information about Macrocosm please email sales@hedgeye.com

   

ABOUT HEDGEYE RISK MANAGEMENT


Hedgeye Risk Management is an independent investment research and media firm. Focused exclusively on generating and delivering actionable investment ideas in a proven buy-side process, the firm combines quantitative, bottom-up and macro analysis with an emphasis on timing. The Hedgeye team features some of the world's most regarded research analysts, all with buy-side experience, covering Macro, Financials, Energy, Healthcare, Retail, Gaming, Lodging & Leisure (GLL), Restaurants, Industrials, Consumer Staples, Internet & Media, Housing, and Materials.

 

CONTACT: Dan Holland

dholland@hedgeye.com

203.562.6500


Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.

CHART OF THE DAY: Has U.S. Consumer Confidence Peaked?

Editor's Note: Below is a brief excerpt and chart from this morning's Early Look written by Hedgeye CEO Keith McCullough. Click here to subscribe. 

 

"... As you can see in today’s Chart of The Day, US Consumer Confidence looks a lot like the US economic and profit cycle. Elevator on the way up, and windows on the way down. Since it’s behavioral, it makes sense – unless you don’t do #behavioral.

 

If you don’t do history, math, and behavioral – you don’t do macro like we do. And we’d humbly submit that if you don’t do rate of change macro like we do, macro is currently doing you."

 

CHART OF THE DAY: Has U.S. Consumer Confidence Peaked? - 11.16.15 EL chart


Liberty's Colossus

“Here at our sea-washed, sunset gates shall stand
A mighty woman with a torch, whose flame
Is the imprisoned lightning, and her name
Mother of Exiles” –New Colossus

 

I’m on the Acela train to Boston this morning and, admittedly, having a hard time thinking about macro markets as the sun rises on the East Coast of Liberty’s Colossus.

 

The New Colossus is commonly known as the Statue of Liberty poem. It’s a sonnet that was written by Emma Lazarus in 1883.  Interestingly, the poem wasn’t placed on the pedestal of the statue until 1903. History often takes time to find her truths.

 

En francais, on appelle le statue La Liberte Eclairant Le Monde. And whether your mother’s tongue is French like mine’s is this morning or not… no matter what your politics, we should all stand together to defend all that is truth, liberty, and justice in this world this morning.

Liberty's Colossus - statue of liberty

 

Back to the Global Macro Grind

 

My favorite long-term risk management quote is more of a question really. “What is the truth?” is something Ray Dalio from Bridgewater Associates coined a long-time ago. I like it because it attempts to simplify the complex.

 

Unlike economic and political ideologies, the rates of change in economies aren’t complex. They are simple sine curves that anyone with an excel spreadsheet can map. They (like the US Federal Reserve is supposed to be) are data dependent.

 

In our Hedgeye GIP (Growth, Inflation, Policy) model, we focus primarily on trying to probability-weight the prospective change in monetary policy by measuring the rates of change in both growth and inflation, across multiple durations.

 

Last Friday was an important “data” day as we were able to see the truth on two important growth and inflation scores:

 

  1. GROWTH – US Retail Sales slowed (again) from last November’s #ConsumerCycle high of 4.7% to 1.7% y/y
  2. INFLATION – Producer Price #Deflation hit a new cycle low of -1.6% y/y (year-over-year)

 

Since US Retailers like Macy’s (M), Nordstrom’s (JWN), and Kohl’s (KSS) had been crashing coming into this #LateCycle consumption data slowing, it was quite bearish to see both those stocks and the US Retail (XRT) sector hit new lows on the “news.”

 

Neither was it surprising to us that the 6-month crash in inflation expectations continued:

 

  1. CRB Commodities Index (19 commodities) lost another -3.3% on the week, taking its 6-month crash to -20.1%
  2. Copper deflated another -3.5% week-over-week, taking its 6-month crash to -26.1%
  3. Oil (WTI) got crushed (again) losing another -7.9% on the week, taking its 6-month crash to -35.6%

 

In other words, if you’ve been buying into the “global growth is bottoming – get long reflation” call for the last 6 months, you didn’t heed Hedgeye’s 18 month old advice, and probably lost whatever hope you had of having a big Q4.

 

What’s interesting to me isn’t that the Consensus Macro that missed calling for the #Deflation to begin with still thinks you should be long inflation expectations – it’s that they don’t get the link between #Deflation and #GrowthSlowing.

 

Here’s how this thing called the cycle works:

 

  1. Inflation Expectations peak and companies lose both pricing power and cyclical revenue “growth”
  2. As the corporate profit cycle peaks and slows, companies start firing employees to make “earnings”
  3. As people make less money and/or get fired, consumer confidence rolls over from its cycle peak

 

As you can see in today’s Chart of The Day, US Consumer Confidence looks a lot like the US economic and profit cycle. Elevator on the way up, and windows on the way down. Since it’s behavioral, it makes sense – unless you don’t do #behavioral.

