prev

Crash! Boom! Bang! [Commodity Crash Continues]

Takeaway: In case you hadn't noticed, commodities are in a bear market.

The crash continues...

 

Crash! Boom! Bang! [Commodity Crash Continues] - z crash

 

In a note to subscribers this morning, Hedgeye CEO Keith McCullough (once again) highlighted the developing commodity bear market:

 

"The crash in Copper (-1.8% this am to $2.02) continues and Oil is down another -3%, testing $40 WTI (again) – hardly the green shoots a supply/demand bull is looking for, but I’m probably being too bearish looking at fact vs fiction."

 

It's no coincidence that the Copper and Oil price crash coincided during a week of U.S. dollar strength. The U.S. dollar index was up +0.6%, and +10.3% YTD, after ECB President Mario Draghi said, "We will do what we must to raise inflation as quickly as possible." That sent the Euro -1.2% on the week to -12% YTD.

 

This strong dollar event is just as deflationary a force as it was during the summer.

 

Consequently, things like Copper have plummeted. Copper is off 28% year-to-date.

 

Crash! Boom! Bang! [Commodity Crash Continues] - copper 1

 

It's happening all throughout commodities. The CRB index is down 20% year to date.

 

Crash! Boom! Bang! [Commodity Crash Continues] - 11.23.15 EL chart

 

Here is a look at some other commodities:

  • Wheat prices dropped another -1.6% on the week, taking it back into crash mode at -20.8% YTD 
  • Nickel deflated another -5.1% week-over-week, taking its crash to -41.5% YTD
  • Oil (WTI) continued to crash, closing down another -1.2% week-over-week at -30.9% YTD

 

***In related news, Saudi Arabia announced earlier this morning that it is ready to work with other countries to stabilize the price of Oil.

 

Crash! Boom! Bang! [Commodity Crash Continues] - Oil cartoon 11.20.2015

 


Monday Mashup

Monday Mashup - CHART 1

 

RECENT NOTES

11/18/15 CAG | SMOOTH MOVES

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 up +2.6% last week, the top performers on a relative basis from our list were Amira Natural Foods (ANFI) and Smuckers (SJM) posting increases of +10.6% and +6.9%, respectively. The worst performing companies on a relative basis on our list were United Natural Foods (UNFI) and WhiteWave Foods (WWAV), which were down -5.9% and -4.5%, respectively.

Monday Mashup - CHART 2

 

XLP VERSUS THE MARKET

Monday Mashup - CHART 3

 

QUANTITATIVE SETUP

From a quantitative perspective, the XLP is BEARISH in the TRADE duration, but BULLISH in the TREND duration.

Monday Mashup - CHART 4

 

Food and Organic Companies

Monday Mashup - CHART 5

Monday Mashup - CHART 6

Monday Mashup - CHART 7

Monday Mashup - CHART 8

 

Keith’s Three Morning Bullets

US stocks had their 3rd up day in the last 13 (Friday) and volume was -14% vs. it’s 1yr avg:

 

  1. USD – another #StrongDollar week in the bag (+0.6% USD Index to +10.3% YTD) after Draghi Devaluation sent the Euro -1.2% on the wk to -12% YTD – this is as deflationary a force as it was in the summer-time – FICC markets get that – Equities, not so much
  2. COMMODITIES – crash in Copper (-1.8% this am to $2.02) continues and Oil is down another -3%, testing $40 WTI (again) – hardly the green shoots a supply/demand bull is looking for, but I’m probably being too bearish looking at fact vs fiction
  3. UST 2YR – spike continues to 0.93% this morning as the Fed abandons the “data dependence” thing and goes with whatever the SP500 is doing instead – USD and short-term rates say DEC hike – so does the Yield Spread, compressing 9bps last wk, which reads as a hike perpetuating both #Deflation and #GrowthSlowing

 

SPX immediate-term risk range = 2040-2108; UST 10yr Yield 2.18-2.36%

 

Please call or e-mail with any questions.

 

Howard Penney

Managing Director

 

Shayne Laidlaw

Analyst

 


MONDAY MORNING RISK MONITOR | COMMODITY DEFLATION

Takeaway: Rising Fed expectations remain deflationary, while the situation in Europe is the exact opposite.

