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RISK MONITOR: SLOWLY AND SILENTLY RISK IS COMING BACK

A RARE GROWTH STORY IN FINANCIALS: OPPORTUNITIES IN PAWN/PAYDAY

CONFERENCE CALL THIS WEDNESDAY 11 am

 

Please join us for a conference call this Wednesday, April 11th at 11am EDT, to discuss the outlook for the Specialty Consumer Finance (Payday/Pawn) space. Dial-in and materials for the call will follow. 

 

Risk Monitor Key Takeaways

* High yield rates rose sharply over the week, underscoring increased risk in the market.

 

* The Euribor-OIS fell 1 bps to 41bps while the TED spread remained roughly flat. These measures of interbank risk are flattening out. We expect to see very little improvement from here.     


*The 2-10 spread fell 5 bps points WoW. On a MoM basis, the 2-10 spread has widened by 14 bps. This is incrementally positive for Q1 bank margins. Earnings season is set to kick off this Friday for financials. 

 

Financial Risk Monitor Summary  

• Short-term(WoW): Negative / 0 of 12 improved / 5 out of 12 worsened / 6 of 12 unchanged  

• Intermediate-term(WoW): Positive / 4 of 12 improved / 1 out of 12 worsened / 6 of 12 unchanged  

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

 

RISK MONITOR: SLOWLY AND SILENTLY RISK IS COMING BACK - Summary3

 

1. US Financials CDS Monitor – Swaps widened for 24 of 26 major domestic financial company reference entities last week.    

Widened the most WoW: JPM, C, MS

Tightened the most/ widened the least WoW: COF, UNM, MBI.

Widened the most MoM: PRU, ACE, ALL

Tightened the most MoM: COF, MTG, HIG

 

RISK MONITOR: SLOWLY AND SILENTLY RISK IS COMING BACK - US CDS1

 

2. European Financials CDS Monitor –  Due to technical difficulties this week we were unable to pull swap rates for the European banks.

 

3. European Sovereign CDS – European Sovereign Swaps mostly widened over last week. German sovereign swaps widened the least (+0.2 bps to 74 ) and Spanish sovereign swaps widened the most (+28 bps to 464).

 

RISK MONITOR: SLOWLY AND SILENTLY RISK IS COMING BACK - Sovereign 1

 

RISK MONITOR: SLOWLY AND SILENTLY RISK IS COMING BACK - Sovereign 2

 

4. High Yield (YTM) Monitor – High Yield rates rose 18.8 bps last week, ending the week at 7.33 versus 7.14 the prior week.

 

RISK MONITOR: SLOWLY AND SILENTLY RISK IS COMING BACK - HY

 

5. Leveraged Loan Index Monitor – The Leveraged Loan Index fell  less than a point last week, ending at 1652.

 

RISK MONITOR: SLOWLY AND SILENTLY RISK IS COMING BACK - LLI

 

6. TED Spread Monitor – The TED spread fell less than a point last week, ending the week at 39.5 this week versus last week’s print of 40.0.

 

RISK MONITOR: SLOWLY AND SILENTLY RISK IS COMING BACK - TED spread

 

7. Journal of Commerce Commodity Price Index – The JOC index rose 0.8 points, ending the week at -8.7 versus -9.5 the prior week.

 

RISK MONITOR: SLOWLY AND SILENTLY RISK IS COMING BACK - 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 1 bps to 41 bps over last week.

 

RISK MONITOR: SLOWLY AND SILENTLY RISK IS COMING BACK - 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.  

 

RISK MONITOR: SLOWLY AND SILENTLY RISK IS COMING BACK - Recourse to the deposit facility

 

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 118 bps versus 112 bps the prior week.

 

RISK MONITOR: SLOWLY AND SILENTLY RISK IS COMING BACK - 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 -6 points, ending the week at 928 versus 934 the prior week.

 

RISK MONITOR: SLOWLY AND SILENTLY RISK IS COMING BACK - 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 184 bps, 5 bps tighter than a week ago.

 

RISK MONITOR: SLOWLY AND SILENTLY RISK IS COMING BACK - 2 10

 

13. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.6% upside to TRADE resistance and 0.9% downside to TRADE support.

 

RISK MONITOR: SLOWLY AND SILENTLY RISK IS COMING BACK - 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.

 

RISK MONITOR: SLOWLY AND SILENTLY RISK IS COMING BACK - Margin Debt

 

Joshua Steiner, CFA

 

Allison Kaptur

 

Robert Belsky

 

Having trouble viewing the charts in this email?  Please click the link below to view in your browser.    

