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WEEKLY RISK MONITOR FOR FINANCIALS: FOURTH WEEK IN A ROW WITH MORE POSITIVE THAN NEGATIVE

Last week, 4 of the 8 risk measures registered positive readings on a week-over-week basis while 2 were neutral and 2 were negative.  A summary table is shown below.

 

Our risk monitor looks at the following metrics weekly:

1. CDS for all available US Financials (29 companies)

2. CDS for large European Financials (39 companies)

3. High Yield

4. Leveraged Loans

5. TED Spread

6. Journal of Commerce Commodity Price Index

7. Greek Bond Spreads

8. Markit MCDX

 

WEEKLY RISK MONITOR FOR FINANCIALS: FOURTH WEEK IN A ROW WITH MORE POSITIVE THAN NEGATIVE - summary

 

1. Financials CDS Monitor – Swaps were mostly negative last week.  Swaps tightened for 8 of the 29 reference entities and widened for 21.    Conclusion: Negative.

 

Tightened the most vs last week: MTG, MBI, AIG

Widened the most vs last week: AXP, PRU, CB

Tightened the most vs last month: JPM, SLM, AIG

Widened the most vs last month: PGR, AGO, MMC

 

WEEKLY RISK MONITOR FOR FINANCIALS: FOURTH WEEK IN A ROW WITH MORE POSITIVE THAN NEGATIVE - cds US

 

2. European CDS Monitor – In Europe, CDS was nearly all negative.  Swaps tightened for only 2 of the 39 reference entities tightened and widened for the other 37.   Conclusion: Negative.

 

Widened the most vs last week: Greek banks: Alpha Bank, EFG Eurobank Ergasias, National Bank of Greece

Tightened the most vs last week: IKB Deutsche, Caja de Ahorros del Mediterraneo, Svenska Handelsbanken

Widened the most vs last month: EFG Eurobank, Bank of Ireland, DnB NOR

Tightened the most vs last month: Hannover Rueckversicherungs, Bankinter, HSBC Holdings

 

WEEKLY RISK MONITOR FOR FINANCIALS: FOURTH WEEK IN A ROW WITH MORE POSITIVE THAN NEGATIVE - cds euro

 

3. High Yield (YTM) Monitor – High Yield rates fell slightly last week, closing at 8.40 on Friday. Conclusion: Positive.

 

WEEKLY RISK MONITOR FOR FINANCIALS: FOURTH WEEK IN A ROW WITH MORE POSITIVE THAN NEGATIVE - high yield

 

4. Leveraged Loan Index Monitor – The leveraged loan index rose 4.5 points last week.  Conclusion: Positive.

 

WEEKLY RISK MONITOR FOR FINANCIALS: FOURTH WEEK IN A ROW WITH MORE POSITIVE THAN NEGATIVE - leveraged loan

 

5. TED Spread Monitor – Last week the TED spread rose slightly, closing at 15 bps. Conclusion: Neutral.

 

WEEKLY RISK MONITOR FOR FINANCIALS: FOURTH WEEK IN A ROW WITH MORE POSITIVE THAN NEGATIVE - ted spread

 

6. Journal of Commerce Commodity Price Index – Last week, the index rose a hair, closing at 15.00 on Friday. Conclusion: Neutral.

 

WEEKLY RISK MONITOR FOR FINANCIALS: FOURTH WEEK IN A ROW WITH MORE POSITIVE THAN NEGATIVE - joc

 

7. Greek Bond Yields Monitor – We chart the 10-year yield on Greek bonds.  Last week yields fell 51 bps, ending the week at 1105 bps versus 1156 bps the prior week.  Conclusion: Positive.

 

WEEKLY RISK MONITOR FOR FINANCIALS: FOURTH WEEK IN A ROW WITH MORE POSITIVE THAN NEGATIVE - greek bonds

 

8. Markit MCDX Index Monitor – The Markit MCDX is a measure of municipal credit default swaps.  We believe this index is a useful indicator of pressure in state and local governments.  Markit publishes index values daily on four 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. Our index is the average of their four indices.  Spreads were down last week, closing at 215 versus 227 the prior week.  Conclusion: Positive.

