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WEEKLY FINANCIALS RISK MONITOR: BROAD NEGATIVE SIGNALS

This week there are no positive signals on a short-term basis.  Mortgage Insurers continue their slide, while EU Sovereign CDS continues to back up.


Financial Risk Monitor Summary (Across 3 Durations):

  • Short-term (WoW): Negative / 0 of 11 improved / 8 out of 11 worsened / 3 of 11 unchanged
  • Intermediate-term (MoM): Negative / 2 of 11 improved / 7 of 11 worsened / 2 of 11 unchanged
  • Long-term (150 DMA): Neutral / 3 of 11 improved / 5 of 11 worsened / 3 of 11 unchanged

 

WEEKLY FINANCIALS RISK MONITOR: BROAD NEGATIVE SIGNALS - summary

 

1. US Financials CDS Monitor – Swaps widened significantly across domestic financials last week, widening for all 28 of the reference entities by an average of 15% (median 7%). 

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

Widened the least vs last week: AON, MMC, GS

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

Widened the least vs last month: TRV, AON, MMC

 

WEEKLY FINANCIALS RISK MONITOR: BROAD NEGATIVE SIGNALS - US cds

 

2. European Financials CDS Monitor – Banks swaps in Europe were wider last week.  35of the 38 swaps were wider and only 3 tightened.   

 

WEEKLY FINANCIALS RISK MONITOR: BROAD NEGATIVE SIGNALS - euro cds

 

3. European Sovereign CDS – European sovereign swaps rose higher again last week, widening 47 bps on average. 

WEEKLY FINANCIALS RISK MONITOR: BROAD NEGATIVE SIGNALS - sov cds

 

4. High Yield (YTM) Monitor – High Yield rates moved higher last week, ending at 7.45 versus 7.31 the prior week.  

 

WEEKLY FINANCIALS RISK MONITOR: BROAD NEGATIVE SIGNALS - high yield

 

5. Leveraged Loan Index Monitor – The Leveraged Loan Index fell more than five points last week, closing at 1606 versus 1612 the prior week.   

 

WEEKLY FINANCIALS RISK MONITOR: BROAD NEGATIVE SIGNALS - lev loan

 

6. TED Spread Monitor – The TED spread fell slightly last week, ending the week at 20.7 versus 22.1 the prior week.

 

WEEKLY FINANCIALS RISK MONITOR: BROAD NEGATIVE SIGNALS - ted spread

 

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

 

WEEKLY FINANCIALS RISK MONITOR: BROAD NEGATIVE SIGNALS - JOC

 

8. Greek Bond Yields Monitor – We chart the 10-year yield on Greek bonds.  Last week yields rose 78 bps.

 

WEEKLY FINANCIALS RISK MONITOR: BROAD NEGATIVE SIGNALS - 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 115 from 107 the prior week. 

 

WEEKLY FINANCIALS RISK MONITOR: BROAD NEGATIVE SIGNALS - 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 fell 71 points.

 

WEEKLY FINANCIALS RISK MONITOR: BROAD NEGATIVE SIGNALS - 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: BROAD NEGATIVE SIGNALS - 2 10

 

12. XLF Macro Quantitative Setup – Our Macro team sees the setup in the XLF as follows:  1.9% upside to TRADE resistance, 2.4% downside to TRADE support.

 

WEEKLY FINANCIALS RISK MONITOR: BROAD NEGATIVE SIGNALS - XLF

 

Margin Debt Approaching Prior Pre-Crash Highs

We are now publishing NYSE Margin Debt every month when it’s released.  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: BROAD NEGATIVE SIGNALS - margin debt

 

 

Joshua Steiner, CFA

 

Allison Kaptur


World Movers

This note was originally published at 8am on June 08, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Whatever we are, it’s we who move the world, and it’s we who’ll pull it through.”

-Hank Rearden (Atlas Shrugged)

 

If that isn’t the quote of a self-made man, I don’t know what is. In Atlas Shrugged, Rearden Metal personified capitalism. Sometimes it’s harsh. Sometimes you win. Sometimes you lose. But you are always going to be held accountable to your own decision making.

 

Le Bernank showed that he stands for none of that last night in Atlanta. Since he’s never run a company, hired/fired employees, or assumed the responsibility of putting his own capital at risk – this should not surprise you. He is a Keynesian Central Planner.