 


THE HBM: PNRA, WEN, YUM, RT, RRGB

THE HEDGEYE BREAKFAST MONITOR

 

PORTFOLIO POSITIONS

 

LONGS: PFCB, EAT, JACK, SBUX

 

SHORTS: DNKN, MCD

 

MACRO NOTES

 

Commentary from CEO Keith McCullough

 

Growth Slowing, globally, will be a lot easier for consensus to see once this market opens:

  1. CHINA – Dollar Debauchery (Bernanke on Jan 25th, pushing easy money to 2014) fired up commodity inflation sequentially in FEB/MAR, and accelerating inflation then slowed real growth, globally. Same model we have been using for 5yrs – China’s inflation data for MAR rises to 3.6% vs 3.4% FEB.
  2. BOND YIELDS – as far as 1-day moves go, Friday’s reaction in the 10yr was violent; now you have 10yr Treasuries yielding 2.06% (down 35bps in a month!) and the Yield Spread just compressed -14bps in 1-day, wow – just like that growth slowing gets marked to market before everyone thought they could get out.
  3. SP500 – my math says the SP500 closes higher than where the futures are trading, but it also says that a close below 1391 would be bearish if sustained – so wait/watch that line throughout the wk as the inflation data domestically gets reported wed-fri (it will rise again sequentially) and earnings season, which will be one of the slowest growth ones in years, is upon us.

KM

 

SUBSECTOR PERFORMANCE

 

THE HBM: PNRA, WEN, YUM, RT, RRGB - subsector

 

 

QUICK SERVICE

 

PNRA: Panera Bread was rated “New Outperform” at Credit Suisse.

 

WEN: According to an SEC filing filed Friday, Emil Brolick’s total comp for 2011 was $4.6mm after taking the CEO position at Wendy’s in September.

 

YUM: Yum Brands CEO David Novak earned $20.4mm in 2011 versus $14.6mm in 2010.

 

NOTABLE PERFORMANCE ON ACCELERATING VOLUME:

 

SBUX: Starbucks gained 2.1% on accelerating volume on Thursday.

 

CASUAL DINING

 

RT: Raymond James is standing by Ruby Tuesday, according to the WSJ.  The stock sold off on Thursday on weaker-than-expected comps and guidance provided last Wednesday after the close.

 

RRGB: Red Robin Gourmet Burger has commissioned a study that has revealed that “pink slime” related concerns are impacting Americans’ behavior.  The company has never served beef containing the ingredient, according to a press release.

 

NOTABLE PERFORMANCE ON ACCELERATING VOLUME:

 

RT: Ruby Tuesday declined 18% on accelerating volume

 

THE HBM: PNRA, WEN, YUM, RT, RRGB - stocks

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 


Deflated Illusion

This note was originally published at 8am on March 26, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“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 $1637-1675, 124.55-126.62, $79.09-79.61, $82.22-$84.02, and 1397-1411, 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


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Optimistic Bias

“The optimistic bias may well be the most significant of the cognitive biases.”

-Daniel Kahneman

 

After a beautiful long Easter weekend with my family on the East Coast, I really don’t feel like writing negatively this morning. The S&P Futures will do that for you on their own.

 

Growth Slowing, globally, isn’t the “pessimist’s” view – it’s the realist’s view. As Risk Managers, we do not get paid to have an Optimistic Bias. We get paid to have a repeatable risk management process that is biased to the Global Macro data. On the margin, growth is either slowing or accelerating. We’re ok with being early in signaling either direction.

 

Since global growth data has been slowing for at least 6 weeks, why was Old Wall Street consensus so optimistic about the March Employment report? Some people call it perma-bull, but Kahneman’s behavioral psych explanation is a little nicer: we “tend to exaggerate our ability to forecast the future, which fosters optimistic overconfidence.” (Thinking, Fast and Slow, pg 255).

 

Back to the Global Macro Grind

 

Fortuitously, in the last 3 weeks, as Growth Slowing became more obvious, I raised the Cash position in the Hedgeye Asset Allocation Model to 79% (versus 61% two weeks ago). That should put us in a great position to buy on red this morning.

 

Or does it?

 

If I feel like I am too long this morning, I can’t imagine what my overly optimistic competition is feeling.

 

Today is not a day to freak-out and sell on red. Today is a good day to wait and watch. Since most of Europe is closed, the Top 3 Risk Management Signals to watch will be the US Dollar Index, SP500, and 10-year US Treasury Yield:

 

1.   US DOLLAR: after rising +1.4% last wk (its 1st up week in the last 4), the USD needs to show A) some follow through and B) no more policy to debauch it. If the US Dollar Index can hold its head above $79.51 intermediate-term support, that’s bullish.

