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Shorting EUR/USD (FXE): Trade Update

Positions in Europe: Short FXE


Off of a bounce towards our immediate term TRADE resistance line of $1.25 Keith shorted the EUR/USD via the etf FXE in the Hedgeye Virtual Portfolio as we’re looking for the cross to test $1.22 on the downside. As we show in the chart below, our TRADE and intermediate term TREND levels of support are both at $1.22. Our call remains that if $1.22 breaks, look out below! We’re not EUR parity folks because we see Eurocrats stepping in to prevent it; however we see a runway of uncertainty until the June 17th Greek elections that should put significant downside risk in play.

 

Shorting EUR/USD (FXE): Trade Update - 11. eur

 

This cross remains incredibly shifty driven on the backs of Eurocrat posturing, including on the main topics of Eurobonds, a Pan-European Deposit Guarantee facility, another LTRO, and the reach of the ESM. We’ll be highly sensitive to price as we manage risk around this position. 

 

Matthew Hedrick

Senior Analyst


No Man's Land: SP500 Levels, Refreshed

POSITIONS: Long Utilities (XLU), Short Industrials (XLI)

 

With the SP500 under my long-term TAIL line of support, this market is in No Man’s Land right now.

 

There’s a big difference between trading the short side of your book aggressively (Short Covering Opportunities) and ramping up gross long exposure when we are immediate-term TRADE oversold.

 

Across all 3 of my core risk management durations, here are the lines that matter most: 

  1. Intermediate-term TREND resistance = 1369
  2. Immediate-term TRADE resistance = 1308
  3. Long-term TAIL resistance = 1283 

In other words, I am in no hurry to buy/cover (unless I get an immediate-term TRADE oversold signal at the security level) and won’t be provided that 1283 is confirmed as resistance.

 

There’s immediate-term TRADE support (oversold) at 1268.

KM

 

 

Keith R. McCullough
Chief Executive Officer

 

No Man's Land: SP500 Levels, Refreshed - SPX


MACAU: SMALL DATAPOINT BUT BETTER

Early June data suggests 14-19% growth

 

 

It’s only 3 days so there is no real takeaway, especially related to market shares.  Average daily table revenues for June were HK$876 million versus May’s average of HK$775 million.  We think June will post a significant increase in YoY growth than May.  We are currently projecting full month GGR at HK$23-24 billion, which would represent YoY growth of 14-19%.  Remember that May only grew 7% YoY.  Given the precipitous drop in the Macau stocks, we believe June’s accelerating growth will be a positive catalyst.

 

We should be getting the May detail by tomorrow.  The detail should show stronger VIP volume growth (+10%), solid Mass growth of 25-30%, and blowout slot revenue growth of close to 50%.  Investors should react favorably to the details vis a vis the headline growth of only 7%.

 

MACAU:  SMALL DATAPOINT BUT BETTER  - macau222

 

MACAU:  SMALL DATAPOINT BUT BETTER  - june


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Fortune Cookie

This note was originally published at 8am on May 21, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“A different world cannot be built by indifferent people.”

-Jack’s fortune cookie

 

My son Jack was born right around the same time that I came up with this crazy idea to start Hedgeye. I love them both dearly.

 

Last night was the typical Sunday night at the McCullough dinner table. Our kids were exhausted from spending a beautiful day outside, but fired up enough to pound back a few more fortune cookies.

 

By the time I made my last cover/buy move late on Friday afternoon, that’s pretty much how I felt too.

 

Back to the Global Macro Grind

 

As my son grows up, he’ll be taught that it’s always better to be early in life than late. If he ever gets into this business, we’re going to have to work on how early though. Being too early, for too long, is also called being wrong.

 

In buying US Equities, I’m at least a few days early. That’s definitely better than being a few months late in selling them. The last 2 months have been flat out nasty. The highest conviction position you should have had was Cash.

 

We peaked at 91% Cash. That’s 5% lower than where we went in Q3 of 2008. This morning’s Cash position in the Hedgeye Asset Allocation Model is 61% (down from 85% at the start of last week).

