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WEEKLY RISK MONITOR FOR FINANCIALS: WIDELY POSITIVE ON A SHORT-TERM BASIS

Financial Risk Monitor Summary (Across 3 Durations):

  • Short-term (WoW): Positive / 8 of 10 improved / 1 out of 10 worsened / 2 of 10 unchanged
  • Intermediate-term (MoM): Neutral / 5 of 10 improved / 5 of 10 worsened / 2 of 10 unchanged
  • Long-term (150 DMA): Neutral / 3 of 10 improved / 3 of 10 worsened / 4 of 10 unchanged / 1 of 10 n/a

WEEKLY RISK MONITOR FOR FINANCIALS: WIDELY POSITIVE ON A SHORT-TERM BASIS - summary

 

1. US Financials CDS Monitor – Swaps were positive across domestic financials, tightening for 27 of the 28 reference entities and widening for only one. 

Widened the most/tightened the least vs last week: AXP, AIG, HIG

Tightened the most vs last week: MET, TRV, MBI

Widened the most vs last month: C, AXP, ACE

Tightened the most vs last month: LNC, MET, MBI

 

WEEKLY RISK MONITOR FOR FINANCIALS: WIDELY POSITIVE ON A SHORT-TERM BASIS - 1 US cds

 

2. European Financials CDS Monitor – After backing up sharply last week, banks swaps in Europe was mixed.  Swaps tightened for 24 of the 39 reference entities.

 

WEEKLY RISK MONITOR FOR FINANCIALS: WIDELY POSITIVE ON A SHORT-TERM BASIS - 2 euro cds

 

3. Sovereign CDS – Sovereign CDS fell sharply last week on the Portuguese bailout and entry of Japanese buyers before rising slightly on Monday. 

 

WEEKLY RISK MONITOR FOR FINANCIALS: WIDELY POSITIVE ON A SHORT-TERM BASIS - 3 sov cds

 

4. High Yield (YTM) Monitor – High Yield rates fell 9 bps last week, closing at 7.91 on Friday.  

 

WEEKLY RISK MONITOR FOR FINANCIALS: WIDELY POSITIVE ON A SHORT-TERM BASIS - 3 high yield

 

5. Leveraged Loan Index Monitor – The Leveraged Loan Index continued to charge higher, closing at 1598, 8 points higher than the previous week.   

 

WEEKLY RISK MONITOR FOR FINANCIALS: WIDELY POSITIVE ON A SHORT-TERM BASIS - 4 lev loan

 

6. TED Spread Monitor – The TED spread fell to 15.8 from 16.8 the prior week.

 

WEEKLY RISK MONITOR FOR FINANCIALS: WIDELY POSITIVE ON A SHORT-TERM BASIS - 5 ted spread

 

7. Journal of Commerce Commodity Price Index – Last week, the index rose 3.7 points, closing at 35.5 on Friday.

 

WEEKLY RISK MONITOR FOR FINANCIALS: WIDELY POSITIVE ON A SHORT-TERM BASIS - 7 JOC

 

8. Greek Bond Yields Monitor – We chart the 10-year yield on Greek bonds.  Last week yields fell 150 points.

 

WEEKLY RISK MONITOR FOR FINANCIALS: WIDELY POSITIVE ON A SHORT-TERM BASIS - greek bonds

 

9. 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 fell last week, dropping 7 bps to 219.  

 

WEEKLY RISK MONITOR FOR FINANCIALS: WIDELY POSITIVE ON A SHORT-TERM BASIS - 8 mcdx

 

10. Baltic Dry Index – The Baltic Dry Index measures international shipping rates of dry bulk cargo, mostly commodities used for industrial production.  Higher demand for such goods, as manifested in higher shipping rates, indicates economic expansion.  The index fell to a new low of 144 amid Australian flooding. 

