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MONDAY MORNING RISK MONITOR: ITALIAN AND SPANISH SPREADS ARE THE KEY INDICATORS

 

***Tune in for our upcoming call with industry insider Peter Atwater***

 

Peter has run JPMorgan's asset-backed securities business, has been Treasurer of Bank One, CEO of Bank One Private Client Services, and CFO of Juniper Financial among other high-profile roles through the Financial Services Industry. The breadth and profile of his experience should make for an invaluable conversation on the topics of the EU debt crisis, US downgrade ramifications, and various other trends within the sector. 

 

Wednesday, August 3rd, 2011

 

10 AM

 

 

Not surprisingly, last week's trends were dominated by a general increase in risk around the debt ceiling. What we would call out, however, is the trend and current level in Italian and Spanish sovereign swaps, as these are the next risk areas of focus for the market as they are currently near their all-time highs, and continue to move higher. 


Financial Risk Monitor Summary (Across 3 Durations):

  • Short-term (WoW): Negative / 2 of 11 improved / 6 out of 11 worsened / 3 of 11 unchanged
  • Intermediate-term (MoM): Negative / 3 of 11 improved / 7 of 11 worsened / 1 of 11 unchanged
  • Long-term (150 DMA): Negative / 3 of 11 improved / 5 of 11 worsened / 3 of 11 unchanged

 

MONDAY MORNING RISK MONITOR: ITALIAN AND SPANISH SPREADS ARE THE KEY INDICATORS - summary

 

1. US Financials CDS Monitor – Swaps widened across all domestic financials last week (28 of 28 issuers widening).  On a month-over-month basis, only two issuers were tighter.  Mortgage insurer swaps continued to blow out.

Widened the most vs last week: JPM, MTG, AGO

Widened the least vs last week: MET, ACE, MMC

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

Tightened the most/widened the least vs last month: MBI, MMC, AON

 

MONDAY MORNING RISK MONITOR: ITALIAN AND SPANISH SPREADS ARE THE KEY INDICATORS - us cds

 

2. European Financials CDS Monitor – Banks swaps in Europe were mostly wider last week.  36 of the 38 swaps were wider and 2 tightened.   

 

MONDAY MORNING RISK MONITOR: ITALIAN AND SPANISH SPREADS ARE THE KEY INDICATORS - euro cds

 

3. European Sovereign CDS – European sovereign swaps moved higher last week off of their post-bailout lows.  We believe the CDS market is currently pricing in decreased hedge effectiveness in addition to improvement in sentiment around sovereign solvency.  Judging by the Greek bailout, regulators are making a concerted effort to design a bailout that does not trigger CDS.

 

MONDAY MORNING RISK MONITOR: ITALIAN AND SPANISH SPREADS ARE THE KEY INDICATORS - sov cds

 

MONDAY MORNING RISK MONITOR: ITALIAN AND SPANISH SPREADS ARE THE KEY INDICATORS - sov cds 2

 

4. High Yield (YTM) Monitor – High Yield rates were up slightly last week, ending at 7.40 versus 7.36 the prior week.

 

MONDAY MORNING RISK MONITOR: ITALIAN AND SPANISH SPREADS ARE THE KEY INDICATORS - high yield

 

5. Leveraged Loan Index Monitor – The Leveraged Loan Index fell 4 points last week, ending at 1606. 

 

MONDAY MORNING RISK MONITOR: ITALIAN AND SPANISH SPREADS ARE THE KEY INDICATORS - lev loan

 

6. TED Spread Monitor – The TED spread dropped sharply, ending the week at 16.4 versus 22.3 the prior week.

 

MONDAY MORNING RISK MONITOR: ITALIAN AND SPANISH SPREADS ARE THE KEY INDICATORS - ted spread

 

7. Journal of Commerce Commodity Price Index – Last week, the JOC index rose slightly to 8.9. 

 

MONDAY MORNING RISK MONITOR: ITALIAN AND SPANISH SPREADS ARE THE KEY INDICATORS - JOC

 

8. Greek Bond Yields Monitor – We chart the 10-year yield on Greek bonds.  Last week yields rose 14 bps, ending the week at 1483.

 

MONDAY MORNING RISK MONITOR: ITALIAN AND SPANISH SPREADS ARE THE KEY INDICATORS - gr bond

 

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 130 bps.

 

MONDAY MORNING RISK MONITOR: ITALIAN AND SPANISH SPREADS ARE THE KEY INDICATORS - 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 index dropped substantially, falling 60 points to 1264.

 

MONDAY MORNING RISK MONITOR: ITALIAN AND SPANISH SPREADS ARE THE KEY INDICATORS - 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 12 bps to 244 bps.   

