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European Risk Monitor: Debt’s Drag

Position in Europe: Long British Pound (FXB)

 

As is typical for Mondays, we release our weekly European Risk Monitor. With European markets closed today for Easter holiday, the theme for this week may be wait and watch. Greek risk continues to blow out (see sovereign cds and bank swap charts below) as the contagion threat from peripheral debt continues to drag.  A bailout of Portugal (~ €50-90 Billion) is estimated for mid-May and this weekend’s news flow suggests that despite the massive gain of the euro skeptic/anti-bailout True Finns party in Finland last week, the new government is likely to agree to a bailout in Portugal.

 

Finnish Finance Minister Jyrki Katainen, who is set to lead the new government, said that there would be a united voice from Finland on its bailout stance and that he personally was in favor of a bailout for Portugal. Interesting, the European Commission’s top economic official, Olli Rehn, is a Finn, so we could see his Brussels influence should disunion on the bailout issue present itself in the coming weeks. In any case, the statements should calm some market fears.

 

Greece continues to flash a negative divergence among the PIIGS.  The Greek 10YR yield is at a new all-time high of 14.90% as is its sovereign cds at 1442bps, or +84bps day-over-day (see chart directly below). Our European Financials CDS Monitor shows that bank swaps in Europe were mostly wider week-over-week, widening for 25 of the 39 reference entities and tightening for 14 (chart below).

 

European Risk Monitor: Debt’s Drag - a. sov cds

 

The EUR-USD also remains strong.  Our immediate term TRADE range is $1.44 - $1.46 and we continue to caution on the headline risk associated with this trade. We stress that the Euro’s advance has come primarily to USD weakness. The US Dollar Index is down for 13 out of the last 17 weeks, and has lost -8.6% of its intermediate-term value in the last 4 months. However, with the EUR-USD bumping up against our resistance level, and the ever present threat of sovereign debt contagion, this is a trade to monitor acutely. 

 

We remain long the British Pound via the etf FXB in the Hedgeye Virtual Portfolio and bullish on the impact of UK austerity on the currency. The GBP-USD is at $1.65 this morning, up +1.1% week-over-week or +5.8% year-to-date.

 

Matthew Hedrick

Analyst

 

European Risk Monitor: Debt’s Drag - bank swaps


THE M3: LVS COUNTERCLAIM AGAINST JACOBS; WAITING ON COTAI APPEAL; S'PORE CPI

The Macau Metro Monitor, April 25, 2011

 

 

LAS VEGAS SANDS STEPS UP COUNTERATTACK AGAINST FORMER EXECUTIVE Las Vegas Sun

Last week, Las Vegas Sands filed a counterclaim against Steve Jacobs which alleges the following:

  • Jacobs threatened to go public with allegations that Adelson had bribed or attempted to bribe Macau's CEO unless he was paid money to which he was not entitled.  Jacobs knew these statements were false and that they were made recklessly and with malice "in furtherance of his scheme to extort money to which he was not entitled.
  • Jacobs violated a noncompetition agreement Sands China had entered into with its parent Las Vegas Sands in which Sands China was prohibited from involvement in any gaming business outside of a "Restricted Zone" that included the People’s Republic of China, Macau, Hong Kong and Taiwan.  He violated this agreement by publicly announcing Sands China would be pursuing casino businesses outside of the restricted zone in Japan and elsewhere.  Furthermore, LVS claimed Jacob's Japan disclosure hurt its "prospective business relationship with necessary 3rd parties in development of the Japanese market."
  • Without the authorization from Sands China's board, Jacobs commissioned an investigative report by consulting firm International Risk Ltd. regarding Macau public officials, a report which he kept at his home.
  • Jacobs refused to end gambling junket contracts with crime figures such as Cheung Chi Tai (CCT) even when told to do so by Michael Leven and Adelson.

With no settlement in sight, attorneys for both sides filed a status report with the court indicating they’re proceeding toward a June 2012 trial on Jacobs’ lawsuit.

 

SANDS AWAITING COTAI SNUB APPEAL DECISION Sands China, Macau Daily Times

According to Sands China's 2010 annual report sent to the HK Stock Exchange, Sands China is still waiting for the Court of Second Instance to make a decision over its appeal of the Macau government's decision to reject its application for Sites 7 & 8.  Sands also mentioned, “Should we win our appeal, it is still possible for the Chief Executive of Macau [Fernando Chui Sai On] to again deny the land concession based upon public policy considerations.”

 

SINGAPORE'S MARCH CPI UP 5% ON-YEAR, 0.1% ON-MONTH Channel News Asia

S'pore CPI rose 5% YoY and 0.1% MoM in March, in-line with forecasts.  The Department of Statistics (DOS) said the higher costs of housing, clothing and footwear, as well as "recreation and others" was partially offset by the lower cost of transport.


WEEKLY RISK MONITOR FOR FINANCIALS: EUROPEAN RISK CONTINUES TO DOMINATE

This week's notable callouts include Greek bond yields and CDS continuing their sharpest move since the crisis last spring.

