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MONDAY MORNING RISK MONITOR | HIGH YIELD CONTINUES ITS SELL OFF

Takeaway: The high yield carnage continues while commodities catch a momentary reprieve.

 

MONDAY MORNING RISK MONITOR | HIGH YIELD CONTINUES ITS SELL OFF - RM11

 

Key Takeaway:

The sole takeaway from last week was the ongoing deterioration in the high yield markets. YTM widened another +37 bps on the week, pushing yields to 9.09%. That brings the M/M change to +115 bps.

 

Our heatmap below is decidely negative across all durations.


Current Ideas:


MONDAY MORNING RISK MONITOR | HIGH YIELD CONTINUES ITS SELL OFF - RM19

 

Financial Risk Monitor Summary

• Short-term(WoW): Negative / 2 of 12 improved / 5 out of 12 worsened / 5 of 12 unchanged
• Intermediate-term(WoW): Negative / 3 of 12 improved / 7 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 | HIGH YIELD CONTINUES ITS SELL OFF - RM15

 

 

1. U.S. Financial CDS – Swaps were generally tighter among US Financials on the week with the median spread falling from 56 bps to 54.

Tightened the most WoW: COF, MMC, ACE
Widened the most/ tightened the least WoW: ALL, SLM, SLM
Tightened the most WoW: ACE, AIG, MMC
Widened the most/ tightened the least MoM: COF, SLM, SLM

MONDAY MORNING RISK MONITOR | HIGH YIELD CONTINUES ITS SELL OFF - RM1

 

2. European Financial CDS – Swaps were little changed among European banks last week.

MONDAY MORNING RISK MONITOR | HIGH YIELD CONTINUES ITS SELL OFF - RM2

 

3. Asian Financial CDS – Swaps mostly widened among Asian banks last week with the Export-Import Bank of China and the State Bank of India leading the way, the former widening by 7 bps to 127, the latter by 7 bps to 166.

MONDAY MORNING RISK MONITOR | HIGH YIELD CONTINUES ITS SELL OFF - RM17

 

4. Sovereign CDS – Sovereign swaps were flat to wider over last week. Spanish sovereign swaps showed the most movement, widening by 5 bps to 91.

MONDAY MORNING RISK MONITOR | HIGH YIELD CONTINUES ITS SELL OFF - RM18

 

MONDAY MORNING RISK MONITOR | HIGH YIELD CONTINUES ITS SELL OFF - RM3

 

MONDAY MORNING RISK MONITOR | HIGH YIELD CONTINUES ITS SELL OFF - RM4


5. Emerging Market Sovereign CDS – Emerging market swaps mostly tightened last week. Indonesian swaps tightened the most, by -5 bps to 235.

MONDAY MORNING RISK MONITOR | HIGH YIELD CONTINUES ITS SELL OFF - RM16

MONDAY MORNING RISK MONITOR | HIGH YIELD CONTINUES ITS SELL OFF - RM20

6. High Yield (YTM) Monitor – High Yield rates rose 37 bps last week, ending the week at 9.09% versus 8.72% the prior week.

MONDAY MORNING RISK MONITOR | HIGH YIELD CONTINUES ITS SELL OFF - RM5

7. Leveraged Loan Index Monitor  – The Leveraged Loan Index rose 4 points last week, ending at 1800.

MONDAY MORNING RISK MONITOR | HIGH YIELD CONTINUES ITS SELL OFF - RM6

8. TED Spread Monitor  – The TED spread fell 1 basis point last week, ending the week at 40 bps this week versus last week’s print of 41 bps.

MONDAY MORNING RISK MONITOR | HIGH YIELD CONTINUES ITS SELL OFF - RM7

9. CRB Commodity Price Index – The CRB index rose 2.5%, ending the week at 176 versus 172 the prior week. As compared with the prior month, commodity prices have decreased -3.9%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

MONDAY MORNING RISK MONITOR | HIGH YIELD CONTINUES ITS SELL OFF - 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 | HIGH YIELD CONTINUES ITS SELL OFF - RM9

11. Chinese Interbank Rate (Shifon Index) – The Shifon Index rose 12 basis points last week, ending the week at 1.93% versus last week’s print of 1.82%. 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 | HIGH YIELD CONTINUES ITS SELL OFF - RM10

12. Chinese Steel – Steel prices in China rose 1.6% last week, or 31 yuan/ton, to 1958 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 | HIGH YIELD CONTINUES ITS SELL OFF - RM12

13. 2-10 Spread – Last week the 2-10 spread tightened to 124 bps, -1 bp tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

MONDAY MORNING RISK MONITOR | HIGH YIELD CONTINUES ITS SELL OFF - RM13



Joshua Steiner, CFA



Jonathan Casteleyn, CFA, CMT


The Macro Show Replay | December 28, 2015

 


