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TUESDAY MORNING RISK MONITOR: EURIBOR-OIS AND THE TED SPREAD A STUDY IN CONTRASTS

*Interbank risk throws off mixed signals. Euribor-OIS continues to improve, but the TED Spread saw a sharp reversal in the final two days of trading last week. Interbank risk, both US and European, have been among the most important factors to monitor in the last several months. We would look to the next round of LTRO on 2/29 as the next significant milestone/catalyst on this front. Moreover, we would expect that with Greece in the rear view mirror, interbank risk should recede further in the short term. Euribor-OIS tightened 2 bps last week, while the TED spread tightened less than a basis point.

 

* High yield rates sank to a new YTD low on Friday. This is both a risk gauge as well as a reflection of the Fed's policy to pay zero for the foreseeable future.   

 

*European Bank CDS widened last week with the majority of the widening coming from banks in Sweden, The United Kingdom, and Spain. 

 

Financial Risk Monitor Summary  

• Short-term(WoW): Negative / 2 of 12 improved / 3 out of 12 worsened / 7 of 12 unchanged

• Intermediate-term(WoW): Positive / 6 of 12 improved / 2 out of 12 worsened / 4 of 12 unchanged  

• Long-term(WoW): Negative / 0 of 12 improved / 7 out of 12 worsened / 5 of 12 unchanged

 

TUESDAY MORNING RISK MONITOR: EURIBOR-OIS AND THE TED SPREAD A STUDY IN CONTRASTS - Summary 

 

1. US Financials CDS Monitor – Swaps widened for 14 of 27 major domestic financial company reference entities last week.   

Widened the most WoW: MS, ACE, GS

Tightened the most WoW: RDN, MTG, JPM

Widened the most MoM: ACE, MBI, CB

Tightened the most MoM: RDN, GNW, SLM

TUESDAY MORNING RISK MONITOR: EURIBOR-OIS AND THE TED SPREAD A STUDY IN CONTRASTS - CDS  US

 

2. European Financials CDS Monitor – Bank swaps were wider in Europe last week for 24 of the 40 reference entities. The median widening was 2.6%.

 

TUESDAY MORNING RISK MONITOR: EURIBOR-OIS AND THE TED SPREAD A STUDY IN CONTRASTS - CDS  Euro

 

3. European Sovereign CDS – European Sovereign Swaps mostly widened over last week. American sovereign swaps tightened by 8.7% (-4 bps to 37) and Spanish sovereign swaps widened by 3.8% (14 bps to 374).

 

TUESDAY MORNING RISK MONITOR: EURIBOR-OIS AND THE TED SPREAD A STUDY IN CONTRASTS - Sov CDS 1

 

TUESDAY MORNING RISK MONITOR: EURIBOR-OIS AND THE TED SPREAD A STUDY IN CONTRASTS - Sov CDS 2

 

4. High Yield (YTM) Monitor – High Yield rates fell 5.0 bps last week, ending the week at 7.32 versus 7.37 the prior week.

 

TUESDAY MORNING RISK MONITOR: EURIBOR-OIS AND THE TED SPREAD A STUDY IN CONTRASTS - HY

 

5. Leveraged Loan Index Monitor – The Leveraged Loan Index fell 1 point last week, ending at 1634.

 

TUESDAY MORNING RISK MONITOR: EURIBOR-OIS AND THE TED SPREAD A STUDY IN CONTRASTS - LLI

 

6. TED Spread Monitor – The TED spread fell 0.8 points last week, ending the week at 41.4 this week versus last week’s print of 42.2. However, it's worth noting that in the last two days the TED Spread has backed up notably. As of this morning, it widened to 41.6. We'll be keeping an eye on this. For reference, its European cousin, Libor-OIS showed steady improvement.

 

TUESDAY MORNING RISK MONITOR: EURIBOR-OIS AND THE TED SPREAD A STUDY IN CONTRASTS - TED

 

7. Journal of Commerce Commodity Price Index – The JOC index fell 1.3 points, ending the week at -10.8 versus -9.5 the prior week.

