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European Risk Monitor: Big Bazooka Cometh

Positions in Europe: Short EUR-USD (FXE); Short Italy (EWI)


How the European sovereign debt and banking contagion crisis churns… Sunday’s meeting between Merkel and Sarkozy on measures to recapitalize European banks targeted the announcement of a bailout bazooka (size and scope still undermined) by the G20 Summit on November 3/4 in Cannes. That gives us a runway of 3.5 weeks of indecision—and while today’s rally across European equity markets and in the EUR-USD pair reflects “hope” in a bailout’s impact on capital markets, from here we’re positioned to short or fade these intermediate term rallies that the inevitable Bazooka will not be able to address—that is the deeper structural problems that cannot be cured with the snap of a finger or the stroke of the pen.

 

As the banking news out of Dexia and Erste over the last days has captured headlines, what’s clear is that so long as sovereigns remain at risk (and here we’re focused on Italy and Spain beyond the much smaller but critical risks of Greece, Portugal and Ireland), the European banking system will remain at risk due to its interconnectedness.

 

Keith re-shorted Italy via the etf EWI and the EUR-USD via FXE in the Hedgeye Virtual Portfolio today. Our thesis on Italy hasn’t changed and we’d point you towards our work titled “Shorting Italy (EWI)” on 9/30 for review. The EUR-USD remains in a decidedly Bearish Formation, which Keith highlighted in today’s Early Look. In short, such a set-up sees the current price below the long term TAIL line, intermediate term TREND line, and immediate term TRADE line. While we’re seeing intraday strength above $1.36 today, the set-up gives us strong downside conviction (see chart below).

 

European Risk Monitor: Big Bazooka Cometh - 1. EURBEAR

 

We continue to keep our eye on European risks via government bond yields and sovereign CDS. Looking at government yields, the 6% yield line on 10 year government bonds remains a critical one that historically has market a breakout level (see chart below).  Italy and Spain have maintained a level below 6% since the ECB restarted the SMP on August 8th, and currently trade at 5.57% and 5.01%, respectively, but look for any gains towards 6% to cause much market consternation.

 

European Risk Monitor: Big Bazooka Cometh - 1. yields   a

 

European Sovereign CDS – European sovereign swaps were tighter week over week. German and French sovereign CDS spreads tightened by 15% and 7% respectively from last Monday to today.

 

European Risk Monitor: Big Bazooka Cometh - 1. ak 1

 

European Risk Monitor: Big Bazooka Cometh - 1. ak 2

 

European Financials CDS Monitor – Bank swaps mostly tightened in Europe last week.  Swaps tightened for 26 of the 40 reference entities. The average tightening was 2.0%, or 10 basis points, and the median tightening was 3.3%.

 

European Risk Monitor: Big Bazooka Cometh - 1. ak 5

 

Matthew Hedrick

Senior Analyst


Squeezage: SP500 Levels, Refreshed

POSITION: Long Utilities (XLU), Short Consumer Staples (XLP)

 

What felt like the best position (short beta) into Friday’s close, probably feels like the worst position right about now.

 

As with all things beta in a bear market, this too shall pass. Provided that the SP500 fails in the immediate-term TRADE zone of 1186-1193 that I have outlined below and, of course, that the TREND (1228) and TAIL (1266) lines of resistance remain overhead…

 

The bullish news is that in the immediate-term the SP500 just made a higher-low on Friday (from its Short Covering Opportunity (1099) low) of last Tuesday. For the immediate-term TRADE, I’m now using a TRADE zone of support of 1145-1167 (see chart).

 

The bearish news about the immediate-term is that the immediate-term is subject to change in the immediate-term.

 

For now, we have Squeezage.

KM

 

Keith R. McCullough
Chief Executive Officer

 

Squeezage: SP500 Levels, Refreshed - spx neue


BLOW OUT GOLDEN WEEK

Golden Week daily table revs surpass HK$1 billion

 

 

No sign of a Macau slowdown through Golden Week.  Macau table revenues were HK$10.85 billion through the first 10 days of the month, equating to HK$1,085 million per day.  Last year, Golden Week produced average table revenues of HK$780 million per day so we saw a 39% increase in that metric this year.  Our preliminary full month estimate for October, including slots, is HK$25-26 billion which would equate to a 36-42% YoY increase.  Obviously, October should be a monthly record.  We would note that our full month projection assumes a sharp deceleration in GGR per day following the end of Golden Week.

 

We are hearing that hold percentage was a little higher than normal.  The one negative may be that the numbers seem to be fueled by VIP.  Mass, particularly on the low end, was a little disappointing to the operators. 

 

For market share, Galaxy was the clear standout while MGM and SJM were disappointing.  

