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EUROPE: It only gets worse

Now that the pro-bailout party in Greece has effectively “saved” the European Union from an official meltdown, people are breathing a sigh of relief. But should they? We certainly don’t think so.

 

Credit default swaps on Spain and Italy widened over the weekend by several percentage points. That means investors are scared that they’re next in line for a default – or in this case, a bailout. Spanish and Italian banks are effectively the next institutions in line to come running to the International Monetary Fund for a bailout. As we’ve noted before (and will reiterate again): there is no trust in the markets.

 

One only need at the chart below, courtesy of Hedgeye Financials Sector Head Josh Steiner. While the U.S., France and Germany are in the clear for now, it’s become clear that time has run its course for Spain and Italy. After all, you can only kick the can down the road for so long.

 

 

EUROPE: It only gets worse - eurocds 618




MONDAY MORNING RISK MONITOR: CHAOS DELAYED

Key Takeaways

* The Greek election. New Democracy, the pro-bailout/pro-austerity party, received the plurality of the vote on Sunday with 29.7%, eclipsing Syriza by roughly 2.5%. PASOK, the center-left party, took 12.3% of the total vote, which means New Democracy and PASOK  together should be able to clear the 151-seat hurdle necessary to hold a majority of the legislature. Recall that in the May 6 election they fell short of the 151-vote threshold by 2 votes. As such, a Greek exit of the Eurozone has been delayed, and some measure of relief rally should be expected.

 

That said, Spanish and Italian CDS widened, rising 5.3% (+31 bps) and 3.0% (+16 bps), respectively. So, while Greece's election was viewed as a potential downside catalyst, it hasn't changed the negative reality facing either Spain or Italy's economy, or Greece's for that matter. While expectations are now high for austerity terms on Greece to be eased, the current rate of contraction in the Greek economy will make it all but impossible to comply with even reduced terms in the intermediate to long-term. 

 

* Yield spread continues to flatten. The 2-10 spread tightened to 129 bps. If spreads hold where they are now, the 3Q12 sequential change will rival what we saw in 3Q11, an ominous sign for bank margins. 

 

* XLF quantitative setup – Our Macro team’s quantitative setup in the XLF shows 0.6% upside to TRADE resistance of $14.43 and 1.7% downside to TRADE support of $14.10.

 

Financial Risk Monitor Summary  

• Short-term(WoW): Neutral / 3 of 12 improved / 3 out of 12 worsened / 7 of 12 unchanged  

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

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

 

MONDAY MORNING RISK MONITOR: CHAOS DELAYED - Summary 2

 

1. US Financials CDS Monitor – Swaps tightened for 21 of 27 major domestic financial company reference entities last week.   

Tightened the most WoW: WFC, GS, MS

Widened the most WoW: LNC, UNM, AGO

Tightened the most MoM: WFC, GS, MS

Widened the most MoM: UNM, AGO, MMC

 

MONDAY MORNING RISK MONITOR: CHAOS DELAYED - American

 

2. European Financial CDS - 26 of the 39 reference entities we track showed spreads widening across Europe last week. To be clear, these results are from last Friday, a few days before the Greek Election.  

 

MONDAY MORNING RISK MONITOR: CHAOS DELAYED - Europe

 

3. Asian Financial CDS -  10 out of 12 Asian banks swaps were tighter last week. 

 

MONDAY MORNING RISK MONITOR: CHAOS DELAYED - Asia

 

4. Sovereign CDS – European Sovereign Swaps mostly tightened over last week. French sovereign swaps tightened by 8.0% (-17 bps to 195 ) and Spanish sovereign swaps widened by 5.3% (31 bps to 609).


MONDAY MORNING RISK MONITOR: CHAOS DELAYED - Sov Table

 

MONDAY MORNING RISK MONITOR: CHAOS DELAYED - Sov 1

 

MONDAY MORNING RISK MONITOR: CHAOS DELAYED - Sov2 2

 

5. High Yield (YTM) Monitor – High Yield rates fell 6.3 bps last week, ending the week at 7.87 versus 7.93 the prior week.

