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Credit Markets . . . Bearish Is As Bearish Does

Conclusion: The TED SPREAD and junk bond yields are pointed up and to the right.  That’s bearish for equities.


Despite the bounce in equities over the past week, debt markets continue to flash bearish signals as spreads widen and bond prices hit new lows.  Below we’ve outlined a chart of high yield bond yields in the United States and the Ted Spread, both going back three months.   Admittedly,  high yield bond yields and the ted spread both measure slightly different types of risk.


The Ted Spread  is the difference between the interest rates on interbank loans and short term U.S. government debt, and is an acronym formed from T-Bill and Ed (the ticker symbol for the Eurodollar futures contract).  A typical range for the Ted Spread is between 10 and 50 basis points.  Obviously, a widening Ted Spread means that liquidity is being withdrawn and perceived credit risk, generally, is going up.  During the 2007 subprime mortgage crisis, the Ted Spread was routinely in the 150 – 200 basis points region.


Currently the Ted Spread is at 47 basis points, which is up 5 basis points week-over-week.  While this is not flashing an extreme, it is certainly at the high end of its normal range and climbing.  For the equity market to continue to rally, we will likely need to see the Ted Spread narrow.


In conjunction with the widening of the Ted Spread, high yield bond yields in the U.S. have been climbing over the course of the past few months.  As we wrote on May 7th:


“Credit spreads widening in conjunction with a declining stock market typically indicate a dramatic shift away from any type of risk by institutional investors.  More specifically, they also signal bond investors getting increasingly concerned about fundamentals and cash flow.   Over the course of the past few days, corporate high yield yields widened dramatically from 8.2% to 8.6%.  This morning yields continue to climb.”


This dramatic widening of junk bond yields was obviously a precursor to the equity market sell-off, and indicative of less certainty related to specific company cash flows and their ability to refinance at comparable rates.  In Europe, there hasn’t been a high yield bond offering in over a month, although there are a number of offerings on the docket for this week.  The success of these offerings will be an important indicator for the health of debt markets in Europe.


As ever, the credit markets are leading indicators for equity markets.


Daryl G. Jones
Managing Director


Credit Markets . . . Bearish Is As Bearish Does - 1


The Macau Metro Monitor, June 14th, 2010



Local gaming revenues for June will be lower than in May, Director Neves from DICJ told MDT. The regulator stood by his prediction of 30% GGR growth in 2010 and believes the rise “will be smoother in the second half of the year” because of tougher comparisons.  According to Neves, in the first nine days of June, GGR totaled less than MOP 3.9 billion (average of MOP 430 million per casino).  If this average remains steady, June will finish with MOP 12.9 billion GGR, up 54.7% YoY.


IM believes the relatively soft GGR in the first week of June was due to the anticipation of the three-day public holiday for the Dragon Festival on the mainland, which starts today.  IM does not believe this slowdown will continue for the rest of June.



Galaxy Entertainment's Peter Caveny said that the Galaxy Macau resort on Cotai will open in March 2011.


In other news, the president of Philippine Amusement and Gaming Corporation (PAGCOR), Rafael Butch Francisco,said the Manila Bay integrated resorts are likely to attract many Filipino nationals currently working in Macau. Around 40,000 jobs would be created, he added.  Francisco believes the wages in the Manila Bay integrated resorts will match the MSAR ones “in three, four more years," which he hopes would entice the Filipinos workers to return home.



Visitor arrivals in package tours increased by 20.3% YoY to 572,157 in April 2010. Visitors from Mainland China (429,510) and Hong Kong (22,594) rose by 17.8% and 6.3% respectively.  At the end of April 2010, total number of available guest rooms of the hotel sector increased by 2,053 (+11.7%) YoY to 19,631 rooms.  A total of 664,286 guests checked into hotels and guest-houses in April 2010, up by 15.1% YoY.


For the first quarter of 2010, new RMLs approved by Macau banks increased by 5.4% QoQ (208.3% YoY) to MOP7.0 billion.  New CRELs approved decreased by 16.0% QoQ to MOP5.3 billion but increased 164.3% YoY.

At the end of March 2010, the delinquency ratio for RMLs stood at 0.15%, down 0.04% points from three months earlier The ratio for CRELs went up 0.11% points from the previous quarter.