 

BLOW OUT GOLDEN WEEK - oct


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: GOLDEN WEEK VISITATION; S'PORE JULY VISITATION; SEPT CHINA HOUSING PRICES; COTAIJET

The Macau Metro Monitor, October 10, 2011

 

 

VISITORS UP ON NATIONAL DAY HOLIDAY Macau Business

More than 775,000 visitors passed through Macau during Golden Week, an increase of 13.3% YoY.  Among the total arrivals, about 580,000 were from mainland China, a surge of 22.3%.  The daily average number of occupied rooms was 18,730, an increase of 8.67% YoY.  The average occupancy rate of three-to-five-star hotels during Golden Week reached 88.46%, a slight decrease of 1.54% points YoY.  ADR of three-to-five-star hotels in Macau saw a 23.7% YoY rise to MOP 1,760 (US$220).

 

JULY SINGAPORE VISITOR ARRIVALS STB

Singapore visitor count reached 1.27MM people in July 2011, an increase of 16.2% YoY.  Mainland Chinese visitors hit 184k, rising 56% YoY.

 

THE M3: GOLDEN WEEK VISITATION; S'PORE JULY VISITATION; SEPT CHINA HOUSING PRICES; COTAIJET - SPORE

 

CHINA HOUSING PRICES INCH LOWER WSJ

According to China Real Estate Index System, September housing prices in 100 major cities in China were down 0.03% MoM, after a largely flat MoM reading in August.  The data provider said a survey of property developers and real-estate agencies showed that the average home price in September was a touch lower at 8,877 yuan ($1,392) per square meter from 8,880 yuan in August and but slightly higher than July's 8,874 yuan.

 

COTAIJET TO INCREASE FARES Macau Business

The Macau government has approved CotaiJet’s request to increase its fares.  Starting Wednesday, CotaiJet will increase normal seat fare prices by MOP17 (US$2.1) to MOP180.  In first class, prices will go down by MOP7 to MOP390.  Macau residents will be able to enjoy an MOP11 to MOP15 discount.  CotaiJet requested the fare increase due to rising fuel prices and overall inflation.


MONDAY MORNING RISK MONITOR: BANK SWAPS TIGHTEN ON MORE PROMISES OUT OF EUROPE

Amid rumors of a widespread European bank recapitalization, CDS tightened for American and European banks last week. The TED spread and High Yield rates hit new YTD highs mid-week underscoring risk in the market. 

 

Financial Risk Monitor Summary (Across 3 Durations):

  • Short-term (WoW): Negative / 3 of 11 improved / 4 out of 11 worsened / 4 of 11 unchanged
  • Intermediate-term (MoM): Negative / 1 of 11 improved / 6 of 11 worsened / 4 of 11 unchanged
  • Long-term (150 DMA): Negative / 1 of 11 improved / 7 of 11 worsened / 3 of 11 unchanged

 

MONDAY MORNING RISK MONITOR: BANK SWAPS TIGHTEN ON MORE PROMISES OUT OF EUROPE - Summary

 

1. US Financials CDS Monitor – Swaps tightened across 20 of 28 major domestic financials last week.

Tightened the most vs last week: C, MS, TRV

Widened the most vs last week: GS, SLM, AIG

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

Widened the most vs last month: GS, MS, AIG

 

MONDAY MORNING RISK MONITOR: BANK SWAPS TIGHTEN ON MORE PROMISES OUT OF EUROPE - CDS  US

 

2. European Financials CDS Monitor – Bank swaps mostly tightened in Europe last week.  Swaps tightened for 26 of the 40 reference entities. The average tightening was 2.0%, or 10 basis points, and the median tightening was 3.3%

 

MONDAY MORNING RISK MONITOR: BANK SWAPS TIGHTEN ON MORE PROMISES OUT OF EUROPE - CDS  Europe

 

3. European Sovereign CDS – European sovereign swaps were tighter week over week. German and French sovereign CDS spreads tightened by 15% and 7% respectively from last Monday to today.

 

MONDAY MORNING RISK MONITOR: BANK SWAPS TIGHTEN ON MORE PROMISES OUT OF EUROPE - Sovereign CDS 1

 

MONDAY MORNING RISK MONITOR: BANK SWAPS TIGHTEN ON MORE PROMISES OUT OF EUROPE - Sovereign CDS 2

 

4. High Yield (YTM) Monitor – Last week, High Yield rates rose to a YTD high of 9.27 on Tuesday. Rates retreated throughout the rest of the week but still ended 17 bps higher at 8.77 versus 8.60 the prior week.  

 

MONDAY MORNING RISK MONITOR: BANK SWAPS TIGHTEN ON MORE PROMISES OUT OF EUROPE - High Yield

 

5. Leveraged Loan Index Monitor – The Leveraged Loan Index fell 12 points last week, ending at 1515. 

 

MONDAY MORNING RISK MONITOR: BANK SWAPS TIGHTEN ON MORE PROMISES OUT OF EUROPE - LLI LT

 

6. TED Spread Monitor – The TED spread ended the week just off of its YTD high, 3.2 bps higher than the prior week at 38.6 bps.

