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MONDAY MORNING RISK MONITOR: SWAPS WIDEN FURTHER

This week's notable callouts include European sovereign spreads continuing their dizzying ascent and the Baltic Dry Index rolling over to its lowest level since May.

 

Financial Risk Monitor Summary (Across 3 Durations):

  • Short-term (WoW): Negative / 1 of 11 improved / 8 out of 11 worsened / 2 of 11 unchanged
  • Intermediate-term (MoM): Negative / 1 of 11 improved / 6 of 11 worsened / 4 of 11 unchanged
  • Long-term (150 DMA): Negative / 2 of 11 improved / 5 of 11 worsened / 4 of 11 unchanged

 

MONDAY MORNING RISK MONITOR: SWAPS WIDEN FURTHER - summary

 

1. US Financials CDS Monitor – Swaps were largely wider across domestic financials last week, tightening for only 3 of the 28 issuers and widening for 25.  Moneycenter and broker swaps widened 10% on average.  MBI swaps fell on news that BAC may have settled with the insurer. 

Widened the most vs last week: JPM, AXP, ALL

Tightened the most vs last week: MBI, AGO, PMI

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

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

 

MONDAY MORNING RISK MONITOR: SWAPS WIDEN FURTHER - us cds

 

2. European Financials CDS Monitor – Banks swaps in Europe were mostly wider last week.  37 of the 38 swaps were wider and 1 tightened.   ISDA ruled that the Bank of Ireland experienced a credit event (restructuring), triggering a settlement on the credit default swaps.  Accordingly, swaps are not trading this week for Bank of Ireland. 

 

MONDAY MORNING RISK MONITOR: SWAPS WIDEN FURTHER - euro cds

 

3. European Sovereign CDS – European sovereign swaps continued to blow out significantly higher, increasing an average of 13% WoW.

MONDAY MORNING RISK MONITOR: SWAPS WIDEN FURTHER - sov cds

 

4. High Yield (YTM) Monitor – High Yield rates edged higher last week, ending at 7.37 versus 7.31 the prior week.

 

MONDAY MORNING RISK MONITOR: SWAPS WIDEN FURTHER - high yield

 

5. Leveraged Loan Index Monitor – The Leveraged Loan Index was flat last week, ending at 1609. 

 

MONDAY MORNING RISK MONITOR: SWAPS WIDEN FURTHER - lev loan

 

6. TED Spread Monitor – The TED spread fell slightly, ending the week at 24.7 versus 22.6 the prior week.

 

MONDAY MORNING RISK MONITOR: SWAPS WIDEN FURTHER - ted

 

7. Journal of Commerce Commodity Price Index – Last week, the JOC index fell 2.4 points to 7.3. 

 

MONDAY MORNING RISK MONITOR: SWAPS WIDEN FURTHER - JOC

 

8. Greek Bond Yields Monitor – We chart the 10-year yield on Greek bonds.  Last week yields rose 72 bps, ending the week at 1758.

 

MONDAY MORNING RISK MONITOR: SWAPS WIDEN FURTHER - 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.  After bottoming in April, the index has been moving higher.  Last Friday, spreads closed at 117 bps.

 

MONDAY MORNING RISK MONITOR: SWAPS WIDEN FURTHER - 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.  Last week the series fell to its lowest level since May, closing at 1353.

 

MONDAY MORNING RISK MONITOR: SWAPS WIDEN FURTHER - 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 9 bps to 255 bps.   

 

MONDAY MORNING RISK MONITOR: SWAPS WIDEN FURTHER - 2 10

 

12. XLF Macro Quantitative Setup – Our Macro team sees the setup in the XLF as follows:  1.3% upside to TRADE resistance, 1.5% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: SWAPS WIDEN FURTHER - 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: SWAPS WIDEN FURTHER - margin debt

 

Joshua Steiner, CFA

 

Allison Kaptur


LIZ: Buying The Bone

 

We had a theme in 2009 called ‘Bone or Bust’, which basically said to buy these single digit midgets, or short them because they’re going bankrupt. There’s no in between. Our view on LIZ has been ‘Buy The Bone’, and if the rumored sale of Mexx comes to fruition, this stock has nowhere to go but up.

