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European Risk Monitor: Ouch!

Positions in Europe: Long Germany (EWG); Long Sweden (EWD)


Geopolitical risk is back, or did it ever leave? As we look back at last week’s market performance in Europe little has changed regarding the region’s sovereign debt soap opera. The incremental news, including Moody’s downgrade of Portuguese credit rating four notches to junk (Ba2) on Wednesday, contributed significantly to the strong underperformance from the peripheral capital markets, while the spotlight on fiscal imbalances appears to jump from one nation to the next. Of the equity markets, Italy’s FTSE was the worst performer across the region, down -7.2% last week on a week-over-week basis, followed by Spain’s IBEX (-5.3%), and Greece’s Athex (-4.4%).

 

Our risk metrics of bond yields and CDS spreads continue to trend up and to the right, reflecting that little has been done to address the solvency issues of the PIIGS. We’ve named the bailout packages for the PIIGS mere ‘band-aids’ for they’re just that—short term fixes to much larger fiscal imbalances. Repairing years of government overspending, oversized government sectors, and a lack of tax collection on a backdrop of weak growth prospects and under the rigid constraints of the ECB’s unilateral monetary policy, change in the fiscal standing of the PIIGS will not happen overnight—yet investor patience is short and the actions of the main ratings agencies are impactful. Expect more foot power (riots and demonstrations) on the ground. The nearest major catalyst is a mid-September date to finalize a second bailout package for Greece (est. €70-120 Billion).

 

European Risk Monitor: Ouch! - me.1

 

European Risk Monitor: Ouch! - me2

 

As headlines sway markets, “new risks” have surfaced from Italy. We’ve long since warned of elevated debt and deficit levels of Italy and Spain, two economies that make Greece, Portugal, and Ireland, even when combined, look like small fries, with exponentially more banking counterparty exposure to the rest of Europe.  News out today that Italian regulators are ordering a new short-selling rule on Italian-listed securities until September 9th, not only sent banking stocks across the region plummeting [in some cases halting the stock (Unicredit)], but took down entire indices as well. Italy’s FTSE  had its largest one-day drop in more than a year!  Helping the tumble was talk about Italy’s public debt—the second highest in the Eurozone behind Greece’s—at 119% of GDP at a meeting of Eurozone finance ministers today in Brussels as Italy’s parliament still needs to finalize a new three year austerity program worth €47 billion in tax hikes and spending cuts next month.

 

While Eurozone leaders, including Chancellor Merkel, voiced confidence in Italy’s ability to pass austerity and trim its debt, it was nevertheless a bloody Monday, with neither the equity, debt or currency markets un-phased. The worst equity performers day-over-day included:

 

Portugal (-4.3%)

Italy (-4.05%)

Spain (-2.7%)

France (-2.7%)

Greece (-2.6%)

 

The EUR-USD, which has largely held up in the $1.40 to $1.45 range over the last weeks, touched $1.39 intraday today (the first time since late May) and is trading at  $1.4022, or down  -1.70%. The EUR-USD is now squarely through our intermediate term TREND line of $1.43, an ominous signal that we’ll be looking for confirmation of before issuing a new target.  We continue to maintain that Troika’s mandate to step in to bailout any Eurozone member will help support the EUR-USD, but not in perpetuity.

 

All-Time is a Long Time!

With yields continuing to blow out across the periphery, our focus is on Spain and Italy, both of which flashed all-time highs in spreads over German bunds today. This ominous signal was countered by the relative safety trade in the Swiss Franc, a haven as Europe works through its issues. The CHF-EUR reached its own all-time high at 0.8539 EUR today!

 

European Risk Monitor: Ouch! - me3

 

 

Banking Risks Pop

Ahead of this Wednesday’s (7/13) announcement of the European Bank Stress Tests, Part II, and with respect to Italy’s move on short sales today, risk blew out significantly week-over-week. Our European Financials CDS Monitor showed that 32 of the 38 bank swaps were wider week-over-week, and 7 were tighter, and one unchanged.  Should the estimated 15-22 of 95 banks fail the test, expect more downside ahead!

 

European Risk Monitor: Ouch! - me4

 

 

Positioning

We remain very cautious on owning European countries on the long or short sides. To the latter, we think there’s more downside from here for the capital markets of the periphery. We remain long Germany (via the etf EWG) in the Hedgeye Virtual Portfolio and added Sweden (EWD) on the long side on 7/8. 

 

Matthew Hedrick

Analyst


Squeezy Is Full: SP500 Levels, Refreshed

POSITION: no position in SPY

 

At the market’s closing price of 1353 on Thursday July 7th, 2011 (another lower long-term high), the SP500 had been up for 7 out of 8 trading days. Now, after its 85 point short squeeze (+6.7%), it appears that Squeezy The Shark is full.

 

Hindsight in market prices is always crystal clear. In the chart below you can see that US stocks failed to break-out to either a fresh YTD high (1363) or above our long-term TAIL of resistance (1377). In the immediate and long-term (2 of our 3 core risk management durations – TRADE and TAIL), that’s bearish.