 

WEEKLY RISK MONITOR FOR FINANCIALS: WIDELY POSITIVE ON A SHORT-TERM BASIS - 9 baltic dry

 

11. 2-10 Spread – We track the 2-10 spread as a proxy for bank margins.  Last week the 2-10 spread held flat at 273 bps. 

 

WEEKLY RISK MONITOR FOR FINANCIALS: WIDELY POSITIVE ON A SHORT-TERM BASIS - 10 2 10 spread

 

12. XLF Macro Quantitative Setup – Our Macro team sees the setup in the XLF as follows: zero upside to TRADE resistance, 2.0% downside to TRADE support. 

 

WEEKLY RISK MONITOR FOR FINANCIALS: WIDELY POSITIVE ON A SHORT-TERM BASIS - XLF

 

 

Joshua Steiner, CFA

 

Allison Kaptur


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - January 18, 2011


Equity futures are trading mixed with the Nasdaq set to open lower following yesterday's news that Steve Jobs will take a medical leave of absence as the company is set to report earnings after the close.  As we look at today’s set up for the S&P 500, the range is 22 points or -1.26% downside to 1277 and +0.45% upside to 1299.

 

 MACRO DATA POINTS:

  • 7:45 a.m.: ICSC weekly sales
  • 8:30 a.m.: Empire Manufacturing, est. 13.00, prior 10.57
  • 9 a.m.: Net long-term TIC Flows, est. $40.0b, prior $27.6b
  • 10 a.m.: NAHB Housing market index, est. 17, prior 16
  • 11 a.m.: Export inspections (grains)
  • 11:30 a.m.: U.S. to see $29b in 3-mo., $28b in 6-mo. bills
  • 5 p.m.: ABC consumer confidence

TODAY’S EARNINGS TO WATCH:

  • Delta Air Lines (DAL) 7:30 a.m., $0.24
  • TD Ameritrade Holding (AMTD) 7:30 a.m., $0.25
  • Fastenal (FAST) 7:50 a.m., $0.45
  • Citigroup (C) 8 a.m., $0.08
  • Forest Laboratories (FRX) 8 a.m., $0.98
  • McMoRan Exploration Co (MMR) 8 a.m., $(0.28)
  • Charles Schwab (SCHW) 8:45 a.m., $0.11 (tentative)
  • Cree (CREE) 4 p.m., $0.58
  • International Business Machines (IBM) 4:08 p.m., $4.08
  • Western Digital (WDC) 4:15 p.m., $0.58
  • Apple (AAPL) 4:30 p.m., $5.39
  • Fulton Financial (FULT) 4:30 a.m., $0.16
  • Linear Technology (LLTC) 5 p.m., $0.58

PERFORMANCE:

  • One day: Dow +0.47%, S&P +0.74%, Nasdaq +0.73%, Russell +0.86%
  • Last Week: Dow +0.96%, S&P +1.71%, Nasdaq 1.93%, Russell +2.51%
  • Year-to-date: Dow +1.81%, S&P +2.83%, Nasdaq +3.86%, Russell +3.05%
  • Sector Performance - (8 sectors positive and 1 flat) - Financials +1.61%, Energy +1.08%, Tech +0.89%, Consumer Discretionary +0.61%, Industrials +0.47%, Utilities +0.41%, Materials +0.23%, Healthcare +0.12% and Consumer Staples (0.00%).

  EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: 461 (+732)  
  • VOLUME: NYSE 1059.74 (14.61%)
  • VIX:  15.46 +5.67% YTD PERFORMANCE: -12.90%
  • SPX PUT/CALL RATIO: 1.46 from 1.39 (+4.97%)

CREDIT/ECONOMIC MARKET LOOK:


Treasuries were little changed, but tempered slightly weaker as equities rose

  • TED SPREAD: 15.81
  • 3-MONTH T-BILL YIELD: 0.15%     
  • YIELD CURVE: 2.76 from 2.75

COMMODITY/GROWTH EXPECTATION:

