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TUESDAY MORNING RISK MONITOR: CREDIT DEFAULT SWAPS TAKE A BREATHER

Key Takeaways

* American and European bank swaps mostly tightened in the latest week. Notably, French and German banks saw their swaps fall WoW along with the US Global banks. 

 

* We are including a new Asia Financials CDS table this week, which includes major banks and brokers from China, Japan and India. The credit profile of Asia's financials was mixed over the last week, with 6 of the 12 reference entities we track tighter.

 

* Sovereign CDS mostly widened WoW. While much of the focus these days is on Spain and its banks, it's worth noting that Italy continues to press higher right alongside Spain. Ireland is also moving higher. 

 

Financial Summary

  Financial Risk Monitor Summary

• Short-term(WoW): Negative / 0 of 13 improved / 2 out of 13 worsened / 11 of 13 unchanged  

• Intermediate-term(WoW): Negative / 1 of 13 improved / 8 out of 13 worsened / 4 of 13 unchanged  

• Long-term(WoW): Positive / 4 of 13 improved / 3 out of 13 worsened / 6 of 13 unchanged

TUESDAY MORNING RISK MONITOR: CREDIT DEFAULT SWAPS TAKE A BREATHER - Summary

 

1. US Financials CDS Monitor – Swaps tightened for 20 of 27 major domestic financial company reference entities last week.   

Tightened the most WoW: JPM, MTG, RDN

Widened the most WoW:  AXP, UNM, ACE

Widened the least MoM:  C, UNM, TRV

Widened the most MoM:   WFC, AXP, RDN

 

TUESDAY MORNING RISK MONITOR: CREDIT DEFAULT SWAPS TAKE A BREATHER - American Financials

 

2. European Financial CDS - Bank swaps were tighter in Europe last week for 28 of the 39 reference entities we track. French and German banks tightened across the board. The median tightening was 1.6%

 

TUESDAY MORNING RISK MONITOR: CREDIT DEFAULT SWAPS TAKE A BREATHER - European Financials

 

3. Asian Financial CDS -  Bank swaps were tighter in Asia last week for 6 of the 12 reference entities we track. The median tightening was 1.7%. 

 

TUESDAY MORNING RISK MONITOR: CREDIT DEFAULT SWAPS TAKE A BREATHER - Asian Financials 2

 

4. European Sovereign CDS – European Sovereign Swaps mostly widened over last week. French sovereign swaps tightened by 7.2% (-16 bps to 205 ) and Italian sovereign swaps widened by 0.7% (+4 bps to 520).

 

TUESDAY MORNING RISK MONITOR: CREDIT DEFAULT SWAPS TAKE A BREATHER - Sov Table

 

TUESDAY MORNING RISK MONITOR: CREDIT DEFAULT SWAPS TAKE A BREATHER - Sov 1

 

TUESDAY MORNING RISK MONITOR: CREDIT DEFAULT SWAPS TAKE A BREATHER - Sov 2

 

5. High Yield (YTM) Monitor – High Yield rates fell 1 basis point WoW, ending at 7.64 versus 7.65 the prior week.

 

TUESDAY MORNING RISK MONITOR: CREDIT DEFAULT SWAPS TAKE A BREATHER - HY

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index fell 5.71 points last week, ending at 1646.

 

TUESDAY MORNING RISK MONITOR: CREDIT DEFAULT SWAPS TAKE A BREATHER - LLI

 

7. TED Spread Monitor – The TED spread fell less than a basis point last week, ending at 38.3 this week versus last week’s print of 38.8.

 

TUESDAY MORNING RISK MONITOR: CREDIT DEFAULT SWAPS TAKE A BREATHER - TED

 

8. Journal of Commerce Commodity Price Index – The JOC index fell 0.4 points, ending the week at -11.4 versus -11.1 the prior week.

 

TUESDAY MORNING RISK MONITOR: CREDIT DEFAULT SWAPS TAKE A BREATHER - JOC

 

9. 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 2 bps to 41 bps.

 

TUESDAY MORNING RISK MONITOR: CREDIT DEFAULT SWAPS TAKE A BREATHER - Euribor OIS

 

10. 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: CREDIT DEFAULT SWAPS TAKE A BREATHER - ECB

 

11. 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 16-V1. Last week spreads widened, ending the week at 168 bps versus 167 bps the prior week.

