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The Whims, Wishes and Rumors Driving Markets

The Whims, Wishes and Rumors Driving Markets - Bull and bear cartoon this time different 7.08.2014

 

The story that drove markets last week was Dollar Down, Rates Down on the Fed move. 

 

Here's a quick update on what's happening in early morning trading today via Hedgeye CEO Keith McCullough in a note sent to subscribers

 

"Dollar Up, Rates Down this morning – as opposed to the reflation trade (many head-fakes in the last 18 months), that’s the #Deflation risk on move. I'm watching that closely this week with USD signaling immediate-term oversold on Friday."

 

 It's worth noting, over the past two weeks, the USD has been inversely correlated with oil. 

 

"Oil was down -2% this morning (it has a -0.8 inverse 15-day correlation to USD) after a +2.4% wk (WTI) with an immediate-term risk range of $34.65-41.53 and OVX (Oil Volatility) holding @Hedgeye TREND support with a risk range of 42-56."

 

 

But then ... oil speculation (insert: "rumors") took over.

 

Oil prices have rebounded sharply up 1.5% today on talks of an OPEC/Russia oil production "freeze." Potomac Research Group Senior Energy Analyst Joe McMonigle continues to point out, Iran plans to ramp up its oil production and that is in no way bullish for the price of oil, freeze or no freeze.

 

Click the image below to watch McMonigle's recent interview on this subject.

The Whims, Wishes and Rumors Driving Markets - mcmonigle pic

 

Here's the deal. Macro markets are getting whipped around by frenetic wishes and whims of traders. Meanwhile, economic fundamentals continue to deteriorate. So what happens once reality sets in?

 

It could get really ugly. 

 


The 'Dimon Bottom': Massive Conflict Of Interest? | $JPM

Takeaway: Below is a chart of JPMorgan's stock price showing the interesting proximity of Dimon's purchase and JPM's buyback announcement.

Remember the "Dimon Bottom?"

 

On February 11, it was widely announced that JPMorgan CEO Jamie Dimon snapped up 500,000 of his company's beaten-up shares. The stock moved sharply higher on the news. Last week (just five weeks later) JPMorgan said it would boost its stock buyback authorization by $1.88 billion. (Note: On Feb 11, JPM stock is at $53. Today? $60.) 

 

Do we sniff a massive conflict of interest?

 

We'll let you be the judge. Here is the year-to-date chart of JPM's stock:

 

The 'Dimon Bottom': Massive Conflict Of Interest? | $JPM - jpmorgan jamie dimon

 


KSS | The Kohl's Recession

Takeaway: Two distinct earnings streams -- one is at peak. One is at trough. Both are hopeless.

In typical KSS’ fashion, the company released its 10K after the close on a Friday. The biggest item that caught our eye was – you guessed it – credit income. The precise numbers are disclosed once a year, despite the fact that it has grown in to KSS’ single largest profit center.  A few points…

 

1) KSS’ share of income from its partnership with CapitalOne clocked in at $456mm. That’s now 29% of EBIT a level that we think is flat-out unhealthy for a company like KSS at this point in the economic cycle.

2) Consider this…KSS’ EPS was down 5.2% for the year to $4.04 (which includes credit income), but EPS from the operating business was down by 13% -- not good.

3) KSS core business earned $2.54 last year. As a frame of reference, that’s right where earnings came in circa 2008-2009.  In other words, right now its earnings are spot-on with where we were in the Great Recession. But…we’re clearly not in such a climate.  That begs the question – what if we actually enter a severe downturn (or even a moderate one) again?

4) Note that Macy’s delinquency rate ticked up materially in the fourth quarter. We also see CapitalOne’s charge-off rate ticking steadily higher.  We’re not making the call for a collapse in the credit cycle, but it’s pretty irrefutable that it is eroding rather than improving.

 

We still think that KSS is a 3-Stage Short Call. Stage 1) Starting with the weakness we see today by being such a bad retailer with poor competitive and geographic positioning, then Stage 2) morphing into a story where it jeopardizes its own credit income due to its own cannibalistic rewards program – without a roll in the broader credit cycle, and then Stage 3) a weakening economy having an outsized negative impact  on KSS’ consumer, its’ top line, margins, and credit income. 

 

KSS | The Kohl's Recession - 3 21 2016 KSS Credit EPS

KSS | The Kohl's Recession - 3 21 2016 KSS Credit EPS   of Total


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MONDAY MORNING RISK MONITOR | GLOBAL ANXIETY VS DOMESTIC OPTIMISM

Takeaway: The US market, especially HY credit, reacted positively to the Fed's dovish tone, but negative readings outweighed the positive short-term.

