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European Risk Monitor: Bank Swaps Tighten Ahead of EU Summit

Positions in Europe: Short Italy (EWI); Short Spain (EWP)

 

Below we include our weekly Risk Monitor for European bank CDS. Banks swaps in Europe were mostly tighter week-over-week, tightening for 32 of the 39 reference entities and widening for 7.

 

European capital markets continue to be volatile given existing global concerns (in particular the results of the earthquake and tsunami in Japan and unrest in MENA) and domestic issues (existing sovereign debt imbalances across states; indecision from the BoE and ECB on adjusting monetary policy to reflect inflation pressures; the second round of Bank Stress Tests; and the likely consummation of dovish agreements at the comprehensive EU Summit this week (March 24-25) – in short, a larger and more generous social net to bailout/protect ailing member states).

 

To the last point, European equity markets could likely trade with a positive bias anticipating that the EU Summit will calm near-term bailout/default fears. In particular we’ve highlighted Portugal as one country on watch as it goes up against a hefty schedule of bonds coming due over the next 4 months (see our portal: Portugal Shakes on Debt Dues on 3/16).

 

In the Hedgeye Virtual Portfolio we’re short Italy via the etf EWI and Spain via EWP. Our position remains that despite initial attempts at austerity, these two countries should break longer term under their bloated sovereign debt and deficit imbalances. In both cases, we tactically shorted the etfs on a bounce last week. We view the EUR-USD currently overbought, with immediate term TRADE levels of $1.39 - $1.41.

 

Matthew Hedrick

Analyst

 

European Risk Monitor: Bank Swaps Tighten Ahead of EU Summit - cds


GREECE: DRAFT GAMING BILL SUBMITTED TO PARLIAMENT

Update on the Greek VLT Bill.

 

 

The Greece finance ministry unveiled the draft gaming law late last Friday.  The draft details an international tender where each market participant will be able to acquire one license.  An exception may be held for OPAP due to its monopoly agreement it has with the Greek government.  Any unsold licenses will be evenly distributed to those that would already have received a license.  There will be a 30% gross profit tax paid to the government on a quarterly basis.  In addition, a 10% tax on players’ gains will be imposed both in VLTs and Internet betting.  The minimum payout will be 80%.  The gaming regulator that will be established will set up a live monitoring system to which every VLT and internet site will be permanently connected.

 

The ministry reiterated that the bill will earn 500MM euros (US$698 MM) from license fees and 200MM euros (US$280MM) annually from tax collections.  Currently there are over 250 betting websites, ~20,000 slot machines and ~150,000 computers operating gaming programmes illegally in Greece, said the ministry.

 

What are the next steps (with tentative dates):

  1. Passage of bill in Parliament (Late 2011)
  2. Bill sent to President Papoulias for promulgation and publication in the Government Gazette (Late 2011/early 2012)
  3. Setup of new gaming supervising committee (early 2012)
  4. Tender process (2012-2013)

THE M3: CPI, GALAXY EARNINGS DATE

The Macau Metro Monitor, March 21, 2011

 

 

CONSUMER PRICE INDEX FOR FEBRUARY 2011 DSEC

Feb CPI rose 4.7% YoY and 0.90% MoM.

 

DATE OF BOARD MEETING Galaxy Entertainment

The board of directors of Galaxy Entertainment Group will discuss FY 2011 results on March 30.

 

 

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WEEKLY RISK MONITOR FOR FINANCIALS: SPREADS TIGHTENING

This week's notable callouts include European bank and sovereign swaps tightening and the 2-10 spread tightening.  


Financial Risk Monitor Summary (Across 3 Durations):

  • Short-term (WoW): Neutral/ 4 of 11 improved / 4 out of 11 worsened / 3 of 11 unchanged
  • Intermediate-term (MoM): Negative/ 3 of 11 improved / 5 of 11 worsened / 3 of 11 unchanged
  • Long-term (150 DMA): Positive / 5 of 11 improved / 4 of 11 worsened / 2 of 11 unchanged

WEEKLY RISK MONITOR FOR FINANCIALS: SPREADS TIGHTENING - summary

 

1. US Financials CDS Monitor – Swaps were mixed across domestic financials, widening for 16 of the 28 reference entities and tightening for 12. 

