prev

MONDAY MORNING RISK MONITOR | 2 KNOWN RISKS & 1 NEW ONE

Takeaway: While the energy and junk bond/leveraged loan complexes remain under attack, the TED Spread becomes the latest addition to the watch list.

 

MONDAY MORNING RISK MONITOR | 2 KNOWN RISKS & 1 NEW ONE - RM11

 

Key Takeaway:

The three things to keep an eye on include:

1. The TED Spread backed up notably on the week, rising +12 bps to 41 bps.

2. Both High Yield and Leveraged Loans took another leg down last week. High yield (YTM) rose another +15 bps to 8.72% while leveraged loans dropped 11 more points to 1796.

3. The bloodbath that is commodities continued to flow. CRB shed another 3% W/W and is down 6.3% M/M.

Current Ideas:

MONDAY MORNING RISK MONITOR | 2 KNOWN RISKS & 1 NEW ONE - RM19

 

Financial Risk Monitor Summary

• Short-term(WoW): Negative / 1 of 12 improved / 2 out of 12 worsened / 9 of 12 unchanged
• Intermediate-term(WoW): Negative / 4 of 12 improved / 7 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 | 2 KNOWN RISKS & 1 NEW ONE - RM15

 

1. U.S. Financial CDS – Swaps tightened for 14 out of 27 domestic financial institutions with little movement around the Federal Reserve's rate increase. The median change was only -1 bps. The one callout was MGIC (MTG), where swaps rose +12 bps to 249 bps.

Tightened the most WoW: ACE, AIG, MMC
Widened the most WoW: MTG, COF, AON
Tightened the most WoW: ACE, MMC, LNC
Widened the most MoM: COF, CB, WFC

MONDAY MORNING RISK MONITOR | 2 KNOWN RISKS & 1 NEW ONE - RM1

 

2. European Financial CDS – Swaps were little changed, on the margin, last week across Europe's bank complex. The median change was zero. 

MONDAY MORNING RISK MONITOR | 2 KNOWN RISKS & 1 NEW ONE - RM2

 

3. Asian Financial CDS – Bank swaps in Asia were mixed last week and unchanged at the median. One standout was India's ICICI Bank, where swaps widened by +14 bps to 178.

MONDAY MORNING RISK MONITOR | 2 KNOWN RISKS & 1 NEW ONE - RM17

 

4. Sovereign CDS – Sovereign Swaps were mixed last week with a median change of 0 bps. Portuguese swaps showed the most movement, tightening by -5 bps to 168.

MONDAY MORNING RISK MONITOR | 2 KNOWN RISKS & 1 NEW ONE - RM18

 

MONDAY MORNING RISK MONITOR | 2 KNOWN RISKS & 1 NEW ONE - RM3

 

MONDAY MORNING RISK MONITOR | 2 KNOWN RISKS & 1 NEW ONE - RM4


5. Emerging Market Sovereign CDS – Emerging market swaps mostly tightened last week. Turkish and Indonesian swaps tightened the most, by -22 bps to 267 and by -22 bps to 241, respectively.

MONDAY MORNING RISK MONITOR | 2 KNOWN RISKS & 1 NEW ONE - RM16

MONDAY MORNING RISK MONITOR | 2 KNOWN RISKS & 1 NEW ONE - RM20

6. High Yield (YTM) Monitor – High Yield rates rose 15 bps last week, ending the week at 8.72% versus 8.57% the prior week.

MONDAY MORNING RISK MONITOR | 2 KNOWN RISKS & 1 NEW ONE - RM5

7. Leveraged Loan Index Monitor  – The Leveraged Loan Index fell 11 points last week, to end at 1796.

MONDAY MORNING RISK MONITOR | 2 KNOWN RISKS & 1 NEW ONE - RM6

8. TED Spread Monitor  – The TED spread rose 12 basis points last week, ending the week at 41 bps this week versus last week’s print of 29 bps.

