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3 Charts: Don't Buy Equity Market All-Time Highs

Takeaway: As consensus macro piles into the S&P 500, total equity market volume is crashing and the VIX hits a disquieting level.

3 Charts: Don't Buy Equity Market All-Time Highs - consensus cartoon 06.21.2016

 

Sell low, cover high, baby!

 

That's the latest expressed by consensus macro positioning as the S&P 500 hit a new all-time high last week.

 

"The S&P 500 (index + E-mini) net LONG position ramped another +94,526 contracts last week to +154,009 futures & options contracts. To put that in context, that’s a +2.37x move on a 1-year Z-score (at the lows in February, it was a net SHORT position of -280,000 contracts)," Hedgeye CEO Keith McCullough writes this morning.

 

3 Charts: Don't Buy Equity Market All-Time Highs - positioning

 

On a related note, a no confidence vote for the all-time high came by way of total equity market volume which crashed -23% versus its 1-year average on Friday:

 

3 Charts: Don't Buy Equity Market All-Time Highs - volume 7 25

 

Volatility?

 

The VIX is registering a foreboding level. As Hedgeye U.S. Macro analyst Christian Drake pointed out in Friday's Early Look:

 

"In the Chart of the Day below we simply show VIX vs S&P500 (S&P500 is inverted on right axis). What you’ll simply notice is how simply effective it is to take down gross exposure and tighten net exposure when VIX goes <13."

 

#Simple

 

3 Charts: Don't Buy Equity Market All-Time Highs - 7 22 16 CoD2

 

None of this bodes well for the bulls blindly buying the all-time high. 


RH | A Hint Of Confidence

Takeaway: RH building some positive momentum. 1st - Gary buying stock, now first new store opening in 2016.

After about 7 months of nothing but bad news for RH, the company is finally building some positive momentum. It started two weeks ago with CEO, Gary Friedman, making his first public market purchase since the Fall of 2014, and was followed up by the announcement that the company would be opening its newest next generation in Kansas City during the first week of August.

 

At ~55k gross sq. ft. with an additional 10k sq. ft. in outdoor selling sq. ft. this is the first new door of the four promised that the company will open in FY16. We still are expecting plenty of choppiness over the next 6-12 months for the company, as it irons out the Gray Card program, fixes the supply chain, and rationalizes its SKU count. But, the combination of Gary buying stock and then the company inviting the Street to one of its gala events where people can nit-pick management sounds like at least a hint of confidence to us.  At a minimum, it suggests that things certainly are not getting worse.

 

Key Details On The Market:

 

1) This is the 2nd store the company will have finished by early August. KC in addition to the Austin door that is sitting and waiting for the rest of the development to be finished up. That leaves two additional doors the company needs to bring to the goal line to hit the 4 store target the company set. The two additional markets = Seattle and Las Vegas. Compared to prior years, the timeline for real estate is favorable with two projects out of the way by early August. Of course, each market and project is on an independent time line, but given the head start the company has in  2016, additional HQ resources can be focused on completing the opening calendar for this year and the new batch for 2017.

 

2) At just south of $400mm, the Kansas City/Leawood market is the 3rd smallest the company has tapped for a Design Gallery. Tampa was the first in the big format in a smaller market back in Nov. 2015, and Indy was a first generation store with a footprint of ~15k sq. ft. and opened in 2013. The key here is that there is a precedent for a big format store in a lower population density market, and by all accounts (mostly anecdotal) the Tampa door along with the rest of the Next-Gen Design Gallery fleet has performed at or above plan.

RH | A Hint Of Confidence - RH Markets chart1

 

3) The KC market demographics are more favorable than those of Tampa and Indy, with 22% of the population inside the TAM (which we define as households making over $100k/year in income). The average household income at $73k has a 14% and 6% premium respectively to the markets cited above. Don’t get us wrong that’s a far cry from the 50% TAM rate in Greenwich, CT and $143k avg household income number, but we think the buffer here is the rent profile on the store. The ideal situation for RH, we think, would be to have its Full Gen model in every market, but the fact is that there are a few markets where the economics don’t work – we say a few markets because RH went through a 5 year stretch of culling its footprint. But, the buffer is the rent profile. We don’t have the specifics on the KC market, but given the absence of any meaningful sq. ft. growers for the REIT’s to choose from, and the repurposing of a failed restaurant concept to a 3 level RH – we’ll assume that the math on the store is Denver-esque (i.e. Incredibly favorably).