  • CRB: 333.06 +0.02% (last week: +2.82%)  
  • Oil: 91.02 -0.57% - trading +0.56% in the AM (last week: +3.99)
  • Crude Oil Trades Near a 27-Month High After IEA Increases Demand Forecast
  • COPPER: 438.45 -0.62% - trading +1.20% in the AM (last week: +3.02%)
  • Copper rally on supply shortfall
  • GOLD: 1,360.97 +0.14% - trading +0.55% in the AM (last week: -0.65%)
  • Gold Advances as Europe Debt Concern, Price Decline Spur Investor Demand

OTHER COMMODITY NEWS:

  • Food Prices Causing Riots in Africa Stoke Record U.S. Farm Economy Growth
  • Wheat Advances, Corn Reaches 18-Month High on Rising Demand, Lower Stocks
  • Nickel Rises to Eight-Month High on Stronger Chinese Usage; Copper Gains
  • Cocoa Rises After EU Imposes Ivory Coast Sanctions; Sugar, Coffee Advance
  • Hedge-Fund Bets on Costlier Feeder Cattle Increase to Highest Since 2006
  • Soybeans, Palm Oil to Extend Rally on Tight Supply, India's Top Buyer Says
  • Coal Prices Reach Two-Year High as Flooding in Australia Curbs Production
  • Rubber Futures Decline From Record as China May Raise Rates to Cool Prices
  • Mitsui Mining to Cut Zinc Output on Maintenance Shutdown at Top Smelter
  • Coal's China-Australia Discount at 8-Month High on Floods: Energy Markets
  • Gold Sold in Tokyo Vending Machines Competes with Drinks, Sweets, Lingerie
  • Europe Commodity Day Ahead: First Gold Vending Machines Installed in Tokyo

CURRENCIES:

  • EURO: 1.3295 -0.69% - trading +0.90% in the AM
  • DOLLAR: 79.337 +0.22% - trading -0.61% in the AM

EUROPEAN MARKETS:

  • European Markets: FTSE 100: +1.08%; DAX: +0.95%; CAC 40: +0.81% (as of 07:30 ET)
  • European markets opened higher as positive corporate earnings helped sentiment.
  • The periphery remained in focus as European Finance Minister meet today with uncertainty remaining as to whether there will be any agreement to increase the EuroZone rescue fund.
  • Reports Russia may resume buying Spanish debt and a constructive Spanish bill auction lead to indices extending gains, though the UK lagged after disappointing UK inflation data pared gains.
  • All sectors other than healthcare (0.3%) trade higher led by banks +2.6%, media +2.0% and autos +1.6%.

ECONOMICS:

  • UK Dec CPI +3.7% y/y vs consensus +3.3% and prior +3.3%
  • UK Dec RPI +4.8% y/y vs consensus +4.8% and prior 4.7%
  • Germany Jan ZEW Index +15.4 vs consensus +6.8 and prior +4.3 - German Jan ZEW current situation 82.8 vs consensus 83.8 and prior 82.6

ASIAN MARKTES:

  • Asian Markets: Nikkei +0.15%; Hang Seng (0.01%); Shanghai Composite +0.09%
  • Asian stocks were mixed today, as investors waited to see Wall Street’s reaction to Apple (AAPL) CEO Steve Jobs’s taking a medical leave of absence.
  • Australia rose +0.81, with banks and retail stocks finding favor.
  • Japan erased early losses to close slightly higher.
  • China finished flat, with strong earnings from Industrial Bank and China Everbright Bank despite downward pressure resulting from a report that the country has cut banks’ lending targets 10% for the year.
  • Chalco jumped 5% in active trading on forecasting a return to profit for last year, but Hong Kong finished flat. Local property developers extended yesterday’s gains. Hutchison Whampoa fell 2% on announcing a plan to spin off its ports business.
  • Tech stocks advanced, but could not bring South Korea closed down 0.16%
  • Japan revised November industrial output +1.0% m/m, matching preliminary figure. November capacity utilization index +1.6% m/m to 86.7. December department-store sales (1.5%) y/y. Tokyo December department-store sales (0.3%) y/y..

