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Cartoon of the Day: A Sinking Ship?

Cartoon of the Day: A Sinking Ship? - liquidity trap cartoon 01.25.2016

 

"Unfortunately, Illiquidity (institutional investors can’t get out of small/mid cap equity and junk bond exposures) and Leverage (hedge funds running 150-250% “gross long”, growth slowing companies like IBM levering up to buy back stock, the largest $ amount of corporate credit outstanding in human history, etc.), wasn’t objectively discussed @Davos." - Hedgeye CEO Keith McCullough, Early Look.


McCullough: Beware The No-Volume Liquidity Trap

 

In this brief excerpt of The Macro Show today, Hedgeye CEO Keith McCullough cautions on Friday’s market “bounce” and how the Federal Reserve, ECB and BoJ “can’t centrally plan volume.”


Nice! Old Wall Has Second Thoughts About Fed's December Rate Hike

Takeaway: As Wall Street consensus debates whether the Fed rate hike was a 'policy error,' we're pivoting to our next macro call: U.S. #Recession.

Nice! Old Wall Has Second Thoughts About Fed's December Rate Hike - Rate hike cartoon 11.06.2016

 

Is the Fed tightening into an economic slowdown? That's the latest question macro market consensus is grappling with this year.

 

For months now, Hedgeye CEO Keith McCullough has been vocalizing his concerns about flagging U.S. growth while Wall Street all but cheered for a Fed rate hike in December.

 

Watch McCullough Explain our thinking on Fox Business: 

 

Old Wall is now having second thoughts. Here's the latest summation of macro consensus from the Financial Times:

 

Nice! Old Wall Has Second Thoughts About Fed's December Rate Hike - ft policy error

 

"... The long-awaited rate increase went smoothly, but simmering concerns over China, the global economy as a whole, deflating commodities and financial market valuations have since risen to the fore. Even fund managers that were relaxed about slightly tighter monetary policy last month are now wondering whether that was complacent."

 

We've been arguing our Macro themes global #GrowthSlowing#Deflation and #LowerForLonger (rates) for a while now. It appears those realities are slowly dripping into Old Wall consciousness this year, even though we've held them forth for more than 18 months now. 

 

No worries. 

 

We're happy to keep front-running consensus. Our next big Macro theme: U.S. #Recession. Watch the video below in which McCullough and Senior Macro analyst Darius Dale lay out the call on The Macro Show:

... And Watch out!


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Recession Watch | WSJ: "This Time Is Different," Hedgeye: "Nope"

Takeaway: WSJ says recession signals are rolling over but argues "this time is different." We disagree.

Perhaps you saw this headline from the Wall Street Journal over the weekend.

 

Recession Watch | WSJ: "This Time Is Different," Hedgeye: "Nope" - wsj recession story

 

Notwithstanding the headline, the story is seemingly amenable to one of Hedgeye's latest Macro calls – the increasing likelihood that the U.S. slips into a #Recession in 2016.

 

Then, about halfway down, WSJ holds up the old "ex-Energy everything is fine argument." That was Old Wall's favorite line last year for explaining away why client equity portfolios were crashing. It's false.

 

Here's Hedgeye CEO Keith McCullough in the video below on this ex-Energy fallacy.

 

Now, the WSJ hangs the rest of its analysis on the jobs market – which is "growing briskly" – and supposedly strong consumer confidence. The mistake here is in confusing absolutes with what really drives macro markets and is ultimately more predictive – rate of change.

 

In the video below, McCullough also dispels of these consumer confidence and jobs market narratives.    

 

Bottom line: Old Wall needs to believe "this time is different" but economic reality always wins out.

 

 


INSTANT INSIGHT | Oil, Volatility & Old Wall Storytelling

Takeaway: Last week's two day rally in equities was not the bottom for which so many were hoping.

INSTANT INSIGHT | Oil, Volatility & Old Wall Storytelling - bears in car cartoon 01.21.2016

Beware the bounce.

 

No, last week's two-day rally was not a sign that the equity crash bottomed out. Heightened volatility should continue to ravage financial markets.

