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MONDAY MORNING RISK MONITOR: SPANISH BANKS AND SOV CDS WIDEN SHARPLY

Key Takeaways:

* Spain and its banks are getting worse. Spanish bank default swaps were materially wider week-over-week, rising an average 74 bps, or 18%. All six of Spain's major banks, on which swaps trade, are trading well over 300 bps (the "Lehman line"). Spanish Sovereign swaps widened by 27 bps to 427 bps. While most investors are focused on the rapid deterioration taking place in Portugal, we think Spain is the one to watch more closely. Will 2012 be a redux of 2011 on the Europe front, this time with Spain playing the lead role? Looking at sovereign and bank swaps of a country in conjunction has generally been a solid cointegrated risk measure.    

 

* Euribor-OIS continues to improve. It fell 3.5 bps to 44.7 on Friday. The Euribor-OIS spread is moving closer to re-normalized levels of 30-35. Meanwhile, the TED spread rose 1 point WoW, ending at 39.9.

 

* Both American and European Bank Default Swaps were wider over last week.

 

* The MCDX measure of municipal default risk fell sharply week over week, ending last week at a YTD low.

 

* Bullish Short-Term Quantitative Setup -  Our Macro team’s quantitative setup in the XLF shows that there is 1.9% short-term upside in the XLF vs. 0.4% short-term downside. 

 

Financial Risk Monitor Summary  

• Short-term(WoW): Neutral / 3 of 12 improved / 3 out of 12 worsened / 6 of 12 unchanged

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

• Long-term(WoW): Negative / 3 of 12 improved / 4 out of 12 worsened / 5 of 12 unchanged

 

MONDAY MORNING RISK MONITOR: SPANISH BANKS AND SOV CDS WIDEN SHARPLY - Summary 2

 

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

Widened the most WoW: GS, AGO, MBI

Tightened the most WoW: MTG, RDN, HIG

Widened the most MoM: MBI, MMC, AON

Tightened the most MoM: BAC, WFC, AIG

 

MONDAY MORNING RISK MONITOR: SPANISH BANKS AND SOV CDS WIDEN SHARPLY - CDS  US

 

2. European Financials CDS Monitor – Bank swaps were wider in Europe last week for 35 of the 40 reference entities. The average widening was 5.6% and the median widening was 6.0%.

 

MONDAY MORNING RISK MONITOR: SPANISH BANKS AND SOV CDS WIDEN SHARPLY - CDS  EURO

 

3. European Sovereign CDS – European Sovereign Swaps mostly tightened over last week. American sovereign swaps tightened by 7.2% (-2 bps to 30 ) and Spanish sovereign swaps widened by 6.6% (27 bps to 427).

 

MONDAY MORNING RISK MONITOR: SPANISH BANKS AND SOV CDS WIDEN SHARPLY - Sovereign CDS 1

 

MONDAY MORNING RISK MONITOR: SPANISH BANKS AND SOV CDS WIDEN SHARPLY - Sovereign CDS 2

 

4. High Yield (YTM) Monitor – High Yield rates rose 12.4 bps last week, ending the week at 7.13 versus 7.01 the prior week.

 

MONDAY MORNING RISK MONITOR: SPANISH BANKS AND SOV CDS WIDEN SHARPLY - HY

 

5. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 1.93 points last week, ending at 1648.

 

MONDAY MORNING RISK MONITOR: SPANISH BANKS AND SOV CDS WIDEN SHARPLY - LLI

 

6. TED Spread Monitor – The TED spread rose 1.0 point last week, ending the week at 40 versus last week’s print of 39.

 

MONDAY MORNING RISK MONITOR: SPANISH BANKS AND SOV CDS WIDEN SHARPLY - TED2

 

7. Journal of Commerce Commodity Price Index – The JOC index was flat week over week, ending Thursday at -7.7. Data was not available for Friday.

 

MONDAY MORNING RISK MONITOR: SPANISH BANKS AND SOV CDS WIDEN SHARPLY - JOC Index

 

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 45 bps.

