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MONDAY MORNING RISK MONITOR: SWAPS TIGHTEN AROUND THE WORLD EXCEPT AT GREEK BANKS

This week's notable callouts include a new YTD high in the TED spread,  tightening of US and European financial CDS, and tightening of most sovereign swaps. Greek sovereign CDS hit a new high mid-week before falling sharply, ending slightly higher than the prior week.


Financial Risk Monitor Summary (Across 3 Durations):

  • Short-term (WoW): Positive / 5 of 11 improved / 2 out of 11 worsened / 4 of 11 unchanged
  • Intermediate-term (MoM): Negative / 3 of 11 improved / 5 of 11 worsened / 3 of 11 unchanged
  • Long-term (150 DMA): Negative / 2 of 11 improved / 7 of 11 worsened / 2 of 11 unchanged

 

MONDAY MORNING RISK MONITOR: SWAPS TIGHTEN AROUND THE WORLD EXCEPT AT GREEK BANKS - Summary

 

1. US Financials CDS Monitor – Swaps tightened across 27 of 28 major domestic financials in our table last week. In contrast, only 16 companies have tighter swaps compared to a month ago. 

Tightened the most vs last week: GS, PMI, ACE

Tightened the least/ widened the most vs last week: RDN, AGO, GNW

Tightened the most vs last month: PMI, ACE, MMC

Widened the most vs last month: LNC, PRU, AGO

 

MONDAY MORNING RISK MONITOR: SWAPS TIGHTEN AROUND THE WORLD EXCEPT AT GREEK BANKS - CDS US

 

2. European Financials CDS Monitor – Banks swaps mostly tightened in Europe last week.  25 of the 39 swaps were tighter while 14 widened. There was a notable divergence in Greek banks, with Alpha Bank A.E, EFG Eurobank Ergasias, and National Bank of Greece widening 61%, 52%, and 32% respectively. French banks led the tightening, with BNP Paribas and Credit Agricole tightening 13% WoW.

 

MONDAY MORNING RISK MONITOR: SWAPS TIGHTEN AROUND THE WORLD EXCEPT AT GREEK BANKS - CDS  Europe

 

3. European Sovereign CDS – European sovereign swaps mostly tightened across the Eurozone. After hitting a new all-time high of almost 5,000 bps mid-week, Greek swaps are trading at 3,536 bps today, just 27 bps wider than last Monday’s level. CDS of Portugal, Ireland, Spain, Italy, France, and Germany were modestly tighter compared to last week. 

 

MONDAY MORNING RISK MONITOR: SWAPS TIGHTEN AROUND THE WORLD EXCEPT AT GREEK BANKS - Sovereign CDS 1

 

MONDAY MORNING RISK MONITOR: SWAPS TIGHTEN AROUND THE WORLD EXCEPT AT GREEK BANKS - Sovereign CDS 2

 

4. High Yield (YTM) Monitor – High Yield rates rose 2 bps last week, ending at 7.84 versus 7.82 the prior week.

 

MONDAY MORNING RISK MONITOR: SWAPS TIGHTEN AROUND THE WORLD EXCEPT AT GREEK BANKS - High Yield LT

 

5. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 3 points last week, ending at 1541. 

 

MONDAY MORNING RISK MONITOR: SWAPS TIGHTEN AROUND THE WORLD EXCEPT AT GREEK BANKS - LLI LT

 

6. TED Spread Monitor – The TED spread made another new YTD high, ending the week at 35.1 versus 33.3 the prior week.

 

MONDAY MORNING RISK MONITOR: SWAPS TIGHTEN AROUND THE WORLD EXCEPT AT GREEK BANKS - TED Spread LT

 

7. Journal of Commerce Commodity Price Index – Last week, the JOC index fell slightly, ending the week at -4.4.

 

MONDAY MORNING RISK MONITOR: SWAPS TIGHTEN AROUND THE WORLD EXCEPT AT GREEK BANKS - JOC LT

 

8. Greek Bond Yields Monitor – We chart the 10-year yield on Greek bonds.  Last week yields hit new all-time highs, before falling to end the week at 2119 bps.