December 28, 2015

  • Bullish Trend
  • Bearish Trend
  • Neutral

INDEX BUY TRADE SELL TRADE PREV. CLOSE
UST10Y
10-Year U.S. Treasury Yield
2.30 2.15 2.25
SPX
S&P 500
1,998 2,084 2,060
RUT
Russell 2000
1,109 1,163 1,152
COMPQ
NASDAQ Composite
4,901 5,095 5,048
NIKK
Nikkei 225 Index
18,503 19,206 18,789
DAX
German DAX Composite
10,153 10,827 10,727
VIX
Volatility Index
14.11 24.21 15.74
DXY
U.S. Dollar Index
97.29 99.35 98.02
EURUSD
Euro
1.07 1.10 1.09
USDJPY
Japanese Yen
120.02 121.69 120.28
WTIC
Light Crude Oil Spot Price
34.97 38.33 38.12
NATGAS
Natural Gas Spot Price
1.69 2.11 2.09
GOLD
Gold Spot Price
1,049 1,081 1,075
COPPER
Copper Spot Price
2.02 2.14 2.12
AAPL
Apple Inc.
104 110 108
AMZN
Amazon.com Inc.
650 679 662
GOOGL
Alphabet Inc.
750 777 765
DIS
Walt Disney Company, Inc.
102 108 105
NFLX
Netflix Inc.
113 120 117
KMI
Kinder Morgan Inc.
13.83 16.91 16.08

 

Hedgeye's Daily Trading Ranges are twenty immediate-term (TRADE) buy and sell levels, with our intermediate-term (TREND) view and the previous day's closing price for each name.  Click HERE for a video from Hedgeye CEO Keith McCullough on how to use these risk ranges.

 


the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

Oil, Russell 2000 and VIX

Client Talking Points

OIL

Oil was leading the no volume “reflation”/squeeze last week, WTI was up +5.7% week-over-week, but is straight back down -1.7% this morning after tapping the top-end of our immediate-term $34.97-38.33 risk range. MLPs were up +14.4% last week, but still down -32% year-to-date.

RUSSELL 2000

Small cap, debt leverage, and big beta were the best Style Factors in the U.S. stock market last week (and have been the worst all year), so plenty of selling opportunities in small caps this morning with the RUT down -4.1% year-to-date and downside to 1109.

VIX

Since the AUG breakout in equity volatility (prefaced by a credit signal that’s real), raising cash and lowering your portfolios exposure to illiquidity and leverage has been very smart at front month VIX 14-15; here’s another gift.

 

*Tune into The Macro Show at 9:00AM ET - CLICK HERE

Asset Allocation

CASH 64% US EQUITIES 2%
INTL EQUITIES 2% COMMODITIES 0%
FIXED INCOME 18% INTL CURRENCIES 14%

Top Long Ideas

Company Ticker Sector Duration
FII

Federated Investors (FII) profitability got a boost as the Fed boosted short term rates for the first time in 7 years. Even the slight 25 basis point hike improves profitability in the firm’s leading money fund business by +30% into the New Year.

 

In essence, the firm rolls 30-day paper throughout the short term fixed income curves and the new higher yields forthcoming into 2016 will allow the company to claw back some of the waived fees it has extended to its client base in money funds. Year-to-date the company has waived over $300 million in fees. With that firmly in the rearview, it becomes an opportunity set as FII gets higher yield from cash products next year.

 

In the financial sector, FII is the most asset sensitive name we cover, meaning it benefits most from even marginal interest rate hikes.

RH

We have to give Restoration Hardware Chairman and CEO Gary Friedman props for his approximately nine minute segment on Cramer 2 weeks. Let's face it, him going on what's arguably the most volatile and biased financial media platform, unscripted, is not what we wanted to see. The risk of fireworks was high.

 

But he capped off a successful day RH (CFO and IR) had on the investor conference circuit by focusing on the real value drivers at Restoration Hardware (RH) -- growth in product concepts, and RH's real estate transformation. The appearance was planned well before the earnings release, by the way, coinciding with a business-focused trip to NYC. All-in, it was a positive event for the stock.

TLT

In case you were looking for Style Factors that crushed it last week – the Top 3 gainers were the Top 3 #Deflations of 2015!

  1. High Beta Stocks were +3.5% last week to -12.0% YTD
  2. High Debt (to EV) Stocks were +2.9% last week to -10.9% YTD
  3. Small Cap Stocks were +3.2% last week to -12.4% YTD

*Mean performance of Top Quartile vs. Bottom Quartile (SP500 Companies)

 

In other words, the no-volume squeeze had the smaller cap Russell 2000 outperform the large cap Dow at +3.0% week-over-week vs. 2.5%. Heading into the final week of the year, the Dow and Russell are down -1.5% and -4.1%, respectively.

 

In a slower-for-longer secular growth world, you should pay more for the organic growth that you can find. But, more importantly, you should realize that “cheap” has the illusion of “cheap” because the U.S. economic cycle is slowing alongside the secular. 

Three for the Road

TWEET OF THE DAY

What To Watch: The Fed, Oil And U.S. Dollar https://app.hedgeye.com/insights/48256-instant-insight-what-to-watch-the-fed-oil-and-u-s-dollar… via @hedgeye

@KeithMcCullough

QUOTE OF THE DAY

Take time: much may be gained by patience.