 

TUESDAY MORNING RISK MONITOR: EURIBOR-OIS AND THE TED SPREAD A STUDY IN CONTRASTS - 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 69 bps last week.

 

TUESDAY MORNING RISK MONITOR: EURIBOR-OIS AND THE TED SPREAD A STUDY IN CONTRASTS - 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.  Taken in conjunction with excess reserves, the ECB deposit facility measures excess liquidity in the Euro banking system.  An increase in this metric shows that banks are borrowing from the ECB.  In other words, the deposit facility measures one element of the ECB response to the crisis.  

 

TUESDAY MORNING RISK MONITOR: EURIBOR-OIS AND THE TED SPREAD A STUDY IN CONTRASTS - ECB liquidity

 

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 127 bps versus 123 bps the prior week.

 

TUESDAY MORNING RISK MONITOR: EURIBOR-OIS AND THE TED SPREAD A STUDY IN CONTRASTS - MCDX 2

 

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 rose 2 points, ending the week at 717 versus 715 the prior week.

 

TUESDAY MORNING RISK MONITOR: EURIBOR-OIS AND THE TED SPREAD A STUDY IN CONTRASTS - 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 widened to 173 bps, 2 bps wider than a week ago.

 

TUESDAY MORNING RISK MONITOR: EURIBOR-OIS AND THE TED SPREAD A STUDY IN CONTRASTS - 2 10

 

13. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.5% upside to TRADE resistance and 2.2% downside to TRADE support.

 

TUESDAY MORNING RISK MONITOR: EURIBOR-OIS AND THE TED SPREAD A STUDY IN CONTRASTS - XLF  

 

Margin Debt -  December

We publish NYSE Margin Debt every month when it’s released. NYSE Margin debt hit its post-2007 peak in April of 2011 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 last 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 2011. 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 +0.53 standard deviations in November, still has a long way to go. We would need to see it approach -0.5 to -1.0 standard deviations before the trend runs its course. There’s plenty of room for short/intermediate term reversals within this broader secular move, as we saw in November and December's print of +0.55 and +0.53 standard deviations.  Overall, however, this setup represents a headwind for the market. One limitation of this series is that it is reported on a lag.  The chart shows data through December.

 

TUESDAY MORNING RISK MONITOR: EURIBOR-OIS AND THE TED SPREAD A STUDY IN CONTRASTS - Margin Debt


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – February 21, 2012


As we look at today’s set up for the S&P 500, the range is 13 points or -0.82% downside to 1350 and 0.13% upside to 1363. 

 

SECTOR AND GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - one

 

THE HEDGEYE DAILY OUTLOOK - two

 

THE HEDGEYE DAILY OUTLOOK - three

 

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: 432 (-1109) 
  • VOLUME: NYSE 897.31 (11.36%)
  • VIX:  17.78 -7.49% YTD PERFORMANCE: -24.02%
  • SPX PUT/CALL RATIO: 2.31 from 1.45 (59.31%)

CREDIT/ECONOMIC MARKET LOOK:


10yr YIELD – this is the 2nd time this year that we’ve seen an intraday test of our 2.03% intermediate-term TREND line for 10yr Treasury yields. A sustained close > than this line could tip flows from bonds to stocks. But we need to see this confirm for at least 3 weeks in a row, not 6 hours. 

  • TED SPREAD: 41.68
  • 3-MONTH T-BILL YIELD: 0.08%
  • 10-Year: 2.03 from 2.00
  • YIELD CURVE: 1.74 from 1.71 

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Chicago Fed, Jan., est. 0.22 (prior 0.17)
  • 11am: Export inspections: corn, soybeans, wheat
  • 11:30am: U.S. to sell $33b 3-mo., $31b 6-mo. bills
  • 1pm: U.S. to sell $35b 2-yr notes 

GOVERNMENT:

    • IAEA Inspectors return to Iran, Feb. 21-22
    • House, Senate not in session 

WHAT TO WATCH: 