R3: Adding WMT to the List of iPhone 4 Retailers


June 14, 2010


Add Wal-Mart to the growing list of retailers that will have the iPhone 4 at launch. This marks the first time the world’s largest retailer will have the Apple phone available on day one, despite selling the 3Gs after it launched at other venues. While the buzz/hype surrounding the new product is a boost for retailers, it’s interesting to see Apple’s tight rein on distribution slowly relax as each subsequent launch has taken place.  With the phone available at thousands of doors at launch this go around (vs. hundreds for earlier versions) we wonder if this strategy actually leads to the sale of more units or just dilutes sales productivity and leads to shorter lines for consumers.  For those using length of lines to determine iPhone 4 demand, we suspect this time around may be different. 




  • It was only a matter of time before the hit TV show, Glee, had its own line of merchandise. Thanks to Macy’s and Claire’s Stores, a line of Glee branded products will be hitting the shelves soon. Macy’s will have an exclusive range of apparel and accessories while Claire’s will sell a line of jewelry. Aside from the popularity of the TV show, the show’s music has been downloaded 7 million times (so far).


  • Keep an eye open for Target’s latest collaboration, this time with former child actor Soleil Moon Frye a.k.a “Punky Brewster.” The organic line of baby clothing will debut in July and will carry the brand name, The Little Seed. Frye already operates an organic children’s clothing store in Los Angeles, which serves as a base for the Target line.


  • With much of the industry is focused on utilizing social media i.e. Twitter, Facebook, Foursquare, etc. to attract new customers, Lululemon has stayed true to the age old strategy of building the business one hand shake at a time. As part of its retail strategy, managers integrate themselves into the fitness community in an effort to get top instructors involved with the brand – such is the case in Tampa ahead of the company’s June 18th store opening. While recent studies suggest social media sites have a modest impact on consumer behavior at best, the bottom-line is there is no substitute for direct word of mouth persuasion.  





Teen Retailers Run into Some Fashion Trouble - Specialty stores catering to fickle 13- to 19-year-olds are struggling as these consumers grow tired of the Americana and surf-and-skate fashions they’ve long snapped up and search for a new look — even if they’re not quite sure what that look might be. Their ennui is setting off alarm bells over the crucial back-to-school season even as schools let out for the summer. Not only is demand soft, but competition is growing. Fast-fashion retailers such as H&M, Zara and Forever 21 are gaining momentum since their looks change every six weeks or less, and mass merchants are picking up market share, as well. 4% to 6% of teens last year shifted from shopping at specialty stores to shopping at mass merchants and discounters. According to The NPD Group, apparel spending among 13- to 19-year-olds dropped 9.4% to $34.7 billion in the 12 months ended April from $38.3 billion during the comparable prior-year period. Soft demand in the teen segment and a glut of inventory that built up since the first quarter at key stores could trigger an all-out price war in the space, pressuring results for the second quarter and b-t-s, according to analysts. Comparable-store sales at teen stores fell 2.7% in May, Thomson Reuters’ reported. The need to clear out inventory in advance of b-t-s shipments at retailers including Gap Inc., American Eagle Outfitters Inc. and Abercrombie & Fitch Co. not only could put stores under higher price and margin pressures, but also affect consumer psychology going into the important b-t-s selling season. <wwd.com/business-news>

Hedgeye Retail’s Take: While we wouldn’t characterize the current apparel supply as a “glut”, there’s no denying that retailers including AEO and ANF have begin to take bets again on key product categories in an effort to drive sales.  What’s least surprising is that consumers have essentially migrated towards “newness” and away from fashion that seems to repeat itself season after season. Maybe teens finally have enough polos and cargo shorts? 


Moncler Plans IPO in 2011 - Moncler confirmed plans to go public on the Milan bourse by the spring-summer of 2011 and has appointed Merrill Lynch and Morgan Stanley as its global advisors. According to a spokesman for Carlyle Group, which acquired a 48 percent stake in Moncler in mid-2008, the timing isn’t set in stone but is subject to market conditions. The operation would value the company at between 600 to 800 million euros. Most recently Moncler lured fashion veteran Alberto Lavia from Façonnable to become its chief executive officer with the aim of further strengthening its managerial structure. <wwd.com/business-news>

Hedgeye Retail’s Take: Perhaps best known for its down jackets, the Italian-based apparel brand is the latest to test the IPO waters – a process that has likely been accelerated by the country’s debt concerns. 