THE HEDGEYE DAILY OUTLOOK - 1 18 2011 8 25 29 AM


MACRO ICEBERGS

This note was originally published at 8am on January 18, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“It's been 84 years, and I can still smell the fresh paint. The china had never been used. The sheets had never been slept in. Titanic was called the Ship of Dreams, and it was. It really was.”
-Old Rose

 

In the quote above from the blockbuster film “Titanic”, an elderly Rose DeWitt Bukater reminisces on the grandeur and splendor of a vessel once described as “unsinkable” – even by God. More deeply, her allusion to the Titanic’s former nickname triggers feelings of grief as she turns to the memories of a lost life that could’ve been so many years ago.

 

Unfortunately global risk managers don’t have the luxury of dwelling on the past like Old Rose here. We must constantly be playing the game in front of us; this week global markets are tuned squarely to Europe’s bond auctions and statement’s from the region’s leaders on its sovereign debt issues as a proxy for market performance.

 

Over the short term we’d expect European markets to continue to make gains on the heels of announcements from China (earlier this month) and Japan (on Tuesday) to buy European bonds and statements from EU Economic and Monetary Commissioner Olli Rehn (yesterday) that EU officials are trying to forge a “comprehensive” plan to contain the sovereign debt crisis and from German Chancellor Angela Merkel who indicated a desire to do “whatever is needed to support the euro.”  Rehn also ruled out debt restructuring for Greece or any other euro-area member state.

 

With this kind of support, it’s no surprise that investors cheered, markets boomed, and the European auctions have found plenty of demand. Yesterday saw substantial outperformance from the peripheral equity markets, with gains from: Spain’s IBEX +5.4%; Greece’s Athex+ 5.0%; Italy’s FTSE +3.8%, as credit markets have improved over the last 3 days.

 

As we head in to earnings season, MACRO seemed to return to the forefront as the high-profile upside driver to global equity prices as concerns over sovereign debt auctions diminish.  The dampened European sovereign contagion concerns fueled a pickup in risk appetite on the back of a better-than-expected Portuguese bond auction yesterday and Spain’s auction today.  This is leading to outsized gains in the financials around the world.

 

Yesterday in the US, financials extended their 2011 outperformance with the leadership coming from the banking sector, with the BKX +1.5% and the broader XLF up 1.7%.  Despite disappointing Machinery orders out of the Japan, the Japanese megabanks followed their American peers higher, leading Japan to +0.73%.  Like in the US, the potential for increased dividends is driving equity prices higher as both Sumitomo Trust & Banking and Chuo Mitsui Trust Holdings rose 5% overnight on the potential of higher dividends. 

 

Macro Icebergs

 

As we’ve seen throughout market history, it’s typically when everyone is expecting smooth sailing ahead that certain “icebergs” tend to derail things. If we’ve learned anything from the movie “Titanic”, it’s that hubris about our top ideas (the ship) and a disregard for risk (not having enough lifeboats on board) can get us into trouble.

 

Certainly a few Macro Icebergs are scattered across our domestic waters. How we navigate them individually will be the key to getting paid in 2011; currently, the collective is “full speed ahead”.

 

Below we’ll highlight one of the largest Macro Icebergs that a) has the potential to capsize our ship; and b) is out of consensus – at least for now:

 

Municipal Debt Dichotomy

 

Yesterday we published an intraday report titled: “The Municipal Bond Market: Silent But Deadly” (email sales@hedgeye.com if you want to see our work on muni bonds). In it, we took a deep dive at the headwinds affecting this sector of our financial markets and the systemic risk therein. The key takeaways from the article were:

  • Fiscal austerity at the State and Federal Government level and a strong political will in D.C. to avoid bailing out States and municipalities will perpetuate budget woes at the municipal level (together, State and Federal support account for ~34% of municipal budgets);
  • Local governments are running out of room with their accounting “tricks” and are staring at potentially 2-5 years of declining property tax receipts, which are ~26% of their budget;
  • Calls for State defaults are overblown; the real issues lie within the municipalities and municipal authorities across the nation; the States that have the most severe fiscal issues will see a disproportionate number of their municipalities go bust (though bankruptcy is not permitted in 23 States, defaulting on payments to vendors and creditors will be the more likely outcome in many cases); and
  • The equity markets are misinterpreting the recent back up in yields as “growth” and not “risk” and this risk isn’t going away any time soon.

