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WEEKLY RISK MONITOR FOR FINANCIALS: SHORT-TERM NEGATIVE

This week's notable callouts  are the MCDX municipal swap index breaking lower again, while the TED spread hits its highest level since last August.  Among US Financials, COF, AGO and MBI tightened the most week over week, while insurers MET, PRU and HIG widened the most.


Financial Risk Monitor Summary (Across 3 Durations):

  • Short-term (WoW): Negative / 2 of 10 improved / 4 out of 10 worsened / 5 of 10 unchanged
  • Intermediate-term (MoM): Positive / 5 of 10 improved / 3 of 10 worsened / 3 of 10 unchanged
  • Long-term (150 DMA): Positive / 6 of 10 improved / 3 of 10 worsened / 2 of 10 unchanged 

WEEKLY RISK MONITOR FOR FINANCIALS: SHORT-TERM NEGATIVE - SUMMARY

 

1. US Financials CDS Monitor – Swaps were mostly tighter across domestic financials, tightening for 18 of the 28 reference entities and widening for 10. 

Tightened the most vs last week: COF, MBI, AGO

Widened the most vs last week: MET, PRU, HIG

Tightened the most vs last month: JPM, COF, XL

Widened the most vs last month: PMI, RDN, GNW

 

WEEKLY RISK MONITOR FOR FINANCIALS: SHORT-TERM NEGATIVE - us cds

 

2. European Financials CDS Monitor – Banks swaps in Europe were mostly tighter, tightening for 23 of the 39 reference entities and widening for 15.  (One was flat.) 

 

WEEKLY RISK MONITOR FOR FINANCIALS: SHORT-TERM NEGATIVE - euro cds

 

3. Sovereign CDS – Sovereign CDS rose across Europe, climbing 19 bps on average last week.

 

WEEKLY RISK MONITOR FOR FINANCIALS: SHORT-TERM NEGATIVE - sov cds

 

4. High Yield (YTM) Monitor – High Yield rates fell last week, ending at 7.79, 5 bps lower than the previous week.  

 

WEEKLY RISK MONITOR FOR FINANCIALS: SHORT-TERM NEGATIVE - high yield

 

5. Leveraged Loan Index Monitor – The Leveraged Loan Index flatlined last week, ending the week at 1619 where it started.   

 

WEEKLY RISK MONITOR FOR FINANCIALS: SHORT-TERM NEGATIVE - lev loan

 

6. TED Spread Monitor – The TED spread backed up last week to its highest level in six months, ending the week at 21 versus 17.8 the prior week.

 

WEEKLY RISK MONITOR FOR FINANCIALS: SHORT-TERM NEGATIVE - ted spread

 

7. Journal of Commerce Commodity Price Index – Last week, the index held close to flat, falling just under a point to 34 by Friday.

 

WEEKLY RISK MONITOR FOR FINANCIALS: SHORT-TERM NEGATIVE - JOC

 

8. Greek Bond Yields Monitor – We chart the 10-year yield on Greek bonds.  Last week yields rose 20 bps.

 

WEEKLY RISK MONITOR FOR FINANCIALS: SHORT-TERM NEGATIVE - 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, closing at 157 on Friday, matching their prior low last November.  

 

WEEKLY RISK MONITOR FOR FINANCIALS: SHORT-TERM NEGATIVE - 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.  With Australian floods and oversupply pressuring the Index, it has fallen 30% early in the year, down 60% from its most recent peak. For the last two weeks the BDI has been bouncing off the lows.  Last week it rose 123 points to 1301. 

 

WEEKLY RISK MONITOR FOR FINANCIALS: SHORT-TERM NEGATIVE - baltic dry

 

11. 2-10 Spread – We track the 2-10 spread as a proxy for bank margins.  Last week the 2-10 spread widened very slightly to 281 bps. 

 

WEEKLY RISK MONITOR FOR FINANCIALS: SHORT-TERM NEGATIVE - 2 10

 

12. XLF Macro Quantitative Setup – Our Macro team sees the setup in the XLF as follows: 0.6% upside to TRADE resistance, -2.1% downside to TRADE support. 

