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MONDAY MORNING RISK MONITOR | VOLATILITY CATCHING ITS BREATH

Takeaway: Risk measures eased last week. However, longer term measures continue to flash warning signals.

Key Takeaway:

Ten days ago our Washington Policy Group, Potomac Research, hosted a call with former Energy Secretary Spencer Abraham called OPEC Cuts = Mirage. The point of the call was that investors should expect, but shouldn't be headfaked by, comments from various OPEC countries in the weeks/months ahead aimed at shoring up oil prices. Secretary Abraham's message was clear: the Saudis believe their policies are winning and investors should continue to expect energy price weakness over the intermediate term. 

 

We view the recent bounce in oil within that context, and would be sellers of strength. 

 

Current Ideas:

MONDAY MORNING RISK MONITOR | VOLATILITY CATCHING ITS BREATH - RM19

 

Financial Risk Monitor Summary

• Short-term(WoW): Positive / 5 of 13 improved / 2 out of 13 worsened / 6 of 13 unchanged
• Intermediate-term(WoW): Negative / 4 of 13 improved / 7 out of 13 worsened / 2 of 13 unchanged
• Long-term(WoW): Negative / 1 of 13 improved / 6 out of 13 worsened / 6 of 13 unchanged

MONDAY MORNING RISK MONITOR | VOLATILITY CATCHING ITS BREATH - RM15

 

1. U.S. Financial CDS – Swaps tightened for 12 out of 27 domestic financial institutions. The median CDS tightened by 17 bps to 126 as fear in the market eased over the short term. However, month over month, CDS spreads remain 39 bps wider.

Tightened the most WoW: MET, PRU, HIG
Widened the most WoW: COF, SLM, ALL
Widened the least WoW: MMC, AON, TRV
Widened the most MoM: AIG, PRU, MET

MONDAY MORNING RISK MONITOR | VOLATILITY CATCHING ITS BREATH - RM1

 

2. European Financial CDS – Swaps mostly tightened in Europe last week. Following the agreement between Saudi Arabia, Russia, Qatar, and Venezuela not to increase oil production, Russia's Sberbank CDS experienced one of the largest moves in Europe, tightening by -105 bps to 386.



MONDAY MORNING RISK MONITOR | VOLATILITY CATCHING ITS BREATH - RM2

 

3. Asian Financial CDS – Asian bank swaps mostly tightened last week as global risk perception eased. The median CDS tightened by 27 bps to 147.

MONDAY MORNING RISK MONITOR | VOLATILITY CATCHING ITS BREATH - RM17

 

4. Sovereign CDS – Sovereign Swaps mostly tightened over last week. Italian swaps tightened the most, by 6 bps to 149.

MONDAY MORNING RISK MONITOR | VOLATILITY CATCHING ITS BREATH - RM18

 

MONDAY MORNING RISK MONITOR | VOLATILITY CATCHING ITS BREATH - RM3

 

MONDAY MORNING RISK MONITOR | VOLATILITY CATCHING ITS BREATH - RM4


5. Emerging Market Sovereign CDS – Emerging market swaps mostly tightened last week. Indian swaps tightened the most, by -53 bps to 169.

MONDAY MORNING RISK MONITOR | VOLATILITY CATCHING ITS BREATH - RM16

MONDAY MORNING RISK MONITOR | VOLATILITY CATCHING ITS BREATH - RM20

6. High Yield (YTM) Monitor – High Yield rates fell 37 bps last week, ending the week at 8.84% versus 9.21% the prior week.

MONDAY MORNING RISK MONITOR | VOLATILITY CATCHING ITS BREATH - RM5

7. Leveraged Loan Index Monitor  – The Leveraged Loan Index rose 4.0 points last week, ending at 1782.

MONDAY MORNING RISK MONITOR | VOLATILITY CATCHING ITS BREATH - RM6

8. TED Spread Monitor  – The TED spread fell 1 basis point last week, ending the week at 33 bps this week versus last week’s print of 34 bps.

MONDAY MORNING RISK MONITOR | VOLATILITY CATCHING ITS BREATH - RM7

9. CRB Commodity Price Index – The CRB index rose 2.1%, ending the week at 160 versus 156 the prior week. As compared with the prior month, commodity prices have decreased -2.5%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

MONDAY MORNING RISK MONITOR | VOLATILITY CATCHING ITS BREATH - 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 15 bps.