 

TUESDAY MORNING RISK MONITOR: CREDIT DEFAULT SWAPS TAKE A BREATHER - MCDX

 

12. 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 -107 points, ending the week at 1034 versus 1141 the prior week.

 

TUESDAY MORNING RISK MONITOR: CREDIT DEFAULT SWAPS TAKE A BREATHER - Baltic Dry

 

13. 2-10 Spread – We track the 2-10 spread as an indicator of bank margin pressure.  Last week the 2-10 spread widened to 145 bps, 3 bps wider than a week ago.

 

TUESDAY MORNING RISK MONITOR: CREDIT DEFAULT SWAPS TAKE A BREATHER - 2 10

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 2.8% upside to TRADE resistance and 2.6% downside to TRADE support.

 

TUESDAY MORNING RISK MONITOR: CREDIT DEFAULT SWAPS TAKE A BREATHER - XLF

 

Margin Debt - April: +0.93 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 April. 

 

TUESDAY MORNING RISK MONITOR: CREDIT DEFAULT SWAPS TAKE A BREATHER - Margin Debt

 

Joshua Steiner, CFA

 

Robert Belsky

 

Having trouble viewing the charts in this email?  Please click the link at the bottom of the note to view in your browser. 


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – May 29, 2012


As we look at today’s set up for the S&P 500, the range is 39 points or -1.66% downside to 1296 and 1.30% upside to 1335. 

                                            

SECTOR AND GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

THE HEDGEYE DAILY OUTLOOK - 3

 

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: on 05/25 NYSE 114
    • Down from the prior day’s trading of 512
  • VOLUME: on 05/25 NYSE 595.63
    • Decrease versus prior day’s trading of -25.22%
  • VIX:  as of 05/25 was at 21.76
    • Increase versus most recent day’s trading of 1.02%
    • Year-to-date decrease of -7.01%
  • SPX PUT/CALL RATIO: as of 05/25 closed at 2.03
    • Up from the day prior at 1.24 

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: as of this morning 39
  • 3-MONTH T-BILL YIELD: as of this morning 0.09%
  • 10-Year: as of this morning 1.72
    • Decrease from prior day’s trading at 1.74
  • YIELD CURVE: as of this morning 1.43
    • Down from prior day’s trading at 1.45 

MACRO DATA POINTS (Bloomberg Estimates):

  • 9am: S&P/CS 20-city (M/m), Mar., est. 0.2%, prior 0.15%
  • 9am: S&P/CS Home Price Index, Mar., est. 134.4, prior 134.2
  • 10am: Consumer confidence, May, est. 69.5, prior 69.2
  • 10:30am: Dallas Fed manuf. activity, May, est. 1.5, prior -3.4
  • 11:30am: U.S. to sell $30b 3-mo., $27b 6-mo. bills 

GOVERNMENT:

    • 10am: Defense Secretary Panetta speaks at Naval Academy Commencement ceremony
    • 3:25pm: President Obama to award Presidential Medals of Freedom to Bob Dylan, Toni Morrison, John Glenn, others
    • Supreme Court issues opinions
    • Texas Republican primaries; Romney may get enough votes to push him past the 1,144 needed to clinch nomination

 WHAT TO WATCH:

  • Marubeni to buy grain merchandiser Gavilon for $3.6b
  • Dewey & LeBoeuf files Chapter 11 bankruptcy
  • Vale sells Colombian coal assets to Goldman for $407m
  • South Korean manufacturer confidence falls from 9-month high
  • CP Railway strike may end in three days, Canada’s Raitt says
  • Spain may use debt instead of cash to support Bankia Group
  • Greek fund distributes EU18b to country’s 4 biggest banks
  • Italy borrowing costs rise at 6-mo. bill auction
  • Richard Li may be bidder for ING Asia insurance unit: WSJ
  • TNK-BP’s Fridman quits as CEO, deepening dispute
  • Moody’s says China growth collapse may hurt sovereign rating
  • Weekly agendas for energy, real estate, media/entertainment, consumer, industrials, health, finance, tech, rates, Canada oil & gas, Canada mining
  • U.S. Jobs, Chinese Output, Panetta: Week Ahead May 28-June 2 

EARNINGS:

    • Sanderson Farms (SAFM) 6:30am, $0.90
    • Bank of Nova Scotia (BNS CN) 7:30am, C$1.15
    • Copart (CPRT) After-mkt, $0.43 

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG) 