 

MONDAY MORNING RISK MONITOR: BANK SWAPS TIGHTEN ON MORE PROMISES OUT OF EUROPE - TED spread

 

7. Journal of Commerce Commodity Price Index – The JOC index continued its decline, falling 1.6 points to end the week at -18.7

 

MONDAY MORNING RISK MONITOR: BANK SWAPS TIGHTEN ON MORE PROMISES OUT OF EUROPE - JOC LT

 

8. Greek Yield Monitor – Last week the 10-year yield on Greek debt rose 84 bps to end the week at 2353 bps versus 2269 bps the prior week.

 

MONDAY MORNING RISK MONITOR: BANK SWAPS TIGHTEN ON MORE PROMISES OUT OF EUROPE - Greek Bond Yields

 

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 1 bps and closed at 176 bps.

 

MONDAY MORNING RISK MONITOR: BANK SWAPS TIGHTEN ON MORE PROMISES OUT OF EUROPE - 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 rose 101 points, ending the week at 2000 versus 1899 the prior week.

 

MONDAY MORNING RISK MONITOR: BANK SWAPS TIGHTEN ON MORE PROMISES OUT OF EUROPE - 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 2.08, pushing the 2-10 spread to 179 bps, 12 bps wider than a week ago.   

 

MONDAY MORNING RISK MONITOR: BANK SWAPS TIGHTEN ON MORE PROMISES OUT OF EUROPE - 2 10 Spread

 

12. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows the following:  5.7% upside to TRADE resistance, 4.3% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: BANK SWAPS TIGHTEN ON MORE PROMISES OUT OF EUROPE - XLF macro levels

 

Margin Debt Falls in August

We publish NYSE Margin Debt every month when it’s released.  NYSE Margin debt hit its post-2007 peak in April of this year at $320.7 billion. The chart below shows the S&P 500 overlaid against NYSE margin debt going back to 1997. In this chart both the S&P 500 and margin debt have been inflation adjusted (back to 1990 dollar levels), and we’re showing margin debt levels in standard deviations relative to the mean covering the period 1. While this may sound complicated, the message is really quite simple. First, when margin debt gets to 1.5 standard deviations or greater, as it did this past April, that has historically been a signal of extreme risk in the equity market - the last two times it did this the equity market lost half its value in the ensuing period. We flagged this for the first time back in May of this year.

 

 The second point is that margin debt trends tend to exhibit high degrees of autocorrelation. In other words, the last few months’ change in margin debt is the best predictor of the change we’ll see in the next few months. This is important because it means that margin debt, which has retraced back to +0.64 standard deviations as of August, still has a long way to go. We would need to see it approach -0.5 to -1.0 standard deviations before the trend reversed. We’ve dropped 230 S&P handles in getting from +1.5 standard deviations to +0.64 standard deviations. There’s plenty of room for short/intermediate term reversals within this broader secular move, but overall this setup represents a material headwind for the market.  

One limitation of this series is that it is reported on a lag.  The chart shows data through August.

 

MONDAY MORNING RISK MONITOR: BANK SWAPS TIGHTEN ON MORE PROMISES OUT OF EUROPE - margin debt

 

Joshua Steiner, CFA

 

Allison Kaptur


THE HBM: SBUX

THE HEDGEYE BREAKFAST MONITOR

 

MACRO

 

Commodities

The dollar being down this morning is giving commodities a bid with corn up almost 2%.  The U.S. Grains Council has said that China may not need to purchase corn from the U.S. after having a “successful” harvest. 

 

Consumer

European investor confidence fell to the lowest level in more than two years in October declining to -18.5 from -15.4 in September, according to Sentix research institute.  The unresolved sovereign-debt crisis was highlighted as the most important driver of investor anxiety.

 

 

SUB-SECTOR PERFORMANCE

 

Food processor stocks came under pressure on Friday as corn traded higher.

 

THE HBM: SBUX - subsector fbr

 

 

QUICK SERVICE

 

SBUX has been lobbying the US government for entry into India.  Current rules allow it to hold up to a 51% stake in an Indian venture, while the rest would have to be with an Indian partner.  Per Starbucks’ lobbying disclosure reports, its lobbyists discussed “market opening initiatives in India” with the Senate, the House of Representatives, and the Department of State.

 

SBUX is in talks with Tata Coffee to open cafés in India, according to Tata Coffee Managing Director, Hameed Huq.  Starbucks has also commented this morning, saying that it expects to announce a roadmap for its entry into India soon as talks with Tata Coffee are moving forward.

 

THE HBM: SBUX - stocks 1010

 

Howard Penney

Managing Director

 

Rory Green

Analyst


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