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MONDAY MORNING RISK MONITOR: FRENCH SWAPS ARE THE KEY INDICATOR

Highlights:

Watch French Sovereign CDS levels as a proxy for the EU Debt Crisis, as a downgrade of France could jeopardize the EFSF. French Sovereign swaps have risen to 158 bps as of this morning, up from 60 bps as recently as April. In the past week alone, they are wider by 37 bps.

 

The notable callouts from this week's Risk Monitor include swaps and spreads blowing out across the complex. High Yield and Leveraged Loans saw significant declines, while both US and EU financial company CDS widened. Also of interest was the sharp decline in commodity prices reflecting a diminishing global growth outlook. The US downgrade is front and center today.

 

Financial Risk Monitor Summary (Across 3 Durations):

  • Short-term (WoW): Negative / 0 of 11 improved / 10 out of 11 worsened / 1 of 11 unchanged
  • Intermediate-term (MoM): Negative / 2 of 11 improved / 9 of 11 worsened / 0 of 11 unchanged
  • Long-term (150 DMA): Negative / 2 of 11 improved / 6 of 11 worsened / 3 of 11 unchanged

MONDAY MORNING RISK MONITOR: FRENCH SWAPS ARE THE KEY INDICATOR - 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 all 28 issuers were also wider. Mortgage insurer swaps continued to blow out, as PMI Group entered the red zone.

Widened the most vs last week: PMI, MTG, RDN

Widened the least vs last week: CB, XL, MMC

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

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

 

MONDAY MORNING RISK MONITOR: FRENCH SWAPS ARE THE KEY INDICATOR - US CDS

 

2. European Financials CDS Monitor – Banks swaps in Europe were mostly wider last week.  34 of the 38 swaps were wider and 4 tightened.   

Widened the most vs last week: Banco Popular Espanol (Spain), Svenska Handelsbanken, Barclays

Widened the least vs last week: Alpha Bank, EFG Eurobank, National Bank of Greece

Widened the most vs last month: Banco Popolare (Italy), Banco Pastor (Spain), Bayerische Hypo (Germany)

Tightened the most/widened the least vs last month: Alpha Bank (Greece), EFG Eurobank (Greece), Hannover Rueckverischerung (Germany)

 

MONDAY MORNING RISK MONITOR: FRENCH SWAPS ARE THE KEY INDICATOR - EU CDS

 

3. European Sovereign CDS – European sovereign swaps moved higher again last week off of their post-bailout lows.  We believe the CDS market is currently pricing in decreased hedge effectiveness. 

 

MONDAY MORNING RISK MONITOR: FRENCH SWAPS ARE THE KEY INDICATOR - SOV CDS

MONDAY MORNING RISK MONITOR: FRENCH SWAPS ARE THE KEY INDICATOR - SOV CDS 2

 

4. High Yield (YTM) Monitor – High Yield rates were up significantly last week, ending at 7.67 versus 7.40 the prior week.

 

MONDAY MORNING RISK MONITOR: FRENCH SWAPS ARE THE KEY INDICATOR - HY

 

5. Leveraged Loan Index Monitor – The Leveraged Loan Index fell 32 points last week, ending at 1574. 

 

MONDAY MORNING RISK MONITOR: FRENCH SWAPS ARE THE KEY INDICATOR - LLI

 

6. TED Spread Monitor – The TED spread widened considerably, ending the week at 25.8 versus 16.4 the prior week.

 

MONDAY MORNING RISK MONITOR: FRENCH SWAPS ARE THE KEY INDICATOR - TED

 

7. Journal of Commerce Commodity Price Index – Last week, the JOC index fell significantly, ending the week at 2.6 vs. 8.9 the prior week. 

 

MONDAY MORNING RISK MONITOR: FRENCH SWAPS ARE THE KEY INDICATOR - JOCS

 

8. Greek Bond Yields Monitor – We chart the 10-year yield on Greek bonds.  Last week yields rose 41 bps, ending the week at 1524 bps.

