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MONDAY MORNING RISK MONITOR | RATE HIKE WOES AND FRESH OIL LOWS

Takeaway: The credit markets are getting very shaky as evidenced by high yield and leveraged loans while EM and commodities continue to get torched.

 MONDAY MORNING RISK MONITOR | RATE HIKE WOES AND FRESH OIL LOWS - RM11

 

Key Takeaway:

Our risk monitor is now tilted toward the negative across all 3 durations.

High yield backed up another 63 bps to 8.57% last week. Leveraged loans, meanwhile, shed 19 points to 1807 (-1.1%) and are down 30 points on the month (-1.7%). In spite of the emergent carnage in the high yield and leveraged loan markets, the Fed is poised to move forward this week with its first rate hike in almost a decade.

The confluence of a stronger US dollar and both a supply glut and demand uncertainty have crushed oil and the commodities complex generalyl. CRB shed another 3.3% on the week and is down 5.4% on the month. Chinese steel, our proxy for the health of China, is down 2.3% on the week and 9.0% on the month. Beyond this, the TED spread widened by +4 bps on the week to 28 bps. 

 

We've been discussing the risk posed by energy hedges rolling off in the coming weeks. Here's an interesting Reuters article discussing the coming hedge expirations with none other than John Arnold himself being quoted saying (Article HERE):

 

 

"Come Jan. 1, revenues will experience a pronounced decline for many companies, coinciding with a time of severe stress for balance sheets across the industry." - John Arnold, Founder Centaurus Partners

Our Canadian bank short thesis should benefit from this coming expiration. Our favorite small cap plays remain CWB (Canadian Western Bank) and MIC (Genworth MI). Our preferred large cap plays remain Royal Bank (RY) and CIBC (CM).

 

Our heatmap below is more negative than positive across all time horizons.

 

Current Ideas:

MONDAY MORNING RISK MONITOR | RATE HIKE WOES AND FRESH OIL LOWS - RM19

 

Financial Risk Monitor Summary

• Short-term(WoW): Negative / 1 of 12 improved / 7 out of 12 worsened / 4 of 12 unchanged

 • Intermediate-term(WoW): Negative / 3 of 12 improved / 8 out of 12 worsened / 1 of 12 unchanged

 • Long-term(WoW): Negative / 1 of 12 improved / 3 out of 12 worsened / 8 of 12 unchanged

 

MONDAY MORNING RISK MONITOR | RATE HIKE WOES AND FRESH OIL LOWS - RM15 2

 

1. U.S. Financial CDS – Swaps widened for 14 out of 27 domestic financial institutions. The median spread increased by +4bps from 74 to 78 as investors worried about the effects of a Fed rate hike. Notably, Genworth saw its CDS blow out by +87 bps to 712 bps.

Tightened the most WoW: MMC, LNC, AIG
Widened the most WoW: GNW, CB, WFC
Tightened the most WoW: LNC, ACE, MMC
Widened the most MoM: CB, GNW, JPM

MONDAY MORNING RISK MONITOR | RATE HIKE WOES AND FRESH OIL LOWS - RM1

 

2. European Financial CDS – Swaps mostly widened among European banks last week as global markets were roiled over a likely U.S. Fed rate hike and oil prices falling to new lows.

MONDAY MORNING RISK MONITOR | RATE HIKE WOES AND FRESH OIL LOWS - RM2

 

3. Asian Financial CDS – Swaps on Asia banks mostly widened amid global market volatility. The Export-Import Bank of China's CDS widened the most, by +13 bps to 121, followed by the IDB bank of India, which widened by +10 bps to 210.

MONDAY MORNING RISK MONITOR | RATE HIKE WOES AND FRESH OIL LOWS - RM17 2

 

4. Sovereign CDS – Sovereign swaps were little changed last week. The real takeaway here is the contrast between DM and EM sovereign swaps. Compare the table below with the same table for EM further down.