MONDAY MORNING RISK MONITOR | 2 KNOWN RISKS & 1 NEW ONE - RM7

9. CRB Commodity Price Index – The CRB index fell -3.0%, ending the week at 172 versus 178 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 | 2 KNOWN RISKS & 1 NEW ONE - 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 10 bps.

MONDAY MORNING RISK MONITOR | 2 KNOWN RISKS & 1 NEW ONE - RM9

11. Chinese Interbank Rate (Shifon Index) – The Shifon Index rose 3 basis points last week, ending the week at 1.82% versus last week’s print of 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 | 2 KNOWN RISKS & 1 NEW ONE - RM10

12. Chinese Steel – Steel prices in China rose 0.5% last week, or 10 yuan/ton, to 1927 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 | 2 KNOWN RISKS & 1 NEW ONE - RM12

13. 2-10 Spread – Last week the 2-10 spread was unchanged at 125 bps. We track the 2-10 spread as an indicator of bank margin pressure.

MONDAY MORNING RISK MONITOR | 2 KNOWN RISKS & 1 NEW ONE - RM13

 



Joshua Steiner, CFA



Jonathan Casteleyn, CFA, CMT


Retail Callouts (12/21): Idea List (COH, COST, LULU, PIR), NKE/UA Endorsement Strategy, BOPIS

Takeaway: Hedgeye Retail Idea List - COH, COST, LULU, PIR. NKE meaningful tweak to endorsement strategy. BOPIS kinks not ironed out.

Hedgeye Retail Idea List

 

This Week's Changes

Coach (COH): Added to our Long Bench for Vetting. Near $30, we simply need to give this perennial dog a look on the long side. The decision tree is one where all the business needs to do is stabilize, and the stock works. The business improves -- even if by accident -- and the stock goes up a lot. This would be a tactical TRADE/TREND call, and nothing more.

 

Costco (COST): Added to Short Bench for initial Vetting. Half of our team thinks this name is starting to screen like a good short. Half of our team thinks the other half is nuts. Still, a process is a process. We're vetting it.

 

Lululemon (LULU): This has been sitting on our Short Bench waiting for a better price. But we think that the CEO is fired within six months in conjunction with another miss. This company can either invest in people who can develop a real strategy, or sales can drift lower while management chases the elusive mid-50's GM%.

 

Pier 1 (PIR): Booted to the long bench. The call here is simple. It’s not easy, but it is simple. If you DON’T think we’re headed into a recession, or are not concerned about growth slowing incrementally from here…then you’re looking at a 20% FCF yield and 6% dividend yield as PIR recovers from a 3-year investment to build its online business from 1-20%. In a normal economy next year, this stock could be a 4-bagger.  But if you’re in the other camp, then the equity value could go away entirely. We still think that the upside to a $20-something stock is there. But unfortunately, has the potential downside to zero, which we don't like so late in an economic cycle.

 

Retail Callouts (12/21): Idea List (COH, COST, LULU, PIR), NKE/UA Endorsement Strategy, BOPIS - 12 21 2015 idea list

 

NKE - Meaningful Tweak To Endorsement Strategy

http://www.wsj.com/articles/nike-still-has-room-to-run-1450639115

The crux of this article is that Nike has been conservative with athlete endorsements in recent years. Despite the headlines, that's actually true -- on a relative/competitive basis, at least.  The reality is that Nike has $6.2bn in minimum endorsement obligations, which is 16x what Under Armour has committed. UA is at 6.5% of Nike's endorsement levels today, vs 4.5% just two years ago, and 2.0% in 2010. That's on the heels of Nike uncategorically losing the spotlight to UA on its home turf during 2015 thanks to the likes of Steph Curry, Misty Copeland, Jordan Spieth, and Tom Brady. 

 

We can't say that UA's reign will end. But we're near certain that a major theme in 2016 for Nike will be spending more money on athletes. While first blush is that this would be ROIC dilutive...consider that Nike could add the equivalent of UA's entire 10-year endorsement budget to its current capital base with no cash payback, and it would erode Nike's 21% ROIC by only 60bps.