  • Greece won a second bailout after European governments wrung concessions from private investors; European finance ministers approved $173b in aid
  • Japanese billionaire Kazuo Okada, forced to sell stake in Wynn Resorts at discount, pledged to fight to protect his investment
  • URS Corp. agreed to buy Flint Energy Services for C$1.25b
  • Misys received rival bid from Vista Equity Partners, challenging previous agreement with Temenos
  • TNT Express, in talks with UPS on takeover bid, said it plans to refocus operations in Europe
  • FDA hosts media briefing on progress on drug shortages, noon
  • China Telecom becomes second carrier in China to offer iPhone
  • Barnes & Noble may give update on plans for its Nook e- reader unit when it reports 3Q results today
  • Alibaba 4Q net income trails est.
  • No U.S. IPOs scheduled: Bloomberg data 

EARNINGS:

    • Medco Health Solutions (MHS) 5:55 a.m., $1.17
    • Dollar Thrifty Automotive Group (DTG) 6 a.m., $0.75
    • Home Depot (HD) 6 a.m., $0.42
    • Mylan (MYL) 6 a.m., $0.50
    • Kraft Foods (KFT) 6:30 a.m., $0.57
    • Rockwood Holdings (ROC) 6:30 a.m., $0.79
    • Cracker Barrel Old Country Store (CBRL) 7 a.m., $1.14
    • Dana Holding (DAN) 7 a.m., $0.38
    • Wal-Mart Stores (WMT) 7 a.m., $1.45
    • RadioShack (RSH) 7 a.m., $0.12
    • Medtronic (MDT) 7:15 a.m., $0.84
    • Clear Channel Outdoor Holdings (CCO) 8 a.m., $0.10
    • Macy’s (M) 8 a.m., $1.65
    • Saks (SKS) 8 a.m., $0.14
    • Barnes & Noble (BKS) 8:30 a.m., $0.92
    • Genuine Parts Co (GPC) 8:33 a.m., $0.83
    • Expeditors International (EXPD) 9 a.m., $0.47
    • Intuit (INTU) 4 p.m., $0.45
    • Nabors Industries Ltd (NBR) 4 p.m., $0.50
    • Chesapeake Energy (CHK) 4:01 p.m., $0.59
    • Dell (DELL) 4:01 p.m., $0.52
    • Brocade Communications Systems (BRCD) 4:04 p.m., $0.13
    • Newfield Exploration Co (NFX) 4:04 p.m., $1.02
    • HCC Insurance Holdings (HCC) 5 p.m., $0.67
    • Range Resources (RRC) 5:06 p.m., $0.30

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)


OIL – never in the history of Global Consumption has $100 handle per barrel (pick your flavor) not slowed Consumption. On the margin is where discretionary consumption matters and if we push toward $5 at the pump, we think you’ll see this time is not different. After being long Consumer Discretionary (XLY) for most of December-January (on Strong Dollar = Strong Consumption), we shorted it on Friday. 

  • Record Rice Crop Boosting Stockpiles to Decade High
  • Oil Trades Near Nine-Month High as Europe Reaches Greek Aid Deal
  • Copper Gains for a Second Day as Greece Wins Another Bailout
  • Commodities Rally to Highest in More Than Six Months on Greece
  • Soybeans Gain on Dry Weather in South America, China’s Purchase
  • Gold Imports by India Seen Declining From Record on Prices
  • Australia Seen Gaining Asian Wheat Market Share From U.S.
  • Robusta Coffee Falls as Vietnam Sales May Advance; Cocoa Rises
  • Gold May Gain a 2nd Day as Commodities Climb on Greece Bailout
  • Copper Imports by China Decline for First Time in Eight Months
  • Coal to India Beating China on Supply Shortfall: Energy Markets
  • BP’s Maple Bonds Expose Drought Carney Frets: Canada Credit
  • Russia Has Enough Grain to Continue Exports, Minister Says
  • Raw Materials Rally as Greece Wins Bailout
  • Oil Profits Slide Fastest Since Lehman Collapse on Gas: Energy
  • Billionaire Fredriksen Sees Golar LNG Rates Surging: Freight 

THE HEDGEYE DAILY OUTLOOK - four

 

 

CURRENCIES


THE HEDGEYE DAILY OUTLOOK - five

 

 

EUROPEAN MARKETS


FRANCE – now that we have a +18% German DAX rally (YTD) out of the way (Greece was +23% at its YTD peak), we can focus on separating the weak parts of European growth from the strong (Germany). France’s CAC40 fails to breakout above its long-term TAIL of 3565 resistance again. Growth Slowing in France is a major problem – so is Hollande’s continued momentum in the polls vs Sarkozy.


