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WEEKLY FINANCIALS RISK MONITOR: THE CALM BEFORE THE (GREEK) STORM?

This week's notable callouts include high yield and leveraged loans weakening, and domestic financial swaps tightening.

 

Financial Risk Monitor Summary (Across 3 Durations):

  • Short-term (WoW): Negative / 1 of 11 improved / 4 out of 11 worsened / 6 of 11 unchanged
  • Intermediate-term (MoM): Negative / 1 of 11 improved / 7 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: THE CALM BEFORE THE (GREEK) STORM? - summary

 

1. US Financials CDS Monitor – Swaps were mixed across domestic financials last week, tightening for 15 of the 28  reference entities and widening for 13.

Widened the most vs last week: PMI, COF, ALL

Tightened the most vs last week: GS, MET, PRU

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

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

 

WEEKLY FINANCIALS RISK MONITOR: THE CALM BEFORE THE (GREEK) STORM? - us cds

 

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

 

WEEKLY FINANCIALS RISK MONITOR: THE CALM BEFORE THE (GREEK) STORM? - euro cds

 

3. European Sovereign CDS – European sovereign swaps spiked going into last weekend, as uncertainty about the Greek bailout unsettled the market. 

 

WEEKLY FINANCIALS RISK MONITOR: THE CALM BEFORE THE (GREEK) STORM? - sov cds

 

4. High Yield (YTM) Monitor – High Yield rates continued to climb higher last week, ending at 7.62 versus 7.45 the prior week.  

 

WEEKLY FINANCIALS RISK MONITOR: THE CALM BEFORE THE (GREEK) STORM? - high yield

 

5. Leveraged Loan Index Monitor – The Leveraged Loan Index to its lowest level since mid-March, closing at 1602 versus 1606 the prior week. Remember that Leveraged Loans are quoted in prices, not yield.  

 

WEEKLY FINANCIALS RISK MONITOR: THE CALM BEFORE THE (GREEK) STORM? - LEV LOAN

 

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

 

WEEKLY FINANCIALS RISK MONITOR: THE CALM BEFORE THE (GREEK) STORM? - ted spread

 

7. Journal of Commerce Commodity Price Index – Last week, the JOC index fell 5 points, dropping to 12.6. We treat this series as a referendum on economic growth.

 

WEEKLY FINANCIALS RISK MONITOR: THE CALM BEFORE THE (GREEK) STORM? - JOC

 

8. Greek Bond Yields Monitor – We chart the 10-year yield on Greek bonds.  Last week yields rose before giving back much of the increase on Friday.

 

WEEKLY FINANCIALS RISK MONITOR: THE CALM BEFORE THE (GREEK) STORM? - 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 flat WoW at 115. 

 

WEEKLY FINANCIALS RISK MONITOR: THE CALM BEFORE THE (GREEK) STORM? - 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 was essentially flat.

 

WEEKLY FINANCIALS RISK MONITOR: THE CALM BEFORE THE (GREEK) STORM? - baltic

 

11. 2-10 Spread – We track the 2-10 spread as a proxy for bank margins.  Last week the 2-10 spread was close to flat. 

 

WEEKLY FINANCIALS RISK MONITOR: THE CALM BEFORE THE (GREEK) STORM? - 2 10 spread

 

12. XLF Macro Quantitative Setup – Our Macro team sees the setup in the XLF as follows:  0.9% upside to TRADE resistance, 1.8% downside to TRADE support.

 

WEEKLY FINANCIALS RISK MONITOR: THE CALM BEFORE THE (GREEK) STORM? - 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: THE CALM BEFORE THE (GREEK) STORM? - margin debt

 

 

Joshua Steiner, CFA

 

Allison Kaptur


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - June 20, 2011

 

Delaying a European decision is not what markets wanted this morning.  Confusion is starting to breed contempt across asset classes as a result: oil collapsing, Spanish and Italian equities getting tagged and UST Bonds bid higher.  While it's difficult to discern whether this immediate-term TRADE breakout in the US Dollar is due to QG2 ending, a Debt Ceiling compromise in July, or European contagion ending - the answer is probably all of the above.