  • Platinum Glut Diminishing as Bear Market Approaches: Commodities
  • Copper Slips to $7,684 a Ton, Erasing Advance; Aluminum Drops
  • China Agrees to Fund $3 Billion of Farming Projects in Ukraine
  • Oil Advances for a Third Day on Outlook for U.S. Economic Growth
  • Gold Declines as Investors Favor Dollar Amid European Crisis
  • Wheat Drops as Rain From Russia to Australia Boosts Crop Outlook
  • Gold Recycling in India to Jump as Near-Record Price Cuts Demand
  • Sugar Seen Falling on Speculation Prices Have Climbed Too High
  • Wheat Price Seen Having Potential to Jump on Exporter Stockpiles
  • Marubeni Agrees to Buy Gavilon for Access to U.S. Grain Trade
  • Rashnikov Paring MMK Debt Aided by Mystery Suit: Russia Credit
  • Coal Use Set for 1984 Low Batters Global Prices: Energy Markets
  • Seaway Oil Torrent Boosts Gas Cargoes as Scorpio Rises: Freight
  • Copper Gains on China Stimulus Speculation
  • Chinese Sugar Smuggling Seen Declining by Two-Thirds in Q2
  • Gold Losing Allure for Biggest Buyers Spurs Bonds: India Credit
  • Palm Oil Advances to Two-Week High on Ramadan Demand Outlook 

THE HEDGEYE DAILY OUTLOOK - 4

 

 

CURRENCIES


US DOLLAR – after 4 consecutive up weeks, our Strong Dollar theme is getting some headline respect (Most Read on Bloomberg this morn = “Dollar Scarce”). In conjunction with the consensus headline, the USD weakens and commodities strengthen this morning; Gold looks like it could re-test $1601 if the USD down move has any follow through.

 

THE HEDGEYE DAILY OUTLOOK - 5

 

 

EUROPEAN MARKETS


SPAIN – Spanish Retail Sales get smoked (-11.3% y/y in April) and their stock market crash continues (down another -1.5% this morn, down -29% since March). Rajoy wants a Bankia bailout – he’ll probably get that, but lose the trust/flows of his stock/bond market in the meantime. That’s the other side of the trade. 10yr Spanish yields hitting new highs at 6.52% (higher than Nov 2011).

 

THE HEDGEYE DAILY OUTLOOK - 6

 

 

ASIAN MARKETS


CHINA – not an outright bailout plan from the Chinese overnight; they’ll go with stimulus plans first – that had the Shanghai Comp +1.3% (HK +1.4%) but we’d need to see follow through from these levels for the risk management setup to change from the bearish setup Asian Equity markets have been in since March.

 

THE HEDGEYE DAILY OUTLOOK - 7

 

 

MIDDLE EAST


THE HEDGEYE DAILY OUTLOOK - 8

 

 

 

The Hedgeye Macro Team


THE M3: UNEMPLOYMENT RATE

The Macau Metro Monitor, May 29, 2012

 

 

EMPLOYMENT SURVEY FOR FEBRUARY -  APRIL 2012 DSEC

Macau's unemployment rate for February-April 2012 was 2.0%.  Labor force population was 345,000 and the participation rate stood at 72.4%.



Early Look

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Day After Day

“Persistence – just sticking with this thing day after day after day.”

-Joseph Rochefort

 

Born on May 12th, 1900, in Dayton, Ohio, Captain Joseph Rochefort was one of America’s bravest. He was a “major figure in the United States Navy’s cryptographic and intelligence operations from 1, particularly in the Battle of Midway.” (Wikipedia)

 

Ian Toll introduces Captain Rochefort, his team, and their analytical process, in Chapter 9 of Pacific Crucible – a book I had the pleasure of finishing over Memorial Day weekend, and one that really resonated with what it is that we do here in New Haven each and every morning.

 

When it comes to time and patterns, these American military men had discipline. “If you observe something long enough, you’ll see something peculiar. If you can’t see something peculiar, if you stare at it long enough, that in itself is peculiar… you look at it until you see something that attracts your attention, your curiosity… The next day you come back and look at it again.” (pages 305-306)

 

Day After Day – again and again and again.

 

Back to the Global Macro Grind

 

Sometimes I think we are too selfish to take the time to contextualize the moments in life that we all share. I know that I certainly am. That’s why I try my best to take the time to study history.