 

WEEKLY RISK MONITOR FOR FINANCIALS: SHORT-TERM NEGATIVE - xlf

 

 

Joshua Steiner, CFA

 

Allison Kaptur


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - February 22, 2011


Libya remains a key focal point in capital markets as Gaddafi digs his heels in and the prices of oil and gold gain.  Asian equities extended yesterday’s losses and U.S. futures have declined from Friday’s close.  As we look at today’s set up for the S&P 500, the range is 16 points or -0.97% downside to 1330 and 0.22% upside to 1346.

 

MACRO DATA POINTS:

  • 09:00 a.m.: S&P/CaseShiller Home Price Index, December. 20 City MoM% SA est. -0.50%, prior -0.54%. 
  • 10:00 a.m.: Conference Board Consumer Confidence Index, February.  Est. +65.0, prior 60.6. 
  • 10:00 a.m.: Richmond Fed Manufacturing Index, February. Est. 18, prior 18. 
  • State Street Investor Confidence Index
  • 11:30 a.m.: 4-Week Bill Announcement
  • 11:30 a.m.: 3-Month Bill Auction
  • 11:30 a.m.: 6-Month Bill Auction
  • 01:00 p.m.: Minneapolis Federal Reserve President, Narayana Kocherlakota, speaks in Pierre, South Dakota.

 

EARNINGS/WHAT TO WATCH:

  • The regime of Muammar Qaddafi appears to be unraveling as diplomats and soldiers alike desert the leader following brutal crackdowns on protesters.  Libya holds the largest oil reserves in Africa.
  • This past week saw the earnings beat rate slip 100 bps to 69% from the week prior.
  • Moody’s changed Japan’s credit rating outlook to negative, prompted by “heightened concern that economic and fiscal policies may not prove strong enough to achieve the government’s deficit reduction target and contain the inexorable rise in debt”.

PERFORMANCE:

We have 8 of 9 sectors positive on TRADE and 9 of 9 sectors positive on TREND.

  • One day (Friday): Dow +0.59%, S&P +0.19%, Nasdaq +0.08%, Russell 2000 +0.10%
  • Month-to-date: Dow +4.203%, S&P +4.42%, Nasdaq +4.96%, Russell +6.86%
  • Quarter/Year-to-date: Dow +7.03%, S&P +6.79%, Nasdaq +6.83%, Russell +6.53%
  • Sector Performance: - Energy +0.42%, Materials +-1.11%, Consumer Disc +0.27%, Tech -0.15%, Financials +0.22%, Healthcare +0.24%, Industrials +0.28%, Consumer Spls +0.27%, Utilities +0.22%.

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: 458 (-293)  
  • VOLUME: NYSE 1162.45 (+31.78%)
  • VIX:  16.43 -0.96% YTD PERFORMANCE: -7.44%
  • SPX PUT/CALL RATIO: 2.65 from 1.18

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: 22.25
  • 3-MONTH T-BILL YIELD: 0.09%
  • 10-Year: 3.52 from 3.59

COMMODITY/GROWTH EXPECTATION:

  • CRB: 342.20 +0.06%; YTD: +2.67%  
  • Oil: 92.50 +7.31% YTD: +0.30%
  • COPPER: 440.05 -2.12%; YTD: -0.88%
  • GOLD: 1,397.15 -0.66%; YTD: -1.66%

COMMODITY HEADLINES:

  • Corn Futures Advance to Highest Level Since July 2008 on Increased Demand
  • Wool Supply From World’s Biggest Exporter To Be Tight, Shippers Group Says
  • Rubber Futures in Tokyo Decline as Much as 2.6% to 511.3 Yen Per Kilogram
  • Corn, Soybeans May Rise on Demand for U.S. Supplies, According to Survey
  • Vietnam Coffee Price Rises to Highest Since 1995, newspaper says
  • Fonterra Raises Forecast Milk Payout to Farmers on Higher Dairy Prices
  • Surging Food Costs, Unrest in Middle East May Drive Increase in Stockpiles
  • Coffee Exports From Indonesia May Be Held Level by Rainfall, Shippers Say
  • Sugar Production in India to Climb Next Year, Aiding Exports, Group Says
  • China Plans to Sell 150,000 Tons of Sugar From State Reserves on February 28th
  • Lenzing of Austria Said to Plan $684 Million Share Offering by Late April
  • IOI Corp. Leads Malaysian Plantation Stocks Lower as Palm Oil Futures Drop.