RH | A Hint Of Confidence - 7 25 2016 rh 810zone

 

4) With its new store, RH is now in furniture Alley. There was a little competition in its Legacy Store at Country Club Plaza – mainly West Elm, but in the new property RH is smack dab in the middle of Arhaus, Crate & Barrel, PB, etc. (see chart below for distance in miles to competition). What does that mean…a) RH doesn’t have to work too hard to generate additional foot traffic for the category, the shopping center is already a destination for Furniture, b) given the positioning of the real estate (external vs. internal mall) and the size and scale of both the footprint and product relative to the rest of the competitive set we think RH can take considerable share as long as the company continues to get the right product in its doors, and c) lastly, RH will be lined up against these 'competitors' offering better product at lower prices. This market is likely to end up being a case study for people wanting to compare price/value positioning.

RH | A Hint Of Confidence - 7 25 2016 chart3


Daily Market Data Dump: Monday

Takeaway: A closer look at global macro market developments.

Editor's Note: Below are complimentary charts highlighting global equity market developments, S&P 500 sector performance, volume on U.S. stock exchanges, rates and bond spreads, key currency crosses, and commodities. It's on the house. For more information on how Hedgeye can help you better understand the markets and economy (and stay ahead of consensus) check out our array of investing products

 

CLICK TO ENLARGE

 

Daily Market Data Dump: Monday - equity markets 7 25

 

Daily Market Data Dump: Monday - sector performance 7 25

 

Daily Market Data Dump: Monday - volume 7 25 16

 

Daily Market Data Dump: Monday - rates and spreads 7 25

 

Daily Market Data Dump: Monday - currencies 7 25

 

Daily Market Data Dump: Monday - commodities 7 25


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

CHART OF THE DAY: The Beta Chase Is On!

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.

 

"... Looking at last week’s futures & options (CFTC) positioning, the Beta Chase is not an exaggeration: 

  1. SP500 (Index + E-mini) net LONG position increased by +94,526 contracts to +154,099 contracts
  2. The 6-month and 1-year average net positions are net SHORT averages of -54,383 and -100,426 contracts
  3. The current net LONG position registers a z-score of +2.37x (that’s the biggest in all of Global Macro)"

 

CHART OF THE DAY: The Beta Chase Is On! - 07.25.16 chart


Betamon-Go!

“Develop amnesia conveniently and forget everything you heard!”

-Team Rocket Grunt

 

As you may have guessed, I’m not a big gamer. That said, the video-game stocks were one of the first sub-sectors of “consumer” my boss gave me to follow as a hedge fund analyst back in 2000-2001. Anyone remember a stock called Midway Games?

 

While it would have been fun to have had an analyst nail this Nintendo (Pokemon Go!) call in 2016, I’m not so sure it’s going to be fun for whoever chased “the chart” at last week’s highs. Overnight, Nintendo’s stock dropped -17.7%.

 

With the SP500 registering another all-time closing high at 2175 on Friday, I don’t get the sense that there’s an American mania developing in Betamon Go! Total US Equity Volume actually crashed on the “news”, down -23% vs. its 1-year average.

 

Betamon-Go! - Beta Bro cartoon 07.14.2016

 

Back to the Global Macro Grind

 

Unlike other Pokemon Trainer classes, Team Rocket Grunt trainers are never given individual names. They’d be a perfect class of perma US stock market cheerleaders. Forget accountability – develop bull cases conveniently, and change them often!

 

The latest bull case for US stock market beta is one we helped lead. We’ll get the river card on our Street high forecast for Q2 US GDP growth in Q2 tracking at +4.8% q/q SAAR (+2.3% year-over-year) on Friday. Rates and USD are running up ahead of that.

 

Not everyone was a winner on last week’s #StrongDollar (+0.9% week-over-week) move though:

 

  1. Long Bond Bulls lost another 2 beeps week-over-week with the 10yr rising to 1.57% = -70 bps YTD
  2. Gold Bulls saw a correction of -0.3% week-over-week, with Gold correcting to $1331 = +25.1% YTD
  3. Oil Bulls got tagged for another -5.3% weekly deflation which puts WTI at only +4.2% YTD

 

Remember when the narrative was “Oil is breaking out – as oil goes, stocks go”? Ha! Not to be confused with the summer of 2015 bull case that “low gas prices” were going to stimulate the consumer, you really need to develop amnesia on oil risk.

