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MONDAY MORNING RISK MONITOR: INTERBANK RISK CONTINUES TO CLIMB

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Interbank Risk continues to mount in this morning's Risk Monitor, as measured by the TED spread, the Euribor-OIS spread, and the ECB liquidity deposit. All three series made new highs in the last week.  This demonstrates that risk in the system has not abated in the slightest.

 

* The TED spread made a new YTD high at 54.2 bps, indicating risk in the banking system continues to rise. We consider the TED spread to be a more sober reflection of systemic risk in the banking system.  This is a strong cautionary note amid widespread equity gains.  

 

*Credit default swaps for Eurozone countries widened on Monday. Italian swaps were particularly noteworthy widening by 27%.

 

* We have added two new series to our Risk Monitor, the Euribor-OIS spread and the ECB Eurozone Liquidity Recourse to the Deposit Facility.  Both measure interbank lending risk in the Eurozone.  

 

* Our macro quantitative model indicates that in the short term (TRADE), there is currently around 1.8 times more upside than downside in the XLF (2.2% downside vs. 3.9% upside).

 

Financial Risk Monitor Summary (Across 3 Durations):

  • Short-term (WoW): Negative / 2 of 12 improved / 3 out of 12 worsened / 6 of 12 unchanged
  • Intermediate-term (MoM): Negative / 2 of 12 improved / 5 of 12 worsened / 5 of 12 unchanged
  • Long-term (150 DMA): Negative / 1 of 12 improved / 9 of 12 worsened / 2 of 12 unchanged

 

MONDAY MORNING RISK MONITOR: INTERBANK RISK CONTINUES TO CLIMB - summary2

 

1. US Financials CDS Monitor – Swaps tightened for 22 of 27 major domestic financial company reference entities last week.  

Tightened the most vs last week: MTG, RDN, TRV

Widened the most vs last week: AXP, MBI, AIG

Tightened the most vs last month: GS, COF, CB

Widened the most vs last month: SLM, RDN, MBI

 

MONDAY MORNING RISK MONITOR: INTERBANK RISK CONTINUES TO CLIMB - CDS  us

 

2. European Financials CDS Monitor – Bank swaps were wider in Europe last week for 25 of the 40 reference entities. The  median widening was 14.4%.

 

MONDAY MORNING RISK MONITOR: INTERBANK RISK CONTINUES TO CLIMB - CDS  euro

 

3. European Sovereign CDS – European sovereign swaps mostly widened last week. Italian sovereign swaps widened by 27% (+117 bps to 549) and Spanish by 20% (+74 bps to 434).

 

MONDAY MORNING RISK MONITOR: INTERBANK RISK CONTINUES TO CLIMB - Sovereign CDS 1

 

MONDAY MORNING RISK MONITOR: INTERBANK RISK CONTINUES TO CLIMB - Sovereign CDS 2  2

 

4. High Yield (YTM) Monitor – High Yield rates rose 1 bps last week, ending the week at 8.96 versus 8.95 the prior week. 

 

MONDAY MORNING RISK MONITOR: INTERBANK RISK CONTINUES TO CLIMB - HY

 

5. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 2 points last week, ending at 1578.

 

MONDAY MORNING RISK MONITOR: INTERBANK RISK CONTINUES TO CLIMB - LLI

 

6. TED Spread Monitor The TED spread rose 1 point last week, ending the week at 54.2 this week versus last week’s print of 53.3.

 

MONDAY MORNING RISK MONITOR: INTERBANK RISK CONTINUES TO CLIMB - TED

 

7. Journal of Commerce Commodity Price Index – The JOC index rose 1 point, ending the week at -20.2 versus -21.2 the prior week.

 

MONDAY MORNING RISK MONITOR: INTERBANK RISK CONTINUES TO CLIMB - JOC

 

 8. Euribor-OIS spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk.  The Euribor-OIS spread tightened by 3 bps to 96 bps versus last week’s print of 99 bps.

 

MONDAY MORNING RISK MONITOR: INTERBANK RISK CONTINUES TO CLIMB - EURIBOR

 

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. Last week spreads widened, ending the week at 184 bps versus 173 bps the prior week.

 

MONDAY MORNING RISK MONITOR: INTERBANK RISK CONTINUES TO CLIMB - 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 56 points, ending the week at 1922 versus 1866 the prior week.

