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The LTRO Is No Bazooka

Conclusion: The proceeds from the borrowings from the LTRO by European banks are seemingly being deposited into the ECB liquidity facility and not being used to purchase sovereign paper. This is validated by three key measures of risk: German short term bund yields, the TED spread, and Italian 10-year yields.

 

The most recent purported panacea to emerge in the European sovereign debt crisis was the recently announced Long-Term Refinancing Operation, or LTRO. The LTRO, by mandate, provides 3-year loans to European banks at a 1% interest rate. Initially, the program was deemed a massive success as 523 banks “oversubscribed” and took 489 billion euros from the LTRO.

 

Unfortunately, the actual injection of liquidity was substantially smaller than 489 billion euros. According to our preliminary analysis, the roll over of short term debt, from 7-day to 3-month paper, actually took up the majority of the LTRO and, in fact, the actual incremental liquidity increase was likely closer to 210 billion euro, a far cry from the original headline number.

 

Aside from injecting much needed liquidity into the European banking system, which on the margin the LTRO did do, the consensus perspective at the time was that the LTRO was in effect a back-door bazooka. As such, this facility would be utilized by the banks to purchase European sovereign debt, which would in turn alleviate some of the funding pressure in the sovereign market. Based on the most recent data from the ECB, the LTRO does not appear to have been used for this purpose.

 

In the chart below, we’ve highlighted the ECB liquidity facility going back one year and in the inserted chart going back roughly one month. The key takeaway is that the ECB liquidity facility, which is used by European banks to effectively park money, hit a new all-time high at 411 billion euros this morning and has been increasingly rapidly since the inception of the LTRO just over a week ago. In fact, the day before the LTRO was put into effect, the ECB facility was at 265 billion euro and as of this morning has increased by 146 billion euro, or more than 70% of the incremental liquidity from the LTRO.

 

The LTRO Is No Bazooka - ECB

 

So, not only is the LTRO not being used as a bazooka by the European banks, but these banks are parking the borrowed LTRO money with the ECB rather than using it to buy sovereign debt, and thus are experiencing a negative yield on the trade. As noted above, European banks borrow at 1% from the LTRO, but when parking money with the ECB only get paid a 0.25% yield. So rather than taking any risk in buying European sovereign debt, the banks are, seemingly, willing to take a 75 basis point negative carry trade on this liquidity.

 

Not surprisingly, given the actions that European banks are taking, which signals they see more and not less risk on the horizon, the TED spread hit a new YTD high this morning, which in our view is the most appropriate measure of systematic risk in the banking system. As well, we’ve highlighted in the charts below that German 1-year Bunds are approaching close to YTD lows, at less than 0% yield, and Italian 10-year bonds are approaching YTD highs in yield, at north of 7%. The later point is the most disturbing in the face of sizeable Italian bond auctions this week, but together highlight that risk aversion is heightening in Europe.

 

The LTRO Is No Bazooka - German1F

 

The LTRO Is No Bazooka - Italy10F

 

The LTRO is certainly not a panacea and, clearly, not even the fabled Bazooka. In reality, the market is actually looking right through the LTRO and looking directly at the estimated 800 billion euro of Eurozone sovereign debt that needs to be refinanced next year and the 230 billion euro of European bank debt that needs to be refinance in Q1 2012.

 

Daryl G. Jones

Director of Research


MACAU SLOWS AS EXPECTED

No change to HK$22.5-23.5 billion December projection

 

 

Average daily table revenues for the past 8 days in Macau were HK$678 million, off the HK$732 million pace of the rest of the month.  However, this is a typical seasonal pattern.  We are maintaining our HK$22.5-23.5 projection for the full month of December which represents YoY growth of 23-28%.  The set up for January looks favorable as win generated on 12/31 will count in 2012 and Chinese New Year falls in January of 2012 versus February of 2011.  Remember that the DICJ is always one day behind so December actually includes November 30th to December 30th, January includes December 31st to January 30th, etc.

