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MONDAY MORNING RISK MONITOR | IS THE US NET ASSET OR LIABILITY SENSITIVE?

Takeaway: Barring an asteroid strike this week, we'll finally get an answer on whether the US has a net positive or negative 1-year static gap.

 

MONDAY MORNING RISK MONITOR | IS THE US NET ASSET OR LIABILITY SENSITIVE? - RM11

 

 

Key Takeaway:

Risk measures were mixed last week with our summary table below now showing an even balance of improving/worsening factors over the intermediate term. On a short-term basis, the skew is more favorable at 5 to 1.

Clearly, the main event is the long-awaited liftoff by the Fed, catalyzed by Friday's nominally better than expected NFP report. There's some worthwhile debate over whether This Time Is Different on this rate hike, i.e. after so many years of Zero has the country moved to a position of net asset sensitivity or are we still net liabilty sensitive as we have been throughout cycles past. We know banks are asset sensitive (see Call Reports) as are savers, but will longer-term credit demand wane by enough to offset the benefits? Obviously this depends in large part on what happens to the curve. We remain of the view that the curve will flatten as it did from mid-2004 to mid-2006 when the Fed tightened 17 consecutive times raising the Fed Funds rate from 1.00% to 5.25%. During that period of tightening the 30-YR Fixed Rate Mortgage ended about where it started, at ~6%.  

Areas of ongoing weakness include Chinese Steel (down another 2.7% on the week and -8.8% on the month), which is still our proxy for China's economy. Also, high yield and levered loans continue to sell off, driven at least partially by the weakness in the energy segment of the market. High yield YTM has backed up 53 bps on the month now, to 7.95%. 

 


Current Ideas:


MONDAY MORNING RISK MONITOR | IS THE US NET ASSET OR LIABILITY SENSITIVE? - RM19

 

Financial Risk Monitor Summary

• Short-term(WoW): Positive / 5 of 12 improved / 1 out of 12 worsened / 6 of 12 unchanged
• Intermediate-term(WoW): Negative / 5 of 12 improved / 5 out of 12 worsened / 2 of 12 unchanged
• Long-term(WoW): Negative / 1 of 12 improved / 3 out of 12 worsened / 8 of 12 unchanged

MONDAY MORNING RISK MONITOR | IS THE US NET ASSET OR LIABILITY SENSITIVE? - RM15

 

1. U.S. Financial CDS – Swaps tightened for 15 out of 27 domestic financial institutions on Friday's employment report, which came in better than expected with 211k jobs added.

Tightened the most WoW: ACE, ALL, CB
Widened the most/ tightened the least WoW: WFC, SLM, SLM
Tightened the most WoW: LNC, ACE, MMC
Widened the most MoM: CB, AXP, PRU

MONDAY MORNING RISK MONITOR | IS THE US NET ASSET OR LIABILITY SENSITIVE? - RM1

 

2. European Financial CDS – Swaps mostly tightened in Europe last week despite the ECB's stimulus announcement falling short of expectations.

MONDAY MORNING RISK MONITOR | IS THE US NET ASSET OR LIABILITY SENSITIVE? - RM2

 

3. Asian Financial CDS  Two of three Chinese bank swaps tightened following the IMF's decision to make the yuan a lending-reserve currency. Also in India, two of three bank swaps tightened. Indian bank swaps were bolstered when a panel run by the Indian Finance Ministry's chief economic adviser proposed a simple 17% goods and services tax last week.

MONDAY MORNING RISK MONITOR | IS THE US NET ASSET OR LIABILITY SENSITIVE? - RM17

 

4. Sovereign CDS – Sovereign swaps mostly tightened over last week. Portuguese sovereign swaps tightened significantly more than others, by -11 bps to 176.

MONDAY MORNING RISK MONITOR | IS THE US NET ASSET OR LIABILITY SENSITIVE? - RM18

 

MONDAY MORNING RISK MONITOR | IS THE US NET ASSET OR LIABILITY SENSITIVE? - RM3

 

MONDAY MORNING RISK MONITOR | IS THE US NET ASSET OR LIABILITY SENSITIVE? - RM4


5. Emerging Market Sovereign CDS – Emerging market swaps mostly widened last week given the threat of a U.S. Fed rate hike. Brazilian sovereign swaps widened the most, by 19 bps to 446.