 

Bloomberg was out Yesterday with a story that ‘sources’ indicate that LIZ is close to selling Mexx to one of several private equity firms -- Leonard Green & Partners, Sun Capital and Golden Gate.  We cannot verify or refute – other than to say that it makes sense conceptually. LIZ needed to get rid of Mexx 3 years ago, and it has turned into the mother of all distractions for a company that is otherwise inflecting in its core Liz Claiborne business at JC Penney and Home Shopping Network, as well as its direct brands – Kate Spade, Juicy Coture, and Lucky.

 

MEXX has lost $90mm in each of the last 2 years (about $0.60 per share, per year), and has accounted for half of LIZ’ EBIT erosion. Simply put, it has been a disaster. And due to a particularly opaque reporting structure, the Street generally cannot tell the true impact to the P&L, nor can it disaggregate the balance sheet impact of this business from the core. The latter is particularly important, because Mexx has been the biggest working capital drain in the entire company – on both inventories and payables. The other thought is that aside from a working capital drag going away, it would also give a $100mm infusion that would go a long way towards mitigating the bankruptcy concerns that are otherwise present in a $5 stock.

 

Speaking of sentiment, I should note that whenever Casey and I talk about LIZ, we hear crickets in response. Seriously…no one cares about it, and I’m convinced that no one will care about until it’s a $10 stock. This transaction should set it on its way.

 

One client asked me last night what the impact to the stock should be. In my best effort to polish up the crystal ball, I can say that $90mm loss in EBIT goes away – that’s about $0.60 per share. Cash proceeds of $100mm go directly to pay down debt. While some may want to simplistically slap a 10x multiple on $0.60 – in reality, given that it shows that 1) this Board is getting off its tail and actually doing something, 2) there’ll be more transparency  to the earnings model, 3) The biggest working capital drag is gone (it disproportionately impacted inventories – and also hit payables due to heavy Li&Fung exposure), and 4) will get a $100mm injection in cash to mitigate bankruptcy risk – I’d ask myself why we won’t see closer to $2 in upside. That’s not very scientific…but the sentiment is definitely in this thing’s favor.

 

One of the considerations here is whether they are going to sell Europe and Canada together. Our sense is they would, but keep in mind that they are very different from a financial perspective. Europe has lost -$97mm and -$105mm in the last two years while Canada generated $7mm and $15mm. From a revenue perspective it’s roughly a 2:1 ratio b/w Europe and Canada generating roughly $725mm in total revs.

 

The company has been speaking to a goal of break-even by 2012 for MEXX. It’s been a low-to-mid single-digit EBIT margin business in the past. We’ve modeled that over the next two years it will return to roughly 0%. For our SOTP we had assumed 2% margins for a value of $0.75/share.

 

Note that the pro-forma table below illustrates the full-year 2011 contribution we are modeling for MEXX. Given that we are already in the 2H, the 2011 impact should a transaction occur would be materially less than what we have suggested. This table is intended to reflect the annual impact of MEXX on the collective Liz Claiborne business, which would be realized in some portion over 2011-2012. In the event a transaction transpires, we will adjust the timing of our model accordingly.

 

LIZ: Buying The Bone - LIZ MEXX ProForma

 

Sum-of-the-Parts:

 

LIZ: Buying The Bone - LIZ SOTP 7 11

 

 


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - July 18, 2011

 

Ugly morning! Asia wasn't the problem either (China up 2x vs the SP500 from the June low). The problem remains the Fiat Fools and their impact on markets (shortening economic cycles and amplifying market volatility).  As we look at today’s set up for the S&P 500, the range is 30 points or -1.45% downside to 1297 and 0.83% upside to 1327.

 

SECTOR AND GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - levels 718

 

THE HEDGEYE DAILY OUTLOOK - global performance

 

THE HEDGEYE DAILY OUTLOOK - daily sector view

 

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: +650 (+2382)  
  • VOLUME: NYSE 1073.50 (+16.05%)
  • VIX:  19.53 -6.11% YTD PERFORMANCE: +10.03%
  • SPX PUT/CALL RATIO: 2.48 from 2.00 (+23.98%)

 

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: 24.47
  • 3-MONTH T-BILL YIELD: 0.02%
  • 10-Year: 2.94 from 2.98
  • YIELD CURVE: 2.57 from 2.60

 

MACRO DATA POINTS:

  • 9 a.m.: TIC Flows, est. $40.0b, prior 30.6b
  • 10 a.m.: NAHB Housing Market Index, July, est. 14, prior 13
  • 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.: Crop conditions

