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MONDAY MORNING RISK MONITOR | SHORT TERM GAIN

Takeaway: Much of the data we track globally has been bouncing for the last few weeks. This doesn't change our increasingly bearish view of the setup.

 

MONDAY MORNING RISK MONITOR | SHORT TERM GAIN - RM11

 

Key Takeaway:

Last week's better than expected reading on non-farm payrolls coupled with the ongoing stabilization in oil has fueled an impressive relief rally. Our heatmap shows that CDS spread significantly tightened across the globe last week. Additionally, high yield YTM dropped 58 bps to 8.0%, and the Leveraged Loan index rose by 24 points.

 

While short-term readings have skewed positive over the last three weeks, intermediate and longer-term measures remain negative, on balance.

 

Current Ideas:

MONDAY MORNING RISK MONITOR | SHORT TERM GAIN - RM19

 

Financial Risk Monitor Summary

• Short-term(WoW): Positive / 8 of 13 improved / 3 out of 13 worsened / 2 of 13 unchanged
• Intermediate-term(WoW): Negative / 3 of 13 improved / 7 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 | SHORT TERM GAIN - RM15

 

1. U.S. Financial CDS – Swaps tightened for 12 out of 27 domestic financial institutions. With last week's better than expected reading on non-farm payrolls, domestic CDS tightened by an average 9 bps.

Tightened the most WoW: AIG, PRU, HIG
Widened the most WoW: AGO, TRV, MBI
Tightened the most WoW: AXP, JPM, C
Widened the most MoM: AIG, COF, MET

MONDAY MORNING RISK MONITOR | SHORT TERM GAIN - RM1

 

2. European Financial CDS – With positive economic data from the United States and the continued stabalization in oil, swaps mostly tightened in Europe last week .

MONDAY MORNING RISK MONITOR | SHORT TERM GAIN - RM2

 

3. Asian Financial CDS – Swaps tightened across the board in Asia last week. Japan's Sumitomo Mitsui tightened the most, by 24 bps to 131.

MONDAY MORNING RISK MONITOR | SHORT TERM GAIN - RM17

 

4. Sovereign CDS – Sovereign Swaps mostly tightened over last week. Portuguese swaps tightened the most, by 57 bps to 268.

MONDAY MORNING RISK MONITOR | SHORT TERM GAIN - RM18

 

MONDAY MORNING RISK MONITOR | SHORT TERM GAIN - RM3

 

MONDAY MORNING RISK MONITOR | SHORT TERM GAIN - RM4


5. Emerging Market Sovereign CDS – Emerging market swaps tightened last week. Brazilian and Russian swaps tightened the most, by -40 bps to 416 and by -30 bps to 302 respectively.

MONDAY MORNING RISK MONITOR | SHORT TERM GAIN - RM16

MONDAY MORNING RISK MONITOR | SHORT TERM GAIN - RM20

6. High Yield (YTM) Monitor – High Yield rates fell 58 bps last week, ending the week at 7.99% versus 8.56% the prior week.

MONDAY MORNING RISK MONITOR | SHORT TERM GAIN - RM5

7. Leveraged Loan Index Monitor  – The Leveraged Loan Index rose 24.0 points last week, ending at 1813.

MONDAY MORNING RISK MONITOR | SHORT TERM GAIN - RM6

8. TED Spread Monitor  – The TED spread rose 5 basis points last week, ending the week at 37 bps this week versus last week’s print of 32 bps.

MONDAY MORNING RISK MONITOR | SHORT TERM GAIN - RM7

9. CRB Commodity Price Index – The CRB index rose 4.4%, ending the week at 169 versus 161 the prior week. As compared with the prior month, commodity prices have increased 4.1%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

MONDAY MORNING RISK MONITOR | SHORT TERM GAIN - 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 14 bps.

MONDAY MORNING RISK MONITOR | SHORT TERM GAIN - RM9

11. Chinese Interbank Rate (Shifon Index) – The Shifon Index fell 10 basis points last week, ending the week at 1.95% versus last week’s print of 2.05%. 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 | SHORT TERM GAIN - RM10

12. Chinese Steel – Steel prices in China rose 2.2% last week, or 47 yuan/ton, to 2172 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 | SHORT TERM GAIN - RM12

13. 2-10 Spread – Last week the 2-10 spread widened to 101 bps, 4 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

MONDAY MORNING RISK MONITOR | SHORT TERM GAIN - 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 41 bps.

MONDAY MORNING RISK MONITOR | SHORT TERM GAIN - RM14


Joshua Steiner, CFA



Jonathan Casteleyn, CFA, CMT


The Unvarnished Truth: A Look At Year-To-Date Global Equity Performance

Takeaway: Here's the breakdown of S&P 500 sectors and global equity markets in 2016.

S&P 500 year-to-date SECTOR performance...

 

The Unvarnished Truth: A Look At Year-To-Date Global Equity Performance - sector performance 3 7 16

 

... And a look at global equity markets.

 

The Unvarnished Truth: A Look At Year-To-Date Global Equity Performance - world equity markets


Euro, Style Factors and Income

Client Talking Points

EURO

This Thursday the ECB meets and we expect it to announce additional simulative policy. According to our Big Bang Theory, after 600 rate cuts globally, there’s a new regime of investors that has given up on the belief that central bankers can artificially produce stimulus and weaken their currency for economic benefit.  This policy hasn’t worked in Japan, and it isn’t going to work in the Eurozone. We expect the EUR/USD to bounce on a simulative announcement:  to our TREND ($1.12) and TAIL ($1.13) resistance levels. We also expect associated selling of European equities.