 

WEEKLY RISK MONITOR FOR FINANCIALS: FOURTH WEEK IN A ROW WITH MORE POSITIVE THAN NEGATIVE - markit

 

Joshua Steiner, CFA

 

Allison Kaptur


Macro Forces

"The lesson that I have learned is that it isn't reasonable to be agnostic about the big picture."

-David Einhorn

 

There was an article in the Wall Street Journal on Friday that was forwarded to me hundreds of times over. The article was titled “Macro Forces In Market Confound Stock Pickers.” There was nothing particularly new in the article. Everyone who has protected their client’s hard earned capital in the last 3 years gets that macro matters. But what about those who don’t get it? What’s their answer to David Einhorn’s mental flexibility? Do their answers matter?

 

Macro Forces certainly matter. As Risk Managers, it’s our job to both identify their market impact and proactively prepare for their most “improbable” outcomes. I have a great deal of respect for someone like Einhorn because he can skate circles around Captain Stock Picker out there but, at the same time, acknowledge that he needs to continually evolve his investment process to incorporate the macro frontier.

 

If you are a bloodhound who trades merger arbitrage or your job is to be long of the next stock to hit this market’s broadening “rumor mill” of takeout targets, that’s fine. Maybe you don’t do macro until, as Mike Tyson would say, it “punches you in the face.” For the rest of us, “it isn’t reasonable to be agnostic” about global macro market risk anymore. October 1987 mattered.

 

Being Duration Agnostic is also something we evangelize a lot here in New Haven. My sense is that the Buy-And-Hope model of yesteryear isn’t going to be emailed to me 100 times over via a WSJ article anytime soon. Legacy print media has a funny way of being a lagging indicator. All that said, we need to focus intensely on compartmentalizing calendar catalysts that are macro in nature. It’s unreasonable to actively manage risk otherwise.

 

During Friday’s US stock market short squeeze I was also getting a lot of emails asking me when I was going to short the SP500 (SPY). After 3 consecutive down days (Tuesday, Wednesday, and Thursday), the illiquidity rally was broad based and I think the questions were well timed.

 

Unfortunately, I’m not enough of a cowboy anymore to stand on the other side of this market’s intermediate term TREND line and call it anything other than what it became on Friday – what was 1144 resistance in the SP500 is now support.

 

It’s not my job to be bearish or bullish. It’s really not my job to be anything other than a student of whatever it is that Mr. Macro Market throws at me each and every day. There certainly were more bearish than bullish fundamental research data points in my notebook last week but at the end of the week they were all trumped by Mr. Macro’s market price. The US Dollar has been demolished (down 14 of the last 17 weeks) and the reflation trade is back on.

 

To be crystal clear, there are no rules in this game suggesting that the 1144 line cannot become resistance again. The Macro calendar of catalysts for the early part of this week that could easily be construed as bearish are:

  1. Monday: A breakdown close through 1144 on the SP500 combined with a failure of the VIX to breakdown through its critical 20.77 line of support.
  2. Tuesday: A reminder that Housing Headwinds remain in the US economy with the Case Shiller report for July.
  3. Wednesday: An acknowledgement by both Japan (Tankan Survey) and the US (Obama speaks on joblessness) that Fiat Republics are not stable.

Then, of course, you have month and quarter-end on Thursday for the hedge fund business on top of a Chinese PMI report for September that could go either way. No one said that doing macro is easy. The way we all get paid in this business, it shouldn’t be…

 

The Macro Forces that are bullish out there are fairly straight forward at this point:

  1. Prices: The SP500 is up +9.43% for September-to-date!
  2. M&A: Unilever buys Alberto Culver this morning for $3.7B making at least 1 of the 67 rumors of takeouts we are tracking true…
  3. Mid Terms: If you didn’t know the Republicans are going to take the House, now you know.