 

MONDAY MORNING RISK MONITOR: ITALIAN AND SPANISH SPREADS ARE THE KEY INDICATORS - 2 10

 

12. XLF Macro Quantitative Setup – Our Macro team sees the setup in the XLF as follows:  2.1% upside to TRADE resistance, 1.3% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: ITALIAN AND SPANISH SPREADS ARE THE KEY INDICATORS - xlf

 

Margin Debt Continues to Fall

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 $9.5B to $306B.  On a standard deviation basis, margin debt fell to 1.21 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 June.

 

MONDAY MORNING RISK MONITOR: ITALIAN AND SPANISH SPREADS ARE THE KEY INDICATORS - margin debt

 

Joshua Steiner, CFA

 

Allison Kaptur


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - August 1, 2011

 

With the most anticipated headline since ‘sun rising in the East’ behind us, the question for risk managers now isn’t about debt deals – it’s about Growth and Earnings Expectations. I’m looking for those 2 things and Europig problems to take back the headlines in the coming week.  As we look at today’s set up for the S&P 500, the range is 30 points or -0.49% downside to 1286 and 1.84% upside to 1316.

 

SECTOR AND GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - levels 81

 

THE HEDGEYE DAILY OUTLOOK - daily sector view

 

THE HEDGEYE DAILY OUTLOOK - global performance

 

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: -1028 (-303)  
  • VOLUME: NYSE 1209.50 (+22.56%)
  • VIX:  25.25 +6.36% YTD PERFORMANCE: +42.25%
  • SPX PUT/CALL RATIO: 2.30 from 1.60 (44.47%)

CREDIT/ECONOMIC MARKET LOOK:

 

BONDS – we’ve been on the other side of the PIMCO “credit risk” trade (El-Erian) and focused more on the 2 things that have really provided a bid for bonds since April – US Growth Slowing and Inflation Expectations coming down.  New highs in 10 and 30 yr UST bonds on Friday into the “news” this morning.  Don’t forget Q1 2011 US GDP was restated at 0.4% on Friday!

 

  • TED SPREAD: 17.08
  • 3-MONTH T-BILL YIELD: 0.10% +0.03%
  • 10-Year: 2.82 from 2.98    
  • YIELD CURVE: 2.46 from 2.56

MACRO DATA POINTS:

  •  10 a.m.: Construction spending, est. 0.1%, prior (-0.6%)
  • 10 a.m.: ISM Manufacturing, Jul, est. 54.5, prior 55.3
  • 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:

  • Deficit agreement would cut $917b in spending over a decade, raise debt limit initially by $900b and assign special congressional committee to find another $1.5t in deficit savings by late Nov., to be enacted by Christmas
  • HSBC to cut 30,000 jobs total worldwide by 2013 as part of plan to reduce costs by $2.5b-$3.5b; agreed to sell upstate NY branch network to First Niagara for ~$1b as it pares U.S. ops
  • FedEx (FDX) CEO “largely upbeat” on outlook as economy improves, businesses start building inventories: Barron’s

COMMODITY/GROWTH EXPECTATION

 

THE HEDGEYE DAILY OUTLOOK - daily commodity view

 

 

COMMODITY HEADLINES FROM BLOOMBERG:

  • Commodities Rally as Deal Avoids ‘Act of Collective Insanity’
  • Oil Advances From Two-Week Low as Lawmakers Reach Debt Agreement
  • Gold Drops From Record as Obama Says Lawmakers Reach Debt Deal
  • Copper Rises for Third Day as U.S. Debt Accord Averts Default
  • Wheat, Corn Climb as U.S. Debt-Ceiling Accord Avoids Default
  • Sugar Rises on Signals Demand Remains Steady; Coffee Advances
  • Russia Targets Asia With Cheapest Wheat After Putin’s Export Ban
  • ArcelorMittal, Peabody to Put Hostile Bid to Macarthur Holders
  • S. African CEOs Told by Eunomix Nationalization May Happen
  • Funds Raise Bullish Commodity Bets as Silver Holdings Jump
  • BHP Billiton Workers Resume Strikes at Australian Coal Mines
  • India’s Cotton Exports May Be Limited on ‘Lackluster’ Demand
  • Commodities Beat Stocks, Bonds in July Amid China Expansion

CURRENCIES

 

EUR/USD – this is the one strike price that should continue to whip around in the next 48 hours as we finally put this dog to bed; watch 1.43 as your TREND line that inflates/deflates everything else (across asset classes). The global market’s correlation risk moves off that.

