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MONDAY MORNING RISK MONITOR | NOT BUYING THE DIP

Takeaway: Weakening US growth coupled with Japan going NIRP caused a 1-day bad news is good news rally. We'd fade that.

 

MONDAY MORNING RISK MONITOR | NOT BUYING THE DIP - RM11

 

Key Takeaway:

Last week was on course to look like the broader YTD trend (ground and pound), at least until Friday. Friday's rally suggests that we may have re-entered the bad news is good news twilight zone, as the zero handle (0.7%) on 4Q US GDP pushed out expectations for further Fed hikes in 2016 while the BOJ's annoncement of NIRP (negative interest rate policy) suggested that global central banks are collectively hitting the gas (or at least not tapping the brakes).

 

Call us skeptics, but we have zero interest in buying the dip here. Numerous economic indicators are flashing recessionary signals, GDP is trajecting towards zero and the Fed is still debating whether to raise rates. 

 

Our heatmap below is still flashing mostly red across the short and long term while mixed on intermediate-term readings.

 

We have added the CDOR-OIS spread to the bottom of our monitor. 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 but rose week over week to 40 bps from 38 bps.

 

 

Current Ideas:


MONDAY MORNING RISK MONITOR | NOT BUYING THE DIP - RM19

 

Financial Risk Monitor Summary

• Short-term(WoW): Negative / 2 of 13 improved / 4 out of 13 worsened / 7 of 13 unchanged
• Intermediate-term(WoW): Negative / 5 of 13 improved / 5 out of 13 worsened / 3 of 13 unchanged
• Long-term(WoW): Negative / 1 of 13 improved / 4 out of 13 worsened / 8 of 13 unchanged

MONDAY MORNING RISK MONITOR | NOT BUYING THE DIP - RM15

 

1. U.S. Financial CDS – Swaps tightened for 10 out of 27 domestic financial institutions. With 4Q15 U.S. GDP coming in lower than expectations at 0.7%, the median financial swap widened from 75 to 77. 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 -2 bps to 102 and by -17 bps to 508, respectively.

Tightened the most WoW: GS, WFC, MS
Widened the most WoW: BAC, MMC, AIG
Widened the least/ tightened the most WoW: CB, AON, GNW
Widened the most MoM: AIG, AXP, BAC

MONDAY MORNING RISK MONITOR | NOT BUYING THE DIP - RM1

 

2. European Financial CDS – Swaps mostly widened in Europe last week. Portugal's Banco Espirito Santo was an outlier with CDS widening by 174 bps to 1111. Meanwhile Russia's Sberbank CDS tightened by -47 bps to 398 as oil prices rose.

MONDAY MORNING RISK MONITOR | NOT BUYING THE DIP - RM2

 

3. Asian Financial CDS – Swaps were mixed among Asian financials last week. The State Bank of India's CDS stood out with a -11 bps tightening to 174.

 

MONDAY MORNING RISK MONITOR | NOT BUYING THE DIP - RM17

 

4. Sovereign CDS – Sovereign swaps were mixed last week. Spanish sovereign swaps stood out, tightening by -8 bps to 92.

MONDAY MORNING RISK MONITOR | NOT BUYING THE DIP - RM18

 

MONDAY MORNING RISK MONITOR | NOT BUYING THE DIP - RM3

 

MONDAY MORNING RISK MONITOR | NOT BUYING THE DIP - RM4


5. Emerging Market Sovereign CDS – Commodity dependent emerging markets saw swaps tighten with oil and commodity prices rising over last week. Given the rise in oil, Russian swaps tightened the most, by -15 bps to 333.

MONDAY MORNING RISK MONITOR | NOT BUYING THE DIP - RM16

MONDAY MORNING RISK MONITOR | NOT BUYING THE DIP - RM20

6. High Yield (YTM) Monitor – High Yield rates fell 25 bps last week, ending the week at 8.73% versus 8.98% the prior week.

MONDAY MORNING RISK MONITOR | NOT BUYING THE DIP - RM5

7. Leveraged Loan Index Monitor  – The Leveraged Loan Index rose 3.0 points last week, ending at 1796.

MONDAY MORNING RISK MONITOR | NOT BUYING THE DIP - RM6

8. TED Spread Monitor  – The TED spread fell 2 basis points last week, ending the week at 30 bps this week versus last week’s print of 32 bps.

MONDAY MORNING RISK MONITOR | NOT BUYING THE DIP - RM7

9. CRB Commodity Price Index – The CRB index rose 6.7%, ending the week at 167 versus 156 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 | NOT BUYING THE DIP - 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 1 bps to 14 bps.

MONDAY MORNING RISK MONITOR | NOT BUYING THE DIP - RM9

11. Chinese Interbank Rate (Shifon Index) – The Shifon Index fell 4 basis points last week, ending the week at 1.99% versus last week’s print of 2.03%. 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 | NOT BUYING THE DIP - RM10

12. Chinese Steel – Steel prices in China rose 0.2% last week, or 4 yuan/ton, to 2029 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 | NOT BUYING THE DIP - RM12

13. 2-10 Spread – Last week the 2-10 spread tightened to 115 bps, -4 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

MONDAY MORNING RISK MONITOR | NOT BUYING THE DIP - 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 widened by 2 bps to 40 bps.

MONDAY MORNING RISK MONITOR | NOT BUYING THE DIP - CDOR




Joshua Steiner, CFA



Jonathan Casteleyn, CFA, CMT


The Macro Show Replay | February 1, 2016

 


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Secretary Abraham: Rising Geopolitical Tensions And The Price Of Oil

 

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CHART OF THE DAY: Got Non-Sucker Alpha?

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.