 

MONDAY MORNING RISK MONITOR: SPANISH BANKS AND SOV CDS WIDEN SHARPLY - 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.  

 

MONDAY MORNING RISK MONITOR: SPANISH BANKS AND SOV CDS WIDEN SHARPLY - ECB

 

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 110 bps versus 115 bps the prior week.

 

MONDAY MORNING RISK MONITOR: SPANISH BANKS AND SOV CDS WIDEN SHARPLY - 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 rose 34 points, ending the week at 908 versus 874 the prior week.

 

MONDAY MORNING RISK MONITOR: SPANISH BANKS AND SOV CDS WIDEN SHARPLY - Baltic

 

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 188 bps, 5 bps tighter than a week ago.

 

MONDAY MORNING RISK MONITOR: SPANISH BANKS AND SOV CDS WIDEN SHARPLY - 2 10  2

 

13. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.9% upside to TRADE resistance and 0.4% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: SPANISH BANKS AND SOV CDS WIDEN SHARPLY - XLF

 

Margin Debt - February: +0.85 standard deviations 

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, it 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. 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. Overall, however, this setup represents a long-term headwind for the market. One limitation of this series is that it is reported on a lag.  The chart shows data through February.

 

MONDAY MORNING RISK MONITOR: SPANISH BANKS AND SOV CDS WIDEN SHARPLY - Margin Debt

 

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.

 

 


THE M3: S'PORE JUNKETS

The Macau Metro Monitor, March 26, 2012

 

 

TWO JUNKET OPERATORS 'NOT BIG PLAYERS', SAY INDUSTRY SOURCES Strait Times

Sources say the first two junket operators that received the go-ahead to attract high rollers to RWS are relatively small players.  The two, Mr Huang Yu Kiung and Mr Low Chong Aun, ply their trade in Macau but only as sub-junket promoters, offering big-spending clients to main junket operators.  As such, they do not operate their own VIP rooms in casinos there but introduce their clients to other promoters who in turn pay them a cut of the commission they get from casinos.

 

According to a source who knows both men, Huang also hosts about 30 Malaysian clients to casinos in Cambodia every month.  The group would spend about $1 million to $2 million per trip.  "To be honest, they are not very big players. The big junkets have players who bet $500,000 a hand," said the Malaysia-based source.  He added that Huang has been working as a junket promoter for about seven years while Low has about 20 years of experience.

 

 

 

 




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Deflated Illusion

“Failure deflates illusion, while success only makes illusion worse.”

-Nassir Ghaemi

 

“This isn’t a settled debate, and these interpretations could be proven wrong. But if they are correct, they raise several questions. Why do positive illusions occur? Can we only arrive at realism through personal hardship?” (A First-Rate Madness, page 55)

 

This weekend, as I was reading through Ghaemi’s provocative psychological discussion in chapter 3 of A First-Rate Madness (“Heads I Win, Tails It’s Chance”), I couldn’t stop thinking about our profession. Oh how the last 4 years have deflated our illusions of our analytical competence.

 

Or have they? Every time we’ve seen asset prices inflate (Q1 of 2008, Q1 of 2010, Q1 of 2011), we’ve seen the said seers of this business attempt to convince you that it’s “different this time.” Every time there is a “successful” rally, the consensus illusion of inflation morphing into sustainable growth gets worse.

 

Back to the Global Macro Grind

 

The good news is that you can only pretend Growth Slowing doesn’t matter for so long. You can only ignore some of the worst volume and skew signals in global market history until you can’t. Gravity eventually bites.

 

Instead of Greece or Apple, this morning’s Top 3 Most Read on Bloomberg are as follows:

 

1.       “Monti Signals Spanish Euro Risk as EU to Bolster Firewall”

2.       “China Soft Landing May Be Hard For Commodity Exporters”

3.       “Asia Stocks Fall as US Home Sales Damp Economic Outlook”


Hoo-wah!

 

Wasn’t Europe fixed? Isn’t China “decoupling” from the US? Can’t we pretend that Asian stocks and US Housing don’t matter until we get to quarter end?