 

The line that matters for the EURO/USD = 1.42. That's my intermediate-term TREND line, and if it breaks (and sustainably holds below 1.42), there's a heightening probability that we see a 1.36 test by sometime this summer.  That would be very USD bullish and will continue to Deflate The Inflation (which will be good for Equities in the end - after prices deflate). 

 

As we look at today’s set up for the S&P 500, the range is 34 points or -0.98% downside to 1259 and 1.69% upside to 1293.

 

SECTOR AND GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - daily sector view

 

THE HEDGEYE DAILY OUTLOOK - global performance

 

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: +773 (+1093)  
  • VOLUME: NYSE 1604.51 (+52.53%)
  • VIX:  21.85 -3.87% YTD PERFORMANCE: +23.10%
  • SPX PUT/CALL RATIO: 2.03 from 1.92 (+5.96%)

 

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: 22.11
  • 3-MONTH T-BILL YIELD: 0.04%
  • 10-Year: 2.94 from 2.93
  • YIELD CURVE: 2.56 from 2.55 

 

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
  • 4 p.m.: Weekly crop conditions

WHAT TO WATCH:

  • European finance chiefs say further aid for Greece hinged on embattled Prime Minister George Papandreou delivering budget cuts in the face of domestic opposition
  • BASF falls as much as 2% in Frankfurt after board member Michael Heinz says he sees demand weakening in China, according to an interview with Finanz und Wirtschaft - June 18.
  • Microsoft May Stall Without Strategy Shift: Barron’s
  • CBS Shares Not Expensive: Barron’s
  • Barron’s says RIM is its worst pick of the year Allstate, Travelers, Chubb Hurt by Tornado Damage: Barron’s
  • VF, Timberland a ’Beautiful Fit’: Barron’s
  • Blackstone Mulls $1.6bn Northern Rock bid: Observerek

COMMODITY/GROWTH EXPECTATION

 

THE HEDGEYE DAILY OUTLOOK - daily commodity view

 

 

COMMODITY HEADLINES FROM BLOOMBERG:

  • Corn Stocks Plunging to 1974 Low as China Adds Brazil-Sized Crop to Demand
  • Commodities Tumble to Six-Week Low as Oil Declines on European Debt Crisis
  • More Rains Predicted for China Seen Helping Grain Crops After Drought Ends
  • Oil Drops to Four-Month Low, Trades Below 200-Day Average on Europe Crisis
  • Rubber Declines to Four-Week Low as Oil’s Drop, Greek Crisis Lower Appeal
  • Thai Rice-Buying Plan Threatens Shipment Target, Exporters’ Group Says
  • Copper in London Resumes Decline on Concern That Greek Crisis May Worsen
  • Gold May Advance as Greek Debt Crisis Increases Haven Demand; Silver Gains
  • Palm Oil Gains as Exports From Malaysia Climb on Chinese Seasonal Buying
  • Copper Cable Shipments From Japan Gain First Month in 3 on Reconstruction
  • Soybeans in Chicago Rebound After Touching One-Month Low; Corn May Climb
  • Hedge Funds Raise Bets on Heating Oil to Seven-Month High: Energy Markets
  • Funds Reduce Long Positions in Commodities in Bet Global Growth to Decline
  • Europe Commodity Day Ahead: Corn Stocks Plunging to 1974 Low on China Use

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - daily currency view

 

 

EUROPEAN MARKETS

  • EUROPE: what a mess; across the board selling of who's next down the most (Italy -2.5%, Finland -2.5%, Spain -1.9% ), were short Spain

 

THE HEDGEYE DAILY OUTLOOK - euro performance

 

 

ASIAN MARKETS

  • ASIA: ugly with selling across the board; India hammered for another -1.8% drop to -14.4% YTD; China (were long) down -0.8% to -6.7% YTD

THE HEDGEYE DAILY OUTLOOK - asia performance

 

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - MIDEAST PERFORMANCE

 

 

Howard Penney

Managing Director



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Asking For More

"I could not have asked for anything more... I played great for four days and couldn't be happier."