 

Here's analysis from Hedgeye CEO Keith McCullough in a note sent to subscribers earlier this morning:

 

"... 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 US Equity Volume days of the year (-9% vs 1-month average). Front-month VIX didn’t come close to breaking any lines of support."

 

On a related note, Oil volatility is ramping too, as crude prices continue their downward descent this morning. 

 

"Oil led the bounce (that hasn’t been a good thing for 18 months) +5.9% on the week for WTI, but 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!"

 

 

Keep your head up out there and beware of Old Wall's shape-shifting storytelling.


MONDAY MORNING RISK MONITOR | CHINA, NON-PERFORMING LOANS, AND COUNTERPARTY RISK

Takeaway: China's slowdown continues to grip markets, the ECB is investigating NPLs across the Eurozone, and the Euribor-OIS spread rises a bit.

MONDAY MORNING RISK MONITOR | CHINA, NON-PERFORMING LOANS, AND COUNTERPARTY RISK - RM11

 

Key Takeaway:

Slowing growth continued to grip global markets last week. Data came out showing that Chinese 4Q GDP decelerated to 6.8% y/y from 6.9% in 3Q, driving CDS in the U.S., Europe, and Asia higher.  Additionally, the Euribor-OIS spread, a measure of counterparty risk in the Eurozone, widened by +2 bps last week, and concern over non-performing loans has reached the point that the ECB announced it is investigating a number of Eurozone banks about their management of such loans. Italian Banco Popolare confirmed that it is undergoing such an investigation, and its CDS widened by +63 bps to 333.

 

Another measure of counterparty risk, which we have added to the bottom of our monitor this week, is the CDOR-OIS spread. It is the Canadian equivalent of the Euribor-OIS spread and measures the difference between the Canadian interbank lending rate and overnight indexed swaps. In other words, it measures counterparty risk in the Canadian banking system. The measure hitting a post-crisis high of 50 bps on January 15 prompted us to start tracking it. The spread has since tightened somewhat to 38 bps but remains elevated.

 

Our heatmap below remains mostly negative across all durations.

 

Current Ideas: 


MONDAY MORNING RISK MONITOR | CHINA, NON-PERFORMING LOANS, AND COUNTERPARTY RISK - RM19

 

Financial Risk Monitor Summary

• Short-term(WoW): Negative / 2 of 13 improved / 5 out of 13 worsened / 6 of 13 unchanged
• Intermediate-term(WoW): Negative / 5 of 13 improved / 6 out of 13 worsened / 2 of 13 unchanged
• Long-term(WoW): Negative / 1 of 13 improved / 5 out of 13 worsened / 7 of 13 unchanged

MONDAY MORNING RISK MONITOR | CHINA, NON-PERFORMING LOANS, AND COUNTERPARTY RISK - RM15

 

 

1. U.S. Financial CDS – Swaps widened for 10 out of 27 domestic financial institutions with an average change of +2 bps as concerns over slowing Chinese growth and low oil prices continued to drive risk concerns. At the bottom of our U.S. CDS table below, we have added indices on investment grade and high yield CDS, which tightened last week by -6 bps to 104 and by -31 bps to 525, respectively.


Tightened the most WoW: ACE, MMC, CB
Widened the most WoW: AIG, AXP, BAC
Widened the least/ tightened the most WoW: CB, MTG, AGO
Widened the most MoM: AIG, AXP, COF

MONDAY MORNING RISK MONITOR | CHINA, NON-PERFORMING LOANS, AND COUNTERPARTY RISK - RM1

 

2. European Financial CDS – Swaps mostly widened for European banks last week. With low oil prices one of the driving factors in market weakness, Russian Sberbank CDS continued to be significantly affected, widening by +32 bps to 445. In Italy, Banco Popolare CDS widened by +63 bps to 333 as it announced the ECB is investigating the bank's management of non-performing loans. Additionally, in Portugal, with the issue of transferring risk between Novo Banco and Banco Espirito Santo remaining volatile, Banco Espirito Santo CDS tightened by -291 to 937.

