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European Risk Monitor: Trick or Treat?

Positions in Europe: Short EUR-USD (FXE)


Despite the significant bounce in European equity markets on 10/27 following announcements from the EU Summit, the market is increasingly (and again) pricing in downside as the “package” turned out to be more “trick” than “treat”, namely because the details on reinforcing the EFSF, the recapitalization of banks, and solutions for Greece’s persistent default issues were not provided.

 

One main cross-current that is developing is the dichotomy between Fitch ratings agency and ISDA on the implications of investors taking a “voluntary” haircut on their Greek holdings. ISDA’s letter of the law clearly states that so long as it’s a voluntary haircut, CDS will not be triggered to payout for default. However, Fitch clearly argues that a 50% reduction in debt payoff is default. This limbo leaves a lot of uncertainty for investors and should ultimately force the hand of Eurocrats to bring resolve to the issue. Should Eurocrats tip-toe around the issue (which is highly probable), expect investor appetite for European debt, particular for the periphery, to wane, which should put additional pressures on existing “temporary” facilities like the SMP to solve for demand of secondary sovereign issuance.

 

The outcome of this limbo would suggest we’re likely to see a new divergence that may drive swaps and yields in opposite directions at times, making yields the more appropriate risk benchmark. Here we’d point to Italy’s 10YR in particular, currently at 6.14%, and over the historically significant 6% that signaled a expeditious breakout line for Greece, Ireland, and Portugal requiring bailouts, as an important risk signal (see below). 

 

European Risk Monitor: Trick or Treat?  - 1. 10yr

 

European Sovereign CDS – European sovereign swaps tightened considerably last week on the heels of the Eurozone summit. French and German spreads tightened 10.6% and 8.5% respectively.

 

European Risk Monitor: Trick or Treat?  - 2. sov

 

European Risk Monitor: Trick or Treat?  - 3. sov

 

We remain short the EUR-USD via the etf FXE in the Hedgeye Virtual Portfolio. We’re still of the opinion that Europe’s road to a recovery is a long one, and ultimately growth expectations will have to come in lower as austerity erodes tax revenues, business and consumer confidence, and heightens joblessness. We think the EUR-USD cross is the relative loser over the near term as indecision on a policy to move the region beyond the sovereign and banking crisis persists and the ECB is more likely to cut its main rate over the intermediate term. We'd hope but don’t expect to see any clear smoke signals coming from this Thursday’s G20 meeting in Cannes on the aforementioned main topics of reinforcing the EFSF, bank recapitalizations or Greek haircuts. Expect rumors to float that the BRICs could ride in on a white horse.

 

European Financials CDS Monitor – Bank swaps were tighter in Europe last week for 38 of the 40 reference entities. The average tightening was 8.1% and the median tightening was 16.6%.

 

European Risk Monitor: Trick or Treat?  - 4. banks

 

Matthew Hedrick

Senior Analyst


TAIL Risk? SP500 Levels, Refreshed

POSITIONS: Long Consumer Discretionary (XLY), Short Consumer Staples (XLP)

 

With my long-term TAIL line of resistance under assault this morning, what we’ve defined as TAIL Risk is right back on the table (defined as the proactively predictable). It’s just as powerful on the downside obviously as it is on the upside, so watch my TAIL line very closely. 

  1. Immediate-term TRADE overbought = 1294
  2. TAIL = 1267
  3. Immediate-term TRADE oversold = 1247

The TAIL (1267) is sandwiched in between 1247 and 1294, so this is a very difficult spot to deal with – particularly with the immediate-term factoring of month-end markups. In the next 72 hours, this market could go either way and I wouldn’t be surprised. So I’m happy with letting the market tell me what to do next.

 

From the longest of long-term perspectives, all the US stock market is doing is making a series of lower-long-term highs (at 1267 we’re still -19.0% from the 2007 highs and -7.0% from the lower-long-term high established in April of 2011), so long-term investors should just keep that in mind.

 

Since I score my model on a 3-factor basis, what’s critical to acknowledge is that last week’s up move was not confirmed by either long-term VOLUME or VOLATILITY signals.

 

For now, long-term volatility and structurally impaired volume (inflows) looks like it’s here to stay.

KM

 

Keith R. McCullough
Chief Executive Officer

 

TAIL Risk? SP500 Levels, Refreshed - SPX


THE HBM: SBUX, EAT, YUM, JACK, JMBA, SONC, MRT

THE HEDGEYE BREAKFAST MONITOR

 

MACRO NOTES

 

Gasoline prices are down 50 bps over the last week but seem to be trending flat-to-slightly-higher as the dollar has weakened. Gas prices coming down from the 2Q high’s has been a tailwind for restaurant traffic.