-Rory Mcllroy

 

Feel-good fans couldn’t have asked for more in Rory McIlroy’s victory at the 2011 US Open yesterday. Irish eyes were smiling on the 22 year old European as he bear-hugged his Dad on Father’s Day.

 

And then, Europe decided not to bailout Greece…

 

As a result, Global Macro markets are Asking For More this morning. Unfortunately, more debt is not enough. While I am not sure who remains sober enough to realize that this time isn’t any different than most of the sovereign debt crises of the last 600 years (they end in restructuring and/or default), it seems there are at least a few fiscally conservative members of the Fiat Fool Coalition who are willing to concede that point.

 

On the heels of the Irishman’s victory, German Finance Minister, Wolfgang Schaueble, delivered the tough love concession to world markets this morning: “If the Greeks can’t or don’t want to make the necessary decisions, then we can’t move forward on this track.”

 

Risk Manager’s translation: first, deliver on the promises you made on spending cuts and selling assets, or stop Asking For More.

 

Fair enough Germany. Greece, play the ball as it lies.

 

Confusion is starting to breed contempt across asset classes this morning: 

  1. CURRENCIES: EURO/USD is re-testing it’s critical intermediate-term TREND line of $1.42 support
  2. COMMODITIES: Oil prices are getting hammered down to 4-month lows on US Dollar strength ($91.61/barrel)
  3. COUNTRIES: Spanish and Italian stocks are getting tagged (down over 2%) as peripheral contagion concerns mount 

This, of course, should all make sense to everyone who has been in Hedgeye’s camp that The Correlation Risk associated with La Bernank debauching the US Dollar can start as the US Dollar stops going down.

 

As a reminder, into and out of La Bernank’s last rock-star presser (April), the US Dollar Index was down -17% since Obama & Geithner started overseeing Nixon/Carter Deficit/Devaluation life in America (2009). In April, the USD was testing its all-time lows.

 

Today, the US Dollar Index is bidding for its 3rd consecutive UP week, and it’s up a full +3.8% since the beginning of May. Again, if you didn’t know what The Correlation Risk to an up US Dollar looks like, look at the prices of virtually everything priced in US Dollars (housing, stocks, commodities, etc.) since, well, the beginning of May!

 

Hedgeye calls this Deflating The Inflation (Q2 Macro Theme).

 

And, yes, like Growth Slowing As Inflation Accelerates (which we called for 6 months ago), we will be extra sure to remind our competition that we called this first too. As Rory Mcllroy reminded us yesterday – it’s ok to be young, confident, and on your risk management game.

 

What could continue to strengthen the US Dollar from here (and Deflate The Inflation)? 

  1. Quantitative Guessing (QG2) ending 10 days
  2. US Debt Ceiling compromise within 3-6 weeks
  3. European Contagion (ongoing) 

No, this Global Macro Risk Management setup isn’t very difficult to understand. It’s pretty simple to get right – if you get the US Dollar right. And since we have been right on 21 of the 22 calls we have made on the US Dollar since the founding of Hedgeye in 2008, we think we get this.

 

We also get being in Cash.

 

Here’s how the Hedgeye Asset Allocation Model flushed out week-over-week: 

  1. Cash = 49% (down 3% week-over-week from 52% last Monday)
  2. Fixed Income = 18% (Long-term Treasuries and US Treasury Flattener- TLT and FLAT)
  3. International Currencies = 18% (Chinese Yuan – CYB)
  4. International Equities = 6% (Germany and China – EWG and CAF)
  5. Commodities = 6% (Gold – GLD)
  6. US Equities = 3% (US Healthcare – XLV) 

As US Dollar strength Deflates The Inflation, we’ll be in a very good position to buy things on sale. The key will be to be patient on prices. Ultimately, a strong US Dollar is the only way out of this Keynesian mess. Lower-prices are going to be an important catalyst for Global Consumption. In terms of bullish catalysts for Chinese, German, and US Equities, I couldn’t Ask For More than that.