 

What’s bullish is that the intermediate-term TREND line of support for the SP500 remains intact (1316). Can the TREND line hold? We’ll have to wait and watch – because the best way to manage risk around market ranges is to let the market’s last price tell us what to do next. If 1317 breaks, there is no long-term TAIL of support to 1241.

 

KM

 

Keith R. McCullough
Chief Executive Officer

 

Squeezy Is Full: SP500 Levels, Refreshed - 1


MACAU: STRONG START TO THE MONTH

Our early July revenue estimate is for HK$22.5-23.5BN, up 42-48% YoY.

 

 

July is off to a very strong start in Macau.  Table revenues averaged HK$748 million per day for a total of HK$7.479 billion through the first 10 days of the month.  We believe full month total gaming revenues (including slots) is on pace to achieve a range of HK$22.5-23.5 billion, up 42-48% over last year.

 

As can be seen in the table below, MPEL and MGM were the big market share winners in the first 10 days while LVS and SJM were the losers.  We don’t know as of yet how much hold percentage affected the early July results.  As a reminder, we think MPEL and Wynn should generate the biggest upside from consensus for Q2 EBITDA, in that order.  MPEL appears to be off to the best start for Q3.

 

MACAU: STRONG START TO THE MONTH - macau july


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MONDAY MORNING RISK MONITOR: ITALIAN BANK SWAPS BLAST OFF

This week's notable callouts include Italian Bank swaps and European sovereign swaps blowing out.

 

Financial Risk Monitor Summary (Across 3 Durations):

  • Short-term (WoW): Negative / 2 of 10 improved / 3 out of 10 worsened / 5 of 10 unchanged
  • Intermediate-term (MoM): Negative / 1 of 10 improved / 4 of 10 worsened / 5 of 10 unchanged
  • Long-term (150 DMA): Negative / 1 of 10 improved / 5 of 10 worsened / 4 of 10 unchanged

 

MONDAY MORNING RISK MONITOR: ITALIAN BANK SWAPS BLAST OFF - summary

 

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

Widened the most vs last week: JPM, BAC, C

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

Widened the most vs last month: COF, ALL, AIG

Tightened the most vs last month: MTG, RDN, PRU

 

MONDAY MORNING RISK MONITOR: ITALIAN BANK SWAPS BLAST OFF - us cds

 

2. European Financials CDS Monitor – Banks swaps in Europe were mostly wider last week.  32 of the 38 swaps were wider and 7 tightened, with one unchanged.   

 

MONDAY MORNING RISK MONITOR: ITALIAN BANK SWAPS BLAST OFF - euro cds

 

3. European Sovereign CDS – European sovereign swaps continued to blow out significantly higher, increasing an average of 37% WoW.

MONDAY MORNING RISK MONITOR: ITALIAN BANK SWAPS BLAST OFF - sov cds

 

4. High Yield (YTM) Monitor – High Yield rates edged moved lower last week, ending at 7.31 versus 7.38 the prior week.

 

MONDAY MORNING RISK MONITOR: ITALIAN BANK SWAPS BLAST OFF - high yield

 

5. Leveraged Loan Index Monitor – The Leveraged Loan Index climbed slightly last week, ending the week 4 points higher than the previous week at 1609. 

 

MONDAY MORNING RISK MONITOR: ITALIAN BANK SWAPS BLAST OFF - lev loan

 

6. TED Spread Monitor – The TED spread fell slightly, ending the week at 22.6 versus 23.0 the prior week.

 

MONDAY MORNING RISK MONITOR: ITALIAN BANK SWAPS BLAST OFF - ted

 

7. Journal of Commerce Commodity Price Index – Last week, the JOC index rose less than one point to 9.7. 

 

MONDAY MORNING RISK MONITOR: ITALIAN BANK SWAPS BLAST OFF - JOC

 

8. Greek Bond Yields Monitor – We chart the 10-year yield on Greek bonds.  Last week yields rose 52 bps, ending the week at 1686.

 

MONDAY MORNING RISK MONITOR: ITALIAN BANK SWAPS BLAST OFF - greek bonds

 

9. 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.  Last week the series rose slightly, climbing 27 points versus the prior week.

 

MONDAY MORNING RISK MONITOR: ITALIAN BANK SWAPS BLAST OFF - 2 10

 

10. 2-10 Spread – We track the 2-10 spread as a proxy for bank margins.  Last week the 2-10 spread tightened 7 bps to 264 bps.   

 

<chart11>

 

11. XLF Macro Quantitative Setup – Our Macro team sees the setup in the XLF as follows:  2.1% upside to TRADE resistance, 2.3% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: ITALIAN BANK SWAPS BLAST OFF - XLF

 

Margin Debt Back Off of Recent Highs

We publish 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.  In May, margin debt decreased $5.3B to $315B.  On a standard deviation basis, margin debt fell to 1.36 standard deviations above the long-run average.

 

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

 

MONDAY MORNING RISK MONITOR: ITALIAN BANK SWAPS BLAST OFF - margin debt

 

Joshua Steiner, CFA

 

Allison Kaptur


TALES OF THE TAPE: DNKN, MCD, CBRL, BWLD

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

 

 

MACRO

 

Investors are paring back bets on rising agricultural prices has supply concerns ease on recent commentary that revealed better supply metrics than previously assumed. 