 

MONDAY MORNING RISK MONITOR: CHAOS DELAYED - HY

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 3.37 points last week, ending at 1645.

 

MONDAY MORNING RISK MONITOR: CHAOS DELAYED - LLI

 

7. TED Spread Monitor – The TED spread fell 1.5 points last week, ending the week at 37.4 this week versus last week’s print of 38.9.

 

MONDAY MORNING RISK MONITOR: CHAOS DELAYED - TED

 

8. Journal of Commerce Commodity Price Index – The JOC index fell 0.7 points, ending the week at -15.88 versus -15.2 the prior week.

 

MONDAY MORNING RISK MONITOR: CHAOS DELAYED - 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.

 

MONDAY MORNING RISK MONITOR: CHAOS DELAYED - 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: CHAOS DELAYED - 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 14-V1. Last week spreads tightened , ending the week at 162 bps versus 169 bps the prior week.

 

MONDAY MORNING RISK MONITOR: CHAOS DELAYED - MCDX

 

12. Chinese Steel - We use Chinese steel rebar prices to gauge Chinese construction activity. We look at the average Chinese rebar spot price. Steel prices in China rose 0.27% last week, or 11 yuan/ton, to 4,079 yuan/ton. Notably, Chinese steel rebar prices have been generally moving lower since August of last year.

 

MONDAY MORNING RISK MONITOR: CHAOS DELAYED - China 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 to 129 bps, 7 bps tighter than a week ago.

 

MONDAY MORNING RISK MONITOR: CHAOS DELAYED - 2 10

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.6% upside to TRADE resistance and 1.7% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: CHAOS DELAYED - 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: CHAOS DELAYED - 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. 


Fire Bernanke

This note was originally published at 8am on June 04, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“The first thing you have to know is yourself.”

-George Goodman, The Money Game

 

Chapter 2 of The Money Game is about ‘You: Identity, Anxiety, and Money.’ It walks through some very basic training leadership lessons from “Mister Johnson” (as in Ned Johnson, the Founder of Fidelity Investments) on how to make it in this business.

 

A man who knows himself can step outside of himself and watch his own reactions like an observer… With the good men, you can see the learning juices churning around every mistake. You learn from mistakes. When I look back, my life seems to be an endless chain of mistakes.” (pages 26-27)

 

If only America’s economic pundits and politicians had the humility to reflect upon all of the forecasting and policy mistakes we have been making in this country for the last 6 years… if only we had the kind of accountable leadership that The People could trust…

 

Back to the Global Macro Grind

 

At the end of the day, you need to know yourself and your process, or your time in this profession will be relatively short. This is a profession that is in the middle of a revolution. We all need to Re-Think and Re-do what has not been working.

 

What is it that you do? Why did you do it that way? Is your risk management process malleable and repeatable?

 

Credible Sources and Accountable Leadership – find both and you’ll weather this Globally Interconnected economic storm just fine. Today is not a day to be freaking out and selling low. Friday was a Shorting Covering Opportunity. Today is a wait and watch day.

 

Know yourself; know your position:

  1. Cash = 82%
  2. International Currencies = 9% (US Dollar – UUP)
  3. US Equities = 9% (Utilities and Apple – XLU and AAPL)
  4. Fixed Income = 0%
  5. International Equities = 0%
  6. Commodities = 0%

That’s the Hedgeye Asset Allocation Model that we #TimeStamp each and every day. We update these positions daily because we believe strongly that there should be responsibility in recommendation.

 

Not being long anything Commodities in Q2 has been a choice. Not being long anything big beta (Basic Materials, Energy, or Financial stocks) was also a choice. So was not chasing Treasuries higher on Friday.

 

While Growth Slowing and Deflating The Inflation of Bernanke’s Bubbles (Commodities) remains our Q2 Global Macro Theme, that doesn’t mean we short-and-hold. From a time and price, almost everything that ticks is interesting.