 

MONDAY MORNING RISK MONITOR: SWAPS TIGHTEN AROUND THE WORLD EXCEPT AT GREEK BANKS - GR Bond LT

 

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 week, spreads fell 19 bps and closed at 144 bps.

 

MONDAY MORNING RISK MONITOR: SWAPS TIGHTEN AROUND THE WORLD EXCEPT AT GREEK BANKS - Markit 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 hit its YTD high before falling to end the week 24 points lower at 1814.

 

MONDAY MORNING RISK MONITOR: SWAPS TIGHTEN AROUND THE WORLD EXCEPT AT GREEK BANKS - Baltic Dry

 

11. 2-10 Spread – We track the 2-10 spread as an indicator of bank margin pressure.  Last week the 10-year yield rose to 2.05, pushing the 2-10 spread to 188 bps, 15 bps wider than a week ago.   

 

MONDAY MORNING RISK MONITOR: SWAPS TIGHTEN AROUND THE WORLD EXCEPT AT GREEK BANKS - 2 10 Spread

 

12. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows the following:  1.6% upside to TRADE resistance, 1.5% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: SWAPS TIGHTEN AROUND THE WORLD EXCEPT AT GREEK BANKS - XLF Macro Quantitative Setup

 

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.

 

MONDAY MORNING RISK MONITOR: SWAPS TIGHTEN AROUND THE WORLD EXCEPT AT GREEK BANKS - margin debt

 

Joshua Steiner, CFA

 

Allison Kaptur


THE M3: MOCHA CLUBS; FOOD POISONING AT GM; MORE SPENDING; GAMING EMPLOYEES

The Macau Metro Monitor, September 19, 2011

 

 

MOCHA CLUBS OPENS NEW PARLOUR Macau Business

Mocha Clubs has opened a new parlour at Macau Tower.  With 24-hour all weather service, the club offers 260 slot machines and electronic table games.  Mocha Clubs currently has a total of ~1,800 gaming machines in nine locations, running the largest non-casino based operations of electronic gaming machines in Macau.

 

FOOD POISONING AT THE GALAXY Macau Daily Times

11 customers have shown symptoms of food poisoning while eating at one of Galaxy Macau's restaurants.  

 

MORE MAINLAND TOURISTS SPEND WEEKENDS IN MACAU Tai Chung Pao

Mainland tourists claimed that with RMB keeps appreciating, they are more willing to spend money in Macau, with average spending from MOP1,000 to tens of thousands at each trip.  Majority of the visitors shop for daily necessities, gold and luxury goods.

 

DICJ CONSIDERS RESTRICTING GAMING EMPLOYEES TO GAMBLE Tai Chung Pao

Leong Man Ion, deputy director of the Gaming Inspection and Coordination Bureau, says that the authority will actively study the possibility of a restriction on gambling for gaming employees.


Gravity's Bark

This note was originally published at 8am on September 14, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Gravity is only the bark of wisdom’s tree, but it preserves it.”

-Confucius

 

I am definitely not as long as I was 24 hours ago. This morning’s Global Macro Grind is just not good.

 

So before I get into Geithner, Lagarde (IMF), and Barroso (EU) policies to suspend gravity, let’s go through that grind and take a walk down the world’s fundamental path of a continued Growth Slowdown:

  1. JAPAN – Japanese stocks fell another -1.1% overnight to a fresh 18 month low. It’s not “headline” news, but that doesn’t mean that one of the world’s Top 3 economies ceases to exist. This remains the land of Keynesian nod.
  2. KOREA – as in the South side, saw its main stock index (and really one of the biggest leading indicators for industrial and tech demand, globally), the KOSPI, collapse for another -3.5% move overnight. Since May, the KOSPI has crashed (down -21.5%).
  3. CHINA – Chinese stocks bounced “off the lows” to close up +0.55% overnight. While we highly doubt that the best “idea” the Chinese have is investing in Berlusconi Bonds, they are captive to a Global Growth Slowdown, even if they don’t perpetuate it.
  4. GERMANY – the train wreck that has become the German stock market crashing continues. When I write the word crash, I mean it, literally. If the SP500 was down as much as the German DAX since May (down -33%), the SP500 would be testing the 900 level and Geithner would be promoting a $3 TRILLION TARP at today’s Delivering Alpha Conference.
  5. ITALY/SPAIN/GREECE – dead cats bounce all of the time in a global economic system where the suspension of gravity remains the primary policy – but they bounce to lower-highs. And unless Lagarde (IMF) and Barroso (EU) start TARPing these pig banks in the coming days, both the Euro and these European crash markets will come under further selling pressure.
  6. RUSSIA – yep, they’re still around but what was The Inflation Trade bid (USD Down, Oil Up) of Q1 2011 (QE2) in the Russian stock market is now gone. The RTSI index is down again this morning and testing fresh YTD lows.
  7. BRAZIL – like many of the countries in Asia, the Brazilians appropriately raised interest rates when the US should have and can now start cutting them. This has Brazil looking a lot better than most European and US stock market indices all of a sudden but, again, cutting interest rates requires fear mongering (ie Growth Is Slowing people), so plenty to ponder there.
  8. CANADA – if all Keynesian Policy finger pointing fails, Geithner can still blame Canada.