 

Week over week, WYNN gained the most share, coming from LVS and MPEL, and is now above recent trend.  Despite the sequential drop, MPEL remains at trend.  While LVS is above trend, December should be viewed as a disappointment given the junket push the last couple of months.  We would have expected 200-300bps of market share gains by now for LVS although hold may have played a role.

 

MACAU SLOWS AS EXPECTED  - m


THE HBM: MCD, WEN

THE HEDGEYE BREAKFAST MENU

 

Notable MACRO data points, news items, and price action pertaining to the restaurant space.

 

MACRO

 

CatteNetwork – “Retail beef prices rose in November for the fourth consecutive month and set a new record for the third consecutive month. The average price of choice beef in grocery store meat cases in November was $5.001 per pound. That was up 6.8 cents from the October record and up 51.7 cents from November 2010. The average retail price of all fresh beef also was record high at $4.504 per pound in November. Since the per capita beef supply is expected to be 4-5% lower in 2012, many more months of record retail beef prices are likely in the coming year.”

 

SUB-SECTOR PERFORMANCE

 

THE HBM: MCD, WEN - hfbrd

 

QUICK SERVICE

 

MCD - With the Year's Trading Nearly Complete, McDonald's Tops All Dow Jones Industrial Average Component Stocks With 2011 Gain of 30.47%

WEN - re-entered the Japanese market after pulling out of the country in 2009, with plans to open 100 restaurants in the next five years.

 

FULL SERVICE

 

EAT – Up last Friday on accelerating volume

 

 

 

THE HBM: MCD, WEN - qsr

THE HBM: MCD, WEN - fsr

 

 

Howard Penney

Managing Director

            

 

Rory Green

Analyst


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TUESDAY MORNING RISK MONITOR: A NEW ALL-TIME HIGH FOR THE ECB LIQUIDITY DEPOSIT SHOWS MOUNTING RISK

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* The TED spread made a new YTD high at 58.1 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.  According to the TED spread, none of European leaders' actions over the last weeks and months has made a difference to banking system stability.

 

* The ECB Liquidity Recourse to the Deposit Facility hit a new all-time high just days after its last cycle low.  This suggests that levels will climb even higher before the next cycle peak.  The level currently stands at 411 billion euros.  

 

*Credit default swaps for Eurozone countries tightened on Monday. Italian swaps tightened by 7%.

 

Financial Risk Monitor Summary (Across 3 Durations):

  • Short-term (WoW): Neutral / 4 of 11 improved / 4 out of 11 worsened / 4 of 11 unchanged
  • Intermediate-term (MoM): Negative / 5 of 11 improved / 6 of 11 worsened / 1 of 11 unchanged
  • Long-term (150 DMA): Negative / 2 of 11 improved / 9 of 11 worsened / 1 of 11 unchanged

TUESDAY MORNING RISK MONITOR: A NEW ALL-TIME HIGH FOR THE ECB LIQUIDITY DEPOSIT SHOWS MOUNTING RISK - Summary

 

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

Tightened the most vs last week: RDN, XL, MMC

Tightened the least vs last week: GS, SLM, HIG

Tightened the most vs last month: SLM, RDN, UNM

Tightened the least vs last month: ACE, ALL, XL

 

TUESDAY MORNING RISK MONITOR: A NEW ALL-TIME HIGH FOR THE ECB LIQUIDITY DEPOSIT SHOWS MOUNTING RISK - cds  US

 

2. European Financials CDS Monitor – Bank swaps were tighter in Europe last week for 37 of the 40 reference entities. The median tightening was 6.33%. The three exceptions were the Greek banks. 

 

TUESDAY MORNING RISK MONITOR: A NEW ALL-TIME HIGH FOR THE ECB LIQUIDITY DEPOSIT SHOWS MOUNTING RISK - cds  Euro

 

3. European Sovereign CDS – European sovereign swaps tightened last week. German sovereign swaps tightened by 3% (-3 bps to 103) and Italian tightened by 7% (-38 bps to 500).