STYLE FACTORS

Alongside another rate-of-change slowing in employment and income last week, High Beta (+8.4% on the week), Small Cap (+6.2%)  and High Debt (+7.2%) stocks led the counter-Trend move higher.  In other words, the leverage and illiquidity that got you crushed over the last 8-months reflated.  With growth slowing and the economic, profit and credit cycles past peak we don’t think the 3-week squeeze off of the mid-February 2016 Global Equity crash lows is sustainable.  

INCOME

In a Keynesian economy consumption is king and income growth drives the capacity for consumption growth.  With hourly earnings growth decelerating and average hours worked per week declining in Friday’s NFP data, aggregate income growth will decelerate both sequentially and year-over-year when the official data are released for February later this month.  Unless credit growth accelerates meaningful and/or the savings rates declines materially, consumption growth for February should show further deceleration and the labor, income, consumption peaks (4Q14/1Q15) will remain rearview.  

 

*Tune into The Macro Show with Hedgeye Healthcare Sector Head Tom Tobin live in the studio at 9:00AM ET - CLICK HERE

Asset Allocation

CASH 62% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 3%
FIXED INCOME 29% INTL CURRENCIES 6%

Top Long Ideas

Company Ticker Sector Duration
XLU

If you were long energy over utilities last week, nice trade! We'd remind you that Utilities (XLU) are outperforming the S&P 500 by +10% year-to-date. And that’s with the bounce. By contrast, Energy (XLE) was up 6.5% on the week but is up only 1% year-to-date.

GIS

General Mills (GIS) faces some headwinds across their portfolio, and although the 1H of FY16 was a challenge, the company has robust merchandising and consumer plans in the 2H that should improve results.

 

GIS has embarked on a mission to drive their top 450 SKUs, which represent 75-85% of their volume. Calling it their ‘Power 450’, surprisingly these 450 SKUs aren’t even in all retail locations and formats, broadening the distribution footprint of these top SKUs is priority number one for GIS’s sales team. The organization is also looking at the bottom 450, representing 1-2% of volume and making critical decisions on what products can be discontinued.

 

We continue to believe GIS is one of the best positioned consumer packaged foods companies due to its strong brands and best-in-class people and organization.

TLT

We can’t emphasize enough the bigger picture from both a data and top-down market signaling perspective. To contextualize the relief rallies and short squeezes in asset classes and instruments that are counter to our more longer-term view. Here’s what how we think the macro environment plays out from here:

  1. The market is positioned for more rate hikes into 2016
  2. The data continues to deteriorate, and market volatility ensues
  3. The expectation that “all is good” comes off the table and the market increasingly pivots to the view that, throughout 2016, the Fed is going to hike rates in methodical fashion straight into an economic slowdown
  4. The market takes in the growth slowing pivot in real-time (Treasury rates and the dollar both move lower, and inflation-leveraged assets like gold catch a bid)

 

Once the policy catalysts are out of the way in the next few weeks, our expectation is a return to outperformance in growth slowing asset classes (TLT and XLU). If you’re in for the TAIL and the TREND call, focus on the data, not the desperate attempts of central planners to arrest economic gravity. A brief reminder: ECB chief Mario Draghi will attempt to walk on water Thursday.

Three for the Road

TWEET OF THE DAY

VIDEO (15 mins) The Last Commodity Bubble Still Standing https://app.hedgeye.com/insights/49558-the-last-commodity-bubble-still-standing

@KeithMcCullough

QUOTE OF THE DAY

There is only one way to avoid criticism: do nothing, say nothing, and be nothing.

Aristotle

STAT OF THE DAY

Alibaba affiliate Ant Financial is valued at nearly $50 billion, the internet-finance company plans to raise up to $3.1 billion in its current funding round.


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The Macro Show Replay | March 7, 2016

CLICK HERE to access the associated slides. 

Click here for an audio replay.

 

 


REPLAY: Interactive Healthcare Q&A with Tobin and Freedman

Takeaway: Must-see insights from Hedgeye's non-consensus Healthcare team.

IN CASE YOU MISSED IT. Our all-star Healthcare team was live and interactive in our HedgeyeTV studio earlier today presenting their latest update and answering viewer questions in real-time.

 

Sector Head Tom Tobin and analyst Andrew Freedman discuss key topics below:

  • Employment Call-outs for Healthcare Sectors - is it topping?
  • Tracker Updates - Maternity, Hologic (HOLX), AMN Healthcare Services (AHS)
  • HIMMS Review - athenahealth (ATHN), Allscripts (MDRX), Computer Programs and Systems (CPSI)
  • Key Takeaways - from meetings in San Francisco last week

 

CLICK HERE to access the associated slides.

 

 

 


CHART OF THE DAY: A Review Of The Recent 3-Week Squeeze

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.

 

"... Notwithstanding the newfound bull market narrative that rising gas prices are going to stimulate the consumer, here’s what you had to be long last week (in US Equity Style Factor terms) to have crushed my bearish view:

 

  1. High Beta Stocks were +8.4% on the week to -3.5% YTD
  2. High Debt (to Enterprise Value) Stocks were +7.2% on the week to +1.6% YTD
  3. Slow-Growth (EPS) Stocks were +6.7% on the week to +2.4% YTD
  4. High Short Interest Stocks were +6.7% on the week to +2.7% YTD
  5. Small Cap Stocks were +6.2% on the week to -0.9% YTD

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

 

CHART OF THE DAY: A Review Of The Recent 3-Week Squeeze - 03.07.16 Chart


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