 

2.   SP500: if the SP500 closes below 1391 support (my immediate-term TRADE line), that’s bearish and it puts 1331 in play over my intermediate-term TREND duration (next 3 months or more). Since 3 of the last 4 YTD SP500 tops occurred in the Feb-May periods, you want to be very careful on time and price here.

 

3.   TREASURIES: plenty who suggested “growth is back” and “bond yields could breakout (buy equities!)” have just seen the 10-yr yield drop -14% in a straight line (from 2.40% to 2.06%). That’s going to leave a mark on asset allocation moves. The long-term TAIL of Growth Slowing remains with 10-yr yield resistance up at 2.47%. Now we’ll see if 2.03% support holds.

 

This is the 3rdtime that Bernanke has made a formal decision to Debauch The Dollar with a Policy To Inflate (2010, 2011, and 2012) and the 3rd time that his policy has ignited short-term asset price inflation that, in turn, slowed growth.

 

Other than those who get paid by commodity price inflation, who wants QE 4, 5, and 6? Remember last year when Q1 GDP slowed to a halt (0.36%)? Back then, expectations were for 3.5-4% growth. Today, the perma-bulls are still talking about US Growth north of 3%. That’s an Optimistic Bias if I ever saw one.

 

Real (inflation adjusted) US Growth could get cut in half again from here if Bernanke decides to debauch further. If he doesn’t, Strong Dollar has every opportunity to emerge the victor in Bernanke’s War.

 

Strong Dollar Deflates The Inflation. Strong Dollar = Strong Consumption. Strong Dollar = Strong America.

 

The risk to all of that, of course, is that now I’m being the optimist.

 

My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, 10-year US Treasury Yield, and the SP500 are now $1, $121.61-124.18, $79.51-80.16, 2.03-2.18%, and 1, respectively.

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Optimistic Bias - Chart of the Day

 

Optimistic Bias - Virtual Portfolio


THE M3: GENTING SECURITIES; MGM COTAI; CHINA MARCH NEW LOANS; KANGWON LAND

The Macau Metro Monitor, April 9, 2012

 

 

GENTING S'PORE TO OFFER UP TO S$500MM WORTH OF PERPETUAL SECURITIES Channel News Asia, Strait Times

The securities will have an annual coupon rate of 5.125% until October 2022 and 6.125% after that.  In the event of oversubscription, Genting added that it may issue up to an additional S$200 million worth of securities to satisfy the excess demand.  DBS Bank is the sole global coordinator for the offering and DBS Bank and OCBC Bank are the joint lead managers and bookrunners for the offering.  Just last month, Genting had launched S$1.8 billion in perpetual securities to fund its investment plans. 

 

"This round is really for the retail investors, the man on the street," said GENT's CFO Lee Shi Ruh. "The purpose of this is really to tap on a different pool of investors."

 

MGM COTAI TO ONLY HAVE 12% OF FLOOR SPACE FOR GAMING Macau Business

MGM China CEO Grant Bowie says the gaming operator has already handed all the necessary paperwork to the government for the approval process of its land request in Cotai.  “It is totally and absolutely in the hands of the Macau government,” said Bowie.  “From our current drawings, gaming represents less than 12% of the floor space of the property,” Bowie said.  The Cotai property will have 1,800 rooms but capacity to include additional towers and 500 gaming tables, pending government approval, he added.

 

CHINA MARCH NEW YUAN LOANS EXPECTED AT CNY770-840 BILLION 21st Century Business Herald

Citing sources close to a state-owned bank,  the newspaper said March new yuan loans data is likely to exceed CNY800B. The four state-owned banks have issued CNY294.6 billion of new yuan loans in March, up from People's Bank of China's expectation of CNY269 billion at the beginning of March.


S KOREA: KANGWON LAND CASINO TO CLOSE FOR INSPECTION NEXT WEEK Macau Daily Times

Kangwon Land, the only casino in the country open to Korean nationals, will temporarily shut down for the first time since it opened in October 2000.  The casino explained that the temporary closure from 6 a.m. next Tuesday to 10 a.m. Wednesday aims to prevent game fixing and fraudulent practices by staff.  According to donga.com, a person suspected of getting a hidden camera installed at Kangwon Land Casino to cheat at games is known to have fled to China.  Known to have been the middle man between scheming gamblers and casino workers, he is suspected of ordering the two staff members to move a card box with tiny video cameras installed to a baccarat table, promising them 10% of profits.


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