 

My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1, $91.60-98.29, and 1, respectively.

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Asking For More - Chart of the Day

 

Asking For More - Virtual Portfolio


The Week Ahead

The Economic Data calendar for the week of the 120th of June through the 24th 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 - len1

The Week Ahead - len2


R3: M, Puma, China, Deals…

 

R3: REQUIRED RETAIL READING

June 17, 2011

 

 

 

 

RESEARCH ANECDOTES

  • Confirming that product costs are flowing through on average up 15% in the 2H as expected thus far, management at PVH highlighted that it is planning to increase ticket prices between 12-15% on average banking on half of the increase from AURs with the balance driven by unit increases rather than simply pricing alone.
  • In the latest retail concept designed to drive store traffic, Pier 1 Imports has announced that it’s launching its Pier 1 To-Go after a successful test. The new concept enables consumers to see what items are in stock online and then reserve them to be picked up at a store eliminating much of the hassle associated with today’s shopping experience. Not surprisingly, the company has seen an increase in both ticket and units per transaction compared to the company average. For shoppers that prefer to avoid the crowds altogether, but wants to save S&H costs this is a great alternative and one that we’d expect other home furnishing retailers to consider testing as well.
  • At a recent conference, management of DKS noted that Academy has proven to be a good competitor in TX in recent years, but there is increased uncertainty with KKR now at the helm. It’s important to note that TX has been comping at a faster rate than the company average of late – something to keep in mind if Academy gets more disruptive with 5% of the company’s store base located in this market.

OUR TAKE ON OVERNIGHT NEWS

 

LF USA Adds Ellen Tracy License - LF USA has added another license to its growing collection — Ellen Tracy. Since 2009, Brand Matter LLC, the owner of Ellen Tracy, has licensed RVC Enterprises to produce a women’s better sportswear line. Together they forged a strategic alliance with Macy’s Inc. as the exclusive department store retailer, which will continue. The transition of the license to LF USA is effective with the August shipments of the Ellen Tracy women’s better sportswear line. Mark Mendelson, president of Ellen Tracy, has moved to LF USA, along with his entire design team. Susanne Klevorick remains creative director and senior vice president of design. <WWD>

Hedgeye Retail’s Take: Funny…It’s getting some life pumped into it now that it is no longer owned by LIZ.

 

Macy’s Reaches Tentative Deal With Union - Macy’s Inc. and the Retail, Wholesale and Department Store Union have reached a tentative agreement that will avoid a walkout of more than 4,000 workers at four of the retailer’s New York-area stores, including the Herald Square flagship.The two groups negotiated around the clock to avert a strike that union members had authorized earlier this week. “This is a solid contract and it reflects the fact that our workers are the true magic of Macy’s,” said Ken Bordieri, President of Local 1-S of the RWDSU. <WWD>

Hedgeye Retail’s Take: We don’t know the specs. Near term this is a positive for M as a NYC strike would be damaging – in perception if not reality. Longer term this likely included wage increases/work rules that won’t go unnoticed by the other 160,000 employees at Macy’s.

 

Milan Models Eclipsed by M&A Chatter - Men’s spring-summer 2012 in Milan may be the first fashion season where clothing and accessories are the last things on people’s minds.  As PPR SA hunts assets, Prada SpA and Salvatore Ferragamo SpA court investors for initial public offerings and a French investment firm snaps up Moncler SpA, the chatter in Milan is of who’ll be next to list or get bought. Suitmaker Corneliani kicks off four days of shows in the Italian city tomorrow. Potential targets may include Burberry Group Plc (BRBY), Mulberry Group Plc (MUL) and Tiffany & Co. in the medium term, according to John Guy, an analyst at Royal Bank of Scotland Group Plc in London. LVMH Moet Hennessy Louis Vuitton SA (MC)’s 4.3 billion-euro ($6.1 billion) purchase of Rome-based jeweler Bulgari SpA (BUL) may spark a wave of consolidation as some companies seek to narrow the gap with their larger peers. “Expect more mergers and acquisitions and IPOs,” said Armando Branchini, vice chairman of Intercorporate, a Milan- based consulting firm specializing in luxury goods. “When the favorable winds blow, all the sailors hoist their sails.” <Bloomberg>