THE HEDGEYE DAILY OUTLOOK - six

 

 

ASIAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - seven

 

 

MIDDLE EAST


THE HEDGEYE DAILY OUTLOOK - eight

 

 

 

The Hedgeye Macro Team

 



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Le Greek Deluge

“Apres nous, le deluge.”

-Madame de Pompadour

 

Greece Wins 2nd Bailout.” The Top 3 Most Read articles on Bloomberg this morning are about Greece. Great job by the world’s central planners. They have saved us from themselves, again.

 

Now what?

 

Not to be confused with one of the alleged prostitutes from the ex-Keynesian Chief at the IMF, Dominique Strauss-Kahn’s, “sex ring” this morning, Jeanne Antoinette Poisson (Madame de Pompadour) was big player in the French courts of 1740s France. As Chief Mistress to Louis XV, she had intimate edge on everything political that was going to happen next.

 

Short-term career risk management of conflicted politicians vs. Long-term globally interconnected what? Yes, it’s sad and pathetic to watch, even if that means we get a little short-term stock and commodity price inflation to lather us up somewhere in between.

 

My thoughts on what I call Duration Mismatch between long-term wants versus short-term political needs are not new. Never mind 18th century France or Rome in 49BC, this is 2012 baby. If you’re in the game of chasing short-term performance, you’ve just got to believe!

 

Or do you?

 

As our good ole counter-punching friend Friedrich von Hayek once said about Keynes and his throw-away line about “in the long-run, we are all dead”, “I fear that these believers in the principle of après nous le deluge may get what they have bargained for sooner than they wish.” (Keynes Hayek, page 186)

 

Back to the Global Macro Grind

 

While some of the world’s insider trading, tax evading, and prostitution ringing politicians of the Global Bubble in Keynesian Economics may want you to believe that “this time is different”, we still think that a Rising Price of Oil Slows Global Growth.

 

To be crystal clear, we’re not talking any price of oil. We like to talk about the price that’s being set on the margin. There has never been an oil price with a $100 handle per barrel that didn’t slow growth. Never is a long time.

 

Whether you look at Brent or West Texas crude oil, here’s what prices did last week: 

  1. Brent Oil = +2.0% to $119.58
  2. WTIC Oil = +4.6% to $103.24

Now, to be sure, there are a lot of things going on here like correlations, causalities, and Iranians – all at the same time - but the one thing that’s been consistent since Ben Bernanke’s Policy To Inflate (January 25th) are Inflation Expectations Rising

  1. Brent Oil (since January 25, 2011) = +9.1% (from $109.86/barrel)
  2. WTIC Oil (since January 25, 2011) = +7.6% (from $98.33/barrel) 

While it’s not clear to us why Old Wall Street’s economists and strategists have not yet cut their US GDP Growth forecasts for Q1 and Q2 of 2012 due to rising oil prices, it wasn’t clear to us why they didn’t at this time last year either.

 

Not to remind some of these perma-bull growth forecasters about the score, but last year plenty of them said that the price of oil crossing the Consumption Rubicon wasn’t going to matter. In fact, a lot of them said rising oil prices were a function of “accelerating demand.”

 

Oh, ok.

 

Someone might want to tell the Chinese about that…

 

Something (hint: Growth Slowing) is making the Chinese very nervous about this whole Global Money Printing thing. Nervous enough to cut the reserve requirement on banks for the 2nd time in the last few months. There are very few high-frequency economic data points coming out of China and/or Asia in the last week that don’t support this non-Greek headline of growth slowing sequentially.

 

But have no fear, Andrea Mitchell is here. Yes, as in the Maestro on these macro matters, Alan Greenspan’s, wife (and Foreign Affairs correspondent on everything NBC). On Meet The Press this Sunday Andrea called out that she saw “$5 Dollars for Supreme” at the pump.