 

Got #Deflation of the “reflation” theme? With the US Dollar Index +4% in the last month:

 

  1. The CRB Index (19 commodities) is down -4.6%
  2. Oil (WTI) is down -11.2%
  3. The SP500 is +4.3%

 

That’s right. While it’s still underperforming TLT and GLD by a country mile in 2016, the SP500 is outperforming Oil now. That’s why it’s time for some serious SPY Go chart chasing!

 

Looking at last week’s futures & options (CFTC) positioning, the Beta Chase is not an exaggeration:

 

  1. SP500 (Index + E-mini) net LONG position increased by +94,526 contracts to +154,099 contracts
  2. The 6-month and 1-year average net positions are net SHORT averages of -54,383 and -100,426 contracts
  3. The current net LONG position registers a z-score of +2.37x (that’s the biggest in all of Global Macro)

 

People might say they are (or were) bearish. But their portfolios are definitely not positioned that way. Maybe everyone has to be long ahead of a hot US GDP print. I don’t disagree with that. But at what point is a big Q2 GDP print priced in?

 

Then there’s the poor Fed…

 

What happens if Q2 GDP is big… they get all cocky again about a rate hike… and both employment and inflation slow, sequentially, when the JUL data is reported?

 

We’re going with amnesia (for now) but it’s still important to realize it’s Q3 (where GDP will slow, again).

 

After pulling back in the week prior, maybe that’s why Utilities (XLU) beat beta (SPY) again last week. From a Sector Style perspective, this is how the week looked, in context vs. SP500 +0.6%:

 

  1. Utilities (XLU) +1.5% to +21.9% YTD
  2. Financials (XLF) +0.7% to -0.6% YTD
  3. Energy (XLE) -1.3% to +13.3% YTD

 

I know. Being overweight the Financials with the 10yr UST Yield still in crash mode (-31% or 70 basis points YTD) in 2016 has been awful on both an absolute and relative basis.

 

And with the VIX back at 12, you’re going to have to try to forget everything you’ve heard about “GDP accelerating in Q2” so that you can re-short the Betamon (XLF) bounce on Friday’s GDP news!

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.45-1.64%

SPX 2125-2180

NASDAQ 4

VIX 11.51-16.76
USD 96.21-97.89
Oil (WTI) 43.09-45.61

Gold 1311-1355

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Betamon-Go! - 07.25.16 chart


MONDAY MORNING RISK MONITOR | LIVING ON A PRAYER

Takeaway: The ECB left rates unchanged, but Draghi's openness to further stimulus in Sep. gave markets something to pray for and pushed CDS tighter.

 

MONDAY MORNING RISK MONITOR | LIVING ON A PRAYER - RM11

 

Key Takeaway:

While the ECB left rates unchanged last week, Mario Draghi's signal that the central bank is open to further stimulus in September gave investors something to pray for and pushed European CDS another -4 bps tighter to 118. CDS in Asia also tightened last week, by -2 bps to 116, and the Canadian CDOR-OIS spread, a measure of counterparty risk in the Canadian banking system, tightened by -1 bps to 38. On the other hand, the price of Chinese steel fell -3.4% W/W.

 

Our heatmap below is positive across all durations.



Current Ideas:


MONDAY MORNING RISK MONITOR | LIVING ON A PRAYER - RM19

 

Financial Risk Monitor Summary

• Short-term(WoW): Positive / 4 of 13 improved / 1 out of 13 worsened / 8 of 13 unchanged
• Intermediate-term(WoW): Positive / 9 of 13 improved / 0 out of 13 worsened / 4 of 13 unchanged
• Long-term(WoW): Positive / 3 of 13 improved / 1 out of 13 worsened / 9 of 13 unchanged

MONDAY MORNING RISK MONITOR | LIVING ON A PRAYER - RM15


1. U.S. Financial CDS
– Swaps tightened for 9 out of 13 domestic financial institutions. With Goldman Sachs, Morgan Stanley, and Bank of America beating earnings expectations, moneycenter CDS tightened by an average -1 bps. Consumer finance and insurance CDS were flat on average.