Hedgeye Retail’s Take: What’s funny is that this shows how this is really a relationship business. Such a big number of strategic acquisitions in the consumer non-durables/durables spaces happen around these trade shows. It’s where the key players assemble and think big.  Remember, Paul Fireman (Reebok) and Herbert Hainer (Adidas) happened to be at the same sporting event back in 2006. They casually got together, and by the end of the night decided that a merger was the best way to crush Nike. Whoops… (except for Fireman and Reebok shareholders, who made out like bandits relative to what they’d have done on their own in the ensuing 12 months).

 

Belle to Launch B2C Shoe Site with Baidu - Shenzhen-based footwear company Belle International will work with Chinese search engine Baidu to establish a business-to-consumer site which will be led by the former vice president of business-to-consumer site 360buy.com, Xu Lei. Industry experts said that Belle’s new e-commerce plan would block other shoe B2Cs from shoe supply.  Belle has planned its online business as early as 2008, and launched its e-commerce website topshoes.cn. However, according to Belle's financial report released in March, its turnover in 2010 hit CNY 23.706 billion, of which topshoes.cn earned only CNY 100 million. <FashionNetAsia>

Hedgeye Retail’s Take: Most people don’t know Belle, but this might be the top story of the day. One of Belle’s strengths is that it was the first casual footwear brand that built physical infrastructure beyond the East coast of China. It even outpaced Nike. Now to pair up with Baidu as they go heavy online is a statement in itself.

 

Spanish Court Strikes Down EUR 98M Award to Puma Licensee - A district court in Madrid has overturned a Spanish arbitration panel's ruling that Puma Ag pay its Spanish licensee EUR 98 million Euros, Puma announced. PUMA is therefore no longer obliged to pay the sum. The verdict was reached on June 14. Puma appealed the arbitration ruling, which required it pay its former Spanish licensee and holder Estudio 2000 S.A. for its  remaining trademark rights in Spain. “The ruling by the District Court of Madrid is totally in line with what we had anticipated and frees us from the payment of 98 million Euros for the vesting of PUMA trademark rights,” said Jochen Zeitz, Chairman and CEO of PUMA AG. “We will now make full use of all the options available to us to secure all PUMA trademark rights in Spain.” PUMA will continue its efforts in uniting all Spanish PUMA trademarks. <SportsOneSource>

Hedgeye Retail’s Take: A rather big win for Puma, considering that it is hardly a Spanish brand. That said, the PPR capital infusion that PUMA Spain is seeing is an influence that we should probably not overlook.

 

China’s Alibaba will Split Taobao into Three e-Commerce Units - China-based e-commerce operator Alibaba Group Holding Ltd. said today it would split its Taobao online retail arm into three units. Alibaba says the Taobao Mall will serve consumers making purchases from retailers; eTao will focus on searches related to shopping; and Taobao Marketplace will enable consumers to buy and sell goods from each other. Alibaba also is considering going public, according to a letter that CEO Jack Ma sent to employees. The letter said the split will help the e-commerce operator compete better amid what Ma called dramatic changes in online retailing. In 2005, Yahoo Inc. bought a 40% stake in Alibaba.com. The company, which was founded in 1999 and had its initial public offering in 2007, has often been called the eBay of China.  <InternetRetailer>

Hedgeye Retail’s Take: Prepping for the deal… This makes perfect sense – public or not. It gives a glimpse as to how consumers think. Some like physical shopping. Some like to do it on a keyboard – but getting new goods at the best price. And others want used items that are presently in the hands of other consumers.

 

 


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