Financial Risk Monitor Summary (Across 3 Durations):

  • Short-term (WoW): Negative / 1 of 11 improved / 4 out of 11 worsened / 5 of 11 unchanged
  • Intermediate-term (MoM): Positive / 4 of 11 improved / 3 of 11 worsened / 4 of 11 unchanged
  • Long-term (150 DMA): Neutral / 4 of 11 improved / 4 of 11 worsened / 3 of 11 unchanged

 

WEEKLY RISK MONITOR FOR FINANCIALS: EUROPEAN RISK CONTINUES TO DOMINATE - summary

 

1. US Financials CDS Monitor – Swaps were mostly tighter across domestic financials, tightening for 21 of the 28 reference entities and widening for 7. 

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

Widened the most vs last week: PMI, MTG, RDN

Tightened the most vs last month: ACE, XL, AGO

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

 

WEEKLY RISK MONITOR FOR FINANCIALS: EUROPEAN RISK CONTINUES TO DOMINATE - us cds

 

2. European Financials CDS Monitor – Banks swaps in Europe were mixed to widened, widening for 25 of the 39 reference entities and tightening for 14.

 

WEEKLY RISK MONITOR FOR FINANCIALS: EUROPEAN RISK CONTINUES TO DOMINATE - euro cds

 

3. European Sovereign CDS – Sovereign CDS continued to rise sharply across Europe as Greek CDS hit another all-time high, up 18% WoW.

WEEKLY RISK MONITOR FOR FINANCIALS: EUROPEAN RISK CONTINUES TO DOMINATE - sov cds

 

4. High Yield (YTM) Monitor – High Yield rates fell slightly last week, ending at 7.78, roughly 1 bps lower than the previous week.  

 

WEEKLY RISK MONITOR FOR FINANCIALS: EUROPEAN RISK CONTINUES TO DOMINATE - high yield

 

5. Leveraged Loan Index Monitor – The Leveraged Loan Index fell very slightly last week to end the week at 1620.   

 

WEEKLY RISK MONITOR FOR FINANCIALS: EUROPEAN RISK CONTINUES TO DOMINATE - lev loan

 

6. TED Spread Monitor – The TED spread rose last week, ending the week at 22.3 versus 21.4 the prior week.

 

WEEKLY RISK MONITOR FOR FINANCIALS: EUROPEAN RISK CONTINUES TO DOMINATE - ted spread

 

7. Journal of Commerce Commodity Price Index – Last week, the JOC index fell to end the week at 32.1, 2.9 points lower than the prior week.

 

WEEKLY RISK MONITOR FOR FINANCIALS: EUROPEAN RISK CONTINUES TO DOMINATE - JOC

 

8. Greek Bond Yields Monitor – We chart the 10-year yield on Greek bonds.  Last week yields ripped 107 bps after jumping 93 bps the prior week.

 

WEEKLY RISK MONITOR FOR FINANCIALS: EUROPEAN RISK CONTINUES TO DOMINATE - 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.  Last week spreads fell to 118. 

 

WEEKLY RISK MONITOR FOR FINANCIALS: EUROPEAN RISK CONTINUES TO DOMINATE - markit

 

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% before bouncing off the lows.  Last week it hit its lowest level since early March, falling to 1254. 

 

WEEKLY RISK MONITOR FOR FINANCIALS: EUROPEAN RISK CONTINUES TO DOMINATE - 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 3 bps to 274 bps. 

 

WEEKLY RISK MONITOR FOR FINANCIALS: EUROPEAN RISK CONTINUES TO DOMINATE - 2 10

 

12. XLF Macro Quantitative Setup – Our Macro team sees the setup in the XLF as follows:  0.4% upside to the bottom of the TRADE range, 1.8% downside to TREND support.

 

WEEKLY RISK MONITOR FOR FINANCIALS: EUROPEAN RISK CONTINUES TO DOMINATE - LF

 

 

Joshua Steiner, CFA

 

Allison Kaptur


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.

TALES OF THE TAPE: DRI, GMCR, MCD, SBUX, PEP, MSSR

News items from the last few days as well as price action from last Thursday.  Also included is our fundamental view on select names.

  • DRI was fined over $25k in back-wages and $30k in fines after an investigation by the U.S. Labor Wage and Hour Division found that 140 current and former servers at the company’s Mesquite, Texas, Olive Garden were not properly paid.
  • GMCR announced that the Mr. Coffee single serve brewer has partnered with Keurig technology, joining the GMCR family of brewers.
  • MCD is facing a firestorm of bad publicity after a woman was badly beaten in an altercation at a Baltimore MCD restaurant that was filmed by a staff member and allegedly shows staff failing to aid the victim.  The video of the incident has gone viral.
  • SBUX is facing its own youtube risk today as a video surfaced of a rodent walking amongst the syrups on a counter inside the Terra Nova, MD, Starbucks.
  • PEP’s CFO has criticized US policymakers’ focus on “core” inflation, arguing that it overlooks the impact of rising food costs.
  • There is a seismic shift under way in how franchisees approach balance in franchisee/franchisor relationships. It is a multi-pronged strategy headed by the three-year-old Coalition of Franchisee Associations (CFA) that utilizes market forces, collective bargaining and possible legislation.
  • MSSR has been offered an extension of the previously announced tender offer from Tilman Fertitta to acquire all of the outstanding common shares of MSSR for $9.25 per share.  The offer has now been extended until midnight on May 31, 2011. 

TALES OF THE TAPE: DRI, GMCR, MCD, SBUX, PEP, MSSR - stocks 425

 

Howard Penney

Managing Director


The Case of the Missing Stimulus

This note was originally published at 8am on April 20, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“The case has, in some respects, been not entirely devoid of interest."

-Sherlock Holmes

 

Sherlock Holmes is the fictional detective created by Scottish author and physician Sir Arthur Conan Doyle.   Doyle based the character of Sherlock Holmes on a number of prominent physicians of the late 1880s.  Indeed, criminal detective work certainly has parallels to a medical examination.  The role of the physician is to provide a diagnosis after thoroughly collecting information both from and about the patient.  Great investment research incorporates a similar process.

 

In our daily morning research process, each Sector Head provides relevant facts in our internal research meeting, which underscores our moves in the Virtual Portfolio that day (in combination with our quantitative models).  Quite often, which makes sense when you get enough”Type A”  Hedgeyes in a room, we have much broader discussions.  A few weeks back our Financials Sector Head Josh Steiner asked, effectively, whether the federal budget deficit could be narrowed by just reversing the stimulus.  That is, shouldn’t compares on stimulus spending get much easier, which would effectively narrow the deficit?  As usual, a great question.

 

To back up, the American Recovery and Reinvestment Act of 2009 (“ARRA”) was passed by the 111th U.S. Congress in February 2009.   According to many reports, the act was nominally worth some $785 billion to the economy.  Roughly 1/3 of this came in the way of tax cuts, while almost 2/3s came in the way of increased government spending. 

 

The philosophical rationale for ARRA, according to our friends at Wikipedia, was as follows:

 

“The stimulus was intended to create jobs and promote investment and consumer spending during the recession. The rationale for the stimulus comes out of the Keynesian economic tradition that argues that government budget deficits should be used to cover the output gap created by the drop in consumer spending during a recession.”

 

Seems simple enough, even for a hockey head like myself. 

 

Interestingly, if we look at government spending in the 2008 – 2010 period we can actually see the impact of the stimulus act on government ledgers.  In fact, according to usgovernmentspending.com the U.S. federal government spent $2.98 trillion in 2008 and $3.59 trillion in 2010.  So, the net increase over this period was just over $600 billion, which roughly equates to the spending portion of The Stimulus.

 

In theory, Dear Watson, there then should then be a step down in spending as ARRA, or The Stimulus, winds down and begins to compare against itself. Interestingly, in 2011 federal government spending is actually expected to step up to $3.61 trillion!

 

The long run compounded annual growth rate of federal government spending from 1990 to 2007 is 4.47%.  If we apply this growth rate to the 2008 – 2011 period, 2011 normalized government spending on that basis would be $3.42 trillion, almost $200 billion less than what the government will actually spend and roughly one-third the size of ARRA, or The Stimulus. So, where did the stimulus go? Confused? I certainly am, but it seems that cutting government spending is not as simple as favorable compares against a “one-time” spending program.

 

But on to a more interesting case, that of today’s global macro investment outlook.  While Keith is enjoying Disney World with his two little risk managers, Jack and Callie, the Hedgeye Research Juggernaut continues to grind.  Three key data points to call out this morning are as follows:

 

1.  Europe – Overseas on the continent, equity indices are rallying hard this morning up almost 2% across the board with the FTSE and DAX leading the way.  Interestingly sovereign bond market are flashing a different signal as bond yields continue to rise in the PIIG nations and both Spain and Portugal are selling debt at much higher rates than even three weeks ago.

 

2.  Asia – Asian equity markets are also positive across the board, with China the clear negative divergence up only 27 basis points.  The noteworthy callout from Asia is the following report: “A senior Hong Kong monetary official told The Wall Street Journal on Tuesday that China's central bank is "actively considering" new rules that would make it easier to bring yuan funds raised offshore back onto the Chinese mainland.” This is positive for the long position we are holding in the Chinese Yuan in the Virtual Portfolio.

 

3.  Technology earnings – We are long the technology sector in the Virtual Portfolio via the etf XLK and are seeing serious fundamental support this morning from a number of key technology bell weathers.  In fact, Intel, IBM, Juniper Networks, and VMware all exceeded analyst expectations.  The results suggest that businesses are spending again. That said, IBM is trading lower as contract signings, an indicator of future demand, were less than expected.

 

Before I let you get back to your detective work this morning, I’ll leave you with one last quote from Sherlock Holmes:

 

“How often have I said to you that when you have eliminated the impossible, whatever remains, however improbable, must be the truth?”

 

Indeed.

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Managing Director

 

The Case of the Missing Stimulus - Chart of the Day

 

The Case of the Missing Stimulus - 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%
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