The Future of Toning - How does toning top a full year of massive sales and major buzz? By exploring new avenues of growth and reenvisioning the category itself, industry experts said. Athletic players from across the spectrum have joined the crowd with their own toning shoes. American Sporting Goods Corp. brands Avia and Ryka premiered instability-based toning shoes to accounts such as DSW and The Finish Line; and in May, Collective Brands Inc.-owned Grasshopper debuted a health and wellness style exclusively with HSN. Even core running brands, including New Balance, which launched into toning in April, have gotten in on the act. NPD estimates that the toning footwear market for men and women has increased to $74 million in April from $3.6 million in May 2009. While the long-term direction of the market isn’t clear, almost everyone agrees that toning will enjoy more success. “Every business — new or old — has a ceiling attached to it, and the question is how much growth can you expect? I don’t know yet when the saturation point comes for toning, but we, at least, have not seen it yet,” said Uli Becker, president and CEO of Reebok. “We’re not even close to reaching a limit in 2010.” <wwd.com/footwear-news>

Hedgeye Retail’s Take: While the ultimate size of the toning market opportunity remains unclear, one this is – competition is up meaningfully over the last 6-months including MBT (the trends originator) joining the fray with a $100 offering.


England-US World Cup Game Hurt UK Retail Traffic Saturday - England’s first World Cup game hit shopper numbers on Saturday, when footfall fell by 4.7%.  <drapersonline.com>

Hedgeye Retail’s Take: Retailers take note. The World Cup provides upside to sales for some retailers, but interest around the sport can’t be ignored when allocating headcount.  


Amazon Stays On Top As Healthiest Retailer - Amazon.com Inc., the world’s largest online merchant, won the top spot in an annual survey of the healthiest U.S. and Canadian retailers for a second year in a row as more shoppers make purchases online. Amazon.com’s technology keeps inventory levels and expenses down, said Consensus Advisors Chief Executive Officer Michael O’Hara, whose firm did the survey. Aeropostale Inc., Urban Outfitters Inc., CVS Caremark Corp. and Wal-Mart Stores Inc. round out the top five in the list, which comes out tomorrow. Amazon.com has posted three consecutive quarters of profit growth as consumers begin spending again amid the economic recovery. 1)  Amazon.com (no change), 2)  Aeropostale (+2), 3)  Urban Outfitters (no change), 4)  CVS (+2), 5)  Wal-Mart (no change), 6)  Bed Bath & Beyond (+6), 7)  Coach (-5), 8)  The Buckle (+1), 9)  Guess (-1), 10) Lululemon Athletica (new).   <bloomberg.com/news>

Hedgeye Retail’s Take: The study, which looks at multiple factors including growth, debt levels and pricing over a 5-year period leaves us with many questions including the definition of “healthy.” A quick look at our SIGMAs suggests the weighting of these factors are not equal with all but two companies (CVS and WMT) sporting overcapitalized balance sheets. While all are currently in Quadrant 1 (margins expanding and sales/inventory spread positive), the differentiation in near-term trends are notable.


Note: Our Q1 SIGMA book will be available for distribution later this week – if you’d like to see the SIGMAs for the aforementioned companies please let us know.


Study Shows Social Sites Have Had Little Impact Over 6 Months - Some consumers show interest in discussing and interacting with brands on social sites like Twitter and Facebook. But research shows little change since six months ago in users’ likelihood to participate in these activities. <emarketer.com>

Hedgeye Retail’s Take: Hard to know if Twitter in general is losing steam or consumers just aren’t continuing their rapid growth in using social networking as a means to influence other consumers.  Either way, the fact that over 50% of Twitter users still recommend a company or product is noteworthy.  At the very least, companies need to be focused on these “influencers” in an effort to keep brand images favorable.


R3: Adding WMT to the List of iPhone 4 Retailers - 6 14 10 R3 chart



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Most troubling this past week is that high yield and leveraged loans broke to new lows (price), while the CDS for Financial companies (US) was generally wider week over week even though equities were slightly higher. The TED Spread continues to widen, even as LIBOR marks time. Overall, six of our eight risk metrics registered negative week over week changes, while two were positive.  


Our risk monitor looks at the following metrics weekly:
1. CDS for all available US Financials (30 companies).
2. High Yield
3. Leveraged Loans
4. TED Spread
5. Journal of Commerce Commodity Price Index
6. Greek Bond Spreads
7. Markit Subprime Spreads
8. AAII Bulls/Bears Sentiment Survey


1. Financials CDS Monitor - Spanish banks were the best performers in CDS last week, with three of the four improving. In the US, the environment was less sanguine, as Moneycenters and Brokers CDS rose an average of 11%, Consumer Finance companies rose an average of 7%, and Insurance companies rose an average of 15% (median 9%). Conclusion: Negative.


Tightened the most versus last week: Spanish banks (SAN-ES, BBVA-ES, SAB-ES, POP-ES)
Widened the most versus last week: ACE, XL, ABK, AGO
Widened the least versus last month: BAC, COF, MMC, SAN-ES
Widened the most versus last month: ACE, XL, ABK, AGO




2. High Yield (YTM) Monitor - High Yield rates rose 20 bps, continuing their recent march upward.  Rates closed the week at 9.29% versus 9.09% the prior week This is a new high on yield post-February (new low on price).  Conclusion: Negative.  