 

TUESDAY MORNING RISK MONITOR: A NEW ALL-TIME HIGH FOR THE ECB LIQUIDITY DEPOSIT SHOWS MOUNTING RISK - Sovereign CDS 1

 

TUESDAY MORNING RISK MONITOR: A NEW ALL-TIME HIGH FOR THE ECB LIQUIDITY DEPOSIT SHOWS MOUNTING RISK - Sovereign CDS 2

 

4. High Yield (YTM) Monitor – High Yield rates fell 9 bps last week, ending the week at 8.92 versus 9.01 the prior week.

 

TUESDAY MORNING RISK MONITOR: A NEW ALL-TIME HIGH FOR THE ECB LIQUIDITY DEPOSIT SHOWS MOUNTING RISK - High Yield

 

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

 

TUESDAY MORNING RISK MONITOR: A NEW ALL-TIME HIGH FOR THE ECB LIQUIDITY DEPOSIT SHOWS MOUNTING RISK - LLI

 

6. TED Spread Monitor – The TED spread rose 1.3 points last week, ending the week at 58.1 this week versus last week’s print of 56.8.

 

TUESDAY MORNING RISK MONITOR: A NEW ALL-TIME HIGH FOR THE ECB LIQUIDITY DEPOSIT SHOWS MOUNTING RISK - TED

 

7. Journal of Commerce Commodity Price Index – The JOC index rose less than 1 point, ending the week at -23.6 versus -24.5 the prior week.

 

TUESDAY MORNING RISK MONITOR: A NEW ALL-TIME HIGH FOR THE ECB LIQUIDITY DEPOSIT SHOWS MOUNTING RISK - 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 widened by 4 bps to 98 bps versus last week’s print of 94 bps.

 

TUESDAY MORNING RISK MONITOR: A NEW ALL-TIME HIGH FOR THE ECB LIQUIDITY DEPOSIT SHOWS MOUNTING RISK - Euribor  OIS

 

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.  The Liquidity Recourse hit a new all-time high on Friday, signaling growing systemic risk to the European banking system. 

 

TUESDAY MORNING RISK MONITOR: A NEW ALL-TIME HIGH FOR THE ECB LIQUIDITY DEPOSIT SHOWS MOUNTING RISK - ECB liquidity facility2

 

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 tightened, ending the week at 182 bps versus 190 bps the prior week.

 

TUESDAY MORNING RISK MONITOR: A NEW ALL-TIME HIGH FOR THE ECB LIQUIDITY DEPOSIT SHOWS MOUNTING RISK - 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 -150 points, ending the week at 1738 versus 1888 the prior week.

 

TUESDAY MORNING RISK MONITOR: A NEW ALL-TIME HIGH FOR THE ECB LIQUIDITY DEPOSIT SHOWS MOUNTING RISK - Baltic

 

12. 2-10 Spread  – We track the 2-10 spread as an indicator of bank margin pressure.  Last week the 2-10 spread widened to 174 bps, 12 bps wider than a week ago.

 

TUESDAY MORNING RISK MONITOR: A NEW ALL-TIME HIGH FOR THE ECB LIQUIDITY DEPOSIT SHOWS MOUNTING RISK - 2 10

 

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.

 

TUESDAY MORNING RISK MONITOR: A NEW ALL-TIME HIGH FOR THE ECB LIQUIDITY DEPOSIT SHOWS MOUNTING RISK - Margin Debt

 

Joshua Steiner, CFA

 

Allison Kaptur

 

Robert Belsky

 

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Boxed In

“If you ever dream of beating me you’d better wake up and apologize.”

- Muhammad Ali

 

In the United Kingdom, Boxing Day, historically, was the day after Christmas on which the wealthy gave their servants gifts in a box to show them appreciation for their service. It is a holiday that it still recognized in much of the Commonwealth, though the concept of the holiday has changed rather dramatically over time. Yesterday, I celebrated Boxing Day in my hometown of Bassano, Alberta with family and friends and a traditional town pond hockey game in the mid-afternoon.

