Volatility, Oil and Italy

Client Talking Points

VIX

After a 2-day bounce in oversold beta all of the bottom callers came back, but day 2 of that came on one of the lightest U.S. Equity Volume days of the year (-9% vs 1 month average) and front-month VIX didn’t come close to breaking any lines of support.

OIL

Oil led the bounce (that hasn’t been a good thing for 18 months), up +5.9% on the week for WTI. But it is straight back down -3% this morning after failing at all lines of @Hedgeye resistance – risk range there = $28.21-32.68; Oil Volatility (OVX) = 62!

ITALY

It was a big week for the Italian (Draghi wins central planner of the week), but it was a bad week for Italy, closing down -0.9% was the MIB Index (in a week almost everything bounced) which remains in crash mode, as does Spain and Germany (-20% or more from peak).

 

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

Asset Allocation

CASH 64% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 0%
FIXED INCOME 21% INTL CURRENCIES 15%

Top Long Ideas

Company Ticker Sector Duration
XLU

Utilities (XLU) continue to be the bright spot in the equity markets for 2016. XLU is up 1% this year, having edged out all other S&P 500 subsectors by a wide margin. Last week, XLU was down marginally but was still second best among the subsectors, beating all but Healthcare (XLV). Essentially, it's paying off to own low-beta XLU in a crashing market.

GIS

General Mills (GIS) has turned on its advertising for no artificial colors and flavors in its cereal, as well as an increased effort for its gluten free campaign. Click here to view the 30 second spot TV commercial.

 

These steps taken on cereal, coupled with improved merchandise planning across their portfolio in the second half should bode well for the company’s future performance. Additionally, General Mills fits neatly into the style factors that we like from a macro point of view, large cap, low beta and liquidity.

TLT

Rating agency S&P disclosed on Thursday three concerning stats as it relates to the wellness of credit oustanding:

  • More companies were at risk of having their credit ratings cut at the end of December than at the close of any other year since 2009
  • The number of potential downgrades was at 655, compared with 824 reported by the finish of 2009
  • The year-end total for 2015 was "exceptionally" higher than a yearly average of 613

 

Then on Friday, S&P followed with additional action:

  • Disclosure that oil-exporting countries face fresh downgrades as crude prices fall further and that it could repeat last year's move when it made a big group of cuts all at once
  • S&P currently has Azerbaijan, Bahrain, Kazakhstan, Oman, Russia, and Saudi Arabia on negative outlook in its Europe, Middle East and Africa region, as well as Brazil and Venezuela in Latin America

Moody’s echoed the shaky state of credit markets by announcing it was putting the ratings of 120 oil and gas companies on watch Friday.

 

Strap on your seatbelts as we expect that credit spreads will continue to widen. If the Fed pivots on its “4 rate hikes” in 2016 as the data continues to slow, Treasury bond yields get pushed lower and high-yield spreads widen into a late cycle deleveraging. This should continue to generate alpha in a Short JNK, Long TLT trade.

Three for the Road

TWEET OF THE DAY

POTOMAC INSIGHT | Washington To Wall Street: What To Watch With JT Taylor https://app.hedgeye.com/insights/48721-potomac-insight-washington-to-wall-street-what-to-watch-with-jt-tay… via @hedgeye

@KeithMcCullough

QUOTE OF THE DAY

A person who won’t read has no advantage over one who can’t read.

Mark Twain                                    

STAT OF THE DAY

The Singapore Straits Times Index is up only 0.2% on the bounce, it remains in #crash mode, down -26.7% from 2015 high.


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