 

MONDAY MORNING RISK MONITOR: FRENCH SWAPS ARE THE KEY INDICATOR - GREECE

 

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 140 bps.

 

MONDAY MORNING RISK MONITOR: FRENCH SWAPS ARE THE KEY INDICATOR - 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 was essentially flat, coming in at 1268 vs 1264 the prior week.

 

MONDAY MORNING RISK MONITOR: FRENCH SWAPS ARE THE KEY INDICATOR - BALTIC

 

11. 2-10 Spread – We track the 2-10 spread as a proxy for banking sector net interest margins.  Last week the 2-10 spread declined 18 bps to 226 bps from 244 bps the prior week.   

 

MONDAY MORNING RISK MONITOR: FRENCH SWAPS ARE THE KEY INDICATOR - 2 10

 

12. XLF Macro Quantitative Setup – Our Macro team sees the setup in the XLF as follows:  8.1% upside to TRADE resistance, 0.3% downside to TRADE support. That said, if TRADE support of $13.39 should fail to hold on the open, then there is no support below that.

 

MONDAY MORNING RISK MONITOR: FRENCH SWAPS ARE THE KEY INDICATOR - XLF LEVELS

 

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: FRENCH SWAPS ARE THE KEY INDICATOR - margin debt

 

Joshua Steiner, CFA

 

Allison Kaptur


THE M3: S'PORE 2011 GDP FORECAST LOWERED

The Macau Metro Monitor, August 8, 2011

 

 

SINGAPORE REVISES 2011 GROWTH FORECAST TO 5-6% Channel News Asia

Because of the recent financial market turmoil and US debt downgrade, S'pore Prime Minister Lee Hsien Loong said the Government is now projecting steady growth of 5 to 6% for 2011 - a one percentage point reduction from the 5 to 7% forecast earlier.


Winning Trinity

This note was originally published at 8am on August 03, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Repetition, confidence, and passion. The trinity of Lombardi’s football success…”

-David Maraniss (“When Pride Still Mattered”, page 225)

 

You didn’t have to look too far to find some losers on Wall Street or in Washington yesterday. In many respects those two compromised and conflicted constituencies are now, sadly, one and the same. US GDP Growth is slower than Wall Street’s “smartest” thought, and Big Government Intervention continues to amplify market volatility.

 

At Hedgeye, we’re focused on winning. Instead of angling for incremental “edge” on when the next round of Quantitative Guessing is going to be unleashed; instead of taking on some orange jumpsuit risk for a super secret piece of information; instead of not evolving the risk management process – that’s it – we’re just focused on winning.

 

Winning’s Trinity here in New Haven, CT is no different than Vince Lombardi’s process: Repetition, Confidence, and Passion. What’s increasingly fascinated me about this profession is that the older I get, the less I find myself needing to explain these principles to a larger community of people. The said “leaders” out there who don’t get these things yet probably never will.

 

Back to the Global Macro Grind

 

First, let’s focus on the good news.

  1. US Equities we’re finally immediate-term TRADE oversold yesterday
  2. Chinese stocks only closed down 3 basis points overnight (0.03%)
  3. Congress is going on vacation

As for the bad news – well, this globally interconnected market had already signaled for you to get out of US and European Equities before yesterday’s capitulation, so today’s risk management signals in those markets are basically just a reminder of the same:

  1. SP500 intermediate-term TREND line = 1319 (broken)
  2. Russell2000 intermediate-term TREND line = 825 (broken)
  3. UK’s FTSE TREND line = 5955 (broken)
  4. German DAX TREND line = 7123 (broken)
  5. Italy’s MIB TREND line = 20655 (broken)
  6. Spain’s IBEX TREND line = 10269 (broken)

Why are all of these stock markets “broken”? I can assure you it’s not because my pre-schooler pulled up a 1-factor point-and-click chart of 200-day Moving Monkey averages. The answer is multi-factor and multi-duration. And everyone in this business who didn’t blow up in 2008 knows exactly what I mean by that.