 

“Under normal conditions, normal people overestimate themselves. We think we have more control over things than we do; we’re more optimistic than circumstances warrant…” (A First-Rate Madness, page 54)

 

There is absolutely nothing normal about the current Global Macro Economic conditions. Sure, you can be “optimistic” about life. I sure am. But realists tend to not blow their entire net worth to smithereens buying into fairy tales.

 

What is not normal and is not going away anytime soon?

  1. The Global Sovereign Debt Crisis
  2. The Bubble in Keynesian Economics (money printing)
  3. The Economic Reality that debt and inflation slow real (inflation adjusted) economic growth

If the US Stock market were to crash tomorrow, you’d have no business telling people you didn’t see any of this coming. This is the most obvious slow moving train wreck in world history – one that plenty of professionals still get paid to willfully ignore.

 

Since I doubt we’ll crash, that means the probability of a crash is going up as market prices do. Last week, global stock markets stopped going up (worst week for Asian and European stocks for 2012 YTD). Commodities have already started their decline.

 

Back to what’s just not normal:

  1. Sovereign Debt Crisis – we could have a healthy debate this morning as to who (Spain or Japan) has the more plainly obvious sovereign debt, deficit, and funding issues. The former Executive Director of the Bank of Japan (BOJ) said overnight that Japan has “crossed the Rubicon with really desperate measures.” Sounds like he was channeling his inner Hedgeye.
  2. Keynesian Policy Bubble – India (down another -1.8% overnight) has tried what every single Western academic dogma has suggested the Indians try, and it’s not working. They’ll be importing $125/barrel Brent Oil like the Japanese will in Q2 as their citizenry sees inflation running higher than real (inflation adjusted growth) = Stagflation.
  3. Inflation Slows Growth – yes, that is not only happening around the world (Commodity Inflation is generally priced in debauched Dollars), but you’ll see it in US Growth. So, when you see 3% US GDP growth for Q4 of 2011 (released on Thursday), pinch yourself and remind the person next to you that US GDP could be running at half of that growth rate right now.

The flip side of all this is that the success of our Global Macro model in forecasting intermediate-term growth slowdowns is making me delusional. Potentially, but that would imply that hedge funds who chased another top in commodity inflation are perfectly sane.

 

My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, Japanese Yen (vs USD) and the SP500 are now $1, 124.55-126.62, $79.09-79.61, $82.22-$84.02, and 1, respectively.

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Deflated Illusion - Chart of the Day

 

Deflated Illusion - Virtual Portfolio


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – March 26, 2012


As we look at today’s set up for the S&P 500, the range is 22 points or -0.58% downside to 1389 and 0.99% upside to 1411. 

 

SECTOR AND GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

THE HEDGEYE DAILY OUTLOOK - 3

 

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: 1262 (2770) 
  • VOLUME: NYSE 741.64 (-2.79%)
  • VIX:  14.82 -4.82% YTD PERFORMANCE: -36.67%
  • SPX PUT/CALL RATIO: 1.96 from 2.49 (-21.29%)

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: 40.19
  • 3-MONTH T-BILL YIELD: 0.07%
  • 10-Year: 2.28 from 2.23
  • YIELD CURVE: 1.91 from 1.88 

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: Fed’s Plosser speaks in Paris
  • 8am: Fed Chairman Bernanke speaks in Virginia
  • 8:30am: Chicago Fed Nat Activity Index, Feb. (prior 0.22)
  • 10am: Pending Home Sales (M/m), Feb., est. 1.0% (prior 2.0%)
  • 10:30am: Dallas Fed Manufacturing, Mar., est. 16 (prior 17.8)
  • 11:30am: U.S. to sell $30b 3-mo., $29b 6-mo. bills 

GOVERNMENT:

    • Supreme Court hears health-care challenge
    • President Obama attends nuclear summit in South Korea
    • FTC hosts press conference on release of final privacy framework report
    • House, Senate in session 

WHAT TO WATCH:

  • Supreme Court hears first of three days of arguments over President Obama’s health-care law
  • Yahoo named three new board members after failing to reach compromise with Third Point, which pledged a proxy fight
  • Rick Santorum won Louisiana Republican primary on Saturday; next major primary is Wisconsin on April 3
  • Obama warned North Korea its plan to fire long-range rocket undermined prospects for future negotiations
  • Bats Global blamed computer malfunction for trading errors last week that results in Bats pulling IPO
  • Pending home sales may have climbed 1% in Feb. after a 2.0% gain in Jan., economists est: Weekly eco preview
  • U.K., most of Europe set clocks ahead one hour over weekend
  • Citigroup expects $700m impairment charge in 1Q as it cuts its investment Turkey’s Akbank by more than half
  • Roche extended its $5.7b hostile takeover offer for Illumina for a second time
  • U.S. Treasury Department set to sell on or around today preferred stock in six banks it bought stakes in as part of TARP
  • ING said to be seeking at least $7b for Asian insurance business and has drawn interest from potential suitors including MetLife 

EARNINGS:

    • Cal-Maine Foods (CALM) 6:30 a.m., $1.02
    • Kior (KIOR) 4:01 p.m., $(0.15)
    • Apollo Group (APOL) 4:05 p.m., $0.37    

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)


COPPER – the Doctor continues to look exactly like the slope of global growth, slowing. Copper now bearish TRADE and TAIL with big TRADE resistance overhead at $3.85/lb. 

  • Hedge Funds Make Wrong-Way Bets for a Fourth Week: Commodities
  • Soybeans Jump to Six-Month High as U.S. Growers Favor Corn
  • Copper Swings Between Gains, Drops as European Crisis May Worsen
  • Oil Falls, Extending Two-Week Drop on Europe Debt, Slower China
  • Sugar Falls to One-Week Low on Indian Supplies; Cocoa Advances
  • Gold May Fall in London as Dollar Strengthens, ETP Holdings Drop
  • China’s Soft Landing Still May Be Hard for Commodity Exporters
  • Robusta Coffee May Gain 10% as Emerging Markets’ Demand Climbs
  • Gold Imports by India to Slump as Jewelers Extend Shutdown
  • Shale Boom in Europe Fades as Polish Wells Come Up Empty: Energy
  • Vitol Said to Buy Diesel From Mangalore Refinery for May Loading
  • Total Says North Sea Elgin Field Output Halts After Gas Leak
  • Asia Naphtha Crack Rebounds; Chevron Sells Fuel: Oil Products
  • Hedge Funds Make Wrong Way Bet for 4th Week
  • BG, Eni Make New East Africa Gas Finds Larger Than U.K. Reserves
  • Japan Has One Reactor With 1.9% of Total Capacity Online
  • German Next-Month Clean-Dark Spread Falls to Lowest Since August 

THE HEDGEYE DAILY OUTLOOK - 4

 

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - 5

 

 

EUROPEAN MARKETS


SPAIN – continued selling in Spanish stocks, down -1.8% to start the week and now down -5.1% for the YTD (vs Germany +18.6%) and Super Mario Monti wants “firewall.” It ain’t over, till its over folks.

 

THE HEDGEYE DAILY OUTLOOK - 6

 

 

ASIAN MARKETS


JAPAN – clients want a “catalyst” in the Japanese Sovereign Debt Crisis – here’s ours: gravity. The Yen kicks off the week down -0.4% vs the USD (after Goldman said buy Yen Fri) and former exec director of the BOJ (Hirano, from 2002-2006) saying that Japan has “crossed the Rubicon with really desperate measures.”

 

THE HEDGEYE DAILY OUTLOOK - 7

 

 

MIDDLE EAST


THE HEDGEYE DAILY OUTLOOK - 8

 

 

 

The Hedgeye Macro Team

 


THE WEEK AHEAD

The Economic Data calendar for the week of the 26th of March through the 30th is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.

 

THE WEEK AHEAD - 1

THE WEEK AHEAD - 2


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