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European Banking Monitor

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor"

 

If you'd like to receive the work of the Financials team or request a trial please email .

  

Of the charts below, in particular we want to highlight the ECB’s SMP bond purchasing program that bought 3.361 Billion EUR last week in European sovereign issuance!  This is notable due to the paltry spend two weeks prior of 635MM EUR, and is supportive of both the strong demand seen in European issuance last week, and the notable decline in peripheral yields late last week.  As a reminder, Draghi continues to warn that the SMP is a temporary facility with limited firepower. While the SMP along with the extension of the LTROs should be additive to capital market gains, we don’t see the programs carrying sustained gains over the intermediate term for European capital markets.

 

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 2 bps to 94 bps versus last week’s print of 96 bps.

 

European Banking Monitor - 1. Euribor

 

 

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.  Last week the facility hit its periodic low, but this level was higher than the previous cycle, indicating growing risk. 

 

European Banking Monitor - 2. Liq

 

 

European Financials CDS Monitor – Bank swaps were wider in Europe last week for 28 of the 40 reference entities. The average widening was 2.7% and the median widening was 0.3%.

 

European Banking Monitor - 3. Banks

 

 

Security Market Program – The ECB's secondary sovereign bond purchasing program bought 3.361 Billion EUR in the week ended 12/16 (versus 635 Million EUR in the previous week) to take the total program to 211.0 Billion EUR.

 

European Banking Monitor - 4. smp

 

Matthew Hedrick

Senior Analyst


MAKE IT TWO IN A ROW IN MACAU

Raising our December GGR forecast to HK$22.5-23.5 billion

 

 

Macau posted another strong week with average daily table revenues of HK$782 million versus HK$719 million last week and HK$717 million for November.  For the second straight week, we are raising our full month projection, this time to HK$22.5-23.5 billion – up 23-28% over last year.  It appears our near-term pessimism was unfounded. 

 

MPEL and LVS remain the big winners in December thus far, both with market shares well in excess of trend.  MPEL was the clear standout this past week, upping its monthly share 130bps from the first 12 days of the month.  We are 12% above the Street for MPEL Q4 EBITDA but it now appears that even our estimate may be conservative.  LVS appears on track to beat the Street by 4-5% in Macau.

 

MAKE IT TWO IN A ROW IN MACAU - macau23


THE HBM: CMG, BWLD, BJRI

THE HEDGEYE BREAKFAST MONITOR

 

MACRO NOTES

 

Comments from CEO Keith McCullough

 

In a consensus world that was begging for the next Big Government Intervention (and didn’t get it), dead cats can still bounce:

  1. DEAD CATS – in real-time risk management speak, crashing is defined by draw-downs of 20% or more vs a recent high; while the dead cats didn’t bounce in Asia overnight (China -21% YTD, India -25.2% YTD etc), we’re seeing the higher impact Correlation Crash bounce (European Equities and Commodities), sort of…
  2. EUROPE – contextualizing a dead cat’s bounce matters; don’t forget last week alone the CAC, MIB, and FTSE were all down between -5.9-6.3%, so a +30-90bps bounce is what it is – another round of lower highs. Fitch downgrading France actually still matters to insolvent French banks who are going to have the negative P&L impact of ratings uplifts going away (higher funding costs).
  3. COMMODITIES – amidst all of the final countdown to year-end markup fun (or are they markdowns?), Dr Copper is down another -0.7% this morning – that’s pretty sad considering Copper dropped -6.2% last wk; Brent Oil is now in a Bearish Formation w/ immediate-term downside to $101.98/barrel; Gold’s refreshed range = $1.

 

In between now and the end, Deflating The Inflation through King Dollar will be good for US Consumption. The only problem between now and whenever the Correlation Crash ends is real-time prices.

 

KM

 

SUBSECTOR PERFORMANCE

 

THE HBM: CMG, BWLD, BJRI - subsector fbr

 

 

QUICK SERVICE

 

CMG: Chipotle Mexican Grill’s co-CEO, Monty Moran, is making headlines as a champion of immigration reform.  The Wall Street Journal is highlighting Mr. Moran’s interactions with political leaders in Washington D.C. aimed at overhauling immigration policies in the U.S.