3. Leveraged Loan Index - Leveraged loans fell last week to close at 1453, down 11 bps from the prior week.  This is also a new low on price post-February. Conclusion: Negative.




4. TED Spread Monitor - A great canary, the TED spread continued to close higher on almost a daily basis, finishing the week at 46 bps, 6 bps higher than the previous week.  Even though the Libor component was flat, we still regard this as a meaningful negative. Remember, a persistently high TED Spread was one of the ways markets knew for sure that the fundamental backdrop was not improving in the 2007/2008 credit crisis. Conclusion: Negative. 




5. Journal of Commerce Commodity Price Index - A sharp sell-off in this index served as a harbinger of the 2008 crash. This week the JOC Commodity Index closed at 16.11 on Thursday, down 4.3 from the previous week.  Conclusion: Negative. 




6. Greek Bond Yields Monitor - Greek Bond yields fell 11 bps  last week to 811 bps.  Conclusion: Positive. 




7. Markit ABX Index Monitor - We include this measure as a reflection of what is going on in deep subprime distressed paper.  We use the 2006-2 series and look at the AAA, AA, A and BBB- series.  The Markit ABX Index was generally flat last week, except the A series, which made a strong move to the upside.  Conclusion: Positive.




8. AAII Bulls/Bears Monitor - The Bulls/Bears survey grew more bearish on the margin, with bulls falling 2.6% to 34.5% and bears gaining 2.3% to climb to 43.1%.  This leaves the spread at 9% to the bearish side, up from 4% bearish last week.  We consider extreme readings in this series to be notable (particularly to the bearish side) as a contraindicator, but moderate readings are less indicative of short-term movements. Conclusion: Negative.  




Joshua Steiner, CFA


Allison Kaptur

Today's Truth

“Whoever is careless with the truth in small matters cannot be trusted with the important matters.”

~ Albert Einstein


The truth is that the US stock market finally closed up for 2 days in a row. The truth is that the SP500 is up +0.2% now for the month of June. The truth is that 2 days and 0.2% does not an immediate or intermediate term TRADE or TREND make.


The truth is that I was just parked on I-95 for almost 2 hours this morning, so I’m going to keep this short and to the point. Into and out of last week’s YTD closing lows for US, European, and Asian equity markets, we covered a lot of short positions (covered SPY on 6/4; covered QQQQ on 6/7). Our cash position in the Hedgeye Asset Allocation Model peaked at 79% early last week. This morning we’ll open the week with a 70% cash position and a 3% position allocated to US Equities.


The truth is that global markets, from countries to their currencies and commodities remain broken from an intermediate term TREND perspective. In the Hedgeye Risk Management model, the intermediate term TREND duration is 3 months or less. If this morning’s rally in the US futures holds and we see the first 3-day rally in US Equities since April, the truth will also be that the immediate term TRADE lines across markets, globally, will come back into play.


In the Hedgeye Risk Management model, the immediate term TRADE is 3 weeks or less in duration. Here are those TRADE lines of resistance (we continue to use them as critical lines of resistance, or stops, as we look to bear market rallies as selling opportunities):

  1. S&P 500 = 1104
  2. Dow Jones Industrial Average = 10,312
  3. Nasdaq Composite = 2276
  4. Russell 2000 = 661
  5. S&P Consumer Discretionary Sector (XLY) = 32.64
  6. S&P Financials Sector (XLF) = $14.97
  7. Goldman Sachs (GS) = $141.91

We bought Goldman Sachs (GS) last Thursday at $133.04. This is a good example of buying a great franchise at a great price but, at the same time, understanding what duration we were buying the stock for. Every stock, commodity, currency, etc. can get immediate term oversold. In this environment, that’s where we want to be covering shorts and buying longs. Every market has a time and price where you need to be active.


At the same time, we don’t want to try and pretend to be Warren Buffett here, so you need the discipline to sell/short whatever you bought/covered if it can’t breakout above its immediate term TRADE line of resistance. That’s how we think about risk management in a bear market. As a practical matter, whether it’s the SPY, XLF, or GS, we consider selling decisions at both the security level and in the aggregate.


The truth is that not every investor you are competing with on the bid or offer is duration agnostic. The truth is that some investors are landlocked in a style that doesn’t allow them to capture the immediate term alpha that you can pull out of a market that is breaking down but inevitably bounces. The truth is that this is going to provide a huge advantage to those who are equipped to manage both their absolute exposure to cash and net exposure to short positions in 2010.