 

THE HEDGEYE DAILY OUTLOOK - daily currency view

 

 

EUROPEAN MARKETS

  • EUROPE: wet Kleenex action continues with European stocks doing nothing on the "news" that is only news to people who need to make it news
  • July final Manufacturing PMI; France 50.5 vs preliminary 50.1; Germany 52.0 vs preliminary 52.1; Eurozone 50.4 vs preliminary 50.4; UK Jul Manufacturing PMI 49.1 vs consensus 51.0, prior revised 51.4 from 51.3

THE HEDGEYE DAILY OUTLOOK - euro performance

 

 

ASIAN MARKETS

  • ASIA: broad based rally; no surprises; no consequential levels breached on the upside - I'm long China and India currently.
  • China July PMI 50.7 vs 50.1 cons and 50.9 seq.
  • Australia July manufacturing index 43.4 vs 52.9 seq.
  • Australia June new home sales (8.7%) m/m.

THE HEDGEYE DAILY OUTLOOK - asia performance

 

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - MIDEAST PERFORMANCE

 

 

Howard Penney

Managing Director


Congress Holds Court

This note was originally published at 8am on July 27, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“If we get jammed up, we're holding court on the street.”

-Jimmy Coughlin, “The Town” (2010)

 

Just when I thought the biggest tail risk to whatever remains of our free-market lives (Congress) couldn’t find lower-lows, the Republicans redefined the ridiculous yesterday.

 

In a must read section of a Bloomberg News article by Julie Hirschfeld Davis this morning, Republican Congressman Kevin McCarthy of California gets YouTubed for playing a clip from “The Town” to inspire the Republican troops at their party headquarters yesterday.

 

I don’t think Julie could have made up this scene if she tried. To put this movie in context (in case you haven’t seen it, it’s an outstanding movie directed in 2010 by Ben Affleck with a 4.5 star rating on Netflix), this is a Boston bank robber movie where the aforementioned character that I quoted (“Jim”, played by Jeremy Renner) is as emotionally unglued as the VIX.

 

Back to the Global Macro Grind

 

The VIX (the Volatility Index) is up +15.6% in a straight line this week as Congress Holds Court, watches gangster movies, and does their best to implode the US Dollar (down another -0.9% yesterday, taking its cumulative losses to -2.2% in the last 7 trading days).

 

This is not only a national embarrassment for the country, but a professional embarrassment for each and every one of these morons who don’t realize that the entire world is watching them – real-time.

 

Did I call them morons? Sorry, I meant Market Morons. Not all of them, some of them, couldn’t tell you what a EUR/USD currency trade in swap means or where to execute it. All the while the entire world’s globally interconnected risk trades off of their unawareness. Nice.

 

Domestically, this analytical incompetence isn’t lost on people. Actually, it isn’t Internationally either. In terms of scoring the Fiat Fools globally, consider the following polls:

  1. USA – Congress hits new low in yesterday’s Rasmussen reading; only 6% of Americans think Congress is doing a good job
  2. JAPAN – Japanese PM Naoto Kan’s approval rating hit a fresh new low yesterday of 17.1% (that’s lower than Obama’s!)
  3. ITALY – Embattled hot-tubing Prime Minister, Silvio Berlusconi’s approval ratings are dropping 1000 basis points a month

What do all of these countries and their said/sad leadership have in common? Print LOTS OF MONEY!

 

Yeah baby, print it – and if you get jammed up with a 17 year-old while swimming naked or swilling with some Republicans in de Club, just bust out some fear-mongering and hold court on the manic media’s streets. They need content.

 

If you didn’t know this is all ending the way that gravity predicted it would, now you know. Thank God for that.

 

What to do with your hard earned money?

 

I’ve actually taken this gong show as an opportunity to get invested. Yesterday, on weakness, I bought the US Dollar (UUP) and Indian Equities (INP), taking my Cash position in the Hedgeye Asset Allocation Model down to its 2nd lowest level of the year (37%).

 

This doesn’t make me a raging bull. This simply makes me a buyer on red and a seller on green. As we outlined in our Q3 Macro Themes call a few weeks ago, as the Fiat Fools of our world play “Policy Pong” with our markets, we should stop getting frustrated by it – and just trade it. Be a “Risk Ranger” (another Q3 Theme) and trade risk around the range.

 

Yes, buy-and-hold fans, trading is a required exercise in modern day risk management. Doesn’t that make me a “short-termist” when our longest of long-term views have been what has really led us to being right on 2011 Growth Slowing As Inflation Accelerates? The Fiat Fools and their policies do 2 very specific things to your economies and markets:

 

1.       They shorten economic cycles

2.       They amplify market volatility

 

And on that note about volatility, I’ll end this morning’s missive where I began – with a preview of the next episode of “The Town’s” Debt Ceiling from our squirrely friend Jimmy, who so seemingly inspired Republican Congressman McCarthy yesterday: “Secrets with this one.”