While still largely ignored by consensus, it was certainly interesting to see some big names in our industry come out on both sides of this debate yesterday:

 

PIMCO’s Bill Gross: “Ultimately, municipal bankruptcies will be at a lower level. I don’t subscribe to the theory that there will be lots of them.” 

 

JPMorgan’s Jamie Diamond: “There have been six or seven municipal bankruptcies already. I think unfortunately you will see more… If you are an investor in municipals you should be very, very careful.”

 

“Smooth Sailing Ahead” vs. “Icebergs A’Cometh”.

 

We certainly aren’t crying wolf for the sake of attention like some analysts with ulterior motives. We don’t do ratings, banking, trading or manage assets; we only get paid for being right. Considering that we’re still in business after three of the most volatile years in the history of financial markets, we’ve been blessed to be more right than wrong over this duration.

 

For the sake of our economy (yes we are patriots), we hope we are not right on this one. The last thing America needs right now is another financial crisis on its hands perpetuated by blow-ups in the $2.9 trillion dollar muni bond market and Housing Headwinds Part II (not mentioned here; email us for more details). Unfortunately, hope is not an investment process. That’s why we’ll continue to help you navigate these murky waters as Global risk managers.

 

We’ll discuss these risks and how to play them on the long and short side on our Q1 Quarterly Themes Conference Call tomorrow at 1:00pm. Qualified prospective institutional subscribers please email sales@hedgeye.com for more details.

 

Keep your head on a swivel.

 

Howard Penney

Managing Director

 

Matthew Hedrick

Analyst

 

Darius Dale

Analyst

 

MACRO ICEBERGS - MUNI


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STRONG START TO YEAR IN MACAU

Expectations for a HK$20 BN+ month as some analysts are suggesting may be high but January should still be a record month.

 

 

Gross table gaming revenues were HK$10.08 billion in the first half of January.  Based on this data we are projecting full month gaming revenues (including slots) will come in at HK$18.5-19.0 billion.  Activity should slow in the last week given the proximity to the February 3rd start of the Chinese New Year celebration.  Still, anywhere in this range would represent a monthly record and generate YoY growth of 36-40%.

 

Market shares shifted significantly in the last month, at least between the two big US operators.  Wynn gave up 300bps compared to its share last week, mostly to LVS which gained 250bps.  Our intelligence in Macau tells us the shift was entirely hold related.  We will note that Wynn’s share remains above its 12 month average although below its recent elevated levels.  LVS is now right in-line with its depressed 3 month average.  We continue to be impressed with MGM and we believe they have been successful in driving bottom line results at the property as well.  Here are the shares:

 

STRONG START TO YEAR IN MACAU - macau


Complex Simplicities

“I must forever make the complex the simple.”

-Martin Luther King, Jr.

 

Ironically enough, one of my best friends gave me “The Autobiography of Martin Luther King, Jr.” for my birthday a few weeks back. Notwithstanding that he didn’t know I’d be on my back reading for the last week, the timing of this gift was impeccable. Dr. King’s passion has forever made the complex the simple.

 

Complex Simplicities are what we chaos theorists wake up looking for each Global Macro market morning. One of my favorite risk management books of all time (“Deep Simplicity”, by John Gribbin) got me hooked on the basic principles of chaos and complexity theory back in 2006. Thank God for those teachings. They saved our clients and our firm a lot of money in 2008.