WHAT TO WATCH:

  • Senate leaders plan to push a revised budget this week aimed at allowing a debt-limit increase needed to avoid a government default as President Obama presses for action in time for Aug. 2 deadline

 

COMMODITY/GROWTH EXPECTATION

 

THE HEDGEYE DAILY OUTLOOK - daily commodity view

 

 

COMMODITY HEADLINES FROM BLOOMBERG:

  • Gold Advances Above Record $1,600 on U.S., Europe Sovereign-Debt Concerns
  • Pork Prices Tumble From Record Highs as Corn Bust Spurs Jump in Hog Herds
  • Brent Crude Oil Falls on Concern Europe Debt Crisis Will Slow Fuel Demand
  • Wheat Drops for a Third Day as Importers May Favor Cheaper Russian Grain
  • Coffee Falls as Sovereign-Debt Crisis May Threaten Demand; Sugar Declines
  • Investors Boost Bullish Commodity Bets as Gold Demand Jumps on Debt Crisis
  • Copper May Advance on Speculation Supply Gap Will Keep Supporting Prices
  • China Removes Limits on Prices of Edible Oils, Quanzhou Evening News Says
  • Copper May Rally to a Record $12,000 on Higher Chinese Demand, Maike Says
  • Gold May Reach $5,000 by 2020 on China’s Demand, Standard Chartered Says
  • Brent Crude May Exceed $123 a Barrel on ‘Swing Highs’: Technical Analysis
  • Posco Said Barred From Exporting Iron Ore From $12 Billion Mine Project
  • Cotton Yarn Exports From India May Rebound From September on Mill Demand
  • China Soy Imports May Fall to 51 Million Tons in First Decline Since 2004

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - daily currency view

 

 

EUROPEAN MARKETS

  • EUROPE: Italy is a train wreck - MIB down another full 1% (crash since FEB) and Italian CDS zooming above the Lehman Line to 325bps

 

THE HEDGEYE DAILY OUTLOOK - euro performance

 

 

ASIAN MARKETS

  • ASIA: down across the board, but not nearly as bad as Europe; China down a whole +12 beeps (UP +7.4% vs June low, double the return of the S&P 500

 

THE HEDGEYE DAILY OUTLOOK - asia performance

 

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - MIDEAST PERFORMANCE

 

 

Howard Penney

Managing Director


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

THE M3: Q2 TABLES/SLOTS; JACOBS; CHANGI JUNE DATA; PONTE 16 MALL; HK GAMBLERS

The Macau Metro Monitor, July 18, 2011

 

 

Q2 GAMING STATISTICS DICJ

Number of gaming tables increased by 384 to 5,237 at the end of 2Q 2011.  Number of slot machines increased 1,311 QoQ to 15,098 in Q2.

 

SANDS CHINA ASKS FOR FREEZING OF LAWSUIT FILED BY FIRED CEO Macau Business

Sands China attorneys has asked for the Jacobs case to be put on hold until the result of its appeal, filed to the Nevada Supreme Court, is known.  The appeal states that Sands China, as a Chinese company, is not subject to the jurisdiction of the Nevada court.   

 

Sands China says it would have to spend up to US$1 million (MOP8 million) finding and sorting information to comply with Jacobs’ discovery requests, which includes information on junket operators and their associates.  Sands China argues that if the case is not put on hold, Jacobs will be in possession of relevant information that he can use afterwards if the Nevada Supreme Court approves Sands China’s appeal.

 

MONTHLY BREAKDOWN OF PASSENGER MOVEMENTS Changi Airport Group

The passenger traffic at Changi Airport increased 10.8% YoY and 6.3% MoM in June 2011.

 

PONTE 16 STILL WAITING FOR GOVT APPROVAL FOR MALL Macau Daily Times

Hoffman Ma Ho Man, the deputy CEO of Ponte 16, says he is still waiting for government approval to go ahead with a 400,000-square-foot retail complex at Ponte 16 for about HK$1.07 billion.  “We are now in talks with some retail operators in Japan and Hong Kong and Taiwan. But we have not yet received permission from the Macau government. Construction work and preservation work need a lot more fine-tuning than just opening a new shopping mall. We are hoping to get the nod within this year,” Ma said.