Latin Proverb

STAT OF THE DAY

The CRB Commodities Index was up +2.3% on the week to down -23.4% year-to-date.


CHART OF THE DAY: A Recap Of Last Week's (No Volume) Rally | $XLE $AMLP

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

 

"... That’s why I’d call Energy (XLE) and MLP (Alerian ETF) stocks leading last week’s counter-TREND bounce (+4.7% and +14.4% to -22.2% and -31.8% YTD, respectively) nothing more than what it was – counter to the TREND that’s been your friend all year long.

 

The combination of #Deflation and #GrowthSlowing knows no “valuation” bottom, until we price in a full economic and credit cycle."

 

CHART OF THE DAY: A Recap Of Last Week's (No Volume) Rally | $XLE $AMLP - 12.28.15 EL chart


American Genius

“Genius knows no class, no condition…”

-Dayton Daily News, 1909

 

First and foremost, I wanted to wish you and your loved ones a happy holiday season. I was blessed with a great surprise for Christmas – a visit to CT by my Mom & Dad. That made my wife, four children, and I, as grateful as we can be.

 

I’m super grateful for the year we had @Hedgeye too. So many of the things we worked so tirelessly on as a team came together in 2015. And I wanted to personally thank all of my teammates for believing in the vision. Without their efforts, this doesn’t happen.

 

While there are many other shapes and forms, we are blessed to be living one version of The American Dream. The genius in that inspiration is that it’s pillars aren’t part of an “upper or lower class”, or any pre-condition.

 

Over 100 years ago, an editorial from the Dayton Daily News nailed that about The Wright Brothers. The aforementioned quote comes from a fantastic passage that typifies free-market history in America:

 

“It is a wonderful lesson – this celebration. It comes at an auspicious time. The old world was getting tired, it seemed, and needed help to whip it into action. There was beginning a great deal of talk about man’s no longer having the opportunities he once had of achieving greatness… some were wondering whether a poor boy might work for himself a place in commerce or industry or science.

 

This celebration throws all such idle talk to the winds. It crowns anew the efforts of mankind. It points out to the ambitious young man that he labors not in vain; that genius knows no class, no condition… above all there is a sermon in the Wright Brothers life of endeavor which cannot be preached too often.” (The Wright Brothers, pg 231)

 

Amen.

 

American Genius - flag

 

Back to the Global Macro Grind

 

Last week’s no-volume (one of the lowest of the year) “rally” was led by everything that’s crashed in 2015. With the US Dollar having a counter-TREND down week of -0.8%, “reflation” led the bounce to lower-highs in FX and Commodities:

 

  1. US Dollar Index -0.8% on the week to +8.5% YTD
  2. Euro (vs. USD) +0.9% on the week to -9.4% YTD
  3. Canadian Dollar +0.9% on the week to -16.0% YTD
  4. CRB Commodities Index +2.3% on the week to -23.4% YTD
  5. Oil (WTI) +5.7% on the week to -37.0% YTD
  6. Copper +0.5% on the week to -25.0% YTD

 

And, this morning:

 

  1. USD stops going down and remains bullish TREND @Hedgeye
  2. Oil (WTI) resumes its epic #Deflation, -1.7%
  3. Dr. Copper remains deathly ill, straight back down, -1.9%

 

In case you were looking for Style Factors that crushed it last week – the Top 3 gainers were the Top 3 #Deflations of 2015!

 

  1. High Beta Stocks were +3.5% last week to -12.0% YTD
  2. High Debt (to EV) Stocks were +2.9% last week to -10.9% YTD
  3. Small Cap Stocks were +3.2% last week to -12.4% YTD

*Mean performance of Top Quartile vs. Bottom Quartile (SP500 Companies)

 

In other words, the no-volume squeeze had the smaller cap Russell 2000 outperform the large cap Dow at +3.0% week-over-week vs. 2.5%. Heading into the final week of the year, the Dow and Russell are down -1.5% and -4.1%, respectively.

 

Bull market.

 

It’s amazing what genius you’ll find in simply listening to Mr. Macro Market’s signals amidst all of the Establishment’s noise. As long as you’re thorough and humble enough to accept that the market may not want what you need, you’re starting with a good #process.

 

In a slower-for-longer secular growth world, you should pay more for the organic growth that you can find. But, more importantly, you should realize that “cheap” has the illusion of “cheap” because the US economic cycle is slowing alongside the secular.

 

That’s why I’d call Energy (XLE) and MLP (Alerian ETF) stocks leading last week’s counter-TREND bounce (+4.7% and +14.4% to -22.2% and -31.8% YTD, respectively) nothing more than what it was – counter to the TREND that’s been your friend all year long.

 

The combination of #Deflation and #GrowthSlowing knows no “valuation” bottom, until we price in a full economic and credit cycle.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.15-2.30%

SPX 1
RUT 1109--1163

VIX 14.11-24.21
USD 97.29-99.35
Oil (WTI) 34.97-38.33
Copper 2.02-2.14

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

American Genius - 12.28.15 EL chart


Early Look

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