 

MONDAY MORNING RISK MONITOR | COMMODITY DEFLATION - RM11

 

Key Takeaway:

Global risk measures were bifurcated last week, dependent on each region's central bank behavior. U.S. bank swaps and the TED spread widened on Federal Reserve minutes showing that most FOMC participants thought conditions for a rate hike could be met by December. In contrast, European bank swaps tightened as ECB minutes conveyed a dovish position and suggested the possibility of further stimulus in December. Additionally, Chinese bank swaps tightened as the PBOC took measures to lower short-term rates.

The knock-on from Fed tightening expectations rising is that commodity prices boadly remain defalationary, falling 2.4% W/W and 5.2% M/M. One specific callout is Chinese steel, which shed another 2.3% W/W and remains in crash mode. Oddly, in spite of broad commodity deflation, sovereign swaps for Brazil and Russia both tightened materially on the week (-38 bps). 

 

Our heatmap below is predominantly negative in the short-, intermediate-, and long-term measures.

 

Current Ideas:

MONDAY MORNING RISK MONITOR | COMMODITY DEFLATION - RM19

 

Financial Risk Monitor Summary

• Short-term(WoW): Negative / 3 of 12 improved / 5 out of 12 worsened / 4 of 12 unchanged
• Intermediate-term(WoW): Negative / 5 of 12 improved / 6 out of 12 worsened / 1 of 12 unchanged
• Long-term(WoW): Negative / 2 of 12 improved / 3 out of 12 worsened / 7 of 12 unchanged

MONDAY MORNING RISK MONITOR | COMMODITY DEFLATION - RM15

 

1. U.S. Financial CDS – Swaps widened for 14 out of 27 domestic financial institutions. With Wednesday's FOMC minutes showing that most participants thought conditions for a rate hike could be met by the December meeting, the median swap widened by +2 bps from 73 to 75.

Tightened the most WoW: MTG, LNC, ACE
Widened the most WoW: CB, PRU, AXP
Tightened the most WoW: MMC, BAC, LNC
Widened the most MoM: CB, AIG, ACE

MONDAY MORNING RISK MONITOR | COMMODITY DEFLATION - RM1

 

2. European Financial CDS – Swaps mostly tightened in Europe last week as Wednesday's ECB minutes showed a strong possibility of further stimulus next month and ECB President Mario Draghi provided dovish rhetoric during a speech on Friday.

MONDAY MORNING RISK MONITOR | COMMODITY DEFLATION - RM2

 

3. Asian Financial CDS – In China, financial swaps tightened on news that the PBOC was cutting rates yet again. Additionally, India's ICICI Bank's swaps tightened significantly, falling -19 bps to 166.

MONDAY MORNING RISK MONITOR | COMMODITY DEFLATION - RM17

 

4. Sovereign CDS – Sovereign Swaps mostly tightened over last week. Portuguese sovereign swaps tightened the most, by -24 bps to 191.

MONDAY MORNING RISK MONITOR | COMMODITY DEFLATION - RM18

 

MONDAY MORNING RISK MONITOR | COMMODITY DEFLATION - RM3

 

MONDAY MORNING RISK MONITOR | COMMODITY DEFLATION - RM4


5. Emerging Market Sovereign CDS – Emerging market swaps mostly tightened last week. Russian and Brazilian swaps led the way, tightening by -39 bps to 253 and -38 bps to 396, respectively.

MONDAY MORNING RISK MONITOR | COMMODITY DEFLATION - RM16

MONDAY MORNING RISK MONITOR | COMMODITY DEFLATION - RM20

6. High Yield (YTM) Monitor – High Yield rates fell 3 bps last week, ending the week at 7.82% versus 7.84% the prior week.

MONDAY MORNING RISK MONITOR | COMMODITY DEFLATION - RM5

7. Leveraged Loan Index Monitor  – The Leveraged Loan Index fell 5.0 points last week, ending at 1832.

MONDAY MORNING RISK MONITOR | COMMODITY DEFLATION - RM6

8. TED Spread Monitor  – The TED spread rose 4 basis points last week, ending the week at 28 bps this week versus last week’s print of 24 bps.

MONDAY MORNING RISK MONITOR | COMMODITY DEFLATION - RM7

9. CRB Commodity Price Index – The CRB index fell -2.4%, ending the week at 184 versus 188 the prior week. As compared with the prior month, commodity prices have decreased -5.2%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

MONDAY MORNING RISK MONITOR | COMMODITY DEFLATION - 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 16 bps.