Tightened the most WoW: HIG, GS, C
Widened the most WoW: AIG, WFC, AXP
Tightened the most WoW: JPM, BAC, C
Widened the most MoM: XL, CB, MTG

MONDAY MORNING RISK MONITOR | LIVING ON A PRAYER - RM1

 

2. European Financial CDS – Financials swaps mostly tightened in Europe last week. Although the ECB left rates unchanged last week, Mario Draghi signaled that the bank is open to further stimulus in September, providing some support to the market.

MONDAY MORNING RISK MONITOR | LIVING ON A PRAYER - RM2

 

3. Asian Financial CDS – All bank swaps in Asia tightened last week in broad optimism, besides Mizuho swaps, which were flat.

MONDAY MORNING RISK MONITOR | LIVING ON A PRAYER - RM17

 

4. Sovereign CDS – Sovereign swaps mostly tightened over last week. Portugal tightened the most, by -5 bps to 283. Meanwhile, Italian sovereign swaps widened by 4 bps to 135.

MONDAY MORNING RISK MONITOR | LIVING ON A PRAYER - RM18

 

MONDAY MORNING RISK MONITOR | LIVING ON A PRAYER - RM3


5. Emerging Market Sovereign CDS – Emerging market swaps mostly widened last week. With the Turkish coup attempt, sovereign swaps for that country widened the most, rising by +50 bps to 275. Meanwhile, Brazilian swaps tightened by another -8 bps week over week to 287.

MONDAY MORNING RISK MONITOR | LIVING ON A PRAYER - RM16

6. High Yield (YTM) Monitor – High Yield rates fell 2 bps last week, ending the week at 6.40% versus 6.42% the prior week.

MONDAY MORNING RISK MONITOR | LIVING ON A PRAYER - RM5 2

7. Leveraged Loan Index Monitor  – The Leveraged Loan Index rose 7.0 points last week, ending at 1932.

MONDAY MORNING RISK MONITOR | LIVING ON A PRAYER - RM6

8. TED Spread Monitor  – The TED spread rose 1 bps last week, ending the week at 40 bps this week versus last week’s print of 38 bps.

MONDAY MORNING RISK MONITOR | LIVING ON A PRAYER - RM7

9. CRB Commodity Price Index – The CRB index fell -3.0%, ending the week at 183 versus 189 the prior week. As compared with the prior month, commodity prices have decreased -3.1%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

MONDAY MORNING RISK MONITOR | LIVING ON A PRAYER - 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 6 bps.

MONDAY MORNING RISK MONITOR | LIVING ON A PRAYER - RM9

11. Chinese Interbank Rate (Shifon Index) – The Shifon Index rose 2 basis points last week, ending the week at 2.02% versus last week’s print of 2.00%. 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 | LIVING ON A PRAYER - RM10

12. Chinese Steel – Steel prices in China fell 3.4% last week, or 89 yuan/ton, to 2521 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 | LIVING ON A PRAYER - RM12

13. Chinese Non-Performing Loans – Chinese non-performing loans amount to 1,392 billion Yuan as of March 31, 2016, which is up +41.7% year over year. Given the growing focus on China's debt growth and the potential fallout, we've decided to begin tracking loan quality. Note: this data is only updated quarterly.

MONDAY MORNING RISK MONITOR | LIVING ON A PRAYER - RM4

14. Chinese Credit Outstanding – Chinese credit outstanding amounts to 151.0 trillion RMB as of June 30, 2016 (data released 7/14/2016), which is up +15.3 trillion RMB or +11.3% year over year. Month-over-month, credit is up +1,514 billion RMB or +1.0%. Note: this data is only updated monthly.

MONDAY MORNING RISK MONITOR | LIVING ON A PRAYER - RM20

15. 2-10 Spread – Last week the 2-10 spread tightened to 86 bps, -2 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

MONDAY MORNING RISK MONITOR | LIVING ON A PRAYER - RM13

16. 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 1 bps to 38 bps.

MONDAY MORNING RISK MONITOR | LIVING ON A PRAYER - RM14


Joshua Steiner, CFA



Jonathan Casteleyn, CFA, CMT



Patrick Staudt, CFA


Early Look

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