 

So is the ongoing Macro Catalyst Calendar – here’s how that looks to us this week:

  1. Monday – capitulation selling on Asia’s Equity market open (despite Asian Equities being red since Feb-Mar)
  2. Tuesday – ISM non-Manufacturing data in the US, where #GrowthSlowing will remain a consensus concern
  3. Wednesday – ECB decision on rates, money printings, bailouts, etc.
  4. Thursday – Fed musings about whatever it is that they can/cannot do as Bernanke gives his economic “outlook”
  5. Friday – Chinese inflation data for May (CPI and PPI), which should slow as we see continued Deflating of The Inflation

Overall, the news-flow will get more policy-centric as we move into the belly of the week. Begging for Bernanke was already the focus of this weekend’s media coverage. So expect more of that – i.e. more of the same that slowed growth to begin with after Bernanke independently opted to debauch the Dollar on January 25thwith another Policy To Inflate.

 

A perpetual policy to inflate is only as good as its economic outcomes. Most people are figuring this out. In addition to their policy mistakes, The Fed has failed miserably on the two scores that matter most within their mandate:

  1. Price Stability
  2. Full Employment

So, rather than hoping for him to do more of the same, I think the best scenario for the 71% (i.e. US Consumption as a % of US GDP) is to fire Ben Bernanke.

 

Either Obama figures this out and shows that he is an executive leader who makes mistakes, understands them, and has the mental flexibility to change – or, Romney will run on it and state plainly that he’ll fire Bernanke himself.

 

Fire Bernanke? Yes. Just like you would any other Coach or Executive who is failing. If we fire Bernanke, I think whatever is left of Oil’s iQe4 upgrade speculation would go away, Gold would crash, and the US Dollar would remind the world who is going to wear the pants in this fiat world of European and Japanese policy makers threatening to blow us all up.

 

I know myself. And I know real people who will celebrate the only way out of this – and that’s by growing the 71% of US GDP by giving this country a monster $2/gallon tax cut at the pump. If you want that, you want a Strong Dollar. If you want a Strong Dollar, you want to get rid of Ben Bernanke too.

 

My immediate-term support and resistance ranges for Gold, Oil (WTIC), US Dollar, EUR/USD, and the SP500 are now $1601-1622, $81.29-89.43, $82.42-83.19, $1.22-1.25, and 1268-1300, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Fire Bernanke - Chart of the Day

 

Fire Bernanke - Virtual Portfolio


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – June 18, 2012


As we look at today’s set up for the S&P 500, the range is 28 points or -1.78% downside to 1319 and 0.31% upside to 1347. 

                                            

SECTOR AND GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1A

 

THE HEDGEYE DAILY OUTLOOK - 2

 

THE HEDGEYE DAILY OUTLOOK - 3

 

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: on 6/15 NYSE 1149
    • Down from the prior day’s trading of 1229
  • VOLUME: on 6/15 NYSE 1513.30
    • Increase versus prior day’s trading of 94.17%
  • VIX:  as of 6/15 was at 21.11
    • Decrease versus most recent day’s trading of -2.63%
    • Year-to-date decrease of -9.79%
  • SPX PUT/CALL RATIO: as of 6/15 closed at 1.72
    • Up from the day prior at 1.23 

CREDIT/ECONOMIC MARKET LOOK:


BONDS – US and European bond markets continue to front-run manic equity traders; both didn’t change TREND last wk, and this morning you are seeing Spanish 10s shoot back above 7% as UST 10yr remains in Growth Slowing formation at 1.59% (Yield Spread in the US (10s -2s) was down 6bps last wk, despite the no volume rally in stocks. 

  • TED SPREAD: as of this morning 38
  • 3-MONTH T-BILL YIELD: as of this morning 0.09%
  • 10-Year: as of this morning 1.56
    • Decrease from prior day’s trading at 1.58
  • YIELD CURVE: as of this morning 1.28
    • Down from prior day’s trading at 1.72 

MACRO DATA POINTS (Bloomberg Estimates):

  • 10am: NAHB Housing Market Index, June, est. 28 (prior 29)
  • 11am: Fed to purchase $1.5b-$2.25b notes in 2/15/2018-5/15/2042 range
  • 11:30am: U.S. to sell $30b 3-mo., $27b 6-mo. bills
  • 2pm: Fed to sell $8b-$8.75b notes in 5/15/2013-11/30/2013 range 

GOVERNMENT:

    • President Obama attends G-20 Summit in Mexico
    • House, Senate in session
    • AFSCME union holds convention, elects successor to President Gerald McEntee (through Thurs.)