 

MONDAY MORNING RISK MONITOR: INTERBANK RISK CONTINUES TO CLIMB - Baltic

 

11. 2-10 Spread – We track the 2-10 spread as an indicator of bank margin pressure.  Last week the 2-10 spread widened to 183 bps, 5 bps wider than a week ago.

 

MONDAY MORNING RISK MONITOR: INTERBANK RISK CONTINUES TO CLIMB - 2 10

 

12. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 3.9% upside to TRADE resistance and 2.2% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: INTERBANK RISK CONTINUES TO CLIMB - XLF macro chart

 

13. ECB Liquidity Recourse to the Deposit Facility – The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB.  The ECB pays lower rates than the market, so an increase in this metric demonstrates increased perceived counterparty risk and liquidity hoarding.  

 

MONDAY MORNING RISK MONITOR: INTERBANK RISK CONTINUES TO CLIMB - ECB liquidity

 

Margin Debt in October

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 retraced back to +0.43 standard deviations in September, 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. There’s plenty of room for short/intermediate term reversals within this broader secular move, as we saw in October’s print of +0.78 standard deviations. 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 October.

 

MONDAY MORNING RISK MONITOR: INTERBANK RISK CONTINUES TO CLIMB - Margin Debt

 

Joshua Steiner, CFA

 

Allison Kaptur

 

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Hope Control

This note was originally published at 8am on December 07, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“We want control. We need control. And bad things happen when we don’t have it.”

-Dan Gardner   

 

That’s an excellent behavioral psychology quote that I dog-eared this year after reading “Future BabbleWhy Expert Predictions Fail and Why We Believe Them Anyway.” (page 134)

 

Why political consensus still believes the Keynesian Quacks who promise them that money printing in Japan, Europe, and the USA is the best long-term path to prosperity is officially beyond me at this point.

 

That said, the market can remain beyond what any of us think for longer than even a centrally planned bank can remain solvent. While the core principle of Chaos Theory that Hedgeye’s Risk Management Process adheres to (Embrace Uncertainty) is what I start my every day with, it seems that these government people want to issue you the failed hope of the opposite, daily.

 

Hope is not a risk management process.

 

Back to the Global Macro Grind

 

First, let me preface this morning’s strategy thoughts with the Top 3 “Most Popular” headlines on the Bloomberg machine:

  1. Geithner Backs French-German Plan
  2. Bloomberg News Reponds to Bernanke Criticism
  3. Citigroup To Cut 4,500 Jobs On Slumping Revenue

Now let’s set aside Washington DC’s Hope Control messaging for 2011 that this Time Is Different, and focus on what’s actually happened since the beginning of the year on all 3 of these headline scores:

  1. Tim Geithner has spent 47% of his born life working on Big Government Intervention at the US Government – he is doing his very best to make said US style “free-market capitalism” look like whatever Europe is. He needs government control.
  2. Bernanke, like Obama, has talked a lot about “transparency, accountability, and trust” since 2006. As a functional matter, the US financial system has never looked so compromised, conflicted, and constrained. Main Street America doesn’t trust the Fed or its crony workings. Bloomberg pasted Bernanke to the boards with this article. It’s about time.
  3. Citigroup’s Vikram Pandit is going to cut costs so that he can get paid. That’s Old Wall Street. That’s what public financial services companies who are missing their revenue targets do. Meanwhile, as Yale’s vaunted Keynesian Economist, Irving Fisher, pleaded from 1929-1932, consensus pleads “but stocks are cheap because corporate profits are good.”

Fisher, Keynes, and all of their Big Government Intervention friends of the “Roaring 1920s”, of course, blew up most of their net worth buying on the way down well before we had a depression in this country.

 

Keynes, who was quite certain about the ‘devalue your currency and hope for exports model’, actually imploded early (in 1928 he was long corn, rubber – you know, the commodity trade baby!).

 

After this European Summit, where are we going? Where have we been? Contextualizing reality matters in mean reversion.

 

If you pull back the multi-duration and multi-factor curtain of what markets have actually done into and out of Big Government Interventions for the last 100 years, you’ll quickly notice that there has never been a central economic plan to debauch a citizenry’s currency that saved the world.

 

They’ve only saved us from what, allegedly, would have been even worse…

 

God Save The Geithner.

 

Timmy continues to take the other side of pretty much everything I think. Yesterday in Europe, this is what he said:

 

“This of course will take time… and a very substantial commitment and sustained commitment of political will.”

