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