MONDAY MORNING RISK MONITOR | GLOBAL ANXIETY VS DOMESTIC OPTIMISM - RM11

 

Key Takeaway:

The U.S. market reacted positively to the Federal Reserve's dovish announcement last week, especially with high yield YTM coming in -17 bps to 7.67%. However, more risk measures flashed red than green; European CDS widened by 5 bps week over week, retracing some of the prior week's tightening, the TED spread (an indicator of contagion risk) rose by +2 bps to 33, and the price for Chinese steel dropped by -3.8%.

Current Ideas:

MONDAY MORNING RISK MONITOR | GLOBAL ANXIETY VS DOMESTIC OPTIMISM - RM19

 

Financial Risk Monitor Summary

• Short-term(WoW): Negative / 3 of 13 improved / 4 out of 13 worsened / 6 of 13 unchanged
• Intermediate-term(WoW): Positive / 8 of 13 improved / 1 out of 13 worsened / 4 of 13 unchanged
• Long-term(WoW): Negative / 1 of 13 improved / 4 out of 13 worsened / 8 of 13 unchanged

MONDAY MORNING RISK MONITOR | GLOBAL ANXIETY VS DOMESTIC OPTIMISM - RM15

 

 

1. U.S. Financial CDS – Swaps were mixed among US Financials. The banks  specialty lenders saw nominal tightening, while the insurers saw large tightening.

Tightened the most WoW: AIG, LNC, AXP
Widened the most WoW: JPM, WFC, AON
Tightened the most WoW: AIG, LNC, HIG
Widened the most MoM: AGO, RDN, MBI

MONDAY MORNING RISK MONITOR | GLOBAL ANXIETY VS DOMESTIC OPTIMISM - RM1

 

2. European Financial CDS – Swaps mostly widened across European banks last week. The median spread widened by +5 bps to 109, giving back some of the prior week's 25 bps tightening.

MONDAY MORNING RISK MONITOR | GLOBAL ANXIETY VS DOMESTIC OPTIMISM - RM2

 

3. Asian Financial CDS Swaps tightened across Financials in China and Japan last week while Indian bank swaps mostly widened.

 

MONDAY MORNING RISK MONITOR | GLOBAL ANXIETY VS DOMESTIC OPTIMISM - RM17

 

4. Sovereign CDS – Sovereign Swaps mostly tightened over last week. Portuguese sovereign swaps tightened the most, by -9 bps to 242.

MONDAY MORNING RISK MONITOR | GLOBAL ANXIETY VS DOMESTIC OPTIMISM - RM18

 

MONDAY MORNING RISK MONITOR | GLOBAL ANXIETY VS DOMESTIC OPTIMISM - RM3

 

MONDAY MORNING RISK MONITOR | GLOBAL ANXIETY VS DOMESTIC OPTIMISM - RM4


5. Emerging Market Sovereign CDS – Emerging markets swaps mostly tightened last week as the dovish Fed announcement allowed for a more positive outlook on EM currencies; a weaker dollar makes it easier for emerging markets to pay back dollar-denominated debt. Brazilian swaps tightened the most, by -25 bps to 366. Meanwhile, on the other end of the spectrum, Indian sovereign swaps widened by 10 bps to 156. 

MONDAY MORNING RISK MONITOR | GLOBAL ANXIETY VS DOMESTIC OPTIMISM - RM16

MONDAY MORNING RISK MONITOR | GLOBAL ANXIETY VS DOMESTIC OPTIMISM - RM20

6. High Yield (YTM) Monitor – High Yield rates fell 17 bps last week, ending the week at 7.67% versus 7.84% the prior week.

MONDAY MORNING RISK MONITOR | GLOBAL ANXIETY VS DOMESTIC OPTIMISM - RM5

7. Leveraged Loan Index Monitor  – The Leveraged Loan Index rose 15.0 points last week, ending at 1848.

MONDAY MORNING RISK MONITOR | GLOBAL ANXIETY VS DOMESTIC OPTIMISM - RM6

8. TED Spread Monitor  – The TED spread rose 2 basis points last week, ending the week at 33 bps this week versus last week’s print of 32 bps.

MONDAY MORNING RISK MONITOR | GLOBAL ANXIETY VS DOMESTIC OPTIMISM - RM7

9. CRB Commodity Price Index – The CRB index rose 2.4%, ending the week at 176 versus 172 the prior week. As compared with the prior month, commodity prices have increased 10.5%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

MONDAY MORNING RISK MONITOR | GLOBAL ANXIETY VS DOMESTIC OPTIMISM - 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 11 bps.