 

Investment opportunities in a globally interconnected ecosystem are omnipresent. While there may be Apple days in California and snow days in Connecticut, there is no such thing as “risk on” and “risk off” days in Global Macro markets. In fact, when I hear people say that, all I can do is smile. Accepting chaos theory in risk management means accepting uncertainty, every day.

 

Over the intermediate-term TREND, there is no such thing as market certainty. The only thing you can be certain of, after a +91.3% melt-up in US stocks since March of 2009, is that for the immediate-term groupthink session everyone on the Barron’s Roundtable is going to be bullish.

 

Being bullish or bearish on the amount of uncertainty you think there is going to be in a market price is an opinion. So is doing nothing. For now, from an asset allocation perspective, we’re doing more and more of nothing. As some market prices climb, we’re raising more cash.

 

This is what the Hedgeye Asset Allocation Model looks like to start off this week:

  1. US Cash: UP to 67% (versus 61% last week)
  2. International Currencies: DOWN to 18%
  3. International Equities: DOWN to 6%
  4. US Equities: UP to 6%
  5. Fixed Income: UNCHANGED week-over-week at 3%
  6. Commodities: DOWN to 0% (in the last 2 wks, I’ve sold all our Oil, Sugar, and Corn – and there are no rules saying I can’t buy them back lower)

Being in cash is a simple concept. While I do get some very complex questions about the nature of my cash position, most of the time the real complexity in the questions is born out of the problems associated with many institutions being mandated to be “fully invested.” I don’t have to be.

 

To be crystal clear on this, the Hedgeye Asset Allocation Model represents what I am personally doing with my investable capital. I’d be nuts to put my name on any other advice than that which I abide by myself. Again, from a transparency and accountability perspective, this is very simple.

 

Complex Simplicities: Did I think people who were jamming into bond and gold funds in Q4 of 2010 were nuts? Yes. Do I think people who are fully invested chasing US Equity indices up here are nuts? Yes. Do people who I think are nuts make money in this business? Yes.

 

But, sometimes (1998, 2000, 2001, 2002, 2008), people who get nutso invested blow up. The goal here, if you’ve made money in each of the last 3 years, is to make it a fourth -  not to implode.

 

Last week in Global Macro, other than in the $2.8 TRILLION US Municipal Bond Market, not a lot of things blew up. Here were the most important Global Macro market moves of the week:

  1. US Dollar Index was debauched for a -2.4% loss, taking it down for the 2nd week out of the last 3 as Republicans attempt to break spending promises
  2. Euro rallied +3% from its prior week’s lows of $1.29 (where we covered our short) as “I Have A Scheme” (Zero Hedge coined) on fiat paper goes global
  3. CRB Commodities Index closed at another weekly closing-high of 333; Dear Ber-nank, that was another +3.1% inflationary move in 19 commodities
  4. Oil prices inflated +4% week-over-week, and 71% of Americans say it’s an issue – really?
  5. Gold was down -0.6% and down for the 2nd consecutive week (we remain short of gold, GLD)
  6. US stock market Volatility (VIX) dropped another -9.5% to 15.46, testing its April 2010 lows when US growth bulls were last this horned up

There wasn’t enough pin action in credit spreads (US or Sovereign) for me to call it out and nominal US Treasury Yields didn’t do much on a week-over-week basis either (they remain in what we call a Bullish Formation – bullish on all 3 of our core investment durations: TRADE, TREND, and TAIL). That’s one of the main reasons why we love our cash so much. Global Inflation Accelerating is bad for de bonds, eh.

 

Complex Simplicities associated with our living in a higher-and-lower American society by the week aside, we’re looking forward to watching how this year’s Global Macro picture plays out post the beginning of the year “flows” thing. While in cash, waiting and watching for US stock-centric investors to react to something other than Apples and snow should be, at a bare minimum, worth the immediate-term absolute performance charge.

 

My immediate term support and resistance lines for the SP500 are now 1277 and 1299, respectively.

 

Best of luck out there today – it’s good to be back in the game,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Complex Simplicities - box


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