 

Retail Callouts (12/21): Idea List (COH, COST, LULU, PIR), NKE/UA Endorsement Strategy, BOPIS - endoresement minimum UA NKE

 

Retail Callouts (12/21): Idea List (COH, COST, LULU, PIR), NKE/UA Endorsement Strategy, BOPIS - endoresement analysis

 

WMT, TGT, KSS, Department Stores - BOPIS Kinks not ironed out. More investment needed.

(http://www.post-gazette.com/news/nation/2015/12/21/Buy-online-pick-up-in-store-Simple-right-Not-this-Christmas/stories/201512210086)

 

For retailers today, the standard ante chip for an 'omnichannel' operation involves a few key functionalities: website, mobile app, ship from store, and buy-online pickup in store (BOPIS). Scan any brick and mortar analyst day or earnings call transcript and you will see the mention of either the development or implementation of this group of strategies. But, it appears that the group still has a long way to go on the infrastructure side in order to service the ship from store/BOPIS functionality. This holiday season, 60% of BOPIS orders ran into a problem - that's notable as it's supposed be a) a margin saver as e-commerce sales are typically bps GM dilutive, and b) a traffic driver to stores. These services become most important during the peak shopping periods (especially when handlers are struggling to keep up with the volume), and its clear that the kinks are not ironed out. Meaning more investment needed in the IT/infrastructure side, and more employees to service the program.

 

BABA - Alibaba Group Appoints Matthew Bassiur as Head of Global Intellectual Property Enforcement

(http://www.businesswire.com/news/home/20151221005376/en/Alibaba-Group-Appoints-Matthew-Bassiur-Head-Global)

 

JCP - JCP names new CIO with Target background

(http://www.retailingtoday.com/article/jcp-names-new-cio-target-background)

 

FDX, UPS - Jet.com warns shoppers that packages will not arrive in time for Christmas

(http://blogs.wsj.com/digits/2015/12/18/holiday-shipping-delays-claim-retailer-jet-com/)

 

60% of shoppers wait for last minute Holiday deals, up from 50% last year.

(http://www.wsj.com/articles/holiday-shoppers-wait-until-the-last-minute-for-deals-1450521042)

  

ADS - Milan Shoppers On The Hunt For Black Adidas Yeezy 750s

(http://footwearnews.com/2015/focus/athletic-outdoor/adidas-yeezy-boost-750-black-kanye-west-release-milan-178465/)

 

KSS, M, WMT, SHLD - For last-minute shoppers, big retailers offer deals, extended hours

(http://www.fredericknewspost.com/news/economy_and_business/retail/for-last-minute-shoppers-big-retailers-offer-deals-extended-hours/article_b403adc9-1f99-5617-802f-4ff2820215f8.html)

 

NKE, GPS, HM-B - Cambodia workers protest after $20 monthly wage hike not implemented

(http://www.channelnewsasia.com/news/asiapacific/cambodian-police-use/2366600.html)

 
Returns Scams to Cost Retailers Billions

Holiday return fraud is expected to cost retailers $2.2 billion this year, up 15% over 2014 levels, according to a National Retail Federation survey released on Thursday.

(http://fortune.com/2015/12/17/holiday-returns-scams/


Repeat After Me: Deflation Is Not Transitory

Takeaway: Deflation is real and it's pervasive.

Let’s be crystal clear about what happened last week. Our omnipotent central planners at the Federal Reserve tightened into a slowdown and perpetuated #deflation in doing so.

 

Essentially, by trying to “demonstrate strength” by raising interest rates into a slowdown revealed the #1 weakness of the macro market last week. It’s called #Deflation.

 

Here’s what that looks like in the real world:

 

Repeat After Me: Deflation Is Not Transitory - oil update

 

Oil is down almost 2% this morning to $34.04 after deflating another -3% last week. Make no mistake,  #Deflation is not “transitory.” On the contrary, it’s been pervasive. And since the U.S. is in an industrial recession right now, it’s finding its way into revs/earnings for 1H 2016.

