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European Risk Monitor: Germany’s Tension Tamer

Positions in Europe: Long Germany (EWG); Short Spain (EWP)

 

Below we show our weekly European Risk Monitor charts that indicate more of the same trend:  risk premiums across the European peripheral continue to blow out over the intermediate term, a trend we expect to continue even as troika (European Commission, ECB, and IMF) continues to subsidize the PIIGS to prevent in their minds the “ugly” words of default and restructuring. Troika’s actions should however also continue to support the EUR-USD around $1.40, with upper resistance around $1.45.

 

European Risk Monitor: Germany’s Tension Tamer - a.1

 

European Risk Monitor: Germany’s Tension Tamer - 6 13 2011 11 12 19 AM

 

The newest piece of “support” in the developing dynamic of the periphery’s sovereign debt imbalances and the growing counterparty exposures between domestic banks, the Eurozone National Central Banks, and ECB, is Germany’s increasing approval of a second bailout package for Greece. The latest band-aid proposed is ~ 90 B EUR, complicit with the Greeks selling off state assets worth ~ 30-50 B EUR and more strict enforcement of austerity measures.  German Finance Minister Wolfgang Schaueble has called for investors to exchange all the Greek bonds currently in their portfolios for new ones with maturities extended by seven years. This presumes lower interest rates, with the original principal paid in full at the new maturity. The extent of this haircut, however, is not known, and obviously a very substantial risk. The ECB’s stance continues to be one against investors (namely private) taking on any losses, but in favor of any bailout to direction attention away from default and restructuring talk.

 

Our European Financials CDS Monitor shows that Bank swaps in Europe were wider last week on a week-over-week basis.  35 of the 38 swaps were wider and only 3 tightened, with Italian and Portuguese banks looking the worst. 

 

European Risk Monitor: Germany’s Tension Tamer - euro cds

 

We continue to take very conservative view of Europe, tending to favor the region’s fiscally sober countries with healthy growth profiles, like Germany and Sweden. That said, Germany, which we’re currently long via the etf EWG in the Hedgeye Virtual Portfolio, has not performed well, with the DAX at +2.8% YTD but down -4% over the last month. Alongside the swing our position has move to one of caution as the high frequency data has slowed over the last 2-4 months.

 

At the right price we’d re-short Spain (EWP) again.  Macro data from the periphery continues to suggest marked headwinds as inflation accelerates, austerity chokes off growth from already anemic levels, unemployment accelerates, and consumer and business confidence shake.

 

Matthew Hedrick

Analyst


MACAU: 2ND WEEK/SAME AS THE 1ST WEEK

No change to HK$18.5-19.5BN revenue estimate for June

 

 

Macau generated gross gaming revenues (GGR) of HK$7.46 billion for the first 12 days of the month.  Average daily revenues of HK$621 million were consistent with the first week of June.  Thus, we maintain our full month estimate of HK$18.5-19.5 billion of GGR.  After an amazing May (HK$23.6) billion, a 19% sequential slowdown could be somewhat of a disappointment to investors even though YoY growth should still be around 45%.

 

LVS continues to hold very well in June, boosting its market share to 17.9%, 240bps above its trailing 3 month average.  MPEL pulled to within 50 bps of its trailing average despite the opening of Galaxy.  MGM was the big loser this week dropping all the way below 7%, no doubt impacted by luck.  Galaxy looks like it is normalizing at around 18.5% since Galaxy Macau opened.

 

MACAU: 2ND WEEK/SAME AS THE 1ST WEEK - macau2


THE M3: CHINA LENDING SLOWS; STAMP DUTY

The Macau Metro Monitor, June 13, 2011

 

 

CHINA LENDING UNEXPECTEDLY TUMBLES, ADDING TO EVIDENCE ECONOMY IS SLOWING Bloomberg

Chinese financial institutions issued 551.6 BN yuan (US$85 billion) of new loans in May, down from 739.6 BN yuan loans in April and missing consensus expectations of 650 BN yuan loans.  May M2--a money supply measure--was up 15.1% YoY (consensus: +15.5%), which is slower than the 16.6% rise in April.

 

NEW STAMP DUTY FOR PROPERTY COMES INTO EFFECT TOMORROW Macau Business

The new 20% stamp duty for residential real estate transactions will come into effect tomorrow.  The special stamp duty will be applied to residential properties resold within a year of their purchase.  The levy will be reduced to 10% if the resale takes place between one and two years after purchase.

 

The law states that a revision should take place in mid-2013, taking into account changes in the real estate environment in Macau.


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TALES OF THE TAPE: WEN, CPKI, SONC, KONA

Notable news items and price action from the restaurant space as well as our fundamental view on select names.

  • WEN has struck a deal with Roark Capital Group to sell its Arby’s chain.  Under the terms of the deal, WEN will receive $130 million in cash and retain an 18.5% stake in the Arby’s business (a stake valued at $30 million).  Roark will assume $190 million of Arby’s debt and the deal will generate a tax benefit of $80 million to Wendy’s.  The total value of the deal is estimated to be $430.
  • CPKI is being sued by an investor who is alleging that the acquisition of the company by an affiliate of Golden Gate Capital, at $18.50 per share, undervalued the company.
  • SONC shares gained on accelerating volume on Friday.  KONA underperformed, its shares sliding 3.1% on accelerating volume.

TALES OF THE TAPE: WEN, CPKI, SONC, KONA - stocks 613

 

 

Howard Penney

Managing Director


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


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