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MONDAY MORNING RISK MONITOR | MUTED ACTIVITY AROUND THANKSGIVING

Takeaway: Risk measures were neutral around the Thanksgiving holiday, although Portugal, Russia, and Turkey experienced some turbulence.

 

MONDAY MORNING RISK MONITOR | MUTED ACTIVITY AROUND THANKSGIVING - RM11

 

Key Takeaway:

Most risk measures were neutral last week. U.S. financial CDS was unchanged at the median as there was little activity around the Thanksgiving holiday, although the TED spread, which tightened by -4 bps, signaled decreasing risk. In developments last week, Portugal's president appointed anti-austerity socialist leader António Costa as prime minister, causing volatility in private and sovereign CDS. Additionally, Russian and Turkish CDS widened, likely due in part to the conflict arising from Turkey downing a Russian jet on November 24. In Asia, risk measures were fairly muted, although Chinese steel prices continued to fall, dropping another -2% last week.

 

Short-term risk measures in our heatmap below are mostly neutral to negative. Intermediate- and long-term measures are mostly negative.

 

Current Ideas:

MONDAY MORNING RISK MONITOR | MUTED ACTIVITY AROUND THANKSGIVING - RM19

 

Financial Risk Monitor Summary

• Short-term(WoW): Negative / 2 of 12 improved / 3 out of 12 worsened / 7 of 12 unchanged
• Intermediate-term(WoW): Negative / 3 of 12 improved / 6 out of 12 worsened / 3 of 12 unchanged
• Long-term(WoW): Negative / 1 of 12 improved / 3 out of 12 worsened / 8 of 12 unchanged

MONDAY MORNING RISK MONITOR | MUTED ACTIVITY AROUND THANKSGIVING - RM15

 

1. U.S. Financial CDS – Swaps widened for 12 out of 27 domestic financial institutions. For the most part, activity was muted in the U.S. around the Thanksgiving holiday. 

Tightened the most WoW: MMC, LNC, ACE
Widened the most WoW: CB, C, BAC
Tightened the most WoW: LNC, MMC, WFC
Widened the most MoM: CB, AXP, AIG

MONDAY MORNING RISK MONITOR | MUTED ACTIVITY AROUND THANKSGIVING - RM1

 

2. European Financial CDS – Swaps mostly tightened in Europe last week. Portugal and Russia were outliers. Portugal's Banco Espirito Santo's swaps widened by 21 bps to 629 as the country's president appointed anti-austerity socialist leader António Costa as prime minister. The widening is interesting because it conflicts with the movement on sovereign Portuguese CDS. The takeaway for Portugal is that, although last week's political development clears up weeks of conflict, it translates to uncertainty and volatility. Russia's Sberbank's CDS widened by 21 bps to 356, likely due in part to concerns over the economic implications of Turkey downing a Russian jet on November 24. 

MONDAY MORNING RISK MONITOR | MUTED ACTIVITY AROUND THANKSGIVING - RM2

 

3. Asian Financial CDS – Swaps in the Asian region mostly widened last week, although only moderately with a 1 bps median change.

MONDAY MORNING RISK MONITOR | MUTED ACTIVITY AROUND THANKSGIVING - RM17

 

4. Sovereign CDS – Sovereign Swaps mostly tightened over last week. Spanish sovereign swaps tightened the most, by -5 bps to 83. In contrast to Portugal's Banco Espirito Santo's swaps widening, the country's sovereign CDS tightened by -4 bps following anti-austerity socialist leader António Costa's appointment as prime minister.

MONDAY MORNING RISK MONITOR | MUTED ACTIVITY AROUND THANKSGIVING - RM18

 

MONDAY MORNING RISK MONITOR | MUTED ACTIVITY AROUND THANKSGIVING - RM3

 

MONDAY MORNING RISK MONITOR | MUTED ACTIVITY AROUND THANKSGIVING - RM4


5. Emerging Market Sovereign CDS – Emerging market swaps mostly widened last week. Brazilian sovereign swaps widened the most, by 31 bps to 427. Additionally, Russian and Turkish swaps widened by 15 bps to 268 and by 16 bps to 257, likely in part due to the conflict arising from Turkey downing a Russian jet on November 24.