MONDAY MORNING RISK MONITOR | RATE HIKE WOES AND FRESH OIL LOWS - RM18

 

MONDAY MORNING RISK MONITOR | RATE HIKE WOES AND FRESH OIL LOWS - RM3

 

MONDAY MORNING RISK MONITOR | RATE HIKE WOES AND FRESH OIL LOWS - RM4


5. Emerging Market Sovereign CDS – Emerging market swaps widened across the board last week from the negative effects of rising dollar / rising U.S. interest rates and falling oil. Indonesian sovereign swaps widened the most, by +35 bps to 263, followed by Brazilian and Russian swaps, which widened by +34 bps to 479 and +27 bps to 307 bps.

MONDAY MORNING RISK MONITOR | RATE HIKE WOES AND FRESH OIL LOWS - RM16

MONDAY MORNING RISK MONITOR | RATE HIKE WOES AND FRESH OIL LOWS - RM20

6. High Yield (YTM) Monitor – High Yield rates rose 63 bps last week, ending the week at 8.57% versus 7.95% the prior week.

MONDAY MORNING RISK MONITOR | RATE HIKE WOES AND FRESH OIL LOWS - RM5

7. Leveraged Loan Index Monitor  – The Leveraged Loan Index fell 19.0 points last week, ending at 1807.

MONDAY MORNING RISK MONITOR | RATE HIKE WOES AND FRESH OIL LOWS - 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 25 bps.

MONDAY MORNING RISK MONITOR | RATE HIKE WOES AND FRESH OIL LOWS - RM7

9. CRB Commodity Price Index – The CRB index fell -3.3%, ending the week at 175 versus 181 the prior week. As compared with the prior month, commodity prices have decreased -5.4%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

MONDAY MORNING RISK MONITOR | RATE HIKE WOES AND FRESH OIL LOWS - 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 was unchanged at 11 bps.

MONDAY MORNING RISK MONITOR | RATE HIKE WOES AND FRESH OIL LOWS - 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 | RATE HIKE WOES AND FRESH OIL LOWS - RM10

12. Chinese Steel – Steel prices in China fell 2.3% last week, or 46 yuan/ton, to 1917 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 | RATE HIKE WOES AND FRESH OIL LOWS - RM12

13. 2-10 Spread – Last week the 2-10 spread tightened to 125 bps, -8 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

MONDAY MORNING RISK MONITOR | RATE HIKE WOES AND FRESH OIL LOWS - RM13


Joshua Steiner, CFA



Jonathan Casteleyn, CFA, CMT


MACAU WEEKLY ANALYSIS (DEC 7-13)

CALL TO ACTION

A much needed shot in the arm, Macau table revenues jumped sequentially last week, causing us to raise our December forecast. However, while any improvement is welcome, let’s put things into perspective. It’s only one data point, table revenues still fell double digits YoY, and the comparison was easier than week 1. Looking ahead, more government constraints may be on the way in the form of real-time Union Pay monitoring and sell side estimates are already not bearish enough for 2016. While maintaining our negative view of the Macau stocks, we didn’t feel that December GGR was necessarily a negative catalyst and we still feel that way. We do, however, remain on the bearish side and are looking for re-entry points on the short side.

 

See our detailed note: CLICK HERE


Euro, Oil and SPY

Client Talking Points

EURO

The Euro finally backs off -0.3% to $1.09 and European Equities are catching a bid on that. Don’t forget that the FTSE and EuroStoxx600 were down -4.6% and -4.0% last week vs. the S&P 500 -3.8% week-over-week.

OIL

After crashing another -11.6% to -41.1% year-to-date last week, Oil starts the week down -0.5%. Down Euro = Up Dollar, don’t forget – and if you think ECB President Mario Draghi is going to take the Euro back to $1.05 + Fed hikes, it’s #Deflation, in Dollars.

SPY

The S&P 500 has been down 18 of the last 26 trading days (top 3 up days came post terrorist attacks) and volume ripped (higher) +19% vs. Total U.S. Equity Volumes 1 month average on Friday; liquidity is there, on the down moves.

 

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

Asset Allocation

CASH 75% US EQUITIES 0%
INTL EQUITIES 5% COMMODITIES 0%
FIXED INCOME 15% INTL CURRENCIES 5%

Top Long Ideas

Company Ticker Sector Duration
MCD

MCD remains one of our top LONG ideas in the restaurants space. All indications are that all day breakfast is working, bringing back old customers and driving growth of new customers. Customers are pairing both breakfast and lunch items together in the lunch and dinner day, part which is helping drive additional sales.