“Republican House” being on the cover of Barron’s this weekend certainly doesn’t make this a new Macro Force to consider. That’s why we did our risk management call with Karl Rove last month to get ahead of this. As always, the better questions in our risk management lives surround what people aren’t talking about. These factors, too, need to be considered on a Duration Agnostic basis.

 

Whether or not the intermediate term TREND line in the SP500 of 1144 holds or not definitely matters to me in the immediate term. At the same time, out on the long term TAIL, the biggest question is why won’t the US stock market continue to make a series of lower-long-term-highs like the Nikkei in Japan has?

 

There are only 7 countries in the world who have underperformed Japanese equities for the YTD at this point (in order of worst to Japan: Greece, China, Slovakia, Italy, Portugal, Spain, and Ireland). Sadly, in response to another lower-long-term-high in the Nikkei, this morning the Japanese have introduced another 4.6 TRILLION Yen in stimulus. Shame on those who don’t learn history’s lessons. They deserve to lose.

 

My immediate term support and resistance lines for the SP500 are now 1131 and 1150, respectively.

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Macro Forces - nikkei


THE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - September 27, 2010

As we look at today’s set up for the S&P 500, the range is 19 points or -1.54% downside to 1131 and 0.12% upside to 1150. Equity futures are trading lower as European market struggle for direction with some support coming from M&A activity in the Food & Beverages sector. Gold continues to re-test the $1300 mark. Today's macro highlights include: Chicago Fed.

  • Allergan (AGN) got FDA approval for Ozurdex drug
  • In Barron’s - Best Buy (BBY) may gain as much as 30% in the next year as it increases sales with new products.
  • Cracker Barrel Old Country Store (CBRL) boosted Q dividend to $0.22 per share from $0.20, vs estimate 20c
  • In Barron’s - DigitalGlobe (DGI) may gain ~30% during the next year as it adds revenues from government, business contracts.
  • Dynavax Technologies (DVAX) plans to sell as much as $100m of mixed securities
  • Hologic (HOLX) 3D mammogram device improves breast-cancer detection when used with conventional mammography, FDA advisers say
  • In Barron’s - JetBlue Airways (JBLU) may rise by 33% or more in next year on business travel, alliances with foreign airlines.
  • LeCroy (LCRY) plans to sell as much as $25m of mixed securities 

PERFORMANCE

  • One day performance: Dow +1.86%, S&P +2.12%, Nasdaq +2.33%, Russell +3.42%
  • Month-to-date: Dow +8.43%, S&P +9.43%, Nasdaq +12.62%, Russell +11.36%
  • Quarter-to-date: Dow +11.1%, S&P +11.4%, Nasdaq +12.88%, Russell +10%
  • Year-to-date: Dow +4.14%, S&P +2.97%, Nasdaq +4.93%, Russell +7.2%

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: 1980 (+3196)
  • VOLUME: NYSE - 1070.72 (+13.38%)  
  • SECTOR PERFORMANCE: XLI was the best performing sector on Friday buoyed by a better than expected Durable Goods report; notables in the sector - CAT’s +4.6%.  Financials, consumer discretionary, materials, energy and tech were all up over 2%. Technology and Telecom were laggards.
  •  MARKET LEADING/LAGGING STOCKS YESTERDAY: RR Donnelley 7.88%, Micron +7.62% and Allegheny +7.15%/IGT -2.54%, ADM -2.24% and Pioneer Natural -1.92%
  • VIX: 21.71 -9.05% - YTD PERFORMANCE: (+0.14%)
  • SPX PUT/CALL RATIO: 1.57 from 1.70, -7.29%

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: 14.94
  • 3-MONTH T-BILL YIELD: 0.15%, -0.1%
  • YIELD CURVE: 2.17 from 2.11