 

Whether you are an Ayn Rand, Ben Bernanke, or Jaime Dimon fan is of no particular concern to me when I wake up to write this note to you every morning. I am concerned with making money so that I can confidently and gainfully employ a team of professionals that helps you manage risk.

 

If there are more than a few lines in Ayn Rand’s 1168 pages of Atlas Shrugged that resonate with me, that doesn’t mean I am an Ayn Rand lover inasmuch as I don’t have to love anything in this good life more than my wife and family. I like to read things that I disagree with. I like things that make me think.

 

I am a Risk Manager – and, unlike Le Bernank, that means I am tasked with considering multiple ideas across multiple risk management scenarios. Accepting anyone’s dogma in full, including the Holy Bible’s, lacks the intellectual honesty to question. I am tasked with not losing you money. That includes accepting when I am wrong. The goal is to be right.

 

What’s been right about cutting interest rates to ZERO percent and scaring the living daylights out of Americans in order to market the fear-mongering message? Has socializing losses made the capitalists in this country less or more confident in hiring? What’s the difference between jacking up short-term liquidity and eroding long-term demand?

 

These are critical questions that the Chairman of America’s Unaccountable Central Planning Board does not have an answer to. Last night he called GROWTH “frustratingly slow” and INFLATION “transitory.” In response, JP Morgan’s respected CEO, Jaime Dimon, asked Le Bernank, “do you have fear like I do?”

 

The context of Dimon’s question was also critical. He prefaced the question about fear by asking Bernanke if he thinks in “10 years someone will be writing a book about” how all of this Big Government Intervention was what perpetuated the slowdown itself. Atlas Shrugged is a 54 year-old fictional book. Jaime, get the paperback.

 

Back to the Global Macro Grind

 

Yesterday, when the US stock market was up intraday, I cut my US Equity exposure in the Hedgeye Asset Allocation Model in half, selling down our long (and wrong) position in US Healthcare (XLV) from 6% to 3%.

 

If the US stock market closes down again today, it will be down for 6 consecutive days and 6 consecutive weeks. If that’s Le Bernank’s definition of success, using a massive amount of financial and societal leverage, I’d hate to see what losing looks like.

 

Why do I continue to sell strength in equity and commodity market exposures?

  1.  The Market – real-time prices don’t lie; Keynesians do.
  2. The Data – I have yet to see sequential improvement in any of the high frequency data that we track
  3. The Fed – and Indefinitely Dovish Fed that can’t hike (or cut) has been a life preserver for Gold and UST Bonds

Away from the US, here’s The Market’s message:

  1. China (the world’s 2nd largest economy) remains bearish TRADE and TREND with the Shanghai Composite down -2.1% YTD
  2. Japan (the world’s 3rd largest economy) remains bearish TRADE and TREND with the Nikkei down -7.6% YTD
  3. Germany (the world’s 4th largest economy) just moved to bearish TRADE and TREND this morning with the DAX down a full -1%

In terms of The Data:

  1. South Korean GDP Growth slowed sequentially to +4.2% in Q1 (better than US, Japanese, or W. European Growth, but slowing)
  2. Brazilian Inflation (CPI) rose sequentially to +6.6% year-over-year in May vs +6.5% in April
  3. Philippines Inflation (CPI) rose sequentially to +4.5% year-over-year in May – a new YTD high

But The Fed (and I couldn’t make this up if I tried):

  1. Expects US employment to improve in the coming months
  2. Expects US Growth to re-accelerate
  3. Expects US Inflation to remain “transitory”

PROBLEM: The Market and The Data completely disagree with The Fed (as they have for the last 3-6 months).

 

That’s why Ben Bernanke having a smirk on his face when a Market/Data centric Risk Manager like Jaime Dimon was asking him THE question (what if your Keynesian Dogma is wrong?), made every red-white-and-blue capitalist in this country want to puke.

 

This is the beggar/bailout central planning that we ordered up folks. “Whatever we are”, it’s only we who can stop doing what we are doing to this country – so that we can start to pull it through.

 

My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $98.40-100.79, $1535-1555, and 1275-1313, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

World Movers - Chart of the Day

 

World Movers - Virtual Portfolio


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - June 13, 2011

 

Roll out the bearish on growth consensus – it’s career risk management time for the bulls and time to get the perma-bears back in the media (Roubini top story on Bloomberg this morn calling it the “Perfect Storm” – and Barrons Mid-Year Roundtable is actually funny when you read what their consensus was (side by side) 6 months ago).