 

"... If you can’t be long the “growth” that everyone is already long, what was up last week that is A) actually up YTD and B) generating non-sucker alpha for the right reasons?

  1. Utilities (XLU) had another monster week, closing +3.7% to 4.9% YTD
  2. The Long Bond (TLT) capitalized on another -13 basis point drop in the 10yr Yield to get to +5.3% YTD
  3. Gold tacked on another +1.8% for the week, moving to +5.3% YTD" 

 CHART OF THE DAY: Got Non-Sucker Alpha? - 02.01.16 Chart


SPY Suckers

“If you don’t know who the sucker is, it’s you.”

-Unknown

 

Searching through QuoteInvestigator.com this morning (nice life at 5AM), I couldn’t figure out who actually made this common sense statement first. If you know, let me know!

 

In one of Berkshire’s Annual Reports, Warren Buffett wrote: “As they say in poker, if you’ve been in the game 30 minutes and don’t know who the patsy is, you’re the patsy.”

 

I don’t like the word patsy, and I don’t want to be the sucker. What I really want is good #process. As Lasse Heje Pedersen wrote in Efficiently Inefficient, “we are interested in strategies that can be expected to continue to make money in the future – a repeatable process that generates alpha.” (pg 39)

 

SPY Suckers - trust my gut cartoon 10.14.2015  2

 

Back to the Global Macro Grind…  

 

Don’t be the guy/gal who woke up this morning with the “15 Stocks To Buy Now” (cover of Barron’s this weekend). Instead of how to “position for a rebound” (Barron’s), non-suckers will continue to be positioned for what’s been working for 7 months – selling into the mother of all-time highs in US stocks, and ramping up defensive Long-term Treasury type (TLT) exposures.

 

Last week was a fun one, if only because they found “rebalance” as a reason to mark-up the US stock market into month end after a ridiculous move by the Japanese to target “negative yields” in their bond market. After closing +2.5% on the day on Friday (to get the SP500 +1.7% on the week), most macro pundits were able to forget that US GDP had a 0% handle on it (0.7% for Q4).

 

If you dig into the internals of the macro market moves (we’re non-sucker sticklers for breaking down the storytelling of it all) here’s how the weekly scores looked relative to 2016 to-date:

 

  1. US Dollar Index flat for the week and +1.0% YTD
  2. Burning Yen (vs. USD) -1.9% for the week and -0.7% YTD
  3. Nikkei (Japan) +3.3% for the week and -8.0% YTD
  4. Russell 2000 +1.4% for the week and -8.8% YTD
  5. Nasdaq only +0.5% on for the week and -7.9% YTD
  6. Healthcare Stocks (XLV) down -2.0% for the week and -7.7% YTD

 

I’ll stop there for a second as it’s critical to contextualize that the “QE hope” was all that was – a day trade. Many US “growth” investors aren’t long Japanese stocks or Commodity squeezes – they’re long Nasdaq and Healthcare beta.

 

If you break down the US Equity Style Factors week-over-week:

 

  1. High Short Interest Stocks were +2.8% for the week and are -6.0% YTD
  2. Low-Growth Stocks were +3.1% for the week and are -5.1% YTD

*Mean Performance of Top Quartile vs. Bottom Quartile of SP500 Companies

 

In other words, not only did Energy Stocks (XLE) +4.4% lead the low-quality-short-squeeze on Friday, but the Top Quartile of SP500 Sales Growers sucked, closing only +0.7% on the week and only -7.5% YTD.

 

If you can’t be long the “growth” that everyone is already long, what was up last week that is A) actually up YTD and B) generating non-sucker alpha for the right reasons?

 

  1. Utilities (XLU) had another monster week, closing +3.7% to 4.9% YTD
  2. The Long Bond (TLT) capitalized on another -13 basis point drop in the 10yr Yield to get to +5.3% YTD
  3. Gold tacked on another +1.8% for the week, moving to +5.3% YTD

 

While US Dollar (UUP), The Long Bond (TLT), and Utilities (XLU) remain the Top 3 LONG Ideas in our Global Macro Themes Deck, I added Gold (GLD) to the long side (when it was red on the day) in Real-Time Alerts late last week.

 

On the other side of those Long Ideas, there’s a bounty of excellent short selling opportunities this morning in things like:

 

  1. Oil
  2. Copper
  3. CAT
  4. Canadian (and US) Banks
  5. SPY (SP500)

 

Oh yeah. You like that last one don’t you! SPY has been the sucker’s rally position for the aforementioned 7 months (when it locked in its all-time #Bubble high of 2130 in July of 2015).

 

Admittedly, being short SPY hasn’t been as sexy as short something like the Italian Stock Market (MIB Index DOWN another -2.0% last week to -12.9% YTD with #EuropeSlowing from its cycle peak), but it’s been pretty sexy.

 

From a sentiment perspective, looking at the CFTC non-commercial net SHORT position in the SP500 (Index + Emini):

 

  1. It got 54,976 LESS short last week to -137,478 net SHORT contracts
  2. That’s 50% less short than the peak short position established in SEP 2015 (at the market low)
  3. And that position registers a -0.5 z-score vs. its 1yr avg (the 6mth avg net SHORT position = -148, 831)

 

So, for starters, I’m thinking that the SP500 (SPY) has at least another 200 handles of intermediate-term TREND downside (another -10% from Friday’s marked-up close) before I take a knee again. Consensus on a US #Recession isn’t nearly Bearish Enough.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.91-2.02%

SPX 1 
RUT  
YEN 119.01-121.54 
Oil (WTI) 27.52-34.66

Gold 1100-1132

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

SPY Suckers - 02.01.16 Chart


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