 

CURRENCIES:

  • EURO: 1.3666 +0.26%
  • DOLLAR: 77.835 +0.20%

 

EUROPEAN MARKETS:

  • FTSE 100: (0.97%); DAX: (0.31%); CAC 40: (1.47%)
  • Mersh Says ECB May Warn Next Week of Rising Inflation Risks in Euro Area
  • Barclays, Santander Are "Driven Out" of Russia as State-Owned Banks Expand
  • Papandreou Urges Merkel to Support Debt Buybacks, Changes to Rescue Fund
  • BOE Officials May GIve Signals on Momentum Toward Interest-Rate Increase

 

ASIAN MARKTES:

  • Nikkei: (1.78%); Hang Seng: (2.11%); Shanghai Composite: (-2.62%)
  • Oil, Bonds Jump as Stocks, Futures Drop on Libya; Kiwi Weakens After Quake
  • China Said to Order Banks to Assign Greater Risk to Local-Government Loans
  • Japan Debt Outlook Lowered by Moody’s on ‘Inexorable’ Debt
  • Honda Cutys Number of Directors, Echoing Toyota's Management Reorganization

THE HEDGEYE DAILY OUTLOOK - levels and trends 222

 

Howard Penney

Managing Director


Holly to Pay $2.9 Billion for Frontier Oil in All-Stock Deal


Early Look

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MACAU: NICE FOLLOW THROUGH FROM CNY

Raising our February rev target to HK$18-19BN

 

 

As a result of very strong volume during the Chinese New Year celebration and surprising follow through in the last week, we are upping our February forecast.  We are now projecting full month total gaming revenue of HK$18.0-19.0 billion (32-40%) versus our previous estimate of HK$17.0-18.0 billion.  Table revenues were HK$14.0 through February 20th implying a surprisingly strong post CNY table revenue per day of HK$609 million.

 

In terms of market share, MGM had a huge week, pushing its February table share up to 11.1% (it was only 9.4% as of last week), in-line with its 3 month average.  LVS lost a lot of share in the past week, down from 18.3% as of 2/13 to 16.8% through 2/20.

 

MACAU: NICE FOLLOW THROUGH FROM CNY - MACAU333

 

Galaxy slipped further back from its poor showing as of last week and this appears to be a combination of lagging VIP win % and a lack of hotel room capacity to take advantage of the busy period. This will obviously change with the opening of Galaxy Macau.

 

There have been a few changes to the gaming floors around town the past week.  Sands removed their only Craps tables and the Venetian has increased to 3 craps tables.  Sands are also down 115 slot machines as a large area directly beside the stage is cordoned off and under renovations.

 

MGM are also down about 80 slots while renovations continue at the back of the casino.  Also being renovated is a VIP room right at the back of the casino beside the entrance from the shopping area.  All tables have been removed and work is in progress.  The Lions bar remains untouched and curtained off.

 

The renovations at Encore are complete with 4 additional gaming rooms over 4 floors replacing corner suites.  Each room has 6 tables, 4 in the main area and two separate VIP rooms with one table each for a total of 24.

 


CHART OF THE DAY: Global Inflation Fully Exposed to American Policy

 

 

CHART OF THE DAY: Global Inflation Fully Exposed to American Policy -  chart


IF We Debauch

This note was originally published at 8am on February 17, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“We are firmly convinced that monetary and fiscal policy will continue to debase the dollar.”

-Ted Kelly (CEO of Liberty Mutual)

 

Liberty Mutual is an American insurance company that was founded in 1912 and currently sits at #71 on the Fortune 500 list. It has over 45,000 employees servicing global insurance products worldwide and has over $100B in consolidated assets. Their CEO made the aforementioned comment in a Bloomberg article yesterday by Noah Buhayar. No, Liberty didn’t pay me an advertising dollar for this paragraph.