COMMODITY/GROWTH EXPECTATION:

  • CRB: 283.63 +1.25% - up for the last 5 weeks
  • Oil: 76.49 +1.74%  
  • COPPER: 361.80 +0.77% - up 5 of last 6 weeks  
  • GOLD: 1,295.95 +0.05% -  up 7 of the last 8 weeks

CURRENCIES:

  • EURO: 1.3492 +1.02% - up 6.22% over the past two weeks and 3 of the last 4 weeks
  • DOLLAR: 79.395 -0.77% - Down 4.03% last two weeks and 13 of the last 16 weeks 

OVERSEAS MARKETS:

Europe

  • European markets are trading modestly higher in reaction to Friday's gains seen on the USA and in a follow through to a strong session in Asia.
  • M&A continues to dominate news flow in the absence of any regional macro releases.
  • Irish banking concerns are set to continue ahead of announcements due sometime this week on the cost of the bailout for Anglo Irish Bank.
  • Food & Beverages, Oil & Gas and Travel sectors are pacing advancers.

Asia

  • Asian markets followed Wall Street up today.
  • Commodities-linked firms rose on higher metals prices.
  • Australia enjoyed a broad rally powered by banks and miners.
  • LNG rose 1% after saying it is studying the possibility of a new liquefied natural gas project in Queensland;
  • Japan rose, but consumer lenders plunged on reports that Takefuji , which was suspended, had ¥433.6B in liabilities as of 30-Jun and is preparing to file for bankruptcy. Advancers led decliners almost 3-to-1.
  • Japan August trade surplus ¥103.2B, (37.5%) y/y vs survey +44.3%. August corporate services price index (1.1%) y/y. 

 Howard Penney

Managing Director 

 

THE DAILY OUTLOOK - levels and trends

 

THE DAILY OUTLOOK - S P

 

THE DAILY OUTLOOK - VIX

 

THE DAILY OUTLOOK - DOLLAR

 

THE DAILY OUTLOOK - OIL

 

THE DAILY OUTLOOK - GOLD

 

THE DAILY OUTLOOK - COPPER

 


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NKE: Back to the Future(s)

Guess what folks? Futures matter again.  The 14% growth # is completely consistent with our call on a multi-year business acceleration. But let’s not turn a blind eye to the math.  Weighted channel growth is 3% -- 4% tops. This 10% from share gain NEEDS to continue with the stock up here. (Note: if images are not coming through -- let us know and we can send out the raw analysis).

 

 

Despite being a big bull for reasons that I still think other bulls don’t appreciate, I noted last week that those looking to manage risk around the quarter at least needed to acknowledge the sky-high expectations on both sides of the Street. In other words, ‘at least play it safe and take out your umbrella if there’s rain in the forecast.’

 

So what did Nike do? They ‘pulled a Nike’ and toasted the high-end of expectations. If there’s any one notable takeaway after packaging up all the commentary, Q&A and financials, it’s that the financial and human resource pain trade inside of Nike a year and a half ago is starting to pay off. Global demand is reaccelerating; a) in both footwear AND apparel, and b) across all the company’s new consumer categories. This has legs, folks. See our Nike Black Book from earlier this year for more details.

 

That said, the quarter was less than perfect, and there are a few items that raise question marks. These might seem like nit picks, but when the stock trades up after expectations were already so high, we need to nit pick.

 

a)      The quality of the beat ($1.14 vs. our $1.08 and the Street’s buck) was not outstanding. Revenue missed our model by 2-points and the Street’s by a point. Blame it on FX – as the business remains solid on a constant-currency basis – but FX is KNOWN, so there should not be any surprises there. 

b)      Gross margins looked solid – right in line with our model and above NKE’s sandbag.

c)      But the big delta was in SG&A, where operating overhead was flat on a -4.8% comp last year.

d)      So the bottom line is that revenue delta cost $0.02 relative to our $1.08, and an unsustainable SG&A rate added up for $0.08.  So overall…sales were +8%, EBIT was +11% and EPS was +10% (higher tax rate offset repo).

e)      Sales/inventory spread and SIGMA position are good, but eroded 1,000 basis points sequentially. Not a disaster, but notable.