 

 

QUICK SERVICE

 

BWLD: Buffalo Wild Wings is featured in an article in the Wall Street Journal today, pitching it as a long idea and an alternative to Chipotle Mexican Grill which is, according to the article, too expensive.  The author does caution readers on the risk of rising wing prices but highlights higher EPS growth in (full year) 2009 despite elevated wing prices.  This article is lacking, in our view, in that it does not highlight the risks to analysts’ expectations which, we believe, are overly optimistic.  We remain bearish on BWLD for 4Q and – in particular – 1Q12.

 

BJRI: BJ’s Restaurants are testing a new limited-menu variant called BJ’s Grill which is about 4,500 square feet, around half the size of a regular BJ’s.  One of the most noticeable aspects of BJ’s Grill is the open kitchen, separated from the 150-seat dining room by clear glass, allowing guests full visibility.  Servers at the restaurant are piloting the use of wireless hand-held tablets to take orders.

 

THE HBM: CMG, BWLD, BJRI - stocks 1219

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 


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THE M3: SANDS CHINA HK PROBE DONE

The Macau Metro Monitor, December 19, 2011

 

 

SANDS CHINA SAYS PROBE IS OVER WSJ

In a written statement to the Hong Kong Stock Exchange on Sunday, Sands China said it had received confirmation from the Securities and Futures Commission that the investigation has been concluded and that no further action will be taken against the Company at this time.  Sands China said in March that the commission had asked the company to produce documents for an investigation into alleged breaches of the Securities and Futures Ordinance.  LVS remains under investigation by U.S. federal and state regulators.

 


Correlation Crash

This note was originally published at 8am on December 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.

“There thus appears to be an inverse correlation between recovery and psychotherapy.”

-Hans Eysenck

 

With The Correlation Risk whipping around faster than a Keynesian can drum up the next big central plan, I’ve decided to source my morning quote from a psychologist. If I have to deal with managing risk today like I did yesterday, I think I might need one.

 

The late Eysenck was a “German-British psychologist … best remembered for his work on intelligence and personality… at the time of his death, Eysenck was the living psychologist most frequently cited in science journals” (Wikipedia).

 

The Big Government Intervention experiments of Japanese, American, and now European social scientists may not be cited in the scientific journals of our children as successes. I’m thinking maybe more like pre-Einstein “scientists” are remembered from Berlin.

 

After Ben Bernanke’s FOMC proclamations of faith yesterday, I was reminded of what the President of the United States should be holding him accountable to (his job):

  1. Achieve full employment
  2. Establish price stability

In the Transparency, Accountability, and Trust school of questioning perceived academic wisdoms, I give the Chairman of the Federal Reserve and the policies he has perpetuated globally to inflate very low grades.

 

Sure, somewhere in between what he thought was going to be an employment recovery and psychotherapy, I can be convinced that the man got lucky with some inverse correlations (driving commodities and stocks up with the Dollar Down). But for now, it’s the Correlation Risk (i.e. the other side of the trade), that’s ungluing just about everything that he believed would stick.

 

Back to the Global Macro Grind

 

As the SP500 bumped up against (and failed at) my immediate-term TRADE line of resistance (1249) yesterday, I sold my long position in the SPY (957AM EST, #TimeStamped).

 

While that’s a 180 versus what I was outlining yesterday, there’s also a 180 degree difference between the SP500 at 1229 and 1249. There’s an even bigger difference on a TRADE line breakdown through 1232. Risk works both ways.

 

Contextualizing why you make immediate-term TRADE decisions requires an intermediate to long-term risk management process. That’s why we call our model Duration Agnostic.

 

If you take a step back and consider our most fundamental intermediate-term TREND view in Global Macro right now, it’s a lot easier to see why we’d have a 0% asset allocation to something like Commodities.

