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WEEKLY FINANCIALS RISK MONITOR: BANK SWAPS SPIKE

This week's notable callouts include domestic swaps increasing sharply and European sovereign CDS backing off for a second week in row.


Financial Risk Monitor Summary (Across 3 Durations):

  • Short-term (WoW): Negative / 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): Neutral / 3 of 11 improved / 5 of 11 worsened / 3 of 11 unchanged

 

WEEKLY FINANCIALS RISK MONITOR: BANK SWAPS SPIKE - summary

 

1. US Financials CDS Monitor – Swaps widened across domestic financials, widening for all 28 of the reference entities. 

Widened the most vs last week: BAC, PRU, MBI

Widened the least vs last week: AXP, RDN, TRV

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

Widened the least vs last month: GNW, TRV, AXP

 

WEEKLY FINANCIALS RISK MONITOR: BANK SWAPS SPIKE - us cds

 

2. European Financials CDS Monitor – Banks swaps in Europe were mixed to wider last week.  20 of the 38 swaps were wider and 18 tightened.   

 

WEEKLY FINANCIALS RISK MONITOR: BANK SWAPS SPIKE - euro cds

 

3. European Sovereign CDS – European sovereign swaps edged off their highs last week, falling 14 bps on average. 

 

WEEKLY FINANCIALS RISK MONITOR: BANK SWAPS SPIKE - sov cds

 

4. High Yield (YTM) Monitor – High Yield rates rose last week, ending at 7.31 versus 7.14 the prior week.  

 

WEEKLY FINANCIALS RISK MONITOR: BANK SWAPS SPIKE - high yield

 

5. Leveraged Loan Index Monitor – The Leveraged Loan Index was down only slightly last week, closing at 1612 versus 1614 the prior week.   

 

WEEKLY FINANCIALS RISK MONITOR: BANK SWAPS SPIKE - lev loan

 

6. TED Spread Monitor – The TED spread rose slightly last week, ending the week at 22.1 versus 21.3 the prior week.

 

WEEKLY FINANCIALS RISK MONITOR: BANK SWAPS SPIKE - ted

 

7. Journal of Commerce Commodity Price Index – Last week, the JOC index continued to bounce along at a low level, rising less than a point versus the prior week. 

 

WEEKLY FINANCIALS RISK MONITOR: BANK SWAPS SPIKE - JOC

 

8. Greek Bond Yields Monitor – We chart the 10-year yield on Greek bonds.  Last week yields fell 48 bps versus the prior Friday, their second down week in a row.

 

WEEKLY FINANCIALS RISK MONITOR: BANK SWAPS SPIKE - 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 were rose to 107 from 101 the prior week. 

 

WEEKLY FINANCIALS RISK MONITOR: BANK SWAPS SPIKE - 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% before bouncing off the lows.  Last week the series gained 15 points.

 

WEEKLY FINANCIALS RISK MONITOR: BANK SWAPS SPIKE - 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 4 bps to 256 bps. 

 

WEEKLY FINANCIALS RISK MONITOR: BANK SWAPS SPIKE - 2 10 spread

 

12. XLF Macro Quantitative Setup – Our Macro team sees the setup in the XLF as follows:  1.8% upside to TRADE resistance, 0.7% downside to TRADE support.

 

WEEKLY FINANCIALS RISK MONITOR: BANK SWAPS SPIKE - XLF

 

Margin Debt Approaching Prior Pre-Crash Highs

We are now published NYSE Margin Debt every month when it’s released.  Last week we got April data (as of month-end). This chart shows the S&P 500, inflation adjusted back to 1997, along with the inflation-adjusted level of margin debt (expressed as standard deviations from the long-run mean).  As the chart demonstrates, higher levels of margin debt are associated with increased risk in the equity market.  Our analysis shows that more than 1.5 standard deviations above the average level is the point where things start to get dangerous.  Currently, we are very close to that level – April margin debt hit 1.49 standard deviations above the average.

 

One limitation of this series is that it is reported on a lag.  The chart shows data through April.

 

WEEKLY FINANCIALS RISK MONITOR: BANK SWAPS SPIKE - margin debt

 

 

Joshua Steiner, CFA

 

Allison Kaptur



Relief From Responsibility

“A movement whose main promise is the relief from responsibility cannot but be antimoral.”

-F.A. Hayek

 

It was a long, hard, weekend for the central planners of wanna-be Keynesian Kingdoms. In the US, “blue chip economists” advising President Obama were busy obfuscating the simple fact that QG2 has equated to Jobless Stagflation. In Europe, the socialists were voted off another proverbial island of responsibility – Portugal.

 

Where do we go from here? What broken promises does Academic Dogma have in store for us next? Fortunately, plenty of these outcomes have been proactively predictable. And those of us responsible for being responsible are well on our way to seizing the opportunity of cleaning up another mess.