 

Here’s how our asset allocation looks this morning:

  1. Cash = 61%
  2. US Equities = 27% (SP500, Consumer Discretionary, Healthcare, and Apple – SPY, XLY, XLV, and AAPL)
  3. Int’l Equities = 12% (China and Brazil – CAF and EWZ)
  4. Int’l Currencies = 0%
  5. Fixed Income = 0%
  6. Commodities = 0%

Not being long anything in Commodities wasn’t something Jack came up with at dinner last night. It’s been part of our Q2 Global Macro Themes calls that include Fed Fighting and Bernanke’s Bubbles (email Sales@hedgeye.com if you’d like an updated slide deck with our refreshed risk management levels – all of the long-term bubble charts are in there, most of them Commodities).

 

Buying Brazilian Equities early was my biggest mistake on the long-side (buying anything Global Equities other than Chinese Equities has pretty much been a big mistake since the end of Q1). Of the major countries, China is the world’s top performer since April.

 

My long SPY (SP500) position is at 9% in the asset allocation model and that’s likely to have a short leash. If the SP500 doesn’t hold our long-term TAIL line of 1282 support, I won’t have a position in it at all. That’s when the crash (YTD peak to trough drop of 20% or more) risk comes into play. Being early by a few days is one thing – buying into a crash is not what we do.

 

With the SP500 down -4.3% last week, down -7.4% for the month-to-date, and down -8.7% from the YTD high, this is either the only obvious “buying opportunity” we’ve had since early January, or a not so friendly signal for the weeks and months ahead.

 

Growth Slowing and Deflating The Inflation – we get that. What we don’t get is how quickly these fundamental research factors get fully priced in. That’s why we reserve the unalienable right to change our mind any minute of the day.

 

Embrace Uncertainty.

 

If we get a lift today and/or tomorrow, we’re likely going to sell into it. That’s because A) we’re too long and B) the Macro Catalyst Calendar starts to get gnarly again starting on Wednesday:

  1. Wednesday = New Home Sales for April (expectations are high at 335,000 given the weather in Feb/Mar)
  2. Thursday = Durable Goods for April are “expected” to rise, sequentially, versus March – that’s not a given either
  3. Friday = University of Michigan Consumer Confidence (for May) is expected to hold fairly elevated gains at 77.8

Then you have the long weekend…

 

And then… you have Europe, a potential mess of a Q2 “earnings season”, and Volcker Rule implementation in July.

 

Don’t be indifferent. Keep moving out there. And keep a Fortune Cookie or two nearby if you need to feel better about America’s economic future. If we don’t evolve our policy making process soon, our kids are going to need all the help they can get.

 

My immediate-term support and resistance ranges Gold, Oil (WTIC), US Dollar Index, EUR/USD, 10-year Treasury Yield, and the SP500 are now $1575-1618, $90.57-94.42, $80.67-81.81, $1.26-1.28, 1.66-1.80%, and 1282-1335, respectively.

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Fortune Cookie - Chart of the Day

 

Fortune Cookie - Virtual Portfolio


MONDAY MORNING RISK MONITOR: RISK MEASURES DETERIORATE ACROSS THE BOARD

Key Takeaways

 

* Junk bonds saw a sharp sell-off last week, with YTM's rising 45 bps to 8.09%. 


* European Sovereign CDS mostly widened along with European Bank CDS. French and German banks widened across the board.  


* US Financial CDS saw widespread widening.

 

* MCDX rose sharply last week, reflecting a growing probability of municipal default. 

 

* This week, we replaced the Baltic Dry Index with Chinese steel rebar prices. The average spot price of steel rebar in China continues to drop, signaling weakening demand in the Chinese construction market. 

 

* Our summary tab shows that on the short to intermediate term, the negative data points are building. This is the first time its been this red in a while. 

 

Financial Risk Monitor Summary  

• Short-term(WoW): Negative / 0 of 12 improved / 9 out of 12 worsened / 4 of 12 unchanged  

• Intermediate-term(WoW): Negative / 1 of 12 improved / 9 out of 12 worsened / 3 of 12 unchanged  

• Long-term(WoW): Positive / 4 of 12 improved / 3 out of 12 worsened / 6 of 12 unchanged

 

MONDAY MORNING RISK MONITOR: RISK MEASURES DETERIORATE ACROSS THE BOARD  - Summary

 

1. US Financials CDS Monitor – Swaps widened for 24 of 27 major domestic financial company reference entities last week.    

Widened the most WoW: JPM, ALL, MMC

Tightened the most WoW: SLM, MTG, RDN

Widened the most MoM: JPM, WFC, AXP

Tightened the most MoM: RDN, UNM, TRV

 

MONDAY MORNING RISK MONITOR: RISK MEASURES DETERIORATE ACROSS THE BOARD  - American CDS

 

2. European Financial CDS - Bank swaps were wider in Europe last week for 26 of the 39 reference entities we track. The median widening was 7 bps.  