 

THE HBM: SBUX, EAT, YUM, JACK, JMBA, SONC, MRT - gasoline 1031

 

 

SUBSECTOR PERFORMANCE

 

THE HBM: SBUX, EAT, YUM, JACK, JMBA, SONC, MRT - subsector fbr

 

 

GENERAL

 

The Nation’s Restaurant News Restaurant Social Media Index (RSMI) was released, ranking restaurant chains using three primary aspects of tracking in social media: digital brand interaction; consumer sentiment and social audience growth; and overall Klout score. Unsurprisingly, Starbucks topped the list.   More surprising was Chili’s coming in at 75th.  You can find the full list here.

 

 

QUICK SERVICE

 

YUM: Yum! Brands’ KFC raised its menu prices in China by 0.5-to-2 Yuan, according to media reports.  The move is the third price adjustment that KFC China has made in 2011.

 

JACK, JMBA: Jack in the Box and Jamba Juice are testing Google Wallet in a limited trial of the technology that lets customers pay for purchases and redeem coupons with their smartphones, executives at each chain have said, according to Nation’s Restaurant News.

 

SONC: Sonic is putting out a new Bacon Cheddar Melt burger and a Mushroom Swiss Melt burger.  The advertisement reads "starting at $1.99" but it is unclear what exactly that means.  The burgers are served on "Texas toast".

 

 

CASUAL DINING

 

MRT: Morton’s Restaurant Group was reiterated “Perform” at Oppenheimer.

 

THE HBM: SBUX, EAT, YUM, JACK, JMBA, SONC, MRT - stocks 1031

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst


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THE HEDGEYE DAILY OUTLOOK

THE HEDGEYE DAILY OUTLOOK

 

TODAY’S S&P 500 SET-UP - October 31, 2011

 

As we look at today’s set up for the S&P 500, the range is 27 points or -1.41% downside to 1267 and 0.69% upside to 1294. 

 

SECTOR AND GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - levels 1031

 

THE HEDGEYE DAILY OUTLOOK - daily sector view

 

THE HEDGEYE DAILY OUTLOOK - global performance

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: -57 (-2378) 
  • VOLUME: NYSE 1009.62 (-29.46%)
  • VIX:  25.43 -3.65% YTD PERFORMANCE: +38.20%
  • SPX PUT/CALL RATIO: 1.54 from 1.60 (-16.23%)

 

CREDIT/ECONOMIC MARKET LOOK:

 

10-yr TREASURY – bond yields have had the same call we’ve had for most of 2011; intermediate to long-term US economic growth is structurally impaired (slower) than what garden variety recovery models expect. The 10-yr failed at my intermediate-term TREND level of 2.41% last week and is down 6bps this morn vs Friday.

 

  • TED SPREAD: 42.94
  • 3-MONTH T-BILL YIELD: 0.01%
  • 10-Year: 2.34 from 2.42    
  • YIELD CURVE: 2.06 from 2.11

 

MACRO DATA POINTS (Bloomberg Estimates):

  • 9:45am: Chicago Purchasing Manager, est. 59.0, prior 60.4
  • 10:30am: Dallas Fed Manufacturing, est. (-5.0), prior (-14.4)
  • 11:30am: U.S. to sell $29b 3-mo., $27b 6-mo. bills

WHAT TO WATCH:

  • MF Global said to hire Weil, Gotshal & Manges; nearing deal for bankruptcy filing and asset sale to Interactive Brokers, WSJ says
  • Yahoo said to be leaning toward selling its Asian assets and redistributing the proceeds to shareholders, rather than selling itself to a group of buyers
  • U.S. may postpone second share sale of AIG: WSJ
  • World population to surpass 7b today, U.N. projects
  • Daylight savings time in most of Europe ended over weekend; difference between London, New York is now only 4 hours. U.S. clocks roll back next weekend.
  • ACI Worldwide (ACIW) received a request for more info from DOJ regarding proposed takeover of S1 Corp.
  • Amazon.com (AMZN) may gain 20%, citing Citigroup, Barron’s said

COMMODITY/GROWTH EXPECTATION

 

COPPER – agrees with the move in China  – Dr Copper down -2.9% this morning after failing at TREND line resistance ($3.91/lb) last week; Oil fails at its long-term TAIL of resistance ($93.86 WTIC) but holds its TREND line of $88.89 support. Plenty of volatility to trade around whatever the US Dollar does.