 

In other words, Japan and the US needed even bigger bailout and socialization bazookas. Timmy believes “deeply” in being fully “committed.”

 

And if we, The American People, were as “committed” to centrally planned risk taking and price volatility as Geithner and Bernanke wanted us to be, we’d all be fine. That’s what Irving Fisher and John Maynard Keynes said in 1929 too…

 

In other news – the rest of the world’s Growth Slowdown doesn’t cease to exist:

  1. Brazil reported its slowest year-over-year GDP number in 2 years (+2.1% y/y in Q311 vs +3.1% last quarter)
  2. China called the current slowdown in Global Export demand “under severe pressure”
  3. Santa’s Global Consumption Sleigh is running on $110/barrel oil

Follow the bouncing ball of hope. Piling-debt-upon-debt, bailing out banks, and money printing A) Shorten Economic Cycles and B) Amplify Market Volatility. The Hope Control’s market volume is running on empty. “And bad things happen when we don’t have it.”

 

My immediate-term support and resistance ranges for Gold, Brent Oil, German DAX, French CAC40, and the SP500 are now $1724-1743, $110-112-39, 5940-6242, 3104-3234, and 1233-1266, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Hope Control - Chart of the Day

 

Hope Control - Virtual Portfolio


THE M3: SJM COTAI

The Macau Metro Monitor, December 12, 2011

 

 

COTAI PLOT GRANTED 'IN PRINCIPLE': SJM Macau Daily Times

“In principle we got a letter saying that it [the Administration] will grant the land to us but we haven’t been given any further notice about, for instance, the premium payment,” SJM CEO Ambrose So said.  So added that the Cotai investment will be about US$ 2 billion and he expects the land grant procedures to be ready next year.  After the concession is complete, SJM will begin diversifying its business with a bigger investment in non-gaming.   


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RESTAURANT SENTIMENT TAKEAWAYS

In our view sentiment is going to play a significant role in several restaurant stocks’ price action in 2012.  For some of our Hedgeye Restaurants Alpha top ideas, in particular, sentiment is an important component or risk factor, as the case may be.  Accordingly, we will be focusing more closely on sentiment going forward. 

 

The Sentiment Scorecard, below, incorporates both sell-side and buy-side sentiment.  As the table indicates, MCD and YUM are loved by the investment community.  This has been true for some time, especially for MCD, and we don’t see sentiment turning alone as a catalyst for the stock, but it is worth bearing in mind that if the fundamental outlook for the company were to deteriorate, there is plenty of room for sentiment to turn bearish.  MCD continues to be a favorite name of ours as it continues to take share with the latest monthly comps, reported last Thursday, indicated that global comps in November came in at +7.4% versus consensus at 5.1%.  Even the bullish sell side (73% Buys, 0 sells), was not bullish enough going into the release.  YUM has, over time, traded lower on China scares and our view is that these dips have made for opportune entry points on the long side.  The company continues to drive strong sales in China, despite the slowdown in macroeconomic data in the country, and is also maintaining its appetite for seeking high-return growth opportunities in emerging markets.  Both YUM and MCD are positive on Trade (3 weeks or less), Trend (3 months or more) and Tail (3 years or less) durations per our Hedgeye Restaurants Alpha list.

 

DNKN is not rated highly on the sentiment scorecard.   The hype around the IPO shot the stock and the cash flow multiple embedded therein, to an unrealistic level.  The stock has been trading poorly of late as investors have more closely scrutinized the growth strategy bulls are touting more closely.  We are negative on this stock on all three durations (Trade, Trend, Tail).

 

WEN is a stock that is not viewed favorably by the investment community.  We believe that there is a short-term opportunity for investors here with comparable restaurant sales running above the industry average.  We are positive on WEN for Trade and Tail durations in the Hedgeye Restaurants Alpha list.  Over the Trend, the stock may not perform well if a clear plan for remodeling the store base is not produced by management. 

 

EAT is hated and we love both the stock and the fact that it is so hated.  As investors, faced with the growing clarity around the improving performance of the Chili’s system, shed the emotional baggage that past experiences with the stock have burdened them with, we expect for a sea change in sentiment to buoy the stock price.  We are positive on EAT on Trade, Trend and Tail durations.  It should be noted that DRI registers a very positive reading on the sentiment scorecard and the company is experiencing significant difficulty in performing the current environment and its primary brand, Olive Garden, is hampered by an asset base in need of investment. 