 

McDonald’s Canada opened its first standalone McCafe this month. The much simplified concept intends to appeal to customers by offering both speed of service and low cost. They intend to be faster than their main competitor Tim Hortons and cheaper than Starbucks, carving out their own niche in the market.

RH

This RH quarter is going to draw a Mason Dixon line between the Bulls and the Bears. The key factors that the Bulls (including us) need to see were profoundly present – giving us confidence that revenue will double, that we’ll see a 16% operating margin, and $11 in earnings power. In addition, RH beat the quarter, delivered 33% EPS growth in what should be the slowest growth quarter of the year, and it took up 4Q revenue guidance based on what it’s seeing so far this quarter (to 20%+).

 

The Bears got a nice little gift in the form of weaker Gross Margins due to promotional activity, and renewed concerns about management. The reality is that this is a transformational growth story that will change on the margin more often than it doesn’t. Based on our confidence in the earnings power at play here, we’d use any weakness as an opportunity to buy.

TLT

Implicit in our long TLT/short JNK bias is an expectation for high-yield spreads to continue along their recent trend of widening throughout the YTD.

 

“The U.S. economy is #LateCycle and the probability of a recession commencing by mid-2016 is extremely elevated – both in absolute terms and relative to the belief held by the overwhelming majority of investors and policymakers. Moreover, the risk of a global recession is also great in this scenario.”

 

The economic cycle doing what it always does (i.e. decelerate into a recession before bottoming and then reaccelerating) is reason enough to be bullish on the long bond and bearish on junk bonds, which are accelerating into full-blown crisis mode (the JNK ETF declined another -2% on Friday and is down -4.1% WoW, -5.8% MoM and -12.7% YTD).

 

Three for the Road

TWEET OF THE DAY

Hedgeye Guest Contributor | Cliggott: 'Bad, Bad Data This Week' https://app.hedgeye.com/insights/48045-hedgeye-guest-contributor-cliggott-bad-bad-data-this-week… via @hedgeye

@KeithMcCullough

QUOTE OF THE DAY

A good archer is known not by his arrows but by his aim.

Thomas Fuller

STAT OF THE DAY

61% of the U.S. public was middle class in 1971 now that figure has dropped to 50%.


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.

CHART OF THE DAY: What If The Data Continues To Trend Bearish?

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.  

 

"... What you may not know is that if the data continues to TREND bearish (on both growth and inflation), you’ll see both the slowest year-over-year GDP and S&P profit growth of the cycle in the 1st half of 2016.

 

Sure, there are plenty of buy-siders who agree with us on this. And they will continue to make money on that. But what about those who didn’t believe there would be something like a credit-cycle alongside this? Shall they all just “bar investor withdrawals”?"

 

CHART OF THE DAY: What If The Data Continues To Trend Bearish? - 12.14.15 chart


Forecasting 2016

“I have seen the future and it is very much like the present, only longer.”

-Kehlog Albran

 

That’s a quote from a book called The Profit that was published in 1973 as a parody to a popular poetry book called The Prophet. I sincerely hope you’ve learned enough in this profession to realize that it’s processes that consistently predict the future, not pundits.

 

While last week’s macro market moves shouldn’t surprise anyone who understands both #Deflation Risk and #LateCycle Slowing, it surprised me that the cover article of Barron’s 2016 Forecasts didn’t incorporate anyone seeing what’s happening in the present.

 

If you haven’t seen my crystal ball, I can show it to you. My wife gave it to me for my birthday last year. It’s cool. I have seen the future. And it is very much like what we’ve been seeing Mr. Macro Market price in since July.

 

Forecasting 2016 - fed forecast crystal ball

 

Back to the Global Macro Grind

 

At this time last year, the Barron’s Forecasts were looking for 3-3.5% GDP, 8-10% profit growth, a 3-3.5% 10yr Bond Yield and 2275 SP500. Now they’re looking for 2.5-2.75% GDP, +5% profit growth, a 2.75% 10yr Yield, and 2220 SP500.