From a Hedgeye Macro Theme perspective, we remain very bearish on the only bubble that remains – that of the Fiat Fools in Big Keynesian Governments. After we covered our short position in the Nasdaq last Monday, we also shorted the US Dollar (UUP) as a way to express our being negative on the US deficit and debt disasters that America has yet to address. The good news for Europeans on deficit spending is that they are at least starting to tell the truth.


While a down Dollar may very well be reflationary for commodities priced in US Dollars in the immediate term (we have a 6% allocation to Commodities), in the intermediate term the truth has already been told by the Europeans as to where the Road to Keynesian Perdition ends – with austerity measures. The truth is that we aren’t telling Americans the truth about that because they won’t like austerity measures either.


My immediate term support and resistance levels for the SP500 are now 1082 and 1104, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Today's Truth - Day


The S&P 500 finished higher on Friday and rose 2.5% for the week, despite some mixed MACRO economic data.  On Friday, the preliminary June Michigan Consumer confidence Index hit its highest level in more than two years in June, though retail sales unexpectedly fell in May for the first time since September.


MACRO data points for the week pertaining to the consumer pointed to mostly weaker trends. Consumer credit trends, mortgage applications, initial jobless trends and retails sales all showed softness.  Coming into Friday’s release of retail sales, consumer spending had been one bright spot since last October.  May Retail Sales declined 1.2% vs. consensus of 0.2%; ex-Autos (1.1%) vs. consensus 0.1%.  April Retail Sales was revised downward to 0.6% from 0.4%; ex-Autos revised upward to 0.6% from 0.4%. 


In contrast to the weakening macro data points, confidence showed stronger trends.  On Wednesday last week, the ABC confidence numbers showed a slight tick positive and on Friday the preliminary June Michigan Consumer Confidence also improved.  June University of Michigan Confidence (prelim) 75.5 vs. consensus 74.5; the final May reading was 73.6.


Technology shares climbed for a second consecutive day, and the NASDAQ ended up roughly where it started on Monday.  Strong results and optimism from chipmakers attempted to stifle concerns around a slowdown in the space. Pharma rallied around numerous upgrades and investors taking on new risk.


On Friday, the three best performing sectors were Materials (XLB) up 1.1%, Technology up 0.9% and, Healthcare up 0.81%.  With the S&P 500 up 2.5% on the week, the Hedgeye Risk Management models now have Energy (XLE) and Utilities (XLU) positive on TRADE; there are no companies positive on TREND.  The three worst performing sectors on Friday were Consumer Staples (XLP), Consumer Discretionary (XLY) and Utilities (XLU).  The XLP and the XLY were the only two sectors down on the day.   


The DXY rallied 0.4% on Friday and the Hedgeye Risk Management models have the following levels for the USD – Buy Trade (86.32) and Sell Trade (88.21).  The VIX declined 5.8% on Friday and 18.6% last week.  The Hedgeye Risk Management models have the following levels for the VIX – Buy Trade (27.11) and Sell Trade (36.41). On Friday, Treasuries gained modestly with the long-end outperforming.


In early trading, the EURO is trading higher by 1.1%.  The Hedgeye Risk Management models have the following levels for the EURO – Buy Trade (1.18) and Sell Trade (1.23).


A notable standout on Friday was Healthcare (XLV). The (XLV) was up 0.8%, led by strength in Biotech with the BTK +1.8% and Pharmaceuticals (IHE) up 1.4%.  The second best performing sector on Friday was Technology (XLK).  The S&P software index was up 2.2% on the day and the SOX improved by 1.4%. National Semiconductor’s earnings and upbeat guidance lifted its shares by +5.0%; May quarter revenues, earnings and gross margins all beat consensus estimates.  Coupled with TXN’s (0.3%) bullish outlook earlier this week, investors are beginning to get a clearer picture of how the second half could take shape in Semis.


In early trading, crude oil is trading above $75 on speculation of continued growth in the U.S. economy. The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (73.73) and Sell Trade (76.40).


In early trading, Copper is trading higher for the fifth straight day.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (2.89) and Sell Trade (3.05). 


The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,214) and Sell Trade (1,245).   


As we look at today’s set up for the S&P 500, the range is 22 points or 0.9% (1,082) downside and 1.1% (1,104) upside.  Equity futures are trading above fair value and close to session highs in a continuation of Friday's late rally and ahead of a busier week for economic releases which include May's CPI reading on Thursday.


Howard Penney













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