 

NKE: Back to the Future(s) - sigmanke

 

Back to the Future(s)

That brings me to the title of this note.  Friday morning Keith and I were discussing the numbers. I took a few minutes and gave the plusses and minuses of the financials – noting the low quality relative to expectations. Then I got to the 14% North American futures number, and he looked at me like I had two heads and chuckled. He was probably thinking something like “Hello! Anybody home McFly? Think McFly, Think!”

 

NKE: Back to the Future(s) - Nike North American Futures Chart

 

That’s when it hit me… Sell side analysts and people inside the company – of which I was both – have it engrained in them that ‘futures really don’t matter that much anymore.’  That, of course, is a product of a time period where NKE would trade on the US business and nothing else. Even when US Footwear got to be less than 1/3 of sales – the US footwear number is what would drive the stock, and would drive the company (and the sell side) batty.  Over the past few years, the market finally ‘got it’ that there’s more to this business than the US.  But today, Mr. Market is definitely reverting to his former view as to what’s important. The trader in Keith got this in about 3 seconds flat. It took my inner McFly a couple hours to get ‘Back to the Futures’.

 

NOTE: Though unrelated, Nike secured a patent last quarter for a self-inflating shoe. Remind you of anything?

 

NKE: Back to the Future(s) - btfair

 

That leads to the 14% NA futures number. Let’s put things into perspective. 14% growth over the next 2 quarters is the equivalent of adding $289mm in new business (assuming that 85% of the base is on the Futures program). This number annualized is bigger than the ENTIRE US BUSINESS for over 90% of the footwear brands in the world. The good news is that the number is balanced over footwear and apparel. That definitely makes this number more easily digestible.

 

But is anyone watching the comp, square footage growth, and inventory trends of the channels that sell Nike’s product? Yes, they’ve picked up recently – no doubt. They’re also generally light on inventory. And yes, a better R&D cycle should help as well. But keep in mind that Adi and Reebok are no longer share donors (after losing 11 points of share—from 18% to 7% -- over 5 years) and casual brands like Skechers are giving it a go in the performance category.

 

Precise quantification of this order number is tough. But here’s our best crack. When we add up comp and square footage growth by customer and by channel, we get to about $128m top line growth for the YEAR – or about 2.5%. Now…this excludes growth in Nike retail and Nike.com – both of which should take the aggregate growth rate on a reported basis for Nike up by another 2-3 points. So what we need is to justify doubling this growth rate again due to market share gains in order to get to 14%.

 

NKE: Back to the Future(s) - sg

NKE: Back to the Future(s) - athspec

NKE: Back to the Future(s) - ritr 

*Hedgeye Estimates 

 

Right now, this is absolutely, positively, 100% realistic. But with Nike’s sales/inventory spread ticking down on the margin, and sales in the channel (incl square footage) supporting 3% growth, we need to sustain a steep trajectory in share gains to keep the halo on the US futures number.

 

It pains me to even write this, because our long-term call is so much bigger than the US. But Mr. Market just told us that local share matters again. We’re going to have to keep our Hedgeyes on this into the fall.

 

 


EARLY LOOK: Don't Eat Yellow Snow

 

 

“Even if you are on the right track, you will get run over if you just sit there.”

-Will Rogers

 

 

EARLY LOOK: Don't Eat Yellow Snow - Will Rogers

 

 

 

Oklahoma’s favorite son, Will Rogers, probably didn’t know it at the time but he made a very important contribution to modern day risk management with the aforementioned quote.

 

Rogers was our kind of guy. Multi-factor, multi-duration, and not afraid to put his thoughts out there for everyone to criticize every day. He was transparent and didn’t feel compelled to live a professional life of opacity. He lived his life out loud.