Sorry. Did I say I was going to wait until I addressed the Fiat Foolery of Geithner, Lagarde, and Barroso? I couldn’t help myself.

 

Sadly, Gravity’s Bark will have to deal with these people intervening in what were our “free” market lives until they sufficiently blow this entire thing up.

 

Obviously Greek bonds, Italian stocks, and US Financials have been blowing up since February. This is not new. What is new is that consensus has been forced to realize that policy perpetuates the growth slowdown problem as opposed to rescuing it.

 

Geithner loves this stuff. He’s a big Anti-Gravity guy. Spending 47% of his born life at the US Treasury and Federal Reserve (New York Banker kind) and not accepting any responsibility in his policy recommendations across 23 years of his being on the Big Government Intervention team is impressive. That’s what gets you the nod as a keynote to generate some alpha!

 

As for what France’s lovely Christine Madeleine Odette Lagarde (new head of the IMF post the other French guy having some transparency problems) and Jose Manuel Durao Barroso (President of the European Commission) can do to drive some volatility in these very price stable and socialized markets … let’s consider their options:

  1. TARP the Europig Banks with some Geithner/Paulson policy (that’s what the EFSF is – a hybrid TARP)
  2. Start issuing some Eurobonds so that the Europig Bonds get a little lift from the German Bund mix
  3. Fire Greece out of the EU

Fire, as in the “rapid oxidation of a material in the chemical process of combustion” (Wikipedia). Or, as in firing the Greeks (after the Troika meetings) for lying about their numbers. There may not be gravity in the Fiat world – but there will be fire!

 

This is obviously a gong show at this point and, as a result, I see no reason not to trade this Global Macro market risk aggressively.

 

Rick Perry went with the “treason” thing. And Jamie Dimon opted for the “blatantly anti-American” thing.

 

I am going to go with fading the anti-gravity thing.

 

My immediate-term support and resistance ranges for Gold, Oil, Copper, Germany’s DAX, and the SP500 are now $86.18-90.11, $1808-1846, $3.93-4.04, 4889-5314, and 1141-1181, respectively. Don’t be ideological about all of this – just trade the ranges.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Gravity's Bark - Chart of the Day

 

Gravity's Bark - 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 80.33%
  • SHORT SIGNALS 78.49%

Unconscious Anchoring

“The anchoring-and-adjustment heuristic, as it is called, is unconscious.”

-Dan Gardner

 

I sold into the end of Friday’s 3-day rally, taking the Hedgeye Portfolio to 11 LONGS and 8 SHORTS. Last Tuesday, I held my longest net long (longs minus shorts) position of Q3 2011. Short Covering Opportunities are fun when you get them right.

 

Do not confuse a Short Covering Opportunity with a change in the intermediate-to-long-term fundamental reality that Global Growth Slowing is here to stay as long as the market keeps begging for Keynesian policy to bail us out. Remember, Big Government Intervention does two things to your markets and your lives: 1. Shortens Economic Cycles and 2. Amplifies Market Volatility.

 

Put another way (in Hedgeye speak), do not confuse a TRADE (immediate-term) with a TREND (intermediate-term) or TAIL (long-term). Since there is neither responsibility in Old Wall Street recommendations or an ability to be what we call Duration Agnostic when considering risk, you need to capitalize on the Sell-Side’s propensity to anchor on intermediate-term TRENDs, after they have occurred.

