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WEEKLY RISK MONITOR FOR FINANCIALS: LITTLE CHANGE WEEK OVER WEEK

This week's notable callouts include Greek bond yields continuing upward and commodity prices falling.


Financial Risk Monitor Summary (Across 3 Durations):

  • Short-term (WoW): Positive / 3 of 11 improved / 2 out of 11 worsened / 6 of 11 unchanged
  • Intermediate-term (MoM): Neutral / 4 of 11 improved / 4 of 11 worsened / 3 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: LITTLE CHANGE WEEK OVER WEEK - summary

 

1. US Financials CDS Monitor – Swaps were mostly tighter across domestic financials, tightening for 25 of the 28 reference entities and widening for 3. 

Tightened the most vs last week: PMI, RDN, ALL

Widened the most vs last week: MBI, AGO, MS

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

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

 

WEEKLY RISK MONITOR FOR FINANCIALS: LITTLE CHANGE WEEK OVER WEEK - us cds

 

2. European Financials CDS Monitor – Banks swaps in Europe were mostly tighter, tightening for 31 of the 39 reference entities and widening for 8.

 

WEEKLY RISK MONITOR FOR FINANCIALS: LITTLE CHANGE WEEK OVER WEEK - euro cds

 

3. European Sovereign CDS – Greek CDS reversed their meteoric rise in the middle of last week, leading the overall average to flat for the week (down 2 bps).    

WEEKLY RISK MONITOR FOR FINANCIALS: LITTLE CHANGE WEEK OVER WEEK - sov cds

 

4. High Yield (YTM) Monitor – High Yield rates fell last week, ending at 7.66 versus 7.78 the prior week.  

 

WEEKLY RISK MONITOR FOR FINANCIALS: LITTLE CHANGE WEEK OVER WEEK - high yield

 

5. Leveraged Loan Index Monitor – The Leveraged Loan Index rose slightly last week to end the week at 1621.   

 

WEEKLY RISK MONITOR FOR FINANCIALS: LITTLE CHANGE WEEK OVER WEEK - lev loan

 

6. TED Spread Monitor – The TED spread rose last week, ending the week at 23.8 versus 22.3 the prior week.

 

WEEKLY RISK MONITOR FOR FINANCIALS: LITTLE CHANGE WEEK OVER WEEK - ted spread

 

7. Journal of Commerce Commodity Price Index – Last week, the JOC index fell to end the week at 28.3, 3.8 points lower than the prior week.

 

WEEKLY RISK MONITOR FOR FINANCIALS: LITTLE CHANGE WEEK OVER WEEK - JOC

 

8. Greek Bond Yields Monitor – We chart the 10-year yield on Greek bonds.  Last week yields jumped a further 76 bps despite the mid-week pullback.

 

WEEKLY RISK MONITOR FOR FINANCIALS: LITTLE CHANGE WEEK OVER WEEK - 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 six 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. We track the 14-V1.  Last week spreads fell to 112 from 123. 

 

WEEKLY RISK MONITOR FOR FINANCIALS: LITTLE CHANGE WEEK OVER WEEK - 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, then rebounded slightly to 1269. 

 

WEEKLY RISK MONITOR FOR FINANCIALS: LITTLE CHANGE WEEK OVER WEEK - 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 6 bps to 268 bps. 

 

WEEKLY RISK MONITOR FOR FINANCIALS: LITTLE CHANGE WEEK OVER WEEK - 2 10

 

12. XLF Macro Quantitative Setup – Our Macro team sees the setup in the XLF as follows:  0.6% upside to TRADE resistance, 1.4% downside to TREND support.

 

WEEKLY RISK MONITOR FOR FINANCIALS: LITTLE CHANGE WEEK OVER WEEK - XLF

 

 

Joshua Steiner, CFA

 

Allison Kaptur




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Dangerous Knowledge

“A little knowledge is dangerous. So is a lot.”

-Albert Einstein

 

I have a tremendous amount of respect for what Einstein’s independent thinking did for this world, and I love that risk management quote. No matter what you do or do not know this morning, there’s this interconnected Global Macro market’s last price.

 

US Dollar driven correlation-risk to currency, commodity, and stocks market prices is running at its highest level since Q2 of 2008. While it’s Dangerous Knowledge to have marked-to-market models on your desktop to help you price this real-time risk, it’s doubly dangerous to summarize the uncertainty associated with this risk with partisan politics.

 

Since neither the Manic Media nor 90% of Washington/Wall Street got what a Crashing Currency meant in Q2 of 2008, we don’t expect consensus to provide any proactive thought leadership on the risk management topic this time. Whether it’s the US Dollar Index’s relationship to the price of Oil, Gold, or even Volatility, the similarities to the second quarter of 2008 are borderline glaring at this point.