WHAT TO WATCH: 

  • Samaras begins bid to form Greek coalition to stop crisis
  • Euro leaders signal softening on Greek austerity
  • Spain 10-yr yield surges past 7% to new record
  • Hollande’s Socialist party wins control of French parliament
  • Melrose in talks over $2.3b offer for CVC’s Elster
  • China May home prices fall in record number of cities on curbs
  • FDA staff reports due for 6/20 advisory committee meeting on Sanofi’s semuloparin for prevention of blood clots in chemotherapy patients, ONXX/LGND’s carfilzomib for 3rd-line multiple myeloma
  • Orbis will back Vodafone’s bid for Cable & Wireless
  • Microsoft, B&N may unveil e-reader/tablet: TechCrunch
  • Fairfax Media to cut 1,900 workers as readers migrate to web
  • G-20 said to be discussing mix of global stimulus if needed
  • Weekly agendas for finance, energy, health, real estate, transports, industrials, technology, consumer, media/entertainment, Canada mining, Canada oil & gas
  • Greek Election, G-20 Summit, Fed Meeting: Week Ahead 

EARNINGS: 

    • IHS (IHS) After-mkt, $0.94
    • Platinum Underwriters (PTP) After-mkt, $1.16 

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

 

GOLD – no bailout or Monday morning money printing (yet) is pressuring Gold – will be interesting to watch it as a leading indicator into the FOMC meeting on Wednesday and whatever Geithner begs for at the G20 all the while (he wants the US (IMF) to bailout Spanish banks). Sold our long Gold position; shorted the Euro and bought cattle on Friday. 

  • Hedge Funds Boost Bullish Bets on Stimulus Outlook: Commodities
  • Oil Little Changed as European Debt Woes Outweigh Greek Optimism
  • HKEx Shares Tumble as ‘Expensive’ LME Bid Seen Passing Regulator
  • Wall Street Gas Bears Squeezed by Utility Buyers: Energy Markets
  • European Union Says Iran Oil Embargo on July 1 Will Go Forward
  • Copper Seen Advancing as Greek Vote Eases Debt-Crisis Concern
  • Gold Set for First Decline in Seven Days After Greek Elections
  • Cotton Area in India to Drop 10% This Year as Prices Slump
  • Gazprom May Offer China Lower Gas Price With Advance Payments
  • German Clean-Dark Spread Declines as 2013 Power Contract Drops
  • Solar Boom Heads to Japan Creating $9.6 Billion Market: Energy
  • U.K. Natural Gas Advances as Norwegian, Dutch Flows Decline
  • Noda Ends Japan Nuclear Freeze, Risking Backlash at Polls
  • Funds Add Bullish Bets on Stimulus Outlook
  • Iran Nuclear Offer Fails to Stall EU Oil Embargo at Moscow Talks
  • Corn Climbs After Greek Election Eases Concern Over Euro Crisis
  • Angola to Boost August Daily Crude Exports to Six-Month High

THE HEDGEYE DAILY OUTLOOK - 4

 

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - 5

 

 

EUROPEAN MARKETS


SPAIN – Greece is the tree, Spain/Italy/Japan is the forest; markets get that – they also get that “coordinated action” means they can’t be fully invested (hedged), which is just sad to watch; Spain’s IBEX and Italy’s MIB down -1.8% and -1.5% this morn in un-coordinate reaction to whatever remains (both continue to crash, down -26% and -23% from YTD tops).

 

THE HEDGEYE DAILY OUTLOOK - 6

 

 

ASIAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 7

 

 

MIDDLE EAST


THE HEDGEYE DAILY OUTLOOK - 8

 

 

 

The Hedgeye Macro Team



Our Saviors

“Our mediocre and bankrupt elite, concerned with its own survival, spends its energy and our resources desperately trying to save a system that cannot be saved.”