Consensus, however, can remain a constant until its fully priced in:

  1. ASIAN EQUITIES: no bid this morning, with Japan down another -0.7% to -7.6% YTD on a nasty machinery order print (-3.3%)
  2. EUROPEAN EQUITIES: no bid as Greek stocks and bonds continue to crash (Athex Index down -27% since mid-Feb)
  3. COMMODITIES: no bid for Copper in particular (down -0.8% this morn) as base metals (nickel smoked) and silver (I guess that “industrial demand” component are seeing Growth Slowing getting priced in.

 

As we look at today’s set up for the S&P 500, the range is 43 points or -1.26% downside to 1255 and 2.13% upside to 1298.

 

SECTOR AND GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - levels 613

 

THE HEDGEYE DAILY OUTLOOK - daily sector view

 

THE HEDGEYE DAILY OUTLOOK - global performance

 

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: -1920 (-2755)  
  • VOLUME: NYSE 1019.30 (+12.07%)
  • VIX:  18.86 +6.13% YTD PERFORMANCE: +6.25%
  • SPX PUT/CALL RATIO: 1.77 from 1.43 (+24.46%)

 

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: 21.29
  • 3-MONTH T-BILL YIELD: 0.05%
  • 10-Year: 2,99 from 3.01
  • YIELD CURVE: 2.58 from 2.58 

 

MACRO DATA POINTS:

  • 9 a.m.: ECB’s Trichet speaks at London School of Economics
  • 9:30 a.m.: Fed’s Lacker speaks on manufacturing in Virginia
  • 11 a.m.: Export inspections, corn, wheat, soybeans
  • 11:30 a.m.: U.S. to sell $27b 3-mos. bills, $24b 6-mo. bills
  • 4 p.m.: Crop conditions
  • 7 p.m.: Fed’s Fisher speaks in Dallas 

WHAT TO WATCH:

  • Citi defends hacking disclosure delay - WSJ
  • US banks to cut Treasury use - FT
  • Best Buy may postpone its European expansion plans - FT

COMMODITY/GROWTH EXPECTATION

 

THE HEDGEYE DAILY OUTLOOK - daily commodity view

 

 

COMMODITY HEADLINES FROM BLOOMBERG:

  • Nickel Plunging Into Bear Market as Expanding Glut Outstrips Record Demand
  • Aluminum Bookings From LME’s Asian Warehouses Jump as U.S. Fees Hit Record
  • Oil Declines for a Second Day on Concern Over Economic Growth, Share Slump
  • Palm Oil Has Longest Losing Run in Two Years on Malaysian Supply Outlook
  • China’s Copper Imports ‘Low’ Last Month as Stockpiles Drop, Goldman Says
  • Wheat Rises as Rains May be Too Late to Prevent U.S., France Yield Losses
  • Rubber Drops to Two-Week Low as Chinese Demand May Ease on Slowing Economy
  • Funds Boost Bullish Agriculture Bets for Third Week as Crops May Decline
  • George Soros Urges G20 to Demand Mining Transparency, Le Figaro Reports
  • Tanzania Plans to Discuss Proposed Super Tax With Miners, Minister Says
  • Roubini Says a ‘Perfect Storm’ May Converge on the Global Economy in 2013

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - daily currency view

 

 

EUROPEAN MARKETS

  • EUROPE: no bid; Greece continues to crash (down -27% since FEB hope highs); FTSE/DAX/CAC all breaking Hedgeye intermediate term TREND lines

 

THE HEDGEYE DAILY OUTLOOK - euro performance

 

 

ASIAN MARKETS

  • A China banks issue CNY551.6B of new loans in May vs cons CNY650B - MarketWatch; M2 at end of May +15.1% y/y vs cons +15.5%.
  • ASIA: no bid; China makes new YTD lows and Japan down another -0.7% (were short) as rest of Asia breaks down (Taiwan -1.4%, Indonesia -1.0%)

 

THE HEDGEYE DAILY OUTLOOK - asia performance

 

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - MIDEAST PERFORMANCE

 

Howard Penney

Managing Director


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New Start

“If we are to build a better world, we must have the courage to make a new start.”