 

Hedgeye Global Macro Themes for Q411 (introduced in mid October):

  1. King Dollar – an explicitly bullish view of the US Dollar across durations
  2. Correlation Crash – an explicitly bearish view of Global Equities, Commodities and Foreign Currencies
  3. Eurocrat Bazooka – a view that the Europeans would ultimately fail in keeping rumors in line with reality 

So far, so good.

 

Our competition (shh, even in a fair share world, it really still is a competition) has had plenty of opportunity to follow the leader on these Global Macro Themes. But, sadly, they have chosen the path most travelled by Old Wall Street sell-side firms and stayed the course with what didn’t work for them in 2008 and certainly is not working now. Same broken models.

 

Not to name names, but whether it was Goldman saying buy Commodities in October (then buy the Euro in November!), or Tom Lee at JP Morgan just saying buy buy buy, it’s all one and the same old thing. I’m not the only one who should be considering psychotherapy.

 

Back to The Correlation Risk

 

Yesterday I heard a few pundits talk about how interesting it was that the “correlations are starting to come undone.” Not sure what that means (they were saying it when US stocks were up on the day actually), but here’s the latest math:

 

Immediate-term inverse correlations between the US Dollar Index and the big Macro that matters:

  1. CRB Commodities Index = -0.87
  2. SP500 = -0.59
  3. EuroStoxx = -0.73
  4. Gold = -0.82
  5. Silver = -0.89
  6. Corn = -0.84

Now maybe if you are US stock centric and not paying attention to Global Macro Correlations other than the SP500, this data could be spun as half-true (SP500 was a -0.8). But C’mon Man – interconnectedness is what’s been driving the Alpha bus for all of 2011. Period.

 

Since we authored this very basic thought, we do agree that the best path to long-term prosperity in America is through a Strong Dollar. Correlation Risk is not perpetual. With time, Strong Dollar = Strong US Consumption. Strong Consumption (71% of US GDP) will ultimately save this country from the Keynesians themselves - like it did in 2009.

 

Unfortunately, this is not yet 2009. Bottoms are processes, not points. And this Correlation Crash still needs to run its course.

 

My immediate-term support and resistance ranges for Gold, Brent Oil, German DAX, French CAC, and the SP500 are now $1637-1718, $107.12-109.56, 5667-5842, 3026-3133, and 1214-1232, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Correlation Crash - Chart of the Day

 

Correlation Crash - Virtual Portfolio


MONDAY MORNING RISK MONITOR: MCDX & TED SPREAD STILL GOING THE WRONG DIRECTION

Trouble viewing the charts in this email?  Please click the link at the bottom of the note to view in your browser. 

 

Margin Debt in November

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 and November’s print of +0.78 and +0.55 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 November.

 

MONDAY MORNING RISK MONITOR: MCDX & TED SPREAD STILL GOING THE WRONG DIRECTION - Margin Debt

 

* The TED spread made a new YTD high at 56.8 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 were a mixed bag on Monday. German sovereign swaps widened by 6.3% while Spanish swaps tightened by 5.6% compared to the prior week. 

 

* Our composite MCDX monitor shows municipal default risk making steadily higher highs and higher lows. While it has not yet returned to the post-Whitney/Build America Bonds levels, it is on track do so in the not too distant future.

 

 * Our macro quantitative model indicates that in the immediate term (TRADE), there is currently around 2 times more downside than upside in the XLF (2.2% downside vs. 1.0% upside).

 

Financial Risk Monitor Summary (Across 3 Durations):

  • Short-term (WoW): Negative / 2 of 11 improved / 4 out of 11 worsened / 6 of 11 unchanged
  • Intermediate-term (MoM): Negative / 2 of 11 improved / 5 of 11 worsened / 5 of 11 unchanged
  • Long-term (150 DMA): Negative / 1 of 11 improved / 10 of 11 worsened / 1 of 11 unchanged

 

MONDAY MORNING RISK MONITOR: MCDX & TED SPREAD STILL GOING THE WRONG DIRECTION - Summary

 