 

Hoo-wah!

 

“Apres nous, le deluge.” Sadly, maybe then, and only then, our elite central planners won’t have us pay for their taking car service to work.

 

After being long Consumer Discretionary (XLY) stocks for most of December-January (on Strong Dollar = Strong Consumption), I shorted the Sector ETF on Friday. My immediate-term support and resistance ranges for Gold, Brent Oil, WTIC Oil, EUR/USD, and the SP500 are now $$1, $116.89-120.56, $100.91-105.88, $1.30-1.32, and 1, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Le Greek Deluge - Chart of the Day

 

Le Greek Deluge - Virtual Portfolio



CAKE: EARNINGS CHECKLIST

Cheesecake Factory reports 4Q EPS after the market close tomorrow.  Here are some thoughts on the release and a recap of the most recent forward looking commentary from management.

 

On January 11th, we posted “CAKE: LOOKING AHEAD TO 4Q EARNINGS”.  Our stance at that time was that, following our bearish view of the stock during much of 2011, several sell-side downgrades and had seen expectations come more in line with our view of the stock. Our estimate remains at $0.51 versus the street at $0.52 but, despite being below consensus, we believe that the strength on the top-line will offset other concerns.  Expectations around the company’s food costs, in particular, are now more realistic, in our view, than they were during 2011.

 

One chart we published in January and would like to do so is below; CAKE system same-store sales versus the ICSC Chain Store Sales Index.  The correlation between the two data sets is +0.8.  Given that consumer metrics in general, not only the ICSC Chain Store Sales Index, have been indicating quite healthy levels of spending for 4Q, it is difficult to be bearish on CAKE’s top-line prospects.  CAKE is a beneficiary of traffic in malls and the strong dollar as much as any other player in the space. 

 

CAKE: EARNINGS CHECKLIST - icsc vs cake

 

 

Despite some short covering over the past couple of months helping the stock move higher, sentiment around CAKE remains quite bearish relative to other restaurant names.  The current short interest of 13.8% of the float poses some risk for investors selling the stock short ahead of the print.

 

CAKE: EARNINGS CHECKLIST - cake sentiment1

 

 

Below is a selection of important forward looking comments from management pertaining to 4Q and 2012.  As a reminder, 2011 was a 53-week year for CAKE with the extra week falling in 4Q.

 

 

HEADLINE NUMBERS

 

“For the fourth quarter of 2011, we estimate a range of comparable sales between 1.5% and 2.5%, consistent with our recent trends. Based on this assumption, our estimate for diluted earnings per share is between $0.51 and $0.53.”

“For the full-year 2012, we are currently estimating diluted earnings per share in a range of $1.80 to $1.90 based on an assumed comparable sales range of between 1% and 2%, extending the trends we see in 2011. Our earnings per share estimate assumes that we will use the majority of our free cash flow for share repurchases.”

 

 

MARGINS

 

“We continue to experience higher food costs related to certain non-contracted items, particularly dairy, as well as some grocery and produce items.”

 

“Food costs are not moderating on a comparative basis quite as much as we expected them to, and we are now projecting cost of sales to be flat to only slightly better versus the prior year in the fourth quarter. That impacts the fourth quarter by about $0.01 in earnings as compared to our prior expectations.”

 

 

UNIT GROWTH & CAPEX

 

“Looking ahead to 2012, it looks to be a solid year. We're currently expecting to open as many as 7 to 10 new restaurants next year, including a new Grand Lux Café. The pipeline for high-quality sites is strong and more robust than we've seen in quite some time.”

 

“Our projection for capital spending this year [2011] is now $75 million to $80 million, in support of our planned seven new restaurant openings in 2011 as well as expected early 2012 openings.”

 

“We plan to open as many as 7 to 10 new domestic restaurants next year [2012] as well as 3 internationally. Our total capital expenditures are expected to be between $105 million and $125 million.”

 

 

OTHER

 

“We are increasing our target for share repurchases by $20 million in 2011 to a range of between $145 million and $170 million. Our restaurants generate a healthy amount of cash, and we are using the majority of our free cash flow to buy back our shares.”

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst


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