MONDAY MORNING RISK MONITOR | MUTED ACTIVITY AROUND THANKSGIVING - RM16

MONDAY MORNING RISK MONITOR | MUTED ACTIVITY AROUND THANKSGIVING - RM20

6. High Yield (YTM) Monitor – High Yield rates rose 12 bps last week, ending the week at 7.94% versus 7.82% the prior week.

MONDAY MORNING RISK MONITOR | MUTED ACTIVITY AROUND THANKSGIVING - RM5

7. Leveraged Loan Index Monitor  – The Leveraged Loan Index fell 4.0 points last week, ending at 1828.

MONDAY MORNING RISK MONITOR | MUTED ACTIVITY AROUND THANKSGIVING - RM6

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

MONDAY MORNING RISK MONITOR | MUTED ACTIVITY AROUND THANKSGIVING - RM7

9. CRB Commodity Price Index – The CRB index fell -0.2%, ending the week at 183 versus 184 the prior week. As compared with the prior month, commodity prices have decreased -6.3%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

MONDAY MORNING RISK MONITOR | MUTED ACTIVITY AROUND THANKSGIVING - 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 17 bps.

MONDAY MORNING RISK MONITOR | MUTED ACTIVITY AROUND THANKSGIVING - RM9

11. Chinese Interbank Rate (Shifon Index) – The Shifon Index was flat at 1.79% last week. 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 | MUTED ACTIVITY AROUND THANKSGIVING - RM10

12. Chinese Steel – Steel prices in China fell 2.0% last week, or 42 yuan/ton, to 2017 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 | MUTED ACTIVITY AROUND THANKSGIVING - RM12

13. 2-10 Spread – Last week the 2-10 spread tightened to 130 bps, -4 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

MONDAY MORNING RISK MONITOR | MUTED ACTIVITY AROUND THANKSGIVING - RM13

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.1% upside to TRADE resistance and 1.3% downside to TRADE support.

MONDAY MORNING RISK MONITOR | MUTED ACTIVITY AROUND THANKSGIVING - RM14


Joshua Steiner, CFA



Jonathan Casteleyn, CFA, CMT


Retail Callouts (11/30) | What To Own/Short Into Holiday

Takeaway: We’re net sellers of Retail, this is bigger than weather/holiday. Hedgeye Retail Idea List.

SELL RETAIL | THIS IS BIGGER THAN HOLIDAY

 

We’re happy to get into the debate about how crowded the parking lot was at the mall this weekend, but it’s nowhere near as relevant as the current profitability growth trajectory for Retail, and the consensus expectations for the group as we head into 2016. The good news is that 4Q sales estimates look only slightly high. The bad news is that margins expectations are still 50-100bps high for the group. The worse news is that the Street’s numbers are banking on a recovery in growth and margin starting in 1Q16. In other words, it’s chalking up this ‘thing’ retailers are feeling now as exactly what management teams want us all to believe – while they cross their fingers, hope and pray that the economy is not really slowing.  The group might be viewed as damaged goods in this market, but keep in mind that it’s only down 4.3% for the YTD vs a 1.5% gain for the market – not a big difference. It’s trading at 18-19x earnings, and has short interest that is disproportionately low for an economy that is #LateCycle. We’re net sellers of Retail.

To see our full note from yesterday CLICK HERE

 

Hedgeye Retail Idea List

Retail Callouts (11/30)  |  What To Own/Short Into Holiday - 11 30 2015 chart1

 

SPLS, ODP - Regulators prepare blocking Staples-Office Depot merger

(http://nypost.com/2015/11/29/regulators-eye-blocking-staples-office-depot-6b-merger/)

Our Take: Blocking this merger is ridiculous. The 'space' is so loosely defined. There's nothing you can buy in a Staples/Office Depot that you can't buy in Wal-Mart, Target, CVS or even your average local supermarket.