 

In other news, US GDP is about to drop towards 1.5% year-over-year growth (at best) in Q4, profit growth is tracking down -5-10%, the 10yr Yield is at 2.13%, and the SP500 is -2.2% YTD in 2015.

 

But you already know that.

 

What you may not know is that if the data continues to TREND bearish (on both growth and inflation), you’ll see both the slowest year-over-year GDP and S&P profit growth of the cycle in the 1st half of 2016.

 

Sure, there are plenty of buy-siders who agree with us on this. And they will continue to make money on that. But what about those who didn’t believe there would be something like a credit-cycle alongside this? Shall they all just “bar investor withdrawals”?

 

Reviewing what the present told us about the future last week, here’s what macro markets did:

 

  1. Commodities (CRB Index) continued to crash, closing down another -2.9% on the week to -24.0% YTD
  2. Oil (WTI) continued to crash, deflating another -11.6% on the week to -41.1% YTD
  3. Nickel prices saw another -5.1% draw-down on the week to -44.3% YTD
  4. Coffee prices got slammed for another -4.5% deflation, taking their crash to -32.3%% YTD
  5. Natural Gas continued to crash, deflating another -9.5% on the week to -44.0% YTD
  6. The Canadian Dollar dropped another -2.9% on the week, making lower-lows at -15.9% YTD
  7. The Toronto Stock Exchange (TSX) lost another -4.3% on the week to -12.6% YTD
  8. Emerging Market Stocks (MSCI) deflated another -2.9% on the week to -17.5% YTD
  9. Latin American Stocks (MSCI) continued to crash, -1.9% on the week to -29.8% YTD
  10. High Yield Credit Yields ramped another +39 basis points to 8.34% (that’s +153 basis points YTD)

 

Apologies for not cherry picking and pointing out that the MLP #Bubble imploded to -41.1% YTD on the Alerian MLP Index. But I had to remind you that the Global Macro market isn’t the Dow, Bro. It’s interconnected and very much trading on #Deflation Risk.

 

No, you didn’t see any of the blue chippers forecast a breakout in High Yield Spread Risk in 2015. You saw them all hope for GDP to have a 3-handle and rates to “move higher” in a healthy way. They’re expecting more of that in 2016.

 

Don’t worry, I didn’t forget what happened in US Equities last week:

 

  1. SP500 lost -3.8% of its value and is heading into the messiest Santa Rally I’ve seen in a while at -2.2% YTD
  2. Russell 2000 got slammed for another -5.1% weekly loss and is currently -6.7% YTD
  3. Energy Stocks (XLE) led decliners (despite being up for 3 days) at -6.6%, but remain in crash mode at -23.6% YTD
  4. The Beloved “rate hike” Financials (XLF) got crushed, dropping -5.4% on the week at -5.2% YTD
  5. The ole “PMIs have bottomed” Industrials (XLI) dropped another -3.6% on the week to -7.0% YTD

 

And finally, from a SP500 Style Factor perspective:

 

  1. LEVERAGE: High Debt Stocks (EV/EBITDA) dropped another -4.4% on the week to -13.5% YTD
  2. BETA: High Beta Stocks got buried -6.6% on the week to -14.2% YTD
  3. SIZE: Small Cap Stocks were down another -5.7% on the week to -15.9% YTD

*Mean performance of the Top Quartile vs. Bottom Quartile of SP500 companies

 

I’m sorry (I really am). But I didn’t do this to macro markets. Economic gravity did.

 

And, while I think it’s totally fair to ask me in 1 on 1 meetings “where I could be wrong”, I think it’s equally fair to ask yourself if your prediction of the future is more in line with what’s actually happening out there, or with what you might like to see happen.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.10-2.22%

SPX 2001-2049
RUT 1116--1149

VIX 17.82-25.85
EUR/USD 1.05-1.11
Oil (WTI) 34.08-38.54

Nat Gas 1.85-2.11

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Forecasting 2016 - 12.14.15 chart


The Macro Show Replay | December 14, 2015

 


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