MONDAY MORNING RISK MONITOR | IS THE US NET ASSET OR LIABILITY SENSITIVE? - RM16

MONDAY MORNING RISK MONITOR | IS THE US NET ASSET OR LIABILITY SENSITIVE? - RM20

6. High Yield (YTM) Monitor – High Yield rates rose 1 bps last week, ending the week at 7.95% versus 7.94% the prior week.

MONDAY MORNING RISK MONITOR | IS THE US NET ASSET OR LIABILITY SENSITIVE? - RM5

7. Leveraged Loan Index Monitor  – The Leveraged Loan Index fell 2.0 points last week, ending at 1826.

MONDAY MORNING RISK MONITOR | IS THE US NET ASSET OR LIABILITY SENSITIVE? - RM6

8. TED Spread Monitor – The TED spread was unchanged last week at 25 bps.

MONDAY MORNING RISK MONITOR | IS THE US NET ASSET OR LIABILITY SENSITIVE? - RM7

9. CRB Commodity Price Index – The CRB index fell -1.3%, ending the week at 183 versus 186 the prior week. As compared with the prior month, commodity prices have decreased -4.1%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

MONDAY MORNING RISK MONITOR | IS THE US NET ASSET OR LIABILITY SENSITIVE? - 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 tightened by 6 bps to 10 bps.

MONDAY MORNING RISK MONITOR | IS THE US NET ASSET OR LIABILITY SENSITIVE? - RM9

11. Chinese Interbank Rate (Shifon Index) – The Shifon Index was unchanged over 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 | IS THE US NET ASSET OR LIABILITY SENSITIVE? - RM10

12. Chinese Steel – Steel prices in China fell 2.7% last week, or 54 yuan/ton, to 1963 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 | IS THE US NET ASSET OR LIABILITY SENSITIVE? - RM12

13. 2-10 Spread – Last week the 2-10 spread widened to 133 bps, 3 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

MONDAY MORNING RISK MONITOR | IS THE US NET ASSET OR LIABILITY SENSITIVE? - RM13

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.1% upside to TRADE resistance and 2.2% downside to TRADE support.

MONDAY MORNING RISK MONITOR | IS THE US NET ASSET OR LIABILITY SENSITIVE? - RM14


Joshua Steiner, CFA



Jonathan Casteleyn, CFA, CMT


CRASH: Strong Dollar Deflation Continues To Crush Commodities

Takeaway: Fed perpetuated deflation hits oil and other commodities hard.

CRASH: Strong Dollar Deflation Continues To Crush Commodities - Oil cartoon 11.20.2015

 

It's a central planner's world and we're all just living in it. 

 

In a note to subscribers this morning, Hedgeye CEO Keith McCullough highlighted how the much telegraphed Fed rate hike is impacting global financial markets. In particular, McCullough singled out last week's gyrations in the U.S. dollar as a developing market trend to keep an eye on: 

 

"In rate of change terms, at 1.88% year-over-year that was the slowest Non-Farm Payroll print since the cycle peaked in Q1 2015, but the Fed is going to hike on that.

 

That’s why we signaled buy USD on last week’s Euro ramp of +2.7%. The Euro is back down -0.6% this morning to $1.08 and has no immediate-term support to $1.05; the data doesn’t matter to the Fed – the S&P 500 does."

 

CRASH: Strong Dollar Deflation Continues To Crush Commodities - dollar strong

 

That's important because (in related news) the strengthening U.S. dollar is ripping through oil markets:

 

"#StrongDollar (rate hike catalyst DEC 16th) driven #Deflation Risk definitely matters to most asset classes – after a -3.8% decline last week, Oil is down another -1.1% this morning to $39.53 and the Commodities complex remains in crash mode."

 

CRASH: Strong Dollar Deflation Continues To Crush Commodities - wti oil

 

That's just one example of how a stronger dollar continues to take its toll on commodity prices. (Note: Commodities (CRB Index) were unable to bounce on a Down USD week and remain in crash mode -20.3% YTD.)


CHART OF THE DAY: A 2015 Scorecard, Style Factor Divergence In S&P 500

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.

 

"... You get the point – what’s worked during #Deflation and GDP slowing in 2015 is:

  1. Good Balance Sheets: Low Debt = +3.6% YTD
  2. Quality: Low Beta and Low Short Interest +1.7% and +3.0% YTD, respectively
  3. Organic Sales Growth: Top 25% Sales Growers in the SP500 = +7.3% YTD

That’s why that +7.8% YTD performance for the XLK (Tech) is so close to the Organic Sales Growth Style Factor (hint: they are largely the same stocks). And it’s also why the illusion of growth (levered companies like Kinder Morgan, KMI, and Valeant, VRX) crashed."

