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Whispers: SP500 Levels, Refreshed

POSITIONS: Long Consumer Staples (XLP); Short Industrials (XLI)

 

I’ve only heard 4 whispers about different flavors of interventions in the last hour. That’s just got to be good for someone, because it sure can’t be for confidence.

 

No trust; no volume. That’s the market you have to risk manage right now. Equity outflows remain a paramount factor when we get to the top end of either my immediate or intermediate-term range.

 

Across risk management durations, here are the lines that matter most: 

  1. Intermediate-term TREND resistance = 1365
  2. Immediate-term TRADE resistance = 1347
  3. Immediate-term TRADE support = 1319 

In other words, keep managing the risk of the range. It’s somewhat predictable. So are the whispers.

 

 

Just make sure to have a large cash position for that day when the whispering stops,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Whispers: SP500 Levels, Refreshed  - SPX


European Banking Monitor: Chaos Delayed

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .

 


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. 

 

If you’d like to discuss recent developments in Europe, from the political to financial to social, please let me know and we can set up a call.

 

Matthew Hedrick

Senior Analyst

 

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European Financials CDS Monitor – 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.  

 

European Banking Monitor: Chaos Delayed  - aaa. banks

 

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.

 

European Banking Monitor: Chaos Delayed  - aaa. euribor

 

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.  The latest overnight reading is €741.2B.

 

European Banking Monitor: Chaos Delayed  - aaa. facility

 

Security Market Program – For the fourteenth straight week the ECB's secondary sovereign bond purchasing program, the Securities Market Program (SMP), purchased no sovereign paper for the latest week ended 6/15, to take the total program to €210.5 Billion.

 

European Banking Monitor: Chaos Delayed  - aaa. SMP


MACAU AND