 

More to be revealed.

 


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

12/21/15 DRI | GREAT QUARTER, DON’T EXPECT ANOTHER ONE SOON

12/17/15 AN OPEN LETTER TO THE CEO OF CHIPOTLE FROM HIS PEER GROUP

12/16/15 DRI | ONE LAST GOOD QUARTER

12/11/15 YUM | INVESTOR DAY IN REVIEW

12/9/15 CMG | WHO WILL BENEFIT FROM THEIR STRUGGLES? (ZOES, PNRA, QDOBA, CHUY, MCD)

 

SECTOR PERFORMANCE

Casual Dining and Quick Service stocks that we follow outperformed the XLY, last week, which was down -0.9%. Top performers on a relative basis from casual dining were DRI and KONA posting increases of +9.1% and +6.8%, respectively, while NDLS and JMBA led the quick service group this week up +3.9% and +3.6%, respectively.

Monday Mashup - CHART 2

Monday Mashup - CHART 3

 

XLY VERSUS THE MARKET

Monday Mashup - CHART 4

 

CASUAL DINING RESTAURANTS

Monday Mashup - CHART 5

Monday Mashup - CHART 6

Monday Mashup - CHART 7

 

QUICK SERVICE RESTAURANTS

Monday Mashup - CHART 8

Monday Mashup - CHART 9

Monday Mashup - CHART 10

 

Keith’s Three Morning Bullets

The Fed tightened into a slow-down last week and perpetuated #deflation in doing so…

 

  1. VIX – with the SP500 -3.6% for DEC, front-month VIX is back up at 20.70 – more importantly, it’s risk range is now 17.84-24.83 and this breakout on our TREND duration has been brutal for High Beta as a Style Factor, which was down another -2% last wk
  2. SPAIN – down hard in a generally up tape for European Equities this morning – post the Spanish election the IBEX is -2% (-7.5% in the last month) while the 10yr Yield for Spain is +11bps to 1.80%; I still think Draghi wants to snap Euro $1.05 vs. USD
  3. OIL – down another -0.6% this morning to $34.49 after deflating another -3% last week - #Deflation is not “transitory”, it’s been pervasive and since the US is in an industrial recession right now, it’s finding its way into revs/earnings for 1H 2016

 

SPX immediate-term risk range = 1; UST 10yr Yield 2.12-2.32%

 

Please call or e-mail with any questions.

 

Howard Penney

Managing Director

 

Shayne Laidlaw

Analyst

 


The Macro Show Replay | December 21, 2015

 


INVITE (NEM) | HAPPY ASSUMPTIONS VS. SAD REALITIES

As a follow-up to the the launch of the Hedgeye Materials vertical, please join us TOMORROW (Tuesday, December 22, 2015 at 11AM EST) for a review of the bear case on Newmont Mining.

 

INVITE (NEM) | HAPPY ASSUMPTIONS VS. SAD REALITIES - Marketing Image

 

Overview

 

NEM is typically perceived as a ‘premium’ gold miner, but, for one, we aren’t sure there really is such a thing.  Long-term, NEM has been a secular underperformer; we expect that underperformance to continue.  NEM may struggle with comparatively high costs in a declining gold price environment.  We are not convinced that NEM’s 2015 cost reductions reflect the underlying production economics and expect the shares to be further derated by the market in 2016.

 

 

Highlights

  • Assumption vs. Reality:  A look at key assumptions behind NEM’s costs and those of competitors
  • Charges Coming:  NEM may need to again adjust asset values lower, potentially with broader implications
  • Likely Value Trap:  Cyclicals in a downswing typically look cheap as conditions deteriorate
  • No Gold Cure:  With mine production likely to exceed estimates and gold continuing to move out of favor with investors, we expect gold prices to decline in most major currencies.

 

Dial-in information will be distributed in the reminder email for this call. Please email sales@hedgeye.com for more information on joining.

 


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