Tightened the most vs last week: JPM, WFC, BAC

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

Tightened the most vs last month: UNM, MMC, WFC

Widened the most vs last month: RDN, MET, XL

 

WEEKLY RISK MONITOR FOR FINANCIALS: SPREADS TIGHTENING - us cds

 

2. European Financials CDS Monitor – Banks swaps in Europe were mostly tighter, tightening for 32 of the 39 reference entities and widening for 7.

 

WEEKLY RISK MONITOR FOR FINANCIALS: SPREADS TIGHTENING - euro cds

 

3. Sovereign CDS – Sovereign CDS tightened across Europe, falling 33 bps on average last week as Greece backed off its highs. 

 

WEEKLY RISK MONITOR FOR FINANCIALS: SPREADS TIGHTENING - sov cds

 

4. High Yield (YTM) Monitor – High Yield rates rose slightly last week, ending at 7.81, 2 bps higher than the previous week.  

 

WEEKLY RISK MONITOR FOR FINANCIALS: SPREADS TIGHTENING - high yield

 

5. Leveraged Loan Index Monitor – The Leveraged Loan Index fell last week to end the week at 1599.   

 

WEEKLY RISK MONITOR FOR FINANCIALS: SPREADS TIGHTENING - lev loan

 

6. TED Spread Monitor – The TED spread hit the highest level since last August, ending the week at 23.7 versus 23.2 the prior week.

 

WEEKLY RISK MONITOR FOR FINANCIALS: SPREADS TIGHTENING - ted spread

 

7. Journal of Commerce Commodity Price Index – Last week, the JOC index hit its lowest level since January, the rose to end the week 1 point down from its prior level at 27.5.

 

WEEKLY RISK MONITOR FOR FINANCIALS: SPREADS TIGHTENING - JOC

 

8. Greek Bond Yields Monitor – We chart the 10-year yield on Greek bonds.  Last week yields fell 52 bps.

 

WEEKLY RISK MONITOR FOR FINANCIALS: SPREADS TIGHTENING - 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 131 on Friday.  

 

WEEKLY RISK MONITOR FOR FINANCIALS: SPREADS TIGHTENING - 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.  Early in the year, Australian floods and oversupply pressured the Index, driving it down 30%. Since then it has bounced off the lows and is now steadily climbing.  Last week it rose 216 points to 1346. 

 

WEEKLY RISK MONITOR FOR FINANCIALS: SPREADS TIGHTENING - baltic dry

 

11. 2-10 Spread – We track the 2-10 spread as a proxy for bank margins.  Last week the 2-10 spread tightened slightly to 276 bps. 

 

WEEKLY RISK MONITOR FOR FINANCIALS: SPREADS TIGHTENING - 2 10

 

12. XLF Macro Quantitative Setup – Our Macro team sees the setup in the XLF as follows:  2.1% upside to TRADE resistance, 3.0% downside to TRADE support.

 

WEEKLY RISK MONITOR FOR FINANCIALS: SPREADS TIGHTENING - xlf

 

 

Joshua Steiner, CFA

 

Allison Kaptur


CHART OF THE DAY: U.S. Dollar Debauchery = The Inflation

 

 

CHART OF THE DAY: U.S. Dollar Debauchery = The Inflation -  chart


Your Problem

“The dollar is our currency, but it’s your problem.”

-John Connally

 

That’s an interesting way to look at the world’s reserve currency; particularly if you’re the United States Treasury Secretary. That’s where John Connally Jr. found himself for a very short period of time (1). Hedgeye economic history does not remember him or Richard Nixon’s political strategy to devalue the dollar well.

 

In the end, I don’t think history will remember US Treasury Secretaries Hank Paulson or Tim Geithner well either. At least not when considering them alongside this critical score. All pleasantries associated with how they say they saved us from the crisis they helped create aside, the price in the US Dollar Index chart doesn’t lie; professional politicians absolving themselves from it as an accountability metric do.