 

The most market relevant mathematical learning since Einstein’s Relativity has been Chaos and Complexity Theory. It, unlike Efficient Market Theory, accepts uncertainty as a grounding principle. The Keynesian Kingdom’s top brass doesn’t do uncertainty. Allegedly, this time they know exactly what’s going on out there in this gargantuan ecosystem of colliding factors that we call the Global Economy.

 

What’s going on in Global Macro markets may very well be trivial. Market prices and the trailing correlations that impacted them are historical facts. What’s “not clear” (to quote The Bernank’s favorite career risk management qualifier from last week) is what can be quantified as causal over a long period of time. “Not clear” that is, to the professional politicians who are accountable to the US Dollar Debauchery math.

 

Here’s what the US Dollar did last week:

  1. Down another -1.4% week-over-week to a new YTD low
  2. Down -9.8% from its January, 2011 price and down for the 14th week out of the last 18
  3. Down -17.5% from June 2010

Wait. What does June 2010 have to do with anything other than making Groupthink Geithner’s record as a credible US Dollar stability guy anything short of a national embarrassment? June 2010 is when the US Dollar was high and prices at the US pumps were a lot lower.

 

38% lower, actually…

 

Looking ahead at our kids getting out of school and the summer driving season (hearing from my expert network that both still occurs this year), I think most Americans think a -17.5% meltdown in their Crashing Currency and a +38% tax at the gas pump is a bad trade – for them.

 

Have no fear however, the President is here in his weekly address (Saturday): “When oil companies are making huge profits and you’re struggling at the pump, and we’re scouring the federal budget for spending we can afford to do without, these tax giveaways aren’t right.”

 

Right. right…

 

Meanwhile, Brazil’s President had a different take than blaming Petrobras: “Guaranteeing purchasing power means playing tough on inflation. This is one of the fundamentals of our political economy, and one we’ll never let up on.”

 

At least there’s a healthy political bid/ask spread out there in terms of what left-leaning President knows the least about Complexity Theory. With American central planners leaning more left than even Europe and Brazil at this point – who would have thunk…

 

Back to the Global Scorecard – here were the big Global Macro currency and commodity moves associated with the US Currency Crashing week-over-week:

  1. The Euro = UP another +2.1% to $1.48
  2. The Chinese Yuan = UP another +0.3% to a new all-time high of $6.49
  3. CRB Commodities Index (19 commodities) = UP another +0.8% to a new 2-year weekly closing high of 370
  4. WTI Crude Oil = UP another +1.5% to a new 2-year weekly closing high of $113.93
  5. Gold = UP another +3.5% to a new all-time high of $1556 (all-time is a long time)
  6. Copper = DOWN -5.4% at $4.17/lb

Oops, one of these things is not like the other. That’s right, Dr. Copper is reminding those of us with some knowledge about real-time market signals that Global Growth Slows As Inflation Accelerates. Maybe that’s why Chinese and Brazilian stocks lost -3.3% and -1.4% last week, respectively. They no likey The Inflation from The Bernank.

 

US stocks had another great week, rallying like Japanese equities have for decades to lower-long-term-highs on decelerating volume and scary skew signals. But don’t worry – this Currency Crash thing is cool, like it was in Q2 of 2008, until it isn’t…

 

In the Hedgeye Asset Allocation Model I proved that I still know a little about learning from my many prior mistakes. I ended the week with my highest invested position of 2011, dropping my allocation to Cash to 34% (at the last immediate-term overbought peak in US Equities I had 62% in Cash, so at least this time is different in that I am riding out more of The Inflation trade’s gains).

 

The Hedgeye Asset Allocation Model’s week-end allocations are now as follows:

  1. Cash = 34% (down from 40% last week and 52% in the last week of March)
  2. International Currencies = 30% (Chinese Yuan, Canadian Dollar, British Pound - CYB, FCX, and FXB)
  3. Commodities = 12% (Gold, Oil, and Corn – GLD, OIL, and CORN)
  4. International Equities = 9% (China – CAF)
  5. Fixed Income = 9% (US Treasury Flattener – FLAT)
  6. US Equities = 6% (Technology – XLK)

A little knowledge of the Bin Laden takedown would have helped me be levered-long everything US Equities into this week’s start. Having Dangerous Knowledge like that though is a lot of knowledge I’ll pray to do without!

 

My immediate-term support and resistance lines for Gold are now $1515 and $1557, respectively. My immediate-term support and resistance lines for oil are now $111.47 and $115.61. And my immediate-term support and resistance lines for the SP500 are now 1338 and 1377, respectively.