 

By the time he passed away in 1935, Will Rogers penned more than 4,000 nationally syndicated newspaper columns and produced 71 movies. He also traveled across the world 3 times. This gave him a unique perspective on the interconnectedness of human behavior.

 

The most important thing we can acknowledge about human behavior when we buy or sell something is that we are human. By nature, we are more likely to think something we own is worth more than it’s worth. Ultimately, the market’s last sale decides the price.

 

Another critical acknowledgment in modern day risk management is that the game is changing at a rate that’s representative of global economic imbalances, fund flows, and geopolitical risks. Never before has the US government sponsored so much market volatility. Never before has the hegemony of US economic power been such a question mark. Never is a long time.

 

My son Jack is barely 3 years old, but as winter approaches he will be old enough to learn his first few rules in risk management. Never eat yellow snow, and never trust a professional politician.

 

Whoever chooses to trust Greek, Irish, or US politicians who are telling us that they’ll never have to default on any long term liability because they have figured out how to print short term debt-upon-debt-upon-debt subscribes to a belief that the history of sovereign debt cycles doesn’t support.

 

 

EARLY LOOK: Don't Eat Yellow Snow - Flags

 

 

If you choose to trust what you see, recognizing this globally interconnected game of risk is always “risk on”, you are most likely going to see this Fear of Government trading environment plainly. You don’t have to “just sit there” and suck it up. You can keep moving.

 

There are two ways that I’ve applied this basic strategy of motion to express my investment views: 

  1. Hedgeye Asset Allocation Model: Managing the gross exposure of my CASH position dynamically.
  2. Hedgeye Virtual Portfolio: Managing my LONG versus SHORT positions, aggressively, on a net basis. 

I don’t run a hedge fund anymore. So far, this is the best I can do to communicate what it is that I am trying to recommend you do out there. I know that other people don’t do it this way. I also know that I’ll need to keep changing what it is that I do or I’ll get “run over.”

 

Back to explaining what it is that I’ve been doing this week…

 

1. Dynamic Asset Allocation to CASH:


  • On Tuesday when I “Walked The Line” (title of Early Look note that morning) and the SP500 was testing a breakout above my intermediate term TREND line of 1144, I moved to 64% CASH = selling strength.
  • On Thursday, after the SP500 closed down for the 3rd day in a row, I reinvested 6% of that CASH position into Commodities (DBA) and German Equities (EWG), taking my CASH position down to 58% = buying weakness.
  • This morning my Hedgeye Asset Allocation is as follows: Cash 58%, Int'l FX 21%, Bonds 9%, Int'l Equities 6%, Commodities 3%, US Equities 3%.

 

2.  Aggressively Managing Risk Around My Net LONG/SHORT position:


  • On Monday morning at SPX 1125 I had 13 LONGS and 10 SHORTS.
  • On Wednesday morning at SPX 1139 I had 8 LONGS and 10 SHORTS.
  • This morning at SPX 1124 I have 11 LONGS and 7 SHORTS.  

 

Naturally, some “fully invested” asset managers are going to look at this and say a few things: 

  1. You can’t hold a cash position like that.
  2. You can’t time markets like that.
  3. You can’t … 

But, yes I can.

 

Rather than just sit here and accept that at any given moment in my day the government can either squeeze me or displease me, for now I’m going to keep moving with an explicitly large amount of cash on the sidelines to deploy whenever I see the opportunity to do so.

 

My immediate term support and resistance levels for the SP500 are now 1113 and 1143, respectively.

 

Enjoy your weekend and best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

 

EARLY LOOK: Don't Eat Yellow Snow - 1

 

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THE WEEK AHEAD

The Economic Data calendar for the week of the 27th of September through the 1st of October is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.

 

THE WEEK AHEAD - 1

THE WEEK AHEAD - 2


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.

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