 

 

QUICK SERVICE

  • DNKN sees revenues of $155m to $158m for the quarter ended June 25, based on available information, according to an amendment to the company’s S-1 filed this morning.  Additional information included expected net income of $16.4m - $17.4m, Dunkin’ Donuts U.S. comp sales up 3.5% to 4.0% y/y and Baskin-Robbins U.S. comp sales down 2.5% - 3.2% y/y.  The IPO size was boosted to $460m from $400m.
  • MCD operator (Latin America) Arcos Dorados Holdings Inc. issued five-year real-linked bonds to yield 10.25% on Friday.

 

CASUAL DINING

  • CBRL has announced a new five-year $750 million bank credit line.  This should result in added interest charges of $5m in the fourth quarter.
  • BWLD gained on accelerating volume during Friday's trading session.

 

TALES OF THE TAPE: DNKN, MCD, CBRL, BWLD - stocks 711

 

Howard Penney

Managing Director

 

Rory Green

Analyst


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - July 11, 2011

 

As we look at today’s set up for the S&P 500, the range is 39 points or -1.47% downside to 1324 and 1.43% upside to 1363.

 

SECTOR AND GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - levels 711

 

THE HEDGEYE DAILY OUTLOOK - daily sector view

 

THE HEDGEYE DAILY OUTLOOK - global performance

 

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: -1202 (-2926)  
  • VOLUME: NYSE 771.13 (-8.57%)
  • VIX:  15.95 YTD PERFORMANCE: -10.14%
  • SPX PUT/CALL RATIO: 1.65 from 1.15 (-44.05%)

 

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: 22.57
  • 3-MONTH T-BILL YIELD: 0.03%
  • 10-Year: 3.03 from 3.17
  • YIELD CURVE: 2.63 from 2.68

 

MACRO DATA POINTS:

  • 11 a.m.: Export inspections: Corn, soybeans, wheat
  • 11:30 a.m.: U.S. to sell $27b in 3-mo., $24b in 6-mo. bills
  • 4 p.m.: Crop conditions

WHAT TO WATCH:

  • Ruth’s Hospitality (RUTH) may rise as much as 40% in next 18 mos. as economy rebounds: Barron’s, citing Rollins Capital
  • Morgan Stanley (MS) may be attractively priced after 27% plunge from its Feb. high: Barron’s
  • European officials meet today to consider how to dig Greece out of its financial hole; meanwhile markets are battering bonds of Spain, Italy
  • Williams board was expected to meet yesterday about whether to raise its bid for Southern Union, CNBC reported. SUG trading ~5% above Energy Transfer’s offer price
  • Monsanto, Sinochem said to be in advanced talks over strengthening ties between cos.: WSJ
  • “Transformers: Dark of the Moon” top-grossing film at U.S., Canadian theaters for second weekend, taking in $47m 

 

COMMODITY/GROWTH EXPECTATION

 

THE HEDGEYE DAILY OUTLOOK - daily commodity view

 

 

COMMODITY HEADLINES FROM BLOOMBERG:

  • Copper May Decline on Concern Sovereign-Debt Crisis Might Spread to Italy
  • Gold May Advance for a Sixth Day as Growth Concern Fuels Demand for Haven
  • Wheat Drops as India May Allow 2 Million Tons for Sale to Foreign Buyers
  • Sugar Drops as Sovereign-Debt Crisis May Spread to Italy; Coffee Slides
  • Platinum Eyes ‘Top End’ of India’s Mass Bullion Jewelry Market, Group Says
  • Monsoon Rain Covering India a Week Early Boost Crops From Rice to Soybeans
  • Tin Exports From Indonesia Jump to Highest Level Since 2009 as Rain Eases
  • Codelco Miners Fight Job Cuts in Company’s First General Strike Since 1993
  • Palm Oil Stockpiles in Malaysia Climb to 18-Month High on Increased Output
  • Copper Imports by China Climb for First Time in Three Months on Stockpiles
  • Gillard Hits Miners as Bond Spreads Widen Most in Year: Australia Credit
  • Hedge Funds Raise Bets on Gasoline After Retail Price Drop: Energy Markets
  • Bangladesh Plans to Buy More Wheat for Welfare Programs, State Agency Says
  • Steel Beating Oil on China Demand Spurs Metalloinvest Debut: Russia Credit

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - daily currency view

 

 

EUROPEAN MARKETS

  • EUROPE: just a mess this morn; FTSE and DAX holding TREND, but Greece and Spain in particular look awful; Finland down 1.6% to -14% YTD

 

THE HEDGEYE DAILY OUTLOOK - euro performance

 

 

ASIAN MARKETS

  • ASIA: overdue correction across the board except China (we're long) which closed up +0.18%; KOSPI and Sensex holding TREND support

 

THE HEDGEYE DAILY OUTLOOK - asia performance

 

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - MIDEAST PERFORMANCE

 

 

Howard Penney

Managing Director


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