 

My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1599-1624, $98.06-100.81, and 1326-1353, respectively. Buy low. Sell high.

 

Best of luck out there today and enjoy the show,

KM

 

Keith R. McCullough
Chief Executive Officer 

 

Congress Holds Court - Chart of the Day

 

Congress Holds Court - Virtual Portfolio


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THE M3: JULY GGR; JULY CHINA HOME PRICES

The Macau Metro Monitor, August 1, 2011

 

 

MONTHLY GROSS REVENUE FROM GAMES OF FORTUNE DSEC

July Macau GGR rose 48.4% YoY to 24.2MOP BN (23.5HKD BN, 3.02US BN).

 

CHINA JULY RESIDENTIAL PROPERTY PRICES UP 0.21% VS JUNE- DATA PROVIDER- WSJ

According to China Real Estate Index System, residential property prices in 100 major cities in China rose 0.21% in July from June, slower than June's 0.41% MoM increase.

 

 

 



Old Slate

“We’re not just going to start with a clean slate, we’re going to throw the old slate away.”

-Vince Lombardi (1959)

 

That was one of the first iconic leadership quotes to come out of Vince Lombardi’s mouth when he moved his family to Green Bay, Wisconsin in 1959 (page 207 of “When Pride Still Mattered”, by David Maraniss).

 

As all great leaders across history have proven, results matter more than rhetoric. But, when you can combine both, you have the holy grail of life’s opportunities – to “be the change you want to see in this world” (Gandhi).

 

Barack Obama and Johnny Boehner are not Gandhi. Neither are they Lombardi. These two gentlemen would have a tough time leading me to the men’s room at a Yale Hockey game without forming a committee. And, sadly, after we get this morning’s stock market rally out of the way, we’re all going to be stuck with their same Old Slate.

 

This isn’t to say that this gong show of a Debt Ceiling Debate isn’t going to help America start with a clean slate. First though, we need to throw away the old one! That will take time. Change is a process; not a point.

 

Back to the Global Macro Grind

 

With the most anticipated headline since ‘sun rising in the East’ behind us, the question for Risk Managers now isn’t about the mechanics of the debt “deal” (it will be back end loaded and will not move the dial until all of these politicians are gone) – it’s about Global Growth and Earnings Expectations – both are still too high.

 

Here’s how the globally interconnected market is reacting to the “news” that Washington does career risk management:

  1. STOCKS – Asia rallied across the board to lower-highs and remains the best looking region of the 3 majors (Asia/Europe/USA); European Equities are up marginally on low volume and basically still look awful; US Equities have immediate-term downside support at 1286, but a wall of intermediate-term TREND resistance up at 1319 on the SP500.
  2. TREASURY BONDS – We’ve been on the other side of the PIMCO “credit risk” trade (El-Erian) and focused more on the two things that have really provided a bid for bonds since April – US Growth Slowing and Inflation Expectations coming down. We saw new highs in 10 and 30-year UST bonds on Friday into the “news.” Now Treasuries are immediate-term TRADE overbought.
  3. EUR/USD – This is the one strike price that should continue to whip around in the next 48 hours as we finally put this debt deal dog to bed. Watch $1.43 as your TREND line that inflates/deflates everything else (across asset classes). The global market’s Correlation Risk moves off that.

From the Eurocrats to the Fiat Fools of the Keynesian Kingdom in America, do any of these people realize the causal relationship between debt and growth?

 

Republicans and Democrats, Reid my Boehner on this:

 

DEBT STRUCTURALLY IMPAIRS GROWTH.

 

That’s it. So keep it simple stupid. The only thing that you are really doing to global markets and economies are:

  1. Shortening economic cycles
  2. Amplifying market volatility

How short was the last “bullish” economic cycle? You tell me (if you are a Washington/Wall Street person you will have a different answer to this question than Main Street, fyi). The only thing worse than Friday’s Q2 US GDP report of 1.3% is the thought that the government’s made-up number could be off by 81%! (Q1’s was restated at 0.36% versus 1.92% prior!!!)

 

I think that’s the first time I have used 3 exclamation points in an Early Look. Re-read that fact about reported US GDP. Maybe I should have used six!!!!!!

 

Either these Republicans and/or Democrats figure out how to throw out this Old Slate of failed economic policy, or The People are going to throw all of them out. That’s the change I can believe in.

 

My immediate-term support and resistance ranges for Gold (sold ours last week), Oil (no position), and the SP500 (no position) are now $1, $95.96-100.49, and 1, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Old Slate - Chart of the Day

 

Old Slate - Virtual Portfolio


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.28%
  • SHORT SIGNALS 78.51%
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