MONDAY MORNING RISK MONITOR | COMMODITY DEFLATION - RM9

11. Chinese Interbank Rate (Shifon Index) – The Shifon Index was flat last week at 1.78%. 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 | COMMODITY DEFLATION - RM10

12. Chinese Steel – Steel prices in China fell 2.3% last week, or 48 yuan/ton, to 2059 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 | COMMODITY DEFLATION - RM12

13. 2-10 Spread – Last week the 2-10 spread tightened to 134 bps, -9 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

MONDAY MORNING RISK MONITOR | COMMODITY DEFLATION - RM13

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.3% upside to TRADE resistance and 1.2% downside to TRADE support.

MONDAY MORNING RISK MONITOR | COMMODITY DEFLATION - RM14


Joshua Steiner, CFA



Jonathan Casteleyn, CFA, CMT


get free cartoon of the day!

Start receiving Hedgeye's Cartoon of the Day, an exclusive and humourous take on the market and the economy, delivered every morning to your inbox

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.

Monday Mashup

Monday Mashup - CHART 1

 

RECENT NOTES

11/23/15 CMG | SHORT THE FUNDAMENTALS

11/20/15 WEN | REMOVING THE SHORT | GOING LONG

11/20/15 ZOES | ALL IS WELL IN THE KITCHEN

11/17/15 CMG FLASH CALL | SHORT | HYPOCRISY THEORY GAINING MOMENTUM

11/16/15 MCD | THE DAY MCCAFE DIED

 

RECENT NEWS FLOW

Friday, November 20

HABT | Is postponing its proposed follow-on offering of common stock because of current capital market conditions (ARTICLE HERE)

CMG | National outbreak of E. coli at Chipotle restaurant continued to spread (CDC WEBSITE) (FDA WEBSITE)

MCD | Will try new smaller “Originals” unit in France, paying tribute to the early beginnings of the company (ARTICLE HERE)

 

Monday, November 16

MCD | To offer ‘McPick” 2 for $2 menu starting on January 4th, with heavy marketing backing from the company (ARTICLE HERE)

YUM | Taco Bell to serve cage free eggs at all 6,000 U.S. locations by the end of 2016 (ARTICLE HERE)

 

SECTOR PERFORMANCE

Casual Dining and Quick Service stocks that we follow widely underperformed the XLY, last week, which was up 4.5%. Top performers on a relative basis from casual dining were FRGI and KONA posting increases of +5.8% and +5.0%, respectively, while ARCO and WEN led the quick service group this week up +10.1% and +7.6%, 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 BULLISH from a TRADE and TREND perspective, TREND support is 77.99.

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

US stocks had their 3rd up day in the last 13 (Friday) and volume was -14% vs. it’s 1yr avg:

 

  1. USD – another #StrongDollar week in the bag (+0.6% USD Index to +10.3% YTD) after Draghi Devaluation sent the Euro -1.2% on the wk to -12% YTD – this is as deflationary a force as it was in the summer-time – FICC markets get that – Equities, not so much
  2. COMMODITIES – crash in Copper (-1.8% this am to $2.02) continues and Oil is down another -3%, testing $40 WTI (again) – hardly the green shoots a supply/demand bull is looking for, but I’m probably being too bearish looking at fact vs fiction
  3. UST 2YR – spike continues to 0.93% this morning as the Fed abandons the “data dependence” thing and goes with whatever the SP500 is doing instead – USD and short-term rates say DEC hike – so does the Yield Spread, compressing 9bps last wk, which reads as a hike perpetuating both #Deflation and #GrowthSlowing

 

SPX immediate-term risk range = 2040-2108; UST 10yr Yield 2.18-2.36%

 

Please call or e-mail with any questions.

 

Howard Penney

Managing Director

 

Shayne Laidlaw

Analyst

 


CHART OF THE DAY: An Epic Crash In Commodities

 CHART OF THE DAY: An Epic Crash In Commodities - 11.23.15 EL chart

 

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

 

"... If all you looked at was the US stock market last week, your economic forecast would have gone up. Unfortunately, commodity #Deflation and a compression in the US Treasury Yield Spread didn’t corroborate the permanently bullish (consensus) US GDP outlook...

 

Commodities (CRB) Index deflated to new 2015 lows, -0.6% on the week to -20.1% YTD"


Avail Us From Consensus

“I wish to avail myself of all that is already known…”

-Wilbur Wright

 

That’s a quote from the latest history book I’ve cracked open – The Wright Brothers, by David McCullough (unfortunately, no relation!). Wilbur was the older of the two brothers. Born in 1867, he wrote the aforementioned to the Smithsonian Institution, in 1899.