 

In Canada, Boxing Day has morphed from a charitable day to a day which is generally known to have the best shopping deals of the year. With the commercialization of Boxing Day, the goodwill aspect of it has been all but lost. On some level, though, the massive sales that occur on Boxing Day do provide some respite to the middle and lower class consumer who continue to get Boxed In by the North American economy.

 

In the United States, one of the key issues facing the middle and lower class consumer clearly remains the employment situation. The most recent monthly employment report from the Bureau of Labor Statistics in the United States, reported in early December and including November data, showed that the national unemployment rate in the United States had declined from 9.8% in November 2010 to 8.6% in November 2011. This was good news, right? Well, as usual, the devil is in the details.

 

From November 2010 to November 2011, the totally number of employed in the United States increased from 138.9 million to 140.6 million for a total increase of 1.68 million, or 1.2%. Conversely, the total number of civilian and non-institutional population not in the workforce increased from 84.8 million to 86.6 million for a total increase of 1.79 million, or 2.1%. So on a net-net basis, the number of people out of the workforce has increased more than the people in the workforce over the last twelve months, despite the illusion of a decreasing unemployment rate.

 

As it relates to prospects for hiring, the outlook is muddled. According to the Business Roundtable survey released last week, about 1/3 of CEOs expect to add employees in 2012, about 40% expect to keep their employees flat, and almost 25% expect to trim headcount. This survey is basically unchanged from its results three months before. A recent survey from Manpower echoed similar uncertainty in the job market, with the following key conclusion:

 

“Seven percent of employers report they are unsure of their hiring intentions going into the new year. The rise from three to seven percent is the most significant quarterly increase since 1977 and represents the highest percentage of uncertain employers surveyed since 2005.”

 

Despite the more ominous long-term employment picture, recent weekly unemployment claims have shown some improvement in the U.S. In fact, last week’s headline initial claims fell 2,000 to 364,000. In terms of context, our financials team wrote the following regarding the recent claims data point:

 

“It strikes us that claims have exhibited similar tendencies for the past few years. Starting around week 36 of the year, rolling claims begin improving and continue that improvement through year-end. While we don't have a great explanation for why that is, considering the data is seasonally adjusted, it does seem to be a recurring trend. Also important is the fact that in the first 1-2 months of the new year, claims seem to go the wrong way, or least have done so in the past few years.

 

We'd also highlight the sizeable divergence that has emerged between claims and the S&P. Historically these divergences have not lasted. Right now the divergence is suggesting that either claims back up to ~445k or the S&P 500 puts on a move to ~1375. Last time a comparable divergence emerged it was in the fall. The mean reversion instrument at that time was the market, as claims showed resilience, and, ultimately, improvement.”

 

Given the employer surveys highlighted above, it seems likely that typical trend of employment worsening in the first couple of months of the year will again come to the fruition this year.

 

In the Chart of the Day, we’ve highlighted the growth of the population not in the workforce in the United States going back three years. This chart illustrates that as unemployment has grown over that period, so too has the population that has left the workforce.

 

The background of the chart is a picture from the “Thrilla in Manilla,” which was the third and final fight between Muhammad Ali and Joe Frazier. At the start of the seventh round, Ali purportedly whispered in Frazier's ear, "Joe, they told me you was all washed up."  Frazier growled back, "They told you wrong, pretty boy." Unfortunately for Frazier he eventually lost in the 14th round by TKO when his trainer threw in the towel.

 

We are not certain when the U.S. consumer will officially throw in the towel, but there is certainly a scenario in which a strengthening U.S. dollar will help to buoy consumer spending by increasing purchasing power and deflating key input costs. On the other hand, we are much more certain that if Italian yields continue to trend above 7%, as they are this morning, global investors will be increasingly likely to throw in the towel on the Euro.

 

Our immediate-term support and resistance ranges for Gold, Oil (Brent), EUR/USD, and the SP500 are now $1, $106.02-109.11, $1.28-1.30, and 1, respectively.

  

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

 

Boxed In - DJ EL chart

 

Boxed In - HVP


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