How Low Will Moneycenter Margins & Earnings Go in 2H11 and 2012?
*** Tune in for our conference call TOMORROW at 11 am***
- Quantifying the profound extent of net interest margin pressure from the current rate environment for BAC, JPM, WFC & C
- Pinpointing precise timing of that pressure
- Layering on the enormous earnings headwinds from credit renormalization - impact and timing
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This week's notable callouts include tightening in US and European bank swaps WoW, as of Friday, and increased sovereign swaps.
Financial Risk Monitor Summary (Across 3 Durations):
- Short-term (WoW): Positive / 6 of 11 improved / 2 out of 11 worsened / 3 of 11 unchanged
- Intermediate-term (MoM): Negative / 1 of 11 improved / 8 of 11 worsened / 2 of 11 unchanged
- Long-term (150 DMA): Negative / 1 of 11 improved / 7 of 11 worsened / 3 of 11 unchanged
1. US Financials CDS Monitor – Swaps tightened across all 28 major domestic financials in our table last week. In contrast, only two companies (ACE and ALL) have tighter swaps compared to one month ago.
Tightened the most vs last week: ALL, CB, XL
Tightened the least vs last week: BAC, WFC, MS
Widened the most vs last month: BAC, LNC, HIG
Tightened the most/widened the least vs last month: ACE, ALL, CB
2. European Financials CDS Monitor – Banks swaps also tightened in Europe last week. 37 of the 39 swaps were tighter and 2 widened. The average tightening was 10%, or 47 bps, and the median tightening was 7%.
3. European Sovereign CDS – European sovereign swaps were wider week over week across the continent. We are keeping a close eye on France, which is critical to the EFSF, and where swaps widened by 19 bps to 184 bps week over week. 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.
4. High Yield (YTM) Monitor – High Yield rates fell 38 bps last week, ending at 7.69 versus 8.13 the prior week.
5. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 36 points last week, ending at 1536.
6. TED Spread Monitor – The TED spread backed off slightly from its YTD high, ending the week at 31.5 versus 32.8 the prior week.
7. Journal of Commerce Commodity Price Index – Last week, the JOC index rose slightly to -1.9.
8. Greek Bond Yields Monitor – We chart the 10-year yield on Greek bonds. Last week yields hit another new all-time high, ending Monday at 1931.
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 fell 13 bps and closed at 150 bps.
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 rose sharply off a low level, climbing 199 points to 1740.
11. 2-10 Spread – We track the 2-10 spread as an indicator of bank margin pressure. Last week the 10-year yield fell to 1.99, pushing the 2-10 spread to 178 bps.
12. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows the following: 8.2% upside to TRADE resistance, 2.6% downside to TRADE support.
Margin Debt Flat in July
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 July, margin debt held close to flat at $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 July.
Joshua Steiner, CFA