 

NRF’s 2015 Thanksgiving weekend survey, including the spending amount, are not comparable to last year’s survey as the methodology has changed.

(https://nrf.com/media/press-releases/thanksgiving-weekend-shopping-brings-big-store-and-online-crowds-according-nrf)

Our Take: How convenient that the survey methodology for the NRF -- the Retail Industry's lobbying group -- changed at the same time results for the average retailer are well below plan.  This is akin to a company that misses a quarter and changes disclosure to mask the real underlying trends.

 

AMZN - Amazon shows off future drone delivery service in ad

(http://www.marketingweek.com/2015/11/30/amazon-shows-off-future-drone-delivery-service-in-ad-starring-jeremy-clarkson/)

Our Take: Many people still consider this concept to be ridiculous, but we'll rarely bet against Bezos. Consumer buy-in is critical with this delivery service, and with Wal-Mart hot on its tail in testing its own concept, we're glad to see AMZN lead the way.

 

Neiman Marcus web site suffers outages on Friday and Saturday

(http://fortune.com/2015/11/28/neiman-marcus-ecommerce-2/)

 

ZQK - Quiksilver Employee Incentive Plan Gets Pushback

(http://wwd.com/business-news/legal/quiksilver-incentive-plan-gets-pushback-10286702/)

 

EBAY - Brief Outage Strikes PayPal Ahead of Cyber Monday

(http://www.ecommercebytes.com/cab/abn/y15/m11/i30/s01)


Monday Mashup

Monday Mashup - CHART 1

 

RECENT NOTES

11/24/15 INVITE | THOUGHT LEADER CALL | RICK BERMAN ON CHIPOTLE AND OTHER INDUSTRY ISSUES

11/23/15 Restaurant Industry Macro Note (Sales, Confidence, Employment and Commodities)

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

 

SECTOR PERFORMANCE

Casual Dining and Quick Service stocks that we follow widely outperformed the XLY, last week, which was up 1.5%. Top performers on a relative basis from casual dining were FRGI and CHUY posting increases of +10.8% and +9.1%, respectively, while ARCO and HABT led the quick service group this week up +18.8% and +9.2%, 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 BULLISH from a TRADE and TREND perspective, TREND support is 78.42.

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

Damn the data – it’s all about central planning events this week. Yellen and Draghi have a busy schedule!

 

  1. EURO – down another -0.5% last wk (-12.4% YTD vs USD) and down again this morning as the USD Index ramps > 100; Commodity markets don’t like this at all as the CRB Index remains in crash mode, -20.1% YTD
  2. EM – as long as you only look at the Nasdaq, everything is fine – EM and LATAM stocks deflated another -0.6% and -2.4% respectively last week and EM Asia (Indonesia -2.5% overnight) isn’t responding well to #StrongDollar either
  3. YIELDS – super spike in the short-end (2yr = 0.95%) continues to flatten he curve (10yr minus 2yr testing YTD lows at 128bps wide this am) – so the Fed can tighten into a slow-down and perpetuate the late cycle slow-down by doing so

 

SPX immediate-term risk range = 2045-2109; UST 10yr Yield 2.18-2.28%

 

Please call or e-mail with any questions.

 

Howard Penney

Managing Director

 

Shayne Laidlaw

Analyst

 


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It’s All About Central Planning

Client Talking Points

EURO

The Euro was down another -0.5% last week (-12.4% year-to-date vs USD) and down again this morning as the USD Index ramps > 100. Commodity markets don’t like this at all as the CRB Index remains in crash mode, -20.1% year-to-date.

EMERGING MARKETS

As long as you only look at the Nasdaq, everything is fine – EM and LATAM stocks deflated another -0.6% and -2.4% respectively last week and EM Asia (Indonesia -2.5% overnight) isn’t responding well to #StrongDollar either.