 

In any multi-factor model, GROWTH should carry a heavy weighting. Economic Growth is either Accelerating, Slowing, or Unchanged. The biggest calls I’ve ever made in my young career of making “Macro” calls haven’t been on the long or the short side – they have been on the margin. And I don’t mean by levering myself up with margin – I mean calling the turns.

 

In my model, there are 3 STAGES in calling the turns:

  1. Identifying when the acceleration slows
  2. Asserting when the slowdown is accelerating
  3. Recognizing the deceleration of the slowdown

As of this morning, I am going to call these 3 STAGES Hedgeye’s Winning Trinity of global macro risk management.

 

This is a cool model because all of the tired Keynesians can try it at home. You know, whip some top-line assumptions around. Try some fractal math. And generally, just stop whatever it is that they were doing to completely botch calling both the 2008 and 2011 turns in global economic growth.

 

Now, Timmy Geithner, we know you are interviewing at an investment bank right now, so don’t spend too much time on this model until you are done making excuses for the last 47% of your born life in US government perpetuating America’s debt and deficit problems. We want you as a client, so we’ll save you some time here and tell you we are currently in STAGE 2.

 

In Japan, Europe, and the US, I don’t see a catalyst for moving to STAGE 3 (a deceleration of the slowdown) until at least Q4/Q1. In China we see this coming in Q3/Q4. That’s why we’re long Chinese Equities before we buy American.

 

Ours is a process that requires Repetition, Confidence, and Passion. Most of you wouldn’t be where you are today if you didn’t get the focus, discipline, and repetition part. In terms of the confidence and passion part, don’t be shy – if you find it, live it out loud.

 

My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1619-1669, $93.15-96.29, and 1252-1256, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Winning Trinity - Chart of the Day

 

Winning Trinity - Virtual Portfolio


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Questionable Mathematics

“Common sense is not so common.”

-Voltaire (quote used at the end of David Einhorn’s Q2 2011 letter)

 

This morning has nothing to do with legitimate credit risk in America’s sovereign debt. US Treasuries would be collapsing if it did. Instead, stocks are as Treasuries are making new 2011 highs!

 

This morning has everything to do with analytical incompetence. If watching the analytically incompetent chastise the analytically incompetent yesterday didn’t remind you that both S&P and the US Government have issues, you need to replay the tapes. The People don’t trust either ratings agencies or governments’ risk management processes anymore. And they shouldn’t.

 

As outgoing Chairperson of President Obama’s “Council of Economic Advisers”, Austan Goolsbee, told Meet The Press yesterday that S&P had “Questionable Mathematics”, I literally started laughing out loud. This is AFTER the US government revised their Q1 2011 GDP estimate for the US by 81% to the downside to 0.36%!

 

With all due respect to my fellow Yalie (Goolsbee was Yale 1991), there is nothing to respect about the accuracy of either the US government’s economic forecasts in 2011 or what US Growth Slowing implies for any rating agency that has to impute a massive top line slowdown into its rating. AFTER the top line (revenues) slows, both the sell-side and ratings agencies downgrade – not before. They are THE lagging indicators.

 

Bloomberg Consensus (78 buy-side and sell-side institutions) forecasts for US GDP Growth in Q3 and Q4 of 2011 are still at +3.2% respectively. Our models continue to point to rates of U.S. economic growth that are HALF, or less, of those consensus estimates.

 

There is nothing questionable about this math: the US stock market has lost -12% of its value since the end of April for a lot of reasons – but one of the most obvious has been Growth Slowing.

 

Back to the Global Macro Grind

 

Why are US Treasuries bid to new all-time highs (all-time is a long time) on the “news” of a rating agency downgrade this morning? That’s simple. This is old news to the analysts who provide Wall Street with leading indicators.