 

HONG KONG RESIDENTS SPEND HKD 23 BLN IN LOCAL CASINOS Macau Daily Times

The Hong Kong Jockey Club (HKJC) says Hong Kong people gambled up to HKD 23 BN in Macau in 2010, which would be the 2nd largest gambling segment in Macau after the Mainland Chinese.

 

HKJC CEO Winfried Engelbrecht-Bresges said he hoped the Hong Kong Government would consider lowering gaming tax rates to help enhance the overall competitiveness of the club.  HKJC pays a 50-75% tax on football betting and horse racing receipts, while the total gaming tax in Macau is 37-40% of gross receipts.


China Bulls

This note was originally published at 8am on July 13, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Emerging markets today are not what the developed markets were in their infancy.”

-Rama Bijapurkar

 

That’s a very simple, but often misunderstood, Global Macro investment point from a book I have recently cited about India’s Macro Consumer market: “We Are Like That Only”, by Rama Bijapurkar (2007).

 

Simple is as simple does - and this morning those who are still storytelling about China’s pending collapse are going to learn that lesson the hard way. China’s Q2 GDP report was outstanding.

 

Hedgeye isn’t a perma-bull on China. I personally don’t aspire to be perma-anything other than permanently managing risk. Risk lives and breathes through a vacuum of expectations. After seeing its stock market down -14.3% in 2010, expectations for Chinese stocks are low and short interest is high.

 

Before I get into what the short sellers of China have wrong, let’s rattle off what the bulls have right in this morning’s GDP report:

  1. China Q2 GDP beat our already bullish expectation of 8-9%, coming in at +9.5% (we care about buy-side expectations)
  2. Fixed Asset Investment growth in Q2 was up +25.6% year-over-year; that’s big – China can print government spending too
  3. June data reports (Retail Sales and Industrial Production growth) were big sequential accelerations versus May 

Now, back to the short sellers…

 

On two critical leading indicators, Mr. Macro Market has warned the shorts that Chinese growth was not going to be the train wreck that US unemployment has become:

  1. Chinese stocks (Shanghai Composite Index) are up +6.6% since bottoming on June 20th, 2011
  2. Copper prices (highly correlated to Chinese demand) are up +12.5% since bottoming in mid-May

Hedgeye bought China (CAF) on June 16th.

 

Bottoms are processes, not points – we get that. Whether or not we bottom-ticked buying China isn’t the point. The point is that managing risk on a globally interconnected basis works both ways. Being Too Bearish at bottoms can carry a short seller out.

 

As a credibility check, we were long Chinese Equities in 2009 and short them in 2010. It’s actually amusing to get emails (from some of the same people who were accusing me of being “too bearish” on China in Q1 of 2010) insinuating that now I’m “too bullish!”

 

Thankfully, that’s the institutionalized business that we are paid to manage expectations in – a business where career risk management often trumps risk managed research – a business where plenty chase the rabbit, rather than being the rabbit.

 

Sometimes the rabbit gets eaten. We get that too. But Wall Street is smart enough to know that the weaponry of these 3 factors working in one direction is something that they need to manage career risk around:

  1. Bullish data
  2. Rising stock prices
  3. High short interest

Bullish data and the prices that support it are crystal clear for everyone to see this morning (China was up +1.5% on the “news”). What you can’t see are the shorts squirming. So here are a few more things to consider on that score:

  1. Short interest in Chinese stocks has almost doubled since the beginning of January 2011 (4.8% versus 2.9% of total shares)
  2. At $961M YTD, outflows in the FXI (China ETF) were the highest of ANY COUNTRY ETF in the 140 countries in XTF Inc’s database
  3. Moody’s (the ultimate lagging indicator) put China “bank debt concerns” on their radar on July 5th

Now those 3 factors aren’t exactly contrarian indicators of a “fresh new best idea” someone wants to present on the short side at the Ira Sohn conference (although someone did). Maybe they should be bucking up for some insurance research and read Hedgeye.

 

On Friday, our Macro Team will be making our 2ndslide presentation on being China Bulls with our launch of the Q3 Hedgeye Macro Themes. We’re calling one of our Q3 Themes “Chinese Cowboys.”

 

Giddy up.

 

My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1536-1572, $94.11-99.79, and 1301-1330, respectively. Manage your risk around the ranges.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

China Bulls - Chart of the Day

 

China Bulls - Virtual Portfolio



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