 

CHART OF THE DAY: A 2015 Scorecard, Style Factor Divergence In S&P 500 - 12.07.15 EL chart

 

 


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Unyielding Resolve

“We had to go ahead and discover everything ourselves.”

-Orville Wright

 

That’s the quote David McCullough opens with in one of the most inspiring chapters of The Wright Brothers – Chapter 4, Unyielding Resolve. “The pall of discouragement disappeared in a matter of days, replaced with a surge of characteristic resolve.” (pg 65)

 

Now that we have the latest super #LateCycle US jobs report out of the way, I’ve got it out of my system that the Fed is actually going to raise rates into this slow-down. That’s obviously a big problem for many asset classes. But the Fed only cares about the SP500.

 

At 1.88% year-over-year growth in Non-Farm Payrolls (with a standard error of 90,000 on the # itself so it will be revised), November was the slowest rate of change jobs report of the year. This US Labor Cycle peaked in Q1 with 2.34% NFP growth in February 2015.

 

Back to the Global Macro Grind

 

We’ve always measured macro markets (and their implied opportunities and risks) in rate of change terms. The Establishment not doing it that way had them miss both Global #Deflation and #GrowthSlowing in 2015.

 

Unyielding Resolve - deflation

 

Their missing it on the latest of late cycle indicators (employment) doesn’t matter to us inasmuch as most of the non-employment data doesn’t seem to concern them. Please don’t look at ISM or PMI data for details.

 

If all you did was think like a Fed Head and stare at the SPY last week, nothing happened – the SP500 was down then up, closing 0.1% week-over-week. Hooray. If you’re just a US Equities person and you dug 1-level (Sector Styles) deeper, here’s what else you saw:

 

  1. Tech (XLK) +1.5% on the week to +7.8% YTD
  2. Industrials (XLK) -1.0% on the week to -3.6% YTD
  3. Energy (XLE) -4.5% on the week to -18.3% YTD

 

So, if you “back out Energy” and MLP stocks (Alerian MLP Index down another -11.0% on the week, taking its 2015 crash to -37.7% YTD) … oh, and back out producer price #Deflation (Industrials) and bought big cap Tech charts that have gone parabolic, all good.

 

I think I’ve pointed this out weekly in 2015, but it’s worth repeating this morning – during a Global #GrowthSlowing phase, “cheap” cyclical and industrial equities get cheaper, and the expensive growth that you can find gets more expensive.

 

That happened in Q3/Q4 of 2007 (late cycle) and it’s happening right now. So I hope you’ve discovered what US Equity market Style Factors you should continue to avoid as the economic cycle slows and the credit cycle peaks and rolls:

 

  1. LEVERAGE: High Debt (EV/EBITDA) Stocks were down another -1.0% last week and are -9.9% YTD
  2. BETA: High Beta Stocks were down another -1.1% last week and are -7.3% YTD
  3. SIZE: Small Cap Stocks were down another -1.5% last week and are -12.0% YTD

 

And you might notice that while the Russell 2000 was down -1.6% last week (-1.8% YTD), it’s down less than the Style Factor exposure I am looking at within the SP500 as that’s a measure of the mean performance of the Top Quintile vs. Bottom Quintile of SP500 companies.

 

Regardless, you get the point – what’s worked during #Deflation and GDP slowing in 2015 is:

 

  1. Good Balance Sheets: Low Debt = +3.6% YTD
  2. Quality: Low Beta and Low Short Interest +1.7% and +3.0% YTD, respectively
  3. Organic Sales Growth: Top 25% Sales Growers in the SP500 = +7.3% YTD

 

That’s why that +7.8% YTD performance for the XLK (Tech) is so close to the Organic Sales Growth Style Factor (hint: they are largely the same stocks). And it’s also why the illusion of growth (levered companies like Kinder Morgan, KMI, and Valeant, VRX) crashed.