 

To review the time stamps:

  1. March 5, 2010: Jim Grant issued an effective downgrade of USA’s long-term bonds
  2. May 14, 2010: Hedgeye cites Grant’s work and reiterates the conclusion using Reinhart & Rogoff data to compliment our own
  3. August 3, 2010: Hedgeye holds a conference call titled “Should US Debt Be Rated Junk?”

As recently as July 7th, 2011 in his quarterly client letter, Greenlight Capital’s David Einhorn wrote (on page 3): “Earth to S&P, if you can foresee a near-term default scenario that is plausible enough for you to warn about it, AAA cannot be the correct current rating.”

 

Einhorn, like Jim Grant, is one of the world’s most competent financial analysts. He has been profiting from the incompetence of ratings agencies and the governments who pay them for years. Einhorn and his clients won’t be freaking out this morning or looking for Bill Miller and Timmy Geithner to throw them some completely conflicted and compromised view of S&P’s work. They’ll be profiting from it.

 

Tomorrow starts today – so what’s next? Well, let’s start with what AAA not being AAA means for everyone else’s ratings.

  1. It’s now politically palatable to downgrade other AAA rated Sovereigns (France)
  2. Big Bank Ratings that rode USA’s AAA Rating Uplift need to be downgraded

After we moved to ZERO percent US Equity exposure in the Hedgeye Asset Allocation Model last Monday, our Financials guru, Josh Steiner, wrote an important note titled “New Risks For Financials” where he dug into this obvious problem of Big Bank Rating Uplifts:

 

“There are 8 banks that benefit directly from the United States AAA credit rating through ratings uplifts. They include: BK, STT, BAC, C, WFC, JPM, GS and MS. If the US isn’t AAA, then the implicitly backed Too Big To Fail banks can’t rely on the US’s ratings to get AAA debt themselves.”

 

Now Steiner has been The Bear on the moneycenter banks and US Housing since this time last year (sorry Meredith Whitney). Hedgeye has shorted Banker of America (BAC) 10x since 2010 in the face of “smart” money buying it on “valuation.”

 

Well, sorry “smart” money, valuation is not a catalyst.

 

Neither is a pending downgrade of a bank’s credit rating. Citigroup (our top short idea above and beyond BAC right now, which is saying something!) could see a 2-notch downgrade with the end of these “ratings uplifts”. This will add notably to already existing NIM pressure on Citi’s earnings (NIM = Net Interest Margin).

 

And when S&P or Moody’s “downgrades” Citigroup, we’ll cover the short position on that “news” too. Timing matters.

 

My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1, $84.02-92.03, and 1165-1219, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Questionable Mathematics - Chart of the Day

 

Questionable Mathematics - Virtual Portfolio


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - August 8, 2011

 

Today’s market moves are not about USA’s credit default risk (US Treasuries are pushing toward all-time highs this morn). It’s all about analytical incompetence on Growth Slowing and where “risk” is priced. 

 

There is no market in the world that is bullish on either the Hedgeye TRADE or TREND duration other than Venezuela; Europig bond buying only creates short-term short covering in Italy/Spain; the intermediate to long-term result of Big Government Intervention looks more like Greece (down 40% now since February!).

 

As we look at today’s set up for the S&P 500, the range is 54 points or -2.87% downside to 1165 and 1.64% upside to 1219.

 

SECTOR AND GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - levels 88

 

THE HEDGEYE DAILY OUTLOOK - daily sector view

 

THE HEDGEYE DAILY OUTLOOK - global performance

 

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: -1503 (+1315)  
  • VOLUME: NYSE 2254.25 (+23.77%)
  • VIX:  32.00 +1.07% YTD PERFORMANCE: +80.28%
  • SPX PUT/CALL RATIO: 2.59 from 2.24 (+15.74%)

CREDIT/ECONOMIC MARKET LOOK:

 

TREASURIES – 2s and 10s getting bid up to new highs as yields capitulate to 0.25% and 2.49%, respectively. If you had the USA sovereign “credit risk” trade on, you have to cover your shorts; PIMCO needs to be buying back those Treasuries too.