 

The aforementioned quote comes from Hayek’s chapter titled “Material Conditions And Ideal Ends” in The Road To Serfdom (page 217). And, while it’s always dicey to talk like a Coach would about virtue and morality on Wall Street, I think the way that Hayek thought about this in 1944 is no less relevant than it is this morning:

 

“It is true that the virtues which are less esteemed and practiced now – independence, self-reliance, and the willingness to bear risks, the readiness to back one’s own conviction against a majority, and the willingness to voluntary cooperation with one’s neighbors – are essentially those on which the  working of an individualist rests. Collectivism has nothing to put in their place.”

-F.A. Hayek (The Road to Serfdom, page 217)

 

It’s time for leadership. It’s time for change.

 

Last week, I didn’t make many changes to the Hedgeye Asset Allocation Model (our proxy risk management product for gross invested exposure). After starting the week net-short in the Hedgeye Portfolio (our proxy for expressing net exposure), I didn’t change a whole heck of a lot either (I covered a few shorts to end the week with 11 LONGS and 11 SHORTS).

 

The Hedgeye Asset Allocation Model’s complexion at the close last week was:

  1. Cash = 49% (no change week-over-week)
  2. International Currencies = 24% (Chinese Yuan and US Dollar – CYB and UUP)
  3. Fixed Income = 15% (Long-term US Treasuries and US Treasury Flattener – TLT and FLAT)
  4. US Equities = 6% (US Healthcare – XLV)
  5. International Equities = 3% (Germany – EWG)
  6. Commodities = 3% (Gold – GLD)

With Growth Slowing, Long-term Treasury Bonds (TLT) are putting on an impressive move to the upside. Growth Slowing is also instigating compression in the yield curve (long-term minus short-term interest rates) and we’ve also expressed our conviction in Growth Slowing with long positions in a US Treasury Flattener (FLAT) and Gold (GLD).

 

Did I say Growth Slowing?

 

“The readiness to back one’s own conviction against a majority…”

 

The #1 headline on Bloomberg this morning reads: “SLOWING US GROWTH PROMPTS OPTIMISTS TO QUESTION DURABILITY OF RECOVERY”

 

You see, without explicitly seeking Relief From Responsibility, this is how Wall Street works – seeking relief in building a consensus. The best way to perpetuate mediocrity, is to socialize responsibility.

 

Or at least they’ll try. Because the true art of Old Wall Street Research compensation lies not in the risk management of being right or wrong – it lies in the storytelling of collectivism.

 

In the Hedgeye Asset Allocation Model, where was I wrong last week?

  1. Long US Dollar (UUP) = down -1.0% week-over-week
  2. Long US Healthcare (XLV) = down -1.4% week-over-week

It doesn’t particularly matter why I was wrong with these positions. The scoreboard doesn’t care. I was wrong – and there needs to be absolute responsibility in recommendation.

 

“Independence, self-reliance, and the willingness to bear risks…”

 

That’s what we need to champion in this business. Re-think, re-learn, and re-invent. With “the willingness to voluntary cooperation with one’s neighbors”, may the best teams who are collaborating best risk management practices win.

 

My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1, $98.32-102.34, and 1, respectively.

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Relief From Responsibility - Chart of the Day

 

Relief From Responsibility - Virtual Portfolio


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THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - June 6, 2011


There isn’t a data point or market price across the Hedgeye Global Macro risk management model that suggests this correction is over, yet:

  1. Treasury Bonds – continuing higher this morning w/ 2-yr yields crashing to 0.42% (10s at 2.99%); yield curve compressing
  2. Asian/European Stocks – Japan + Spain (2 of our short positions) down -1.2% and -0.9% this morning (Keynesianism not working)
  3. US Stocks – down for 5 consecutive weeks, which isn’t exactly textbook bull market (down -4.6% since April 29th high)

 

As we look at today’s set up for the S&P 500, the range is 24 points or -0.32% downside to 1296 and 1.53% upside to 1320.

 

SECTOR AND GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - levels 66

 

THE HEDGEYE DAILY OUTLOOK - daily sector view

 

THE HEDGEYE DAILY OUTLOOK - global performance

 


EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: -1315 (+1135)  
  • VOLUME: NYSE 971.40 (-3.66%)
  • VIX:  17.95 -0.77% YTD PERFORMANCE: +1.93%
  • SPX PUT/CALL RATIO: 1.61 from 1.19 (-26.59%)

 

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: 22.15
  • 3-MONTH T-BILL YIELD: 0.04%
  • 10-Year: 2.99 from 3.04
  • YIELD CURVE: 2.57 from 2.59 

 

MACRO DATA POINTS:

  • 11 a.m.: Export inspections: corn, soybeans, wheat
  • 11:30 a.m.: U.S. to sell $27b 3-mo., $24b 6-mo. bills
  • 1:15 p.m.: Treasury’s Geithner speaks to bankers in Atlanta
  • 4 p.m.: Crop conditions: Corn, winter wheat, cotton, soybean
  • 5:30 p.m.: Fed’s Fisher speaks in NY

WHAT TO WATCH:

  • Philly Fed President Charles Plosser said plan to withdraw central bank’s record monetary stimulus, “normalize” interest-rate policy would help avert confusion in financial markets
  • Death toll from Germany’s E. coli outbreak rose to 22, with officials saying sprouts grown near Uelzen a “significant source of the bacteria”
  • German government spokesman says expects EU/ECB/IMF report on Greece by mid week -- Reuters
  • Social Democrats win Portuguese parliamentary election, removing the Socialist Party from power -- Boston Globe

 

 

COMMODITY/GROWTH EXPECTATION

 

THE HEDGEYE DAILY OUTLOOK - daily commodity view

 

 

COMMODITY HEADLINES FROM BLOOMBERG:

  • Wheat Fields Wilt in Drought as Parched Earth Spreads From China to Kansas
  • Oil Falls for a Second Day on Signs Slowing U.S. Economy May Crimp Demand
  • Copper Rises for Second Day as Strike at Codelco Mine Fuels Supply Concern
  • Gold Advances for Second Day After U.S. Data Increases Recovery Concerns
  • Wheat Climbs on Speculation USDA Is Set to Reduce Global Supply Estimate
  • OPEC Overshadowed by Qaddafi in Most-Hostile Meeting Since 1990 Gulf War
  • Russia’s Black Earth Grains Growing Area Faces ‘50-50’ Chance of Drought
  • Rubber in Tokyo Advances for Second Day Amid Tight Supplies in Thailand
  • Grain Stockpiles Worldwide May Drop, Soybeans May Increase, Survey Shows
  • Commodity Bubbles Caused by Speculators Need Intervention, UN Agency Says
  • Olam Said to Raise $600 Million in Share Sale to Help Fund Acquisitions
  • Funds Boost Bullish Commodity Bets Amid Improving Global Growth Prospects
  • E. Coli Outbreak Death Toll Rises to 22 as Blame Focuses on Bean Sprouts

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - daily currency view

 

 

EUROPEAN MARKETS

  • In Europe a wet Kleenex continues to hover over Europe Keynesian experiment; Spain down -0.8% after Portugal votes out the socialist party too
  • UK new car registrations (1.7%) y/y in May - SMMT -- wires

THE HEDGEYE DAILY OUTLOOK - euro performance

 

 

ASIAN MARKETS

  • In Asia, China closed but rest of Asia continues lower; Japan down -1.2% to -8.3% YTD (we're short $EWJ); Thailand down -1.1%; Vietnam -2.2%
  • Hong Kong, China, and Taiwan were closed for Tuen Ng/Dragon Boat Festival
  • South Korea was closed for Hyun Choong Il.

THE HEDGEYE DAILY OUTLOOK - asia performance

 

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - MIDEAST PERFORMANCE

 

Howard Penney

Managing Director


MACAU TIDBITS

As always, much is happening in Macau.  Here is some of the stuff we’ve been hearing lately:

 

 

 

Macau Market

  • May was the first HK$ billion slot month
  • Wynn, MGM, and SJM Cotai sites may get gazetted as soon as in the next 4-5 weeks 

MPEL

  • Neptune will be opening a new VIP room at City of Dreams in July/August – Neptune is one of the largest junkets in Macau so this could be significant for MPEL
  • City of Dreams may be looking into converting its Dragon Dome Theater into a giant VIP operation – may be talking to the Guandong VIP Group to run it.  We think Guandong currently has operations at Wynn and Starworld.
  • MPEL may get rid of its dual management structure and leave Ted Chan fully in charge
  • City of Dreams pumped in some extra junket liquidity ahead of the Galaxy Macau opening
  • We still think Studio City might be back on the agenda possibly with MPEL investing in addition to procuring a management contract

Galaxy

  • Galaxy Macau may be cannibalizing 30-35% of Starworld’s VIP volume
  • We’re hearing that Galaxy may have pumped as much as HK$1.6-2.0 billion in liquidity to its junkets through the opening of Galaxy Macau

 LVS/Sands China

  • Neptune and Sun City are finalizing deals with Venetian Macau to open up VIP rooms
  • Staffing has been a problem so the rooms may not open until July/August
  • LVS still struggling to grow its VIP share
  • We’re skeptical that FS apartments will get approved anytime in the foreseeable future - the public airing of dirty laundry in the Jacobs case isn’t helping their cause

The Week Ahead

The Economic Data calendar for the week of the 6th of June through the 10th is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.

 

The Week Ahead - br1

The Week Ahead - br2


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