1. US Financials CDS Monitor – Swaps widened for 19 of 27 major domestic financial company reference entities last week.   

Widened the most vs last week: C, MET, HIG

Tightened the most vs last week: ALL, MBI, AGO

Widened the most/ Tightened the least vs last month: BAC, SLM, RDN

Tightened the most vs last month: ACE, ALL, CB

 

MONDAY MORNING RISK MONITOR: MCDX & TED SPREAD STILL GOING THE WRONG DIRECTION - CDS  us

 

2. European Financials CDS Monitor – Bank swaps were wider in Europe last week for 28 of the 40 reference entities. The average widening was 2.7% and the median widening was 0.3%

 

MONDAY MORNING RISK MONITOR: MCDX & TED SPREAD STILL GOING THE WRONG DIRECTION - CDS  euro

 

3. European Sovereign CDS – European sovereign swaps showed mixed results last week. German sovereign swaps widened by 6.3% (+6 bps to 107) and Spanish tightened by 5.6% (+24 bps to 410).

 

MONDAY MORNING RISK MONITOR: MCDX & TED SPREAD STILL GOING THE WRONG DIRECTION - Sovereign CDS 1

 

MONDAY MORNING RISK MONITOR: MCDX & TED SPREAD STILL GOING THE WRONG DIRECTION - Sovereign CDS 2

 

4. High Yield (YTM) Monitor – High Yield rates rose 5 bps last week, ending the week at 9.01 versus 8.96 the prior week.

 

MONDAY MORNING RISK MONITOR: MCDX & TED SPREAD STILL GOING THE WRONG DIRECTION - High Yield

 

5. Leveraged Loan Index Monitor – The Leveraged Loan Index fell -5 points last week, ending at 1573.

 

MONDAY MORNING RISK MONITOR: MCDX & TED SPREAD STILL GOING THE WRONG DIRECTION - LLI

 

6. TED Spread Monitor – The TED spread rose 2.6 points last week, ending the week at 56.8 this week versus last week’s print of 54.2.

 

MONDAY MORNING RISK MONITOR: MCDX & TED SPREAD STILL GOING THE WRONG DIRECTION - TED spread

 

7. Journal of Commerce Commodity Price Index – The JOC indexfell -4.34 points, ending the week at -24.5 versus -20.16 the prior week.

 

MONDAY MORNING RISK MONITOR: MCDX & TED SPREAD STILL GOING THE WRONG DIRECTION - 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 2 bps to 94 bps versus last week’s print of 96 bps.

 

MONDAY MORNING RISK MONITOR: MCDX & TED SPREAD STILL GOING THE WRONG DIRECTION - Euribor

 

9. 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.  Last week the facility hit its periodic low, but this level was higher than the previous cycle, indicating growing risk. 

 

MONDAY MORNING RISK MONITOR: MCDX & TED SPREAD STILL GOING THE WRONG DIRECTION - ECB liquidity deposit2 

 

10. 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 190.4 bps versus 184 bps the prior week.

 

MONDAY MORNING RISK MONITOR: MCDX & TED SPREAD STILL GOING THE WRONG DIRECTION - MCDX

 

11. 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 fell -34 points, ending the week at 1888 versus 1922 the prior week.

 

MONDAY MORNING RISK MONITOR: MCDX & TED SPREAD STILL GOING THE WRONG DIRECTION - Baltic Dry

 

12. 2-10 Spread – We track the 2-10 spread as an indicator of bank margin pressure.  Last week the 2-10 spread tightened to 162.29 bps, -21.11 bps tighter than a week ago.

 

MONDAY MORNING RISK MONITOR: MCDX & TED SPREAD STILL GOING THE WRONG DIRECTION - 2 10

 

13. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.0% upside to TRADE resistance and 2.2% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: MCDX & TED SPREAD STILL GOING THE WRONG DIRECTION - xlf

 

Joshua Steiner, CFA

 

Allison Kaptur

 

Robert Belsky

 

Trouble viewing the charts in this email?  Please click the link at the bottom of the note to view in your browser. 

 

 


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 80.65%
  • SHORT SIGNALS 78.63%
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