 

Unlike The Ber-nank attempting to trade US Treasury bonds, this isn’t Ted Kelly’s first rodeo. He’s been CEO of Liberty Mutual since 1998 and his job is to manage bond market and duration risk. On the topic of real-time risk management, he went on to add that, “we are positioning our portfolio and our business to respond if inflation emerges.”

 

Notice Kelly didn’t say “when inflation emerges.” He said “IF” - and that’s a critical differentiator between a proactive risk manager (a portfolio manager) and a reactive one (a professional politician). Kelly isn’t alone in this line of thinking. Almost every world class risk manager in the world understands that governments that debauch their fiat currencies will impose an inflation tax on their citizenry.

 

The US Dollar Index backed off hard right where it should have yesterday. It closed down another -0.54%, keeping it below its intermediate-term TREND line of $78.98. Call me lucky or call me right in understanding how to manage risk around the price of the world’s reserve currency. Since starting the Hedgeye Portfolio 3 years ago, I’ve gone 18 for 18 in making profitable long/short calls on the US Dollar (UUP).

 

I’m not calling this out to pump my own tires. I’m calling this out so that the pundits who are out there cheering on Bernanke’s stock market inflation policy pay attention. Making calls on US Dollar declines helped predict bubbles in both US stocks (2008) and US bonds (2010). Sadly, unless President Obama starts listening to the likes of Ted Kelly, Bill Gross, and Jim Grant, it may very well take another US Dollar currency crisis to stop these Big Keynesian Central Planners in their tracks.

 

As a reminder, we first made our call on Global Inflation Accelerating in October of 2010, and from here on in we’ll be acutely monitoring the slope of inflation accelerating or decelerating with the following assumptions:

  1. IF we debauch the US Dollar, Global Inflation will accelerate
  2. IF we stabilize the US Dollar, Global Inflation will decelerate

That’s it. That’s the deep simplicity we’ve found in our multi-factor, multi-duration model. Remember, in principle Chaos Theory is grounded in uncertainty – so every risk management exercise starts with IF and every decision follows the THEN that’s driving correlation risk.

 

On our most immediate-term duration, some of the correlation risk associated with US Dollar Debauchery has burned off in the last 2 weeks. That’s primarily because the US Dollar was UP for the first week out of the last four. IF we debauch it from here, THEN that will change. Correlation risk gets fired up when the Buck Burns.

 

On the heels of yesterday’s US Dollar decline, here were some important Global Macro reactions to consider:

  1. Commodities – CRB Commodities Index inflated back up to its YTD weekly closing high level of 338
  2. Bond Yields – US Treasury Yields on the short-end of the curve popped back up to +0.84%
  3. Emerging Markets – Asian Equities ended their 3-day rally to lower-highs

Again, this isn’t complicated. Debauched Dollar is bullish for inflation (Commodities) and bearish for Bonds and Emerging Markets…

 

As you can see in the Hedgeye Portfolio (attached), alongside re-shorting the US Dollar this week, we re-shorted the following Macro positions:

  1. Indian Equities (IFN)
  2. Emerging Market Equities (EEM)
  3. Japanese Equities (EWJ)

Now as sure as the sun rises in the East, you can bet your Madoff that The Ber-nank won’t be talking about the interconnectedness that his Central Planning Policies and a Debauched Dollar have on Asian and Emerging Market currencies and/or their exports.

 

Let me illustrate this point (generally) with the example of how the USD is affecting South Korea:

  1. South Korean Won strength (born out of US Dollar weakness) = hurts SK Exports (50% of GDP)
  2. South Korean Import Price Inflation zoomed to +14.1% in January vs +12.7% in December = hurts SK Exporter margins
  3. South Korean Equities (KOSPI) have dropped every day this week and are now down -3.6% for 2011 YTD

South Korea’s stock market isn’t what we’d call an “emerging market.” Per capita GDP is 10x that of China and it’s an economy levered to both US Tech and Industrial demand (bearish leading indicators?). Since it’s the world’s 12th largest economy, the KOSPI recently moving to bearish TRADE and TREND in our risk management model is something worth paying attention to as you watch Bernanke and Geithner continue to erode the credibility of America’s currency today.

 

My immediate term support and resistance lines for the SP500 are now 1324 and 1339, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

IF We Debauch - ee1

 

IF We Debauch - ee2


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