 

The history of applying Chaos and Complexity Theory to what it is that we know about markets is relatively short. By the time we are all long gone, I suspect that what we think we know now will be as archaic as cryptography seemed in 1941.

 

Time and Patterns. They matter.

 

Last week’s intermediate-term TREND pattern of a Strong Dollar continued to Deflate The Inflation in what we call Bernanke’s Bubbles (Commodity Prices). With the US Dollar up for the 4th consecutive week, here’s how that was priced:

  1. CRB Commodities Index = down -3.1% (down -13.8% from its February 2012 high)
  2. Gold = down -1.4% (down -12.2% from its February 2012 high)
  3. Oil (WTIC) = down -0.7% (down -17.6% from its February 2012 high)

This morning, with the US Dollar Index down -0.14% to $82.26, most of Bernanke’s Bubbles are bid higher. But, when considered within the patterns of their Bearish Formations (Bearish on all 3 of our risk management durations, TRADE/TREND/TAIL), their no-volume bids appear fleeting.

 

Here are the broken TAIL lines of the aforementioned commodity bellwethers:

  1. CRB Index = 318
  2. WTIC Oil = $96.23
  3. Gold = $1676

In other words, if the US Dollar goes down (and commodities go up) every day this week, it doesn’t matter. Or at least it shouldn’t for “long-term” investors looking to manage the long-term mean reversion risks associated with these asset prices.

 

The longest of long-term risks to Commodities remains the biggest opportunity for not only American Consumers, but Global Consumers of food and energy.

 

The #1 risk factor pricing that risk/reward scenario is the US Dollar Index’s price itself. I’ve said this Day After Day after day, and I’ll say it again and again and again – get the US Dollar right, and you’ll get a lot of other things right.

 

Getting real (inflation adjusted) US Consumption right would solve for the number one thing that the world needs right now – unlevered growth. US Consumption represents 71% of US GDP.

 

Strong Dollar = Strong Consumption, on the margin. Unfortunately, that’s not what you are going to get as long as the conflicted and compromised cheer on higher gold and oil prices. That’s just what they need to get paid.

 

This week’s Macro Catalyst Calendar will be just another reminder of that:

  1. Tuesday: US Consumer Confidence for the month of May should improve as food and energy prices fall
  2. Thursday: Q1 2012 US GDP should continue to be revised to the downside, reflecting higher commodity prices in Q1
  3. Friday: US Employment Report for May should continue to see the soft results of a country that debauched its currency

We, as a country, have a tremendous opportunity to learn from our mistakes. That’s why we study history. That’s why, when it comes to “full employment and price stability”, we understand that the Down Dollar and Treasury Debt Monetization policies of Bush/Obama yielded no better results than those of the Nixon/Carter Administrations.

 

The 1970’s had Arthur Burns at the Fed. The last 6 years have had Ben Bernanke. Day After Day, both he and the President want to remind you of the war we all fought in 2008. I just want to talk about today, and what we can do for a better tomorrow.

 

My immediate-term support and resistance ranges for Gold, Oil (WTIC), US Dollar, EUR/USD, and the SP500 are now $1, $104.69-108.12, $81.63-82.49, $1.24-1.26, and 1, respectively.

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Day After Day - Chart of the Day

 

Day After Day - Virtual Portfolio


ANOTHER WEAK WEEK IN MACAU

May YoY growth should come in at +4-6%.

 

 

While average daily table revenues (ADTR) increased 28% over last year for the same week, we would’ve expected better.  MTD table revenues were HK$20.9 billion.  Throw in slots and four more weekdays left in the month, GGR should come in between HK$24.5 and HK$25 billion, an increase of only 4-6% YoY.  This week’s ADTR of HK$711 million declined 2% sequentially and was below the MTD of HK$775 million and April’s HK$773 million.  Not much positive to say the last few weeks.

 

ANOTHER WEAK WEEK IN MACAU - macau1

 

No major changes in market share from last week.  Wynn improved a little but is still trending below its recent trend.  We think Wynn will post below normal hold this month and market share should improve in June.  LVS is still way below where it should be following the opening of Sands Cotai Central.  We think combined market share should be in the 19-20%.  It will get there in our opinion but will be a slow climb.  Given the precipitous drop in the share price, most of the disappointment appears to be discounted.  MPEL’s share climbed back up this past week close to where it should be with the new competition. 

 

ANOTHER WEAK WEEK IN MACAU - macau3


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