-Chris Hedges

 

This weekend I finished reading Death of The Liberal Class. It’s my kind of book. Not because I agreed with everything in it, but because it made me think outside of my comfort zone. Chris Hedges was fired by the New York Times for having a point of view.

 

Some people call Hedges a socialist; others call him a libertarian. I’ll call him one of the many men and women who need to be heard. You don’t have to agree with everything someone says to be empathetic to their perspective. That’s a democracy.

 

The perspective of almost every politician making central planning calls on the fly right now is that of their own political career risk. In the short-run (this morning), that means they might need a “coordinated action” for the market’s un-coordinate reaction. In the long-run (the next 3 years), doing more of what has not worked will make their political careers dead.

 

Back to the Global Macro Grind

 

Let’s start with what markets are not doing this morning – going up. This is coming off the 2nd Bailout Sunday in a row where the S&P Futures opened 15 handles higher than where they wound up come Monday morning.

 

Got expectations? Markets do. Sadly, Our Saviors don’t. From Obama’s Spanish bank bailout man Tim Geithner to Italy’s Mario Monti, these people don’t have a clue as to what they are building into this globally interconnected market’s set of expectations.

 

Big Government Intervention policies (causality) drive currencies. Currency moves drive asset price inflation/deflation (correlation). For now, that is the deep simplicity of what anyone who manages real-time risk has to deal with in real-time. Fun.

 

With the US Dollar DOWN for the 2nd consecutive week, Global Equity and Commodity prices went UP last week:

  1. US Dollar Index = -1.5% in the last 2 weeks to $81.63 (from $82.89, the weekly YTD closing high)
  2. CRB Commodities Index = +1.5% in the last 2 weeks to 272
  3. SP500 = +5.0% in the last 2 weeks to 1342 (from 1278, the weekly YTD closing low)

Now, while some might say the last few weeks of stocks and commodities rising were based on “fundamentals”, I’ll remind you that is a crock.

 

Never mind Europe, last week’s US economic data was as weak as any we have seen in 2012:

  1. US Retail Sales missing on Wednesday had stocks selloff hard on the news (Consumer stocks down -1.6% on the day)
  2. US Jobless Claims rising to 386,000 (20% higher than where the data was in March), got Qe3 whispering back “on”
  3. US Consumer Confidence (University of Michigan survey) dropped like a rock in June to 74.1 (vs 79.3 in May)

#GrowthSlowing

 

So, you buy stocks and commodities on that, right?

 

Right. Right.

 

The only reason why you’d do that (and more of it was short covering, by the way, because volume in this stock market has gone bone dry) is because you were either begging for (or fearing) more bailouts and easing.

 

Is that what Our Saviors have reduced our markets to? Begging and fearing? This is all turning out to be as pathetic and sad as each and every rally looks to lower long-term highs, on lower and lower volumes.

 

To be fair, some of the options brokers in currency and commodity markets are seeing some flow (the flow is what you get paid when customers pay you a commission to transact). Chucky Evans from the Chicago Fed loves getting a piece of that flow. Who said a politicized man at the Fed can’t be bought and paid for? Can you pay me $25,000 to speak at a road-show lunch?

 

To get a little more granular on the commodity “speculation” side of the flow, here’s how last week’s CFTC flow data looked:

  1. CRB Commodities net long contracts = +9.1% week-over-week (to 587,327 contracts)
  2. Silver net long contracts = +12% week-over-week
  3. Farm Goods net long contracts = +21% week-over-week

Yeah, bro. You get Chucky up there talking down the Dollar and we’re going to dance. Especially as global demand slows, bro. Because we are absolutely and positively paid to speculate on policy, not fundamentals, bro.

 

Not sure on the bro thing, but I am certain that I have no idea what do in these markets any more than the next guy/gal who has the next Fed or Treasury or ECB whisper. Maybe that’s what Our Saviors consider the New Democracy.

 

My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, Spain’s IBEX, and the SP500 are now $1, $95.72-98.47, $81.58-82.26, $1.24-1.26, 6, and 1, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Our Saviors - Chart of the Day

 

Our Saviors - Virtual Portfolio


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.28%
  • SHORT SIGNALS 78.51%
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