MONDAY MORNING RISK MONITOR | VOLATILITY CATCHING ITS BREATH - RM9

11. Chinese Interbank Rate (Shifon Index) – The Shifon Index fell 5 basis points last week, ending the week at 1.94% versus last week’s print of 1.98%. 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 | VOLATILITY CATCHING ITS BREATH - RM10

12. Chinese Steel – Steel prices in China rose 2.1% last week, or 43 yuan/ton, to 2071 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 | VOLATILITY CATCHING ITS BREATH - RM12

13. 2-10 Spread – Last week the 2-10 spread was flat at 104 bps. We track the 2-10 spread as an indicator of bank margin pressure.

MONDAY MORNING RISK MONITOR | VOLATILITY CATCHING ITS BREATH - 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 was unchanged at 40 bps.

MONDAY MORNING RISK MONITOR | VOLATILITY CATCHING ITS BREATH - RM14


Joshua Steiner, CFA



Jonathan Casteleyn, CFA, CMT


Get The QE-Hope Party Started

Client Talking Points

EURO

The euro is down another -0.6% vs. USD this morning after falling -1.1% last week with the composite Eurozone PMI hitting a 13 month low of 52.7 in FEB. Since the risk range is $1.09-1.13, we expect this party to end at $1.09, and Gold to hold $1150.

DAX

DAX loves Burning Euro, +2.1% on the bounce but still very much in crash mode (-23% from the April 2015 peak when the European economic cycle was peaking). ECB President Mario Draghi will have his work cut out for him at the March 10th meeting to break $1.09.

UST 2YR

The UST 2YR pops (like everything that hasn’t been working in 2016) to 0.77% this morning – most importantly, that flattens the Yield Spread (10s/2s) to +100 basis points, which is a new YTD and cycle low; good day to buy more Utilities and short more Financials.

 

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

Asset Allocation

CASH 63% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 3%
FIXED INCOME 24% INTL CURRENCIES 10%

Top Long Ideas

Company Ticker Sector Duration
XLU

Long-Term Treasuries (TLT) and Utilities (XLU) remain our two best fixed income and equity vehicles to play #Lower-For-Longer on growth and interest rates as the market gets more and more skeptical about the central bank dogma.

 

With market turmoil, the Junk Bond ETF (JNK) is down -4.5% vs. the defensive, growth slowing equity sector Utilities (XLU) which is up 6.7%, outperforming the S&P 500 by 12.9% on a relative basis. That’s yet more confirmation of our dour economic outlook economy (spreads widen in tumultuous market environments and Utilities are a defensive sector that outperforms when growth is slowing).

GIS

General Mills (GIS) is a large player in the Yogurt category with their Yoplait brand. Their competitors, Dannon, Chobani and Fage have been aggressive on merchandising and consumer spending, making it difficult to compete while maintaining internal margin objectives. GIS is turning on innovation with the growth of Annie’s yogurt and that should help the trajectory of the business. Yogurt being a roughly $1.4 billion business, turning it around is a top priority for management.

 

On the broader GIS long thesis, it's unlikely that the stock is going to go up 20% in the next year, but we do believe it will fare better than most in the consumer staples sector, especially as we head into an economic slowdown.

TLT

With the market losing faith in the central planning policy backstop, investors continue to yield to top-down market signals and the direction of the data. To be clear, the data continues to deteriorate and volatility continues to break-out.

 

The yield spread (10-year Treasury yield minus 2-year Treasury yield) has compressed 24 basis points this year, and TLT is up 8.6% vs. the S&P 500 which is down -5.2%. The December Federal Funds Futures contract has declined in a straight line since December’s rate hike.  

Three for the Road

TWEET OF THE DAY

NEW VIDEO | New #FCC Proposal Should Worry $DIS $VZ $CHTR https://app.hedgeye.com/insights/49282-how-latest-fcc-rules-could-affect-disney-verizon-charter… @KeithMcCullough @PotomacResearch

@Hedgeye

QUOTE OF THE DAY

Genius ain't anything more than elegant common sense.

Josh Billings

STAT OF THE DAY

A study conducted in the U.S. found that the average American spends 67 minutes per day eating and drinking beverages. Summed up together, the average Joe spends a staggering 32,098 hours eating and drinking beverages in their lifetime.