 

MONDAY MORNING RISK MONITOR: RISK MEASURES DETERIORATE ACROSS THE BOARD  - European CDS

 

3. Asian Financial CDS -  Bank swaps were generally tighter in Asia last week, with 7 of the 12 reference entities we track posting improvements. The median tightening was 13 bps. 


MONDAY MORNING RISK MONITOR: RISK MEASURES DETERIORATE ACROSS THE BOARD  - Asian CDS2

 

4. Sovereign CDS – European Sovereign Swaps were notably wider last week. Spanish swaps hit a new all-time high of 604 bps, while Italian swaps were close to an all-time high at 570 bps. While Portuguese and Irish swaps cooled off nominally, the trend is up. 

 

MONDAY MORNING RISK MONITOR: RISK MEASURES DETERIORATE ACROSS THE BOARD  - Sov Table

 

MONDAY MORNING RISK MONITOR: RISK MEASURES DETERIORATE ACROSS THE BOARD  - Sov1

 

MONDAY MORNING RISK MONITOR: RISK MEASURES DETERIORATE ACROSS THE BOARD  - Sov 2

 

5. High Yield (YTM) Monitor – High Yield rates rose 45 bps last week, ending the week at 8.09% versus 7.60% the prior week.

 

MONDAY MORNING RISK MONITOR: RISK MEASURES DETERIORATE ACROSS THE BOARD  - HY

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index fell 6.5 points last week, ending at 1640.

 

MONDAY MORNING RISK MONITOR: RISK MEASURES DETERIORATE ACROSS THE BOARD  - LLI

 

7. TED Spread Monitor – The TED spread rose 2.2 points last week, ending the week at 40.4 this week versus last week’s print of 38.3.

 

MONDAY MORNING RISK MONITOR: RISK MEASURES DETERIORATE ACROSS THE BOARD  - TED

 

8. Journal of Commerce Commodity Price Index – The JOC index fell less than a point to end at -11.5 on Wednesday (5/30) versus -11.4 the prior Friday(5/25). Data was unavailable for Thursday and Friday of last week.

 

MONDAY MORNING RISK MONITOR: RISK MEASURES DETERIORATE ACROSS THE BOARD  - 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 1 bps to 40 bps.

 

MONDAY MORNING RISK MONITOR: RISK MEASURES DETERIORATE ACROSS THE BOARD  - 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.  

 

MONDAY MORNING RISK MONITOR: RISK MEASURES DETERIORATE ACROSS THE BOARD  - 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 185 bps versus 168 bps the prior week.

 

MONDAY MORNING RISK MONITOR: RISK MEASURES DETERIORATE ACROSS THE BOARD  - MCDX

 

12.Chinese Steel - This indicator is a new addition this week. We're looking at Chinese steel rebar prices as a gauge for Chinese construction demand. We look at the average Chinese rebar spot price. Steel prices in China fell 0.5% last week, or 22 yuan/ton, to 4,074 yuan/ton. Notably, Chinese steel rebar prices have been generally moving lower since August of last year.

 

MONDAY MORNING RISK MONITOR: RISK MEASURES DETERIORATE ACROSS THE BOARD  - Chinese Steel

 

13. 2-10 Spread – We track the 2-10 spread as an indicator of bank margin pressure.  Last week the 2-10 spread tightened by 24 bps to 121 bps.

 

MONDAY MORNING RISK MONITOR: RISK MEASURES DETERIORATE ACROSS THE BOARD  - 2 10

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 3.5% upside to TRADE resistance and 1.5% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: RISK MEASURES DETERIORATE ACROSS THE BOARD  - 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. 

 

MONDAY MORNING RISK MONITOR: RISK MEASURES DETERIORATE ACROSS THE BOARD  - 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. 

 

 



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