YIELDS

A super spike in the short-end (2YR = 0.95%) continues to flatten the curve (10YR minus 2YR testing year-to-date lows at 128 basis points wide this morning) – so the Fed can tighten into a slow-down and perpetuate the late cycle slow-down by doing so.

 

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

Asset Allocation

CASH 67% US EQUITIES 3%
INTL EQUITIES 6% COMMODITIES 0%
FIXED INCOME 18% INTL CURRENCIES 6%

Top Long Ideas

Company Ticker Sector Duration
MCD

We added McDonald's to Investing Ideas on August 11th. Since then shares of McDonald's have risen over 16% compared to a 0.2% return for the S&P 500.

 

As Restaurants Sector Head Howard Penney wrote right around the time we added McDonald's (MCD), "We continue to get more bullish every time we talk to the company, franchisees and/or customers which we have polled via conducting surveys. We are going to be looking at a much different company 1-3 years from now. Urgency has been instilled from the top down by new CEO Steve Easterbrook," according to Penney. "This ship is in gear and headed north. 2015 will be the last time this stock is below $100."

RH

We believe that RH is to Home Furnishings what Ralph Lauren is to Apparel and what Nike is to Athletic Shoes. That’s a meaningful statement given that RH has only 3% share of a $140 billion relevant market.

 

RH is the preeminent brand in the space. We think that RH is in second inning of a game that may ultimately prove to be a double header. We believe the company will add $3 billion in sales over 3-years and climb to $11 in EPS. The earnings growth and cash flow characteristics to get to that kind of number would support a 30+ multiple. In the end, we see a stock in excess of $300.

TLT

The consumption side of the economy is arguably the most important, as its 69% of U.S. GDP. From a rate-of-change perspective, consumption growth decelerated in October, and consumer confidence is waning along-side it. That's why we would like to reiterate our Growth Slowing=Long TLT call.

 

To be clear, the consumption side of the economy had been a point of strength over the last several months. We’re not calling for a crash in household consumption, but the comps (comparison vs. prior reporting period) are important in rate-of-change analysis. The next four quarters of comps for Real PCE growth are the most difficult since Q3 2008 while the next four quarters of comps for CPI are the easiest since the four quarters ended in 4Q11. Simply put, both are headwinds for the consumer and we expect that the consumption component of the economic equation will continue to decelerate.

Three for the Road

TWEET OF THE DAY

What QE Actually Did Was Pay The Few And Crush The Many https://app.hedgeye.com/insights/47754-what-qe-actually-did-was-pay-the-few-and-crush-the-many… via @hedgeye

@KeithMcCullough

QUOTE OF THE DAY

Learning without thought is labor lost; thought without learning is perilous.

Confucius

STAT OF THE DAY

There are about 1,100 regional malls and 7,100 shopping centers in the U.S., which combined account for $5.3 trillion annually, $2.5 trillion in discretionary spending -- nearly $300 billion of that falls in the month of December alone.


CHART OF THE DAY: The Ultimate #GrowthSlowing Indicator?

 

CHART OF THE DAY: The Ultimate #GrowthSlowing Indicator? - 11.30.15 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.

 

"... It certainly shouldn’t surprise anyone who is paying attention to both the #GrowthSlowing and credit cycle signals of the bond market. The long-end of the curve is compressing into said “hike” expectations.

 

Here’s how that looks this morning, in bond market terms:

 

  1. Short-term (2yr) Yields spike to 0.95%
  2. Long-term (10yr) Yields don’t budge at 2.23%
  3. Yield Spread (10yr minus 2yr) compresses to +128 basis points, -23 basis points (at the lows) YTD"

Esteemed Authorities

“Clearly those esteemed authorities had been guessing.”

-David McCullough

 

One of the best parts of evolution stories is that eureka moment when someone comes to realize that the received wisdoms of the past are standing in the way of future progress.