 

I plan on taking down both my gross (Hedgeye Asset Allocation invested position) and net long positions (Hedgeye Portfolio: 17 LONGS, 11 SHORTS) into this morning’s newsy strength.

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Dangerous Knowledge - Chart of the Day

 

Dangerous Knowledge - Virtual Portfolio


Monkey Movement

This note was originally published at 8am on April 27, 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 main question is where this movement will lead us.”

-F.A. Hayek

 

Today is his big day. Today is the 1st day in US economic history that the Almighty Central Planner of US Monetary Policy will hold a press conference with the media immediately following his decision to pander to the political wind. Currency Crashers and Yield Chasers, unite!

 

As Hayek predicted 70 years ago in “The Road To Serfdom” (which Keynes himself called “a grand book” that he agreed “morally” with), this is the long hard road towards socialism that traverses many political conflicts and compromises. Before you watch The Bernank today, take a step back and really think about how Big Government Intervention in our markets has become; you’ll see this certified gong show of Gaming Policy for what it is.

 

“Where these common beliefs of our generation will lead us is a problem not for one party, but for every one of us – a problem of the most momentous significance… Is there a greater tragedy imaginable than that? In our endeavor consciously to shape our future in accordance with high ideals, we should in fact unwittingly produce the very opposite of what we have been striving for?” (Hayek, “The Road to Serfdom”, page 60)

 

As the Monkey Movement hustles us toward prime time advertising dollars, please don’t listen to what storytellers of the Keynesian Kingdom say – watch how they get paid. If there’s any lesson we’ve learned from the Greeks by now it’s that markets don’t lie – politicians do (Greece’s stock market is down another -1.6% this morning, taking its straight down decline since February 18th to -18.3% as Greek bond yields hit record highs).

 

So what do you do with that today?

 

My risk management strategy into the Fed presser is very simple – don’t chase returns; take down your net long exposure; sell high.

 

I made this call in April of 2010 (SP500 dropped -15% to its August low). I made this call again in November of 2010 (November was down, and I got crushed in December). And again in February of 2011 (another -6.5% correction to mid-March where I covered at the YTD low)… again!

 

Two for three in calling for corrections from blow-off US Dollar Debauchery driven tops isn’t good enough. So I am looking at improving upon that … with my longest of long-term risk management calls not changing – BURNING YOUR CURRENCY AT THE STAKE will not end well.

 

If you want to get the US Dollar right, you need to get policy right – and The Bernank, sadly, will remain Indefinitely Dovish.

 

So what do you do with that? I usually start with the what not to do’s:

  1. Don’t go ideological in your portfolio (I’m leaning long ahead of the Fed today – 15 LONGS, 9 SHORTS in the Hedgeye Portfolio)
  2. Don’t sell The Inflation trade (it’s outperforming every global equity market other than maybe Russia for the YTD)
  3. Don’t be a monkey

What are the intermediate to long-term TREND and TAIL implications of the Monkey Movement perpetuating a US Currency Crash?

  1. It perpetuates The Inflation priced in US Dollars
  2. It structurally impairs the sustainability of long-term economic growth
  3. It dares institutional investors to chase “yield”

What am I seeing in the Global Macro Grind this morning that confirms any or all of these realities related to inflation and/or growth?

  1. Chinese stocks closed down for their 4th consecutive day (we’re long them) as the USD hits new lows, inspiring global inflation risk
  2. Brazilian stocks remain down -3.1% for the YTD and bearish from an intermediate-term TREND perspective = inflation risk
  3. Copper continues to breakdown (bearish TRADE and TREND) as global growth slows in the face of USD perpetuated inflation
  4. US Equities are rallying to lower-long-term highs (like Japan’s have for 20 years) on anemic volume and very concerning skew signals
  5. US Financials (XLF) are bearish TRADE and TREND (worst S&P Sector YTD) as a Currency Crash will enforce counterparty and haircut risks
  6. US Treasury Yield Spread continues to narrow (we are long a UST Flattener – FLAT) as US Growth Slows and long-term yields decline

All the while, US Housing is turning into the train wreck (double dip) that we have been calling for in the last year (Case Shiller Home Price Index saw prices drop on a year-over-year basis in 19 of the top 20 US markets yesterday - Washington, DC was the only bull market in housing – long live Julius Caesar’s Roman Empire that plunders its citizenry by clipping their coins).

 

US Housing Demand? The MBA mortgage applications index (our best high-frequency data gauge for demand) plummeted by -13.7% week-over-week this week. Apparently Americans aren’t dumb enough to take on The Bernank’s dare to lever themselves up with a “cheap” long-term liability. Short-term Central Planning, press conferences, and marketing events be damned!