-F.A. Hayek

 

Last week I received a tremendous amount of positive feedback on my note titled “American Optimism.” So I’d like to start this week off by thanking you for inspiring me. I am very bullish on the prospects of building a better world – I am very bullish on change.

 

Interestingly, but not surprisingly, Hayek wrote the aforementioned quote in the concluding chapter of “The Road To Serfdom” (page 237) in 1944. His summary thought stood in the face of British-style Keynesianism that had dominated the economic theory of his time.

 

What was Keynes’ response to Hayek’s conclusions?

 

Bruce Caldwell (who edited the most recent edition of “The Road To Serfdom”) captures the moment best in his Introduction:

 

“John Maynard Keynes read the book on the way to the Bretton Woods conference, and delighted Hayek when he wrote him that it was “a grand book” and that “morally and philosophically I find myself in agreement with the whole of it; and not only in agreement with it, but in a deeply moved agreement.” (Letter, John Maynard Keyens to Hayek, June 28, 1944)

 

Alrighty then – we have a consensus!

 

Last week, the most bullish week-over-week moves in all of Global Macro came right where I think the prospects for change are going to be measured – in the real-time price of the US Dollar Index.

 

I’m not so concerned about US stocks being down for 6 consecutive weeks when it’s crystal clear that Growth Slows As Inflation Accelerates. What I need to see change (to get bullish on stocks) is a Deflating of The Inflation (Hedgeye Q2 Macro Theme).

 

With the US Dollar Index UP a full +2% last week to $75.60, here’s what happened to things priced in US Dollars:

  1. US Stocks = DOWN -2.3%
  2. WTI Crude Oil = DOWN -0.9%
  3. Copper = DOWN -1.4%

Le Mucker’s SERIES 66 TEST QUESTION: Which of those 3 things matters most to the US Economy?

  1. La Bernank says stocks
  2. Le Consumer says gas prices
  3. Le Industrialist says cost pressures

I’ll go with #2 and #3.

 

If you want a New Start in this country you have to see a Deflating of The Inflation. Otherwise you’ll continue to see a slowdown in 70% of US GDP (Consumption) and margin compression at the companies who are supposed to employ these consumers.

 

The Stagflation is not hard to understand (Growth Slowing below the rate of Inflation). It just isn’t palatable for the Keynesian Kingdom to accept responsibility for it. That would be called holding themselves accountable.

 

Until I start seeing data that implies that both of these things are occurring at the same time:

  1. Growth is slowing at a decelerating rate
  2. Inflation is accelerating at a decelerating rate

Why would I stop protecting my family’s hard-earned wealth?

 

Being in Cash in 2011 has obviously beaten 48 of the country stock markets in the Hedgeye Global Macro Stock Market Index for the YTD (there are 66 country indices in our Index). And, depending on where you bought them (or what index you are in – both the Nasdaq and Russell 2000 are DOWN for 2011 YTD), the +1% YTD return in the SP500 has been slim pickings!

 

Here’s how the Hedgeye Asset Allocation Model was positioned going into and out of Friday’s US equity market swoon:

  1. Cash = 52% (UP +3% week-over-week after selling ½ our US Equity Allocation on mid-week strength)
  2. International Currencies = 21% (Chinese Yuan and US Dollar – CYB and UUP)
  3. Fixed Income = 18% (Long-term UST Bonds and US Treasury Flattener – TLT and FLAT)
  4. Commodities = 3% (Gold – GLD)
  5. US Equities = 3% (US Healthcare – XLV)
  6. International Equities = 3% (Germany – EWG)

And no, being in 52% Cash wasn’t enough!

 

On a week-over-week basis, I lost money in 4 of 6 of these asset allocation positions:

  1. US Dollar (UUP) = +1.5%
  2. Long-term Treasuries (TLT) = +0.8%
  3. Chinese Yuan (CYB) = -0.4%
  4. Gold (GLD) = -0.7%
  5. Healthcare (XLV) = -1.1%
  6. Germany (EWG) = -2.7%

It’s a good thing I have shorts – and there’s plenty to be optimistic about on that front. There’s always risk to be managed somewhere.

 

My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1, $98.60-100.45, and 1, respectively.

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

New Start - Chart of the Day

 

New Start - Virtual Portfolio


The Week Ahead

The Economic Data calendar for the week of the 13th of June through the 17th 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 - ca1

The Week Ahead - ca2


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