 

If you go all big picture on your colleagues and look at his non-linear yet interconnected world of growth and inflation expectations in cross-asset class terms, here’s what else you’d have noticed last week:

 

  1. Commodities (CRB Index) were unable to bounce on a Down USD week and remain in crash mode -20.3% YTD
  2. Oil (WTI) continued to crash, closing down another -3.8% last week at -33.1% YTD
  3. Natural Gas deflation of -1.4% on the week took its YTD below that of crude oil at -38.2% YTD
  4. Cattle prices deflated another -3.5% week-over-week to -16.2% YTD
  5. Namibia’s stock market dropped another -6.2% on the week to -18.4% YTD

 

Seriously – who the heck cares about Namibia? Probably as many Federal Reserve people who care about cattle ranchers in Nebraska or pig farmers in Iowa (Lean Hog prices have crashed -35% YTD). So let’s just call all of these “no-price-stability” things transitory.

 

Reality is that for companies with heavy foreign currency, commodity, and/or emerging market exposure, 2015 was not good. The MSCI Emerging Markets index (ex-Namibia) was -0.9% last week and is -14.3% YTD.

 

And then of course you have the Credit Market Signal within the long-term US Treasury Yield signal. This is only the 4th time “high yield” credit has generated a negative annual return going all the way back to 1994. So I say we start talking ex-Energy, ex-Credit now too.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.19-2.33%

SPX 2057-2112
RUT 1165--1191
EUR/USD 1.05-1.09
Oil (WTI) 39.28-41.91

Nat Gas 2.10-2.25

Gold 1049-1089
Copper 1.99-2.09

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Unyielding Resolve - 12.07.15 EL chart


The Macro Show Replay | December 7, 2015

 

 


Euro, Oil and Emerging Markets

Client Talking Points

EURO

In rate of change terms, at 1.88% year-over-year that was the slowest NFP print since the cycle peaked in Q1, but the Fed is going to hike on that. That’s why we signaled buy USD on last week’s Euro ramp of +2.7%. The Euro is back down -0.6% this morning to $1.08 and has no immediate-term support to $1.05; the data doesn’t matter to the Fed – the S&P 500 does.

OIL

#StrongDollar (rate hike catalyst DEC 16th) driven #Deflation Risk definitely matters to most asset classes – after a -3.8% decline last week, Oil is down another -1.1% this morning to $39.53 and the Commodities complex remains in crash mode.

EM

Japanese Equities +1% on the Dollar Up move overnight – EM Asia continued lower (no likey Up Dollar); Thailand -0.7% (-6.4% in the last month is one of the ugliest); EM (MSCI Index) deflated another -0.9% last week to -14.3% year-to-date.

 

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

Asset Allocation

CASH 66% US EQUITIES 3%
INTL EQUITIES 7% COMMODITIES 0%
FIXED INCOME 14% INTL CURRENCIES 10%

Top Long Ideas

Company Ticker Sector Duration
MCD

Restaurants Sector Head Howard Penney had no material update on McDonald's (MCD) this week. However, here is what Penney wrote around when we added MCD to Investing Ideas. It's worth reiterating our high conviction in the stock:

 

"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

A lot has happened in 13 weeks... not the least of which is that Restoration Hardware (RH) is underperforming not only the market by 16%, but Retail as well (by 7%) – despite RH being more insulated from some of the issues that are clipping earnings today for retailers more broadly.

 

Over this time period, however, RH meaningfully accelerated square footage growth, launched two new concepts. Some say it’s bad timing. We disagree. RH is our favorite name in the retail space, and we like it across all three durations. Trade, Trend, and Tail.

TLT

On went the game of slowing last week with a little central planning un-secretive sauce. Despite the ECB’s move to cut the deposit rate to -0.30%, Draghi didn’t ring the cowbell loud enough. Meanwhile, Friday’s jobs report might have been just enough for Janet to hike rates into a late cycle slowdown. The consensus long USD crowd was crushed on the ECB news. The dollar lost over 2% on Thursday and rates were pushed higher.

 

If growth is going to continue to slow, with a rate hike on the horizon, a relative fixed income spread play (long TLT, short JNK) is exactly what you want on.

Three for the Road

TWEET OF THE DAY

The Best of The Macro Show This Week https://app.hedgeye.com/insights/47911-risk-manage-the-process-the-best-of-the-macro-show-this-week… via @hedgeye

@KeithMcCullough

QUOTE OF THE DAY

Obvious thinking commonly leads to wrong judgments and wrong conclusions.

Humphrey B. Neil

STAT OF THE DAY

Only 5% of Twitter users have more than 100 followers.


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