MONDAY MORNING RISK MONITOR | CHINA, NON-PERFORMING LOANS, AND COUNTERPARTY RISK - RM2

 

3. Asian Financial CDS – Swaps mostly widened across Asian Financials last week, rising by +6 bps on average. Indian bank swaps saw the widest moves, increasing between +11 and +16 bps.

MONDAY MORNING RISK MONITOR | CHINA, NON-PERFORMING LOANS, AND COUNTERPARTY RISK - RM17

 

4. Sovereign CDS – Sovereign Swaps mostly widened over last week. Portuguese swaps widened the most, by +16 bps to 209.

MONDAY MORNING RISK MONITOR | CHINA, NON-PERFORMING LOANS, AND COUNTERPARTY RISK - RM18

 

MONDAY MORNING RISK MONITOR | CHINA, NON-PERFORMING LOANS, AND COUNTERPARTY RISK - RM3

 

MONDAY MORNING RISK MONITOR | CHINA, NON-PERFORMING LOANS, AND COUNTERPARTY RISK - RM4


5. Emerging Market Sovereign CDS – Emerging market swaps recovered somewhat from recent widening last week, tightening by -6 bps to 223 at the median, although still higher by +18 bps month over month.

MONDAY MORNING RISK MONITOR | CHINA, NON-PERFORMING LOANS, AND COUNTERPARTY RISK - RM16

MONDAY MORNING RISK MONITOR | CHINA, NON-PERFORMING LOANS, AND COUNTERPARTY RISK - RM20

6. High Yield (YTM) Monitor – High Yield rates rose 1 bps last week, ending the week at 8.98% versus 8.97% the prior week.

MONDAY MORNING RISK MONITOR | CHINA, NON-PERFORMING LOANS, AND COUNTERPARTY RISK - RM5

7. Leveraged Loan Index Monitor  – The Leveraged Loan Index fell 9.0 points last week, ending at 1793.

MONDAY MORNING RISK MONITOR | CHINA, NON-PERFORMING LOANS, AND COUNTERPARTY RISK - RM6

8. TED Spread Monitor  – The TED spread fell 7 basis points last week, ending the week at 32 bps this week versus last week’s print of 39 bps.

MONDAY MORNING RISK MONITOR | CHINA, NON-PERFORMING LOANS, AND COUNTERPARTY RISK - RM7

9. CRB Commodity Price Index – The CRB index rose 0.9%, ending the week at 164 versus 162 the prior week. As compared with the prior month, commodity prices have decreased -7.0%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

MONDAY MORNING RISK MONITOR | CHINA, NON-PERFORMING LOANS, AND COUNTERPARTY RISK - 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 widened by 2 bps to 14 bps.

MONDAY MORNING RISK MONITOR | CHINA, NON-PERFORMING LOANS, AND COUNTERPARTY RISK - RM9

11. Chinese Interbank Rate (Shifon Index) – The Shifon Index rose 7 basis points last week, ending the week at 2.03% versus last week’s print of 1.96%. 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 | CHINA, NON-PERFORMING LOANS, AND COUNTERPARTY RISK - RM10

12. Chinese Steel – Steel prices in China rose 0.8% last week, or 16 yuan/ton, to 2025 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 | CHINA, NON-PERFORMING LOANS, AND COUNTERPARTY RISK - RM12

13. 2-10 Spread – Last week the 2-10 spread was unchanged at 118 bps lats week. We track the 2-10 spread as an indicator of bank margin pressure.

MONDAY MORNING RISK MONITOR | CHINA, NON-PERFORMING LOANS, AND COUNTERPARTY RISK - RM13

14. CDOR-OIS Spread – The CDOR-OIS spread is the Canadian equivalent of the Euribor-OIS spread. It is the difference between the Canadian interbank lending rate and overnight indexed swaps, and it measures bank counterparty risk in Canada. The CDOR-OIS spread tightened by 13 bps to 38 bps last week.

 

MONDAY MORNING RISK MONITOR | CHINA, NON-PERFORMING LOANS, AND COUNTERPARTY RISK - RM14


Joshua Steiner, CFA



Jonathan Casteleyn, CFA, CMT


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