 

The Smithsonian Institution, “established in 1846 for the increase and diffusion of knowledge” is run by the US Government. I’m going to write them a letter, availing myself of all linear forecasting relics used by both the Old Wall and the United States Federal Reserve.

 

If all you looked at was the US stock market last week, your economic forecast would have gone up. Unfortunately, commodity #Deflation and a compression in the US Treasury Yield Spread didn’t corroborate the permanently bullish (consensus) US GDP outlook.

 

Avail Us From Consensus - bear gdp

 

Back to the Global Macro Grind

 

What’s most interesting about being a contrarian on either the corporate profit cycle and/or US GDP #GrowthSlowing into the 1st half of 2016 is that you don’t have to avail yourself of the data that is already known.

 

That’s right. It’s all right there, sitting right in front of you. In rate of change terms, data “dependence” hasn’t been so clearly bearish on both inflation and growth expectations (at the same time) since the 2nd half of 2008.

 

Maybe that’s the new bull case.

 

If it’s not, maybe it was the ECB’s Super Mario (Draghi) devaluing the Euro (again) last week. If you’re not long commodities and/or their linked cash flowing expectations, that is.

 

With the EUR/USD down another -1.2% to -12.0% YTD last week, here’s what happened in FICC (Fixed Income, Currencies, and Commodities):

 

  1. US Dollar Index closed up another +0.6% on the week, taking it to +10.3% YTD
  2. Japanese Yen was -0.1% week-over-week, taking it to -2.5% YTD
  3. Canadian Dollar was deflated another -0.2% on the week, taking it to -12.9% YTD
  4. Commodities (CRB) Index deflated to new 2015 lows, -0.6% on the week to -20.1% YTD
  5. Oil (WTI) continued to crash, closing down another -1.2% week-over-week at -30.9% YTD
  6. Copper crashed another -6.1% last week, taking its 2015 #Deflation to -27.8% YTD

 

That’s right. The same things that blew out credit spreads at the end of the summer are still in motion. Here are three more things to consider on that front:

 

  1. Industrial Supply/Demand – Nickel deflated another -5.1% week-over-week, taking its crash to -41.5% YTD
  2. Food Supply/Demand – Wheat prices dropped another -1.6% on the week, taking it back into crash mode at -20.8% YTD
  3. Yield Spread – US Treasury 10yr Yield MINUS 2yr Yield = 135 basis points wide, -9 bps on the week, and -16bps YTD

 

Yeah, that last one kind of sucks. If you’re this character at the San Francisco Federal Reserve, that is. His name is Williams, and he puffs his central planning chest out whenever the SP500 is up, talking up rate hikes (and he deflates when the SP500 is down).

 

On that score, with the SP500 bouncing +3.3% last week (after closing -3.6% in the week prior), the US stock market has been “up” 3 days in the last 13, so that’s encouraging. When you look at best vs. worst US Equity Sector Styles last week:

 

  1. US Tech (XLK) popped +4.3% to +6.9% YTD
  2. US MLPs (Master Limited Partnerships) continued to crash -1.2% week-over-week to -30.0% YTD

 

It’s a good thing the Old Wall and its bankers got everyone out of those levered upstream E&P companies that had “dividend yields.”

What really worked last week was what has been working all year long – here were the Top 3 Style Factors (Mean Performance of Top Quartile vs. Bottom Quartile in SP500 companies):

 

  1. Good Balance Sheet Stocks (Low Debt) were +3.9% last week = +3.6% YTD
  2. Low Short Interest Stocks were +3.4% last week = +3.6% YTD
  3. Top 25% Sales Growth Stocks were +3.3% last week = +6.4% YTD

 

Yep. This happened at the end of #LateCycle 2007 too. “Cheap” (cyclicals) got cheaper. Expensive (this time is different) got more expensive.

 

The last thing we were waiting to avail ourselves from was consensus hedge funds (those who were levered long at the all-time #bubble highs in July and shorted the September lows to the highest net short position of the year) covering their shorts.

 

From a CFTC non-commercial positioning perspective (futures and options contracts), the net short position in the SP500 (Index + Emini) got +15,419 longer last week, taking the net short position in that consensus “hedge” down to -120k contracts from its SEP peak of -280k.

 

Short low. Cover high. That’s been the 2015 consensus too.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.18-2.36%

SPX 2040-2108
RUT 1138--1192
EUR/USD 1.05-1.07
Oil (WTI) 39.22-43.36
Copper 1.99-2.13

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Avail Us From Consensus - 11.23.15 EL chart


Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

next