 

The aforementioned quote comes from The Wright Brothers when Orville and Wilbur Wright realize “that so many of the long established, supposedly reliable calculations” (on flight from Lilienthal, Langley, etc.)… “had been proven wrong and could no longer be trusted… the accepted tables were, in a word, worthless.” (pg 63)

 

To be fair, I don’t consider ECB, BOJ, Federal Reserve, etc. forecasts worthless (there’s so much money to be made doing the opposite of what their anchoring-linear-forecasts imply). But their calculations do pose systemic threats to worldwide economies.

 

Esteemed Authorities - Central banker cartoon 03.03.2015

 

Back to the Global Macro Grind

 

For your friends who are still only staring at the “Dow” (in daily fantasy points) as a proxy for what “the market” is doing, there’s absolutely nothing to worry about. The Dow, bro, is only -0.1% YTD.

 

Then there are those of us who have embraced not only the non-linearity of a dynamic ecosystem like the Global Economy, but the interconnected and sometimes correlating style factors within macro markets (including Currencies, Commodities, Countries).

 

On that score, last week signaled more of our 18 month old call on the mother of all economic risks – #Deflation. And before I drip on why deflation morphs into a risk to the Fed’s serially overoptimistic growth forecasts, here’s what happened in Global Macro last week:

 

  1. US Dollar Index ramped > 100, closing up another +0.5% on the week to +10.9% YTD
  2. Euros dropped another -0.5% (vs. USD) on the week, taking its YTD devaluation to -12.4%
  3. Canadians lost another -0.2% of their currency’s purchasing power, taking the CAN$ to -13.1% YTD
  4. Commodities (CRB) remained in #crash mode, falling another -0.3% on the week to -20.1%YTD
  5. Oil’s (WTI) crash/deflation for 2015 dropped another -0.5% on the week to -30.4% YTD
  6. Dr. Copper’s crash/deflation hit new lows intraweek, then bounced to -27.3% YTD

 

I’ll take a breather right there as that’s just a wall of headline foreign currency and commodity market risk factors that every legitimate macro investor should be aware of. If you don’t do macro, it will eventually do you.

 

Moving along to the beloved US Equities side of the market:

 

  1. Healthcare Stocks (XLV) were +0.8% on the week, still beating “the market” (SP500) at +5.4% YTD
  2. Financials (XLF) were down -0.4% on the week, still lagging “the market” at -0.6% YTD

 

Now, as the Fed prepares to raise rates (into worldwide #Deflation and a #LateCycle US economic slow-down), isn’t the ongoing bearish divergence between what the Financials are doing and the Fed’s “supposedly reliable calculations” on GDP interesting?

 

It certainly shouldn’t surprise anyone who is paying attention to both the #GrowthSlowing and credit cycle signals of the bond market. The long-end of the curve is compressing into said “hike” expectations.

 

Here’s how that looks this morning, in bond market terms:

 

  1. Short-term (2yr) Yields spike to 0.95%
  2. Long-term (10yr) Yields don’t budge at 2.23%
  3. Yield Spread (10yr minus 2yr) compresses to +128 basis points, -23 basis points (at the lows) YTD

 

In other words, since the rate of change in the Yield Spread is a far better leading indicator for the expansion/contraction of the economy than some central-planning dude’s forecast, the Global Macro market continues to read the Fed’s forecast (hike) as a risk to the economy.

 

Oh, and on the said “data dependence” of the Federal Reserve, they’ll get both a PMI reading out of Chicago this morning and an ISM reading for November tomorrow. Last month’s super slow ISM reading of 50.5 wasn’t cited by anyone at the Fed, or our competition.

 

But does the data really matter? Nope. Yellen’s speech at the central-planning (economics) club of Washington on Wednesday does. And so will Mario Draghi’s central market planning event on Thursday morning (ECB meeting).

 

By the time we get to Yellen’s testimony in front of the “Joint Economic Committee” (JEC) in Washington on Thursday, more #StrongDollar Deflation will still have our esteemed authorities guessing.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.18-2.28%

SPX 2045-2109

NASDAQ 5034-5181
USD 99.19-100.29
Oil (WTI) 40.55-43.26
Copper 1.98-2.11

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Esteemed Authorities - 11.30.15 EL chart


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