 

If you don’t do history, math, and behavioral – you don’t do macro like we do. And we’d humbly submit that if you don’t do rate of change macro like we do, macro is currently doing you.

 

While it doesn’t surprise us that the alleged bull market in US stocks still has the Dow, SP500, and Russell 2000 all down for 2015 YTD (as we head into the end of 2015), we do find the level of unawareness on US Equity Style Factor exposures quite low.

 

From a Style Factor perspective, here were the Worst 3 Things you could have been long both last week (and for the last 6 months):

 

  1. Small Cap Stocks (bottom quartile of the SP500) were -5.3% last week and are -13.8% in the last 6 months
  2. High Short Interest Stocks were -5.4% last week and are -14.2% in the last 6 months
  3. High Beta Stocks were -5.8% last week and are -14.0% in the last 6 months

 

In other words, even if your competitors completely missed making the #Deflation and #GrowthSlowing call 6 months ago, they could have learned from those mistakes and not chased the 1-month counter-TREND bounce in October.

 

But they didn’t learn. And that’s a good thing for those of us who sought the truth as opposed to a preferred compensation outcome.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.15-2.36%

SPX 1
RUT 1129--1175

VIX 16.85-21.66
EUR/USD 1.06-1.08
Oil (WTI) 39.96-44.05
Copper 2.12-2.23

 

Best of luck out there this week and God bless truth and liberty,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Liberty's Colossus - 11.16.15 EL chart


Monday Mashup

Monday Mashup - CHART 1

 

RECENT NOTES

11/12/2015 JACK | THE SHARKS ARE CIRCLING

11/05/2015 HABT | DEFYING GRAVITY

11/04/2015 DRI | ARE OLIVE GARDEN EXPECTATIONS TOO HIGH?

11/03/2015 BLMN | CAN YOU TEACH AN OLD DOG NEW TRICKS

 

RECENT NEWS FLOW

Thursday, November 12

YUM | Yum! Brands China division reported October same-store sales growth of 5%, comparable to the divisions 6% growth in September. October results consist of 10% growth at KFC and a 9% decline at Pizza Hut.  China division same-store sales growth guidance for the fourth quarter was reiterated at 0% to 4%. (ARTICLE HERE)  

JMBA | Is becoming the latest company to launch a Mobile Order app, their app will be launching in mid-November in 600 stores across the United States (ARTICLE HERE)

DPZ | Opened its first store in Belarus, the sixth new market opened in 2015 (ARTICLE HERE)

 

Monday, November 9

DNKN | Dunkin’ Donuts franchisee signs agreement to build 25 restaurants in Mexico (ARTICLE HERE)

 

SECTOR PERFORMANCE

Casual Dining and Quick Service stocks that we follow had a mixed week last week, with casual dining companies outperforming the XLY, while quick service companies underperformed. The XLY was down -4.5%, top performers on a relative basis from casual dining were RT and TXRH posting increases of +6.0% and +4.9%, respectively, while PLKI and WEN led the quick service group this week up +4.0% and +3.2%, respectively.

Monday Mashup - CHART 2

Monday Mashup - CHART 3

 

XLY VERSUS THE MARKET

Monday Mashup - CHART 4

 

QUANTITATIVE SETUP

From a quantitative perspective, the XLY looks BEARISH in the TRADE duration but BULLISH from a TREND perspective, TREND support is 77.55.

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

Both US and European Equity Beta signaled immediate-term oversold into Friday’s close:

 

  1. EURO – down another -0.4% vs. USD at $1.07 this morning with the more important line of support being the YTD low of $1.05. While Dudley’s latest comments on “inflation continues to run well below the Fed’s target” are new/dovish this am, the FX market is obviously focused on the tragic events in France
  2. KOSPI – last week was ugly for everything Global Growth Expectations and KOSPI continued to break-down overnight down another -1%, taking it’s month-over-month decline from OCT’s counter TREND bounce to -4.3%
  3. COPPER – fresh new lows (again) this morning as Copper’s #Deflation Crash continues, -1.1% to $2.12/lb – the 6 month crash in Copper is -26% vs. WTI Oil’s at -35% - the Fed would have to back off the DEC hike to arrest the #Deflation

 

SPX immediate-term risk range = 1; UST 10yr Yield 2.15-2.36%

 

Please call or e-mail with any questions.

 

Howard Penney

Managing Director

 

Shayne Laidlaw

Analyst

 


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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