CHART OF THE DAY | McCullough: 'I Wouldn't Rule Out A 1987 Type Market Crash'

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.

 

"... Unless we have a 1987 type day, fading market moves (both ways) works. And by the way, with the following immediate-term risk ranges, I wouldn’t rule out what might feel like a modern ‘87 type day either:

 

  1. SP500 immediate-term risk range = 135 points wide at 1810-1945
  2. US Equity Volatility (VIX) immediate-term risk range of 19.92-29.28
  3. Oil (WTI) and Oil Volatility (OVX) immediate-term risk range of $25.99-33.05 and 57-81, respectively" 

 

CHART OF THE DAY | McCullough: 'I Wouldn't Rule Out A 1987 Type Market Crash' - 02.22.16 Chart


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Pursuing Data

“If it’s in the data, pursue it.”

-Cliff Asness

 

That was a great quote from a great interview that Lasse Heje Pedersen did with AQR Capital founder (and former head of quant research @Goldman) Cliff Asness in Efficiently Inefficient (pg 158).

 

In stark contrast to something that you cannot pursue (i.e. data that supports the cover of Barron’s saying “the US economy will avoid recession and grow at a healthy 3% pace this year”), this is how Asness taught us to think about math/economics:

 

“I think that good quant investment managers can really be thought of as financial economists who have codified their beliefs into a repeatable process.” Amen brother. A data driven rate-of-change process is both measurable and repeatable.

 

Pursuing Data - juggling bull 02.19.2016

 

Back to the Global Macro Grind

 

Measuring last week’s macro market message was almost as easy as measuring Germany’s PMI reading slowing to a 13-month low of 50.2 this morning – big macro 2016 losers won last week while winners lost some of their YTD gains.

 

Quantitatively driven investors can see this most easily by looking at the performance of US Equity Style Factors:

 

  1. High Beta Stocks ramped +7.9% last week (but are still down -14.1% YTD!)
  2. High Short Interest Stocks squeezed +6.9% last week to -6.4% YTD
  3. Smaller Cap Stocks bounced +6.7% last week (but are still down -9.9% YTD)

*Mean performance of Top Quintile vs. Bottom Quintile of SP500 companies

 

Yes, bear market bounces can be vicious. That’s why you want to have a repeatable risk management #process that provides you the confidence to cover-low and re-short higher.

 

Unless we have a 1987 type day, fading market moves (both ways) works. And by the way, with the following immediate-term risk ranges, I wouldn’t rule out what might feel like a modern ‘87 type day either:

 

  1. SP500 immediate-term risk range = 135 points wide at 1
  2. US Equity Volatility (VIX) immediate-term risk range of 19.92-29.28
  3. Oil (WTI) and Oil Volatility (OVX) immediate-term risk range of $25.99-33.05 and 57-81, respectively

 

In our multi-duration, multi-factor #process, the immediate-term risk range is what should be considered “probable” (in standard deviation speak). Probable and trending levels of 20-80 volatility are incredibly damaging to anyone levered long the underlying securities that are implying that level of volatility.

 

In recent history, Ben Bernanke would just come into the macro matrix and crush volatility (and credit spreads) with an unprecedented level of un-elected quantitative easing. But he’s gonzo now and, if anything, you see the Federal Reserve data-mining for reasons to stay relatively tight. They aren’t getting easier. That’s why the US Dollar isn’t collapsing.

 

As Asness revealed to Eugene Fama (“efficient market theory” professor at the University of Chicago), “the only cure for data mining is an out of sample test” (Efficiently Inefficient, pg 159). So please don’t be a data miner. Stick with rate-of-change and the longest dated time-series you can confirm as good data.

 

This is why I think the future of finance is already here.

 

While I am still uber bearish on High Beta, Highly Levered, Small Cap US stocks right now, I am probably the most bullish man on Wall Street when it comes to building a better way. Our profession is so far behind the curve on pursuing best fundamental and quantitative research practices that we can only get better from here at an accelerating rate.