 

  • TED SPREAD: 26.65
  • 3-MONTH T-BILL YIELD: 0.01% -0.01%
  • 10-Year: 2.58 from 2.47    
  • YIELD CURVE: 2.30 from 2.20

MACRO DATA POINTS:

  • 11 a.m.: Export inspections, corn, soybeans, wheat
  • 11:30 a.m.: U.S. to sell $29b 3-mo., $27b 6-mo. bills
  • 4 p.m.: Crop conditions

WHAT TO WATCH:

  • G-7 finance ministers and central bank governors to “take all necessary measures to support financial stability and growth,’’ they pledge in a statement today
  • S&P’s downgrade of U.S. credit rating leaves France as the AAA country most likely to lose its top grade, some investors and economists say
  • S&P holds 8:45 a.m. conference call to discuss U.S. downgrade
  • Best Buy (BBY) may slide if management can’t figure ways to retake market share from online competitors, Barron’s said

COMMODITY/GROWTH EXPECTATION

 

COMMODITIES – nothing new here; we signaled this last week, but it’s critical to remind ourselves that both TREND and TAIL lines for oil and copper have snapped. We call this Deflating The Inflation – in the end, good for global consumers.

 

THE HEDGEYE DAILY OUTLOOK - daily commodity view

 

 

COMMODITY HEADLINES FROM BLOOMBERG:

  • Commodity Currencies a Refuge as Intervention Upends Havens
  • Central Bankers Confront Decision on Which Risk Scares Them Most
  • Investors Cut Bullish Commodity Bets in ‘Panic’ on Economy
  • Tokyo Rice Halted After First Futures Trading Since 1939
  • Oil Falls to Trade Near Eight-Month Low as S&P Cuts U.S. Rating
  • Gold Tops $1,700 for First Time as U.S. Rating Cut Spurs Demand
  • Rio, Mitsubishi Bid A$1.49 Billion for Rest of Coal & Allied
  • Gold Futures Surge to Record $1,697.70 on Haven Demand
  • Goldman Raises Gold Forecasts, Keeps Long Recommendation
  • Copper, Zinc Fall as S&P Cuts U.S. Credit Rating; Aluminum Gains
  • Commodities Drop as U.S. Credit-Rating Cut May Worsen Slowdown
  • China Aluminum Prices May Gain on Power Cuts, Chinalco Says
  • Gold May Extend Advance to Record $1,750: Technical Analysis
  • Wheat Falls for Fourth Day as U.S. Rating Cut ‘Spooks’ Markets
  • Commodity-Tied Government Bond Yields Surging: Argentina Credit
  • Copper in London Gains 0.4%, Reversing Decline to Six-Week Low
  • Rio Says Higher Labor Costs, Aussie Dollar Curb Expansion Plans
  • Palm Oil Drops as Commodities Decline on U.S. Rating Downgrade

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - daily currency view

 

 

EUROPEAN MARKETS

  • EUROPE: Greece is gone, fyi (market down another 2.6% today; down -40% since FEB); that’s how the storytelling of central planners ends
  • Bank of France Jul business sentiment indicator, industry 98 vs prio 99, services 98 vs prior 99
  • Bank of France estimates Q3 GDP to grow +0.2% (first estimate)
  • Eurozone Aug Sentix (13.5) vs consensus +1.9, prior +5.3

THE HEDGEYE DAILY OUTLOOK - euro performance

 

 

ASIAN MARKETS

  • ASIA: could have been much worse; down 1-4% across board with markets like India rallying intraday, Koreans panicked at the bottom, so down most
  • Japan June current account surplus ¥526.9B vs cons ¥678.3B. June trade balance +¥131.5B, (82.7%) y/y.

 

 THE HEDGEYE DAILY OUTLOOK - asia performance

 

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - MIDEAST PERFORMANCE

 

 

 

Howard Penney

Managing Director


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