 

Storytellers like Paulson and Geithner would have you believe that the US Dollar’s shining moments come to Bear (pardon the pun) when the world is flying for “safety.” And while it is true that if you burn the credibility of your country’s currency to a low enough level that it will eventually bounce (2008), amidst fear enveloping world markets last week the US Dollar went no bid…

 

Last week, the US Dollar Index was down another -1.38% week-over-week, closing at a fresh 2011 YTD low of $75.72.

 

For those of you keeping score:

  1. The USD is down for 9 of the last 12 weeks as the USA printed its highest monthly deficit on record in February ($223B)
  2. The USD has lost -7% of its value since the 1st week of January when it became clear that mid-term election promises would be broken
  3. The USD is down -11% since Geithner took office as the 75th United States Secretary of the Treasury

So, if the idea is to try what the French (1950s), British (1960s) or Japanese (1990s) have already tried – devalue your way to prosperity – it looks like Timmy is right on plan.

 

You don’t need to watch Charles Ferguson’s documentary Inside Job (2010) to understand the basic concept here. We’ve berated this point for 3 years and now you have socially transcending technologies (YouTube) making what drives The Keynesian Kingdom easy to see.

 

As of this morning’s latest viewership readings, here’s another way to look at the score:

  1. “Quantitative Easing Explained” (The Bernank) = 4,371, 553 views (http://www.youtube.com/watch?v=PTUY16CkS-k)
  2. “Every Breath You Take” (Columbia Business School) = 1,725,495 views (http://www.youtube.com/watch?v=3u2qRXb4xCU)

So, The People get it. They trust the US Government on financial matters as little as they ever have (that’s saying a lot). They know that US Dollar Debauchery = The Inflation.

 

But does Wall Street get it? We think it’s starting to. We can see it in the math.

 

Consider the following 6-week correlations:

  1. USD vs WTI Crude Oil = -0.88
  2. USD vs CRB Commodities Index = -0.75
  3. USD vs SP500 = +0.58

In summary, what these correlations have been telling you for the last 6 weeks is that Burning The Buck is driving The Inflation UP and the US stock market DOWN. This is interesting, but not surprising … particularly if you believe that the causality behind this correlation is primarily Big Government Intervention (deficit spending and dollar devaluation).

 

Since the US Dollar and stocks are developing a POSITIVE correlation now (like they did in Q2/Q3 of 2008), and the US Dollar and Commodity prices continue to have very high NEGATIVE correlations (like they did in Q2/Q3 of 2008), what should we be proactively managing risk towards?

 

Well, I think the scenario analysis is pretty straightforward:

 

1.       US Dollar DOWN from here

= immediate-term TRADE upside in the price of oil to $107/barrel; intermediate-term TREND upside to $109/barrel (+7%)

= immediate-term TRADE upside in Commodities (CRB Index) to 365; intermediate-term TREND upside to 373 (+6%)

= immediate-term TRADE downside in SP500 to 1251; intermediate-term TREND downside to 1231 (-4%)

 

2.       US Dollar UP from here

= immediate-term TRADE downside in WTI Crude Oil to $96/barrel; intermediate term TREND downside to $91/barrel (-11%)

= immediate term TRADE downside in Commodities (CRB Index) to 348; intermediate term TREND downside to 333 (-5%)

= immediate term TRADE upside in SP500 to 1312; intermediate-term TREND upside to 1352 (+6%)

 

I also think that The Keynesian Kingdom of stock market cheerleaders should see this as a short-term solution. The best way to DEFLATE The Inflation and have guys like me get bullish on another US stock market rally is to have a Strong US Dollar policy.

 

As for the US deficit and debt problems that stand in the way of having the international investment community trust American politicians and the US currency again – well, Mr. President, I guess it’s your problem.

 

My immediate-term support and resistance lines for the SP500 are now 1276 and 1292, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Your Problem - Chart of the Day

 

Your Problem - Virtual Portfolio


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.65%
  • SHORT SIGNALS 78.63%
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