 

One way we’ve really improved our #process since calling the last US stock market crash has been getting rid of broken Old Wall “sentiment readings” and building our own. On that score one of the most important #behavioral read-throughs in an oversupplied hedge fund industry is weekly CFTC non-commercial futures and options positioning. Here’s last week’s:

 

  1. SP500 (Index + Emini) net SHORT positioning got less short by 60,883 contracts to -162,655
  2. Long-term Treasury (10yr) net LONG positioning only got 11,613 longer last week to +3,599 contracts
  3. Gold net LONG positioning ramped +21,022 longer last week to +93,934 contracts

 

In rate-of-change terms, how I read points 1-3 are as follows:

 

  1. After shorting the YTD lows, hedge funds were forced to cover higher last week
  2. After not being bullish on the Long Bond coming into 2016, consensus is nowhere near bullish enough
  3. After an epic +17% ramp to start 2016, chart chasers got too long of Gold at the highs

 

So, I’ll wait for 1945’ish on the SP500 to short more. I’ll signal buy more TLT closer to 1.85% on the 10yr UST Yield. And I’ll probably buy Gold again on a pullback towards $1151.  I’ll keep pursuing that positioning until the data doesn’t support it.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.62-1.84%

SPX 1

DAX 8

VIX 19.92-29.28
USD 95.49-97.91

Gold 1175-1251

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Pursuing Data - 02.22.16 Chart


The Macro Show Replay | February 22, 2016

 


REPLAY! This Week On HedgeyeTV

Our deep bench of analysts take to HedgeyeTV every weekday to update subscribers on Hedgeye's high conviction stock ideas and evolving macro trends. Whether it's on The Macro Show, Real-Time Alerts Live or other exclusive live events, HedgeyeTV is always chock full of insight.

 

Below is a taste of the most recent week in HedgeyeTV. (Like what you see? Click here to subscribe for free to our YouTube channel.)

 

Enjoy! 

 

 

1. Ahead Of Primary, South Carolina Democratic & GOP Party Chairs Weigh In (2/20/2016)

 

  

Before the primary voting in South Carolina, Hedgeye and Potomac Research Group hosted an exclusive 60-minute conference call with South Carolina Democratic Chair Jamie Harrison and Republican Chair Matt Moore to give their outlooks on how each race is developing in their state.

 

2. FCC Proposal Should Worry Disney, Verizon, Charter (2/19/2016)

 

In this HedgeyeTV video excerpt, Potomac Research Group Senior Telecommunications & Cable analyst Paul Glenchur discusses FCC proposed rules on set-top boxes and how that will affect cable operators, telecoms and major cable programmers with Hedgeye Internet & Media analyst Hesham Shaaban.

 

3. Howe: How Demographic Trends Impact Your Portfolio (2/19/2016)

 

In this recent excerpt of The Macro Show, Hedgeye Managing Director and Demography analyst Neil Howe responds to a subscriber’s question about how the “glacial pace” of demographic trends and migration impacts investors’ portfolios. 

 

4. Under 60 Seconds: Walmart's Earnings Report | $WMT (2/18/2016)

 

Hedgeye highlights three key points from Walmart's quarter courtesy of our Retail analyst Brian McGough.

 

5. McCullough: ‘Markets Are Looking Crashy’ (2/18/2016)

 

In this brief excerpt of The Macro Show earlier today, Hedgeye CEO Keith McCullough explains why he’s more convinced than ever that stocks will crash and why 2016 is eerily reminiscent of 2008.

 

6. From Washington To Wall Street: What To Watch With JT Taylor (2/18/2016)

 

In this HedgeyeTV video, Potomac Research Group Chief Political Strategist JT Taylor speaks with Hedgeye Director of Research Daryl Jones about who’s hot and who’s not in the race for the White House, the anti-establishment surge implications of Donald Trump and Bernie Sanders, and the brewing brouhaha over Justice Scalia’s empty seat on the Supreme Court.

 

7. Why 2016 Will Remain A ‘Painful’ Year For Oil (2/17/2016)

 

Joe McMonigle, Senior Energy Analyst for Potomac Research Group and The Abraham Group, joined Hedgeye CEO Keith McCullough on The Macro Show to give his updated thoughts on OPEC and oil prices.  

 

8. McCullough: ‘Are You Bearish Enough?’ (2/16/2016)

 

In this brief excerpt of The Macro Show from this morning, Hedgeye CEO Keith McCullough explains why most investors aren’t bearish enough.

 

9. Young Guns | A Deep Dive Into Earnings (2/16/2016)

 

Young Guns is a new HedgeyeTV show showcasing our millennial-aged analysts’ insight into how they approach their research.


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