MONDAY MORNING RISK MONITOR | GLOBAL ANXIETY VS DOMESTIC OPTIMISM - RM9

11. Chinese Interbank Rate (Shifon Index) – The Shifon Index rose 4 basis points last week, ending the week at 1.99% versus last week’s print of 1.95%. 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 | GLOBAL ANXIETY VS DOMESTIC OPTIMISM - RM10

12. Chinese Steel – Steel prices in China fell 3.8% last week, or 93 yuan/ton, to 2365 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 | GLOBAL ANXIETY VS DOMESTIC OPTIMISM - RM12

13. 2-10 Spread – Last week the 2-10 spread widened to 104 bps, 1 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

MONDAY MORNING RISK MONITOR | GLOBAL ANXIETY VS DOMESTIC OPTIMISM - 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 | GLOBAL ANXIETY VS DOMESTIC OPTIMISM - RM14


Joshua Steiner, CFA



Jonathan Casteleyn, CFA, CMT


USD, Oil and Equities

Client Talking Points

USD

Dollar Up, Rates Down this morning – as opposed to the reflation trade (many head-fakes in the last 18 months), that’s the #Deflation risk on move. We will be watching that closely this week with the USD signaling immediate-term oversold on Friday.

OIL

WTI Oil is down -2% this morning (it has a -0.8 inverse 15-day correlation to USD) after a +2.4% week with an immediate-term risk range of $34.65-41.53 and OVX (Oil Volatility) holding @Hedgeye TREND support with a risk range of 42-56.

EQUITIES

Won’t be the way Old Wall media will characterize last week, but it wasn’t a good week where the #BeliefSystem on central-market-planning continues to break down. On the week: Italy -2.0%, Japan -1.3%, France -0.7% vs. Russia (purely reflation spec vs. USD Down) +4.7% and the Russell 2000 +1.3% to -3.0% year-to-date.

 

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

Asset Allocation

CASH 62% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 6%
FIXED INCOME 27% INTL CURRENCIES 5%

Top Long Ideas

Company Ticker Sector Duration
XLU

Utilities (XLU) hasn’t bounced as much as leveraged , high-beta resource names, but the outperformance is greatly divergent vs. both the market, and our preferred sector short in financials (XLU +12.3% YTD, S&P -0.3% YTD, XLF -4.6% YTD).

GIS

General Mills (GIS) remains one of analyst Howard Penney's top Long ideas in the Consumer Staples space. As we have continued to say, it boasts style factors ideal during turbulent times; high market cap, low beta and liquidity. Case in point, GIS is up 7% year-to-date, versus essentially flat for the S&P 500 in 2016. We'll have an update next week after GIS reports earnings.

TLT

Long-Term Treasuries (TLT) finished +1.9% on the week. Aside from Mr. Market, the Fed downwardly revised expectations (the common lag) on Wednesday:

  • The median 2016 GDP forecast revised to +2.2% vs. +2.4% in December
  • The median 2016 PCE Inflation forecast revised to +1.2% vs. +1.6% in December
  • Median Federal Funds end-2016 rate forecast revised to 0.9% vs. +1.4% in December

From a GROWTH, INFLATION, POLICY perspective, it’s lower for longer on growth and inflation and a more dovish Fed.

Three for the Road

TWEET OF THE DAY

*VIDEO

How Slowing US Growth Impacts Sectors https://app.hedgeye.com/insights/49828-young-guns-how-slowing-u-s-growth-impacts-sectors… @HedgeyeHIT @Hedgeye_Comdty @KeithMcCullough

@Hedgeye

QUOTE OF THE DAY

The whole world is simply nothing more than a flow chart for capital.

Paul Tudor Jones

STAT OF THE DAY

According to a federal prosecutor a San Diego man who inherited a 1974 aluminum penny valued at $2 million has surrendered it to the U.S. Mint to settle a lawsuit over ownership of the rare coin.


CHART OF THE DAY: A Closer Look At Oil's Recent "Rally"

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.

 

"... Here’s what really worked last week:

 

  1. Short USD = down another -1.2% on the week to -3.6% YTD
  2. Long Euros and Yens (vs. USD) = up +1.0% and +2.0%, respectively, to +3.8% and +7.8% YTD
  3. Long Commodities = +1.6% on the week for the CRB Index to 0.1% YTD
  4. Long Oil = +2.4% on the week for WTI to +0.8% YTD
  5. Long Russia = +4.7% on the week to +16.9% YTD

 

Seriously, who isn’t levered long Russia?" 

 

CHART OF THE DAY: A Closer Look At Oil's Recent "Rally" - 03.21.16 chart


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