 

In “Future BabbleWhy Expert Predictions Fail and Why We Believe Them Anyway” (2010), Dan Gardner does a nice job simplifying this behavioral economics  concept of “anchoring” by citing The Wheel of Fortune Experiment by Daniel Kahneman and the late Amos Tversky. 

 

“Kahneman and Tversky showed that when people try to come up with a number, they simply do not look at the facts available and rationally calculate the number. Instead, they grab onto the nearest available number – dubbed “the anchor” – and they adjust in whichever direction seems reasonable. Thus, a high anchor skews the final estimate high; a low anchor skews it low.” (Future Babble, pg 100)

 

That’s Old Wall Street.

 

Using the #1 risk factor that we’ve been hammering on for all of 2011 (Growth Slowing), here’s how this looks from a Wall Street/Washington Strategist or “Economist” perspective: 

  1. Nearest Available Numbers: Q1 2010 US GDP = 3.94% and Q2 2010 US GDP = 3.79%
  2. Old Wall Street’s Adjusted 2011 US GDP Estimates (in Q1 of 2011) = up +3-4% GDP Growth for 2011-2012
  3. Actual Q1 and Q2 2011 US GDP numbers (subject to 30-81% downside revisions) = 0.36% and 0.98%, respectively 

And, kaboom.

 

But, but, but… this year’s -18% peak-to-trough drawdown in US Equities from the April 2011 peak was all about a tsunami in Japan and Europigs not getting their fiscal houses in order, right?

 

Right. Right.

 

So now Old Wall Street is cutting both their Global and US GDP Growth forecasts to the NEAREST AVAILABLE NUMBERS and we’re, as our friends in the media like to say, “off the lows”, with a nice +5.4% Short Covering Opportunity in the SP500 last week.

 

Nice. Really nice.

 

What else happened week-over-week that caught my craws attention: 

  1. US Dollar TRADE and TREND breakout holds support (this is new)
  2. CRB Commodity Inflation continues to break down (at the beginning of Q2 we called this Deflating The Inflation)
  3. As US Treasury Yields finally make higher-lows, Gold continues to make lower-highs (they are inversely correlated) 

So what did I do with that? 

  1. I made the US Dollar Index a 6% position in the Hedgeye Asset Allocation Model (UUP)
  2. I sold my long Silver position and remain very cautious on all commodity long positions other than Corn (CORN)
  3. I traded a proactively predictable range in the SP500 as its bullish on one duration (TRADE) and bearish on the other (TREND) 

If I have said this 10x in the last week in meetings and on the phones with clients, I have said it a 1000x in the last 3 years. The best path forward for American prosperity is via a strong US Dollar.

 

Strong Dollar Deflates The Inflation. Period. That’s why the US Consumer stocks act a lot better than the Financials and Industrial stocks. Some stocks might, but this country is not going to recover on “cheap exports.” The 71% of the economy that matters = US Consumption. Strengthen the US Dollar and rates of “risk-free” returns on savings accounts and we solidify American income and consumption.

 

If you’re holed up in some Old Wall Street Sell-Side office on Park Avenue and don’t get that trade, take a walk outside and ask an American retiree how he or she feels about The Mucker Plan – a strong US Dollar in the hand is better than a snaky Geithner and a Keynesian Europig in the bush. Anchor on that.

 

My immediate-term support and resistance ranges for Gold, Oil, Germany’s DAX, and the SP500 are now $$1, $86.26-90.11, 4, and 1183-1224, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Unconscious Anchoring - Chart of the Day

 

Unconscious Anchoring - Virtual Portfolio


Apparel Pricing: Negative Trend

With all the talk about retailers passing through higher costs, we’re hardly seeing trends improve on the margin. Specifically, the last two months of apparel CPI have decelerated on the margin – at the same time we’re looking at our fourth consecutive quarter of inventories growing ahead of sales.  We still have about a year – that 12 months last we checked – before cost compares get ‘easy’. The apparel industry can’t afford to see its CPI roll until next summer. We have 3 quarters of earnings between now and then.

 

Apparel Pricing: Negative Trend - Retail vs. CPI


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