                                                                                                             

THE HEDGEYE DAILY OUTLOOK - daily commodity view

 

 

MOST POPULAR COMMODITY HEADLINES FROM BLOOMBERG:

  • Colonel Sanders Devouring Little Sheep Means 69% Gain: Real M&A
  • Hedge Funds Bet on Collapse of WTI-Brent Spread: Energy Markets
  • Funds Lift Bullish Bets Amid Best Rally Since 2009: Commodities
  • Green Mountain Puts Highest Since ’09 as Einhorn Shorts: Options
  • Thai Floods May Spare Inner Bangkok as Drainage Efforts Succeed
  • China Seeks New Iron Ore Price Model, Holds Talks With Miners
  • Gold Drops, Paring Monthly Gain, as Yen Slump Hurts Commodities
  • Thai ‘Credibility’ at Stake as Factories Soak in Flood Plain
  • Thai Floods May Ease as Bangkok Defenses Hold, Yingluck Says
  • Anglo to Extend Rally From Cheapest Since 2009: Chart of the Day
  • Iron Ore May Extend Falls to $95 a Ton, Morgan Stanley Says
  • Oil Declines, Paring Biggest Monthly Increase Since May 2009
  • Copper Pares Biggest Monthly Gain Since December as Metals Drop
  • COMMODITIES DAYBOOK: Funds Bet on Collapse of WTI-Brent Spread
  • Indonesian Tin Producers Extend Export Halt to Boost Prices
  • Corn Drops as Improved Ukrainian Yields Boost Global Supplies
  • Palm Oil Declines on Speculation U.S. Soybean Crop to Increase
  • Copper Falls in London as China’s Demand May Slow: LME Preview
  • Freeport Indonesia Workers Call for One-Week Suspension of Talks
  • Oil Declines, Paring Biggest Monthly Increase Since May 2009

 

CURRENCIES

EURO  - watch that long-term TAIL line of $1.40 for your front-running signal on beta. It’s driving everything else.

 

THE HEDGEYE DAILY OUTLOOK - daily currency view

 

 

EUROPEAN MARKETS 


THE HEDGEYE DAILY OUTLOOK - euro performance

 

 

ASIAN MARKETS

 

CHINA – Chinese stocks hit a new low 2-weeks ago (down -4.7% wk) then rallied the same % move as US stocks did last wk (+6.7%) and stopped going up this morning; overall TREND in both the Shanghai Comp and Hang Seng remains bearish. Asian growth (q/q) continues to slow and should through Q1 of 2012.

 

 

THE HEDGEYE DAILY OUTLOOK - asia performance

 

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - MIDEAST PERFORMANCE

 

 

The Hedgeye Macro Team

Howard Penney

Managing Director


MACAU UP AGAIN

Our Oct GGR estimate moves up to HK$25.7-25.8 billion.

 

 

For the second week in a row, Macau table revenues per day increased sequentially.  Month to date, total table revenues were HK$24.2 billion.  Adding in one more day of the month and slot revenue of a little over HK$1 billion yields a full month projection of HK$25.7-25.8 billion, slightly above our previous projection of HK$25.5 billion and a new monthly record.

 

For market share, MGM was the only mover of significance – up to 11% – while Wynn and LVS continue their downward trend.  SJM and MPEL continue to be our favorite Macau operators. 

 

Here are the numbers:

 

MACAU UP AGAIN - macau


THE M3: BOWIE COMMENTS; SHUTTLES; SMOKING LAW; S'PORE 3Q UNEMPLOYMENT RATE

The Macau Metro Monitor, October 31, 2011

 

 

MGM WILL CONTINUE TO ADD NONGAMING ELEMENTS Jornal Va Kio

Grant Bowie, CEO of MGM Resorts China Holdings, said the company has been always dedicated to developing non‐gaming projects and the company is not just striving to secure more gaming tables.  When asked about his opinion about the upcoming tobacco control law, he said it is a global trend and casino business may be affected at initial stage. 

 

CASINOS AGREE TO REGULATE SHUTTLES: GOVT Macau Business

The Transport Bureau director Wong Wan said casino operators have agreed to restrict the number of shuttle buses.  Wong didn’t put forward any specific goal for the overall number of casino shuttles to operate in Macau in the future.  As part of the overall plan to improve traffic, the government also wants to cap the growth in the number of cars at 4% a year starting in 2020.

 

REGULATION ON CASINO SMOKING OUT THIS YEAR Macau Daily Times

Even though the gaming industry will only be forced to introduce smoking restrictions in 2013, the government is planning to release regulation for casinos by the end of this year, Health Bureau (SSM) director Lei Chin Ion said.  A ban on indoors smoking in public spaces will come into effect on January 2012 but casinos will have one more year to set up dedicated smoking areas of up to 50% of their total public area.

 

SINGAPORE'S JOBLESS RATE FALLS AS COMPANIES INCREASE PAYROLLS Bloomberg

The seasonally adjusted unemployment rate eased to 2% in the three months through September from 2.1% the previous quarter, the Ministry of Manpower said. That’s better than the Street estimate of 2.3%.  S'pore economy added ~32,300 jobs in 3Q, compared with 24,800 in 2Q.

 



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