 

BWLD is a high conviction idea of ours on the short side.  We have been publishing actively on this name, most recently last week on the significance of the Darden 2QFY12 EPS miss and its significance for BWLD going forward.  There have been no sell ratings on the stock since 3Q09 when traditional chicken wing prices were up 51% and company same restaurant sales were running at 0.8% (3.1% for FY09).  Please contact us for a copy of our latest work on BWLD; given the current fundamentals, the sentiment score is not taking into account the pressure the company will see in 1Q12 as wing prices squeeze margins and limit the viability of promotions as a means to driving comps.  We are negative on BWLD for Trade, Trend and Tail durations on our Hedgeye Restaurants Alpha list.

 

In terms of short interest, the second table below shows that CAKE has seen a decline in short interest as dairy commodity prices have come down.  Short interest as a percentage of shares out in EAT has been coming down but the absolute level, at 11.9%, remains above the industry average.  GMCR is the standout in QSR, as sentiment continues to swing to the bearish side with the company’s ability to generate cash flow coming under scrutiny in recent weeks.

 

 

RESTAURANT SENTIMENT TAKEAWAYS - restaurant sentiment scorecard

 

RESTAURANT SENTIMENT TAKEAWAYS - short interest

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 

 

 



No Surer Means

“There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency.”

-John Maynard Keynes

 

If you study the history of John Maynard Keynes and his economic ideas, experiments, and failures, you’ll come to a very simple conclusion – he was a world class storyteller, not a Risk Manager.

 

Before he became politically conflicted and compromised (in his early 40s), Keynes had it absolutely right on what debauching a currency functionally does to a society. After World War I, the policies to inflate across Eastern Europe made that crystal clear.

 

Ironically enough, explaining this in the 1stbook to make him world famous – The Economic Consequences of Peace (1919) – is what made Keynes popular with the Austrian, German, and Russian people:

 

“Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency”, wrote Keynes. “By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.” (Wapshott’s Keynes Hayek, page 22).

 

Tomorrow at the FOMC meeting, someone should ask Ben Bernanke what he thinks about that.

 

Back to the Global Macro Grind

 

I call out this linkage between currency and inflation this morning because last week’s stabilization of the US Dollar continues to improve not only my outlook on the US economy but the Consumer Confidence within it. US Consumption, don’t forget, represents 71% of US GDP.

 

Closing flat week-over-week at $78.63, the US Dollar Index has gained +7.6% since Ben Bernanke signaled the end of Quantitative Guessing II. We’ve called it guessing, because that’s what it was – a guess that a second stock and commodity market inflation could magically boost the US economy into what Bernanke calls “escape velocity.”

 

On the two mandates that he is scored on – full employment and price stability – guessing didn’t work out for him.

 

What has actually worked quite well for Bernanke is getting out of the way. Since the elixir of QE3 hope has been temporarily removed from the almighty table of letting losers win, 3 big things have materialized:

  1. Strong Dollar
  2. Deflating The Inflation
  3. Rising Consumer Confidence

Last week’s preliminary December reading on US Consumer Confidence from the University of Michigan improved again, sequentially, to 67.7 (versus 64.1 in November). It’s not a great reading. But it’s certainly better than bad.

 

Last week’s Deflating The Inflation (Hedgeye Macro Theme from Q311) was also additive to US Consumer Purchasing Power:

  1. CRB Commodities Index (basket of 19 commodities) = -2.2% week-over-week
  2. Oil Prices (Brent and WTIC blended avg) = -1.2% week-over-week
  3. Gold and Copper = -2.0% and -0.8% week-over-week, respectively

Just as an fyi, most Americans don’t have enough money to buy an ounce of Gold, nor should they if their outlook is in line with Hedgeye’s for a potential US Dollar appreciation of another +5-10% higher from here.

 

That’s not to say we don’t want you to own some gold. That’s just a friendly reminder that the idea is to buy low, not high. Gold’s intermediate-term TREND line of resistance remains overhead at $1743/oz and there is no long-term TAIL support to $1568/oz.

 

Back to what Strong Dollar means for America…

  1. Stronger Employment
  2. Stronger Consumption
  3. Stronger Society

If you can have a Keynesian refute Keynes’ view of the same to me, just tweet me @KeithMcCullough.

 

My immediate-term support and resistance ranges for Gold, Oil (Brent), and the SP500 are now $1, $107.11-109.55, and 1, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

No Surer Means - Chart of the Day

 

No Surer Means - Virtual Portfolio


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