 

My immediate-term support and resistance levels for Oil are now $109.98 and $114.11, respectively (we are long). My immediate-term support and resistance levels for Gold are now 1491 and 1524, respectively (we are long). My immediate-term support and resistance levels for the SP500 are now 1324 and 1350, respectively (we are short).

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Monkey Movement - Chart of the Day

 

Monkey Movement - Virtual Portfolio


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - April 29, 2011


As we look at today’s set up for the S&P 500, the range is 39 points or -1.88% downside to 1333 and 0.98% upside to 1377.

 

SECTOR AND GLOBAL PERFORMANCE


The Financials remain the only sector broken on both TRADE and TREND.    

 

THE HEDGEYE DAILY OUTLOOK - levels 52

 

THE HEDGEYE DAILY OUTLOOK - daily sector view

 

THE HEDGEYE DAILY OUTLOOK - BEST PERFORMING GLOBAL

 

THE HEDGEYE DAILY OUTLOOK - WORST PERFORMING GLOBAL

 

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: 917 (+226)  
  • VOLUME: NYSE 975.24 (+1.43%)
  • VIX:  14.75 0.89% YTD PERFORMANCE: -16.90%
  • SPX PUT/CALL RATIO: 1.21 from 1.15 (+5.28%)

 

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: 22.25
  • 3-MONTH T-BILL YIELD: 0.06% -0.01%
  • 10-Year: 3.39 from 3.34
  • YIELD CURVE: 1.75 from 1.96 

 

MACRO DATA POINTS:

  • 10 a.m.: Construction spending, est. 0.4%, prior 1.4%
  • 10 a.m.: ISM Manufacturing, est. 59.5, prior 61.2
  • 11 a.m.: Export inspections: Corn, soybeans, wheat
  • 11:30 a.m.: U.S. to sell $29b 3-mo. bills, $27b 6-mo. bills
  • 4 p.m.: Crop progress: Winter wheat, cotton, corn

WHAT TO WATCH:

  • India’s manufacturing grew at the fastest pace in five months and exports climbed to a record, increasing pressure on the central bank to raise interest rates
  • Silver futures plunged as much as 13% after CME boosted margins
  • Ralcorp said it received unsolicited takeover proposal in March, board determined wasn’t in best interest; CNBC reported Friday that ConAgra had expressed interest

COMMODITY/GROWTH EXPECTATION

 

THE HEDGEYE DAILY OUTLOOK - daily commodity view

 

 

COMMODITY HEADLINES FROM BLOOMBERG:

  • Oil Drops Most in Two Weeks After U.S. Says Bin Laden Killed in Pakistan
  • Copper Declines to 7-Week Low as Chinese Manufacturing Declined in April
  • Corn Slips as Dollar’s Gain Cuts Demand for Commodities as Store of Value
  • India Said to Consider Ending Four-Year Ban on Wheat Exports on Stockpiles
  • Rubber Falls as China’s Manufacturing Index Declines More Than Forecast
  • South Korea Seeking to Boost Wheat, Soybean Production to Reduce Imports
  • Commodities Beat Financial Assets for Fifth Month in Best Streak Since ’97
  • Cocoa Bean Exports From Indonesia’s Sulawesi Slump as Sales Suffer Delays
  • Korea Investment Corp. Buys Noble Group Stake to Partner in Infrastructure
  • Funds Slash Bullish Sugar Bets to Two-Year Low as Thailand Supplies Climb
  • Codelco Waning Copper Pressures $17.5 Billion Bet to Catch Boom for Metals
  • Bolivia President Morales to Overturn Laws on Mining, Banking, Investments

 

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - daily currency view

 

 

EUROPEAN MARKETS

  • European indices are trading higher a few hours after the announcement of Osama bin Laden's death.
  • UK markets are closed for a bank holiday.
  • Eurozone April final manufacturing PMI 58.0 vs consensus 57.7
  • Germany April final manufacturing PMI 62.00 vs consensus 61.7
  • France April Final Manufacturing PMI 57.5 vs consensus 56.9

 

THE HEDGEYE DAILY OUTLOOK - BEST PERFORMING EURO

 

THE HEDGEYE DAILY OUTLOOK - WORST PERFORMING EURO

 

 

ASIA PACIFIC MARKETS:

  • Most Asian markets that were open rose today.
  • China, Hong Kong, Taiwan, and Thailand were closed for Labour Day.

THE HEDGEYE DAILY OUTLOOK - BEST PERFORMING ASIA

 

THE HEDGEYE DAILY OUTLOOK - WORST PERFORMING ASIA

 

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - MIDEAST PERFORMANCE

 

 

 

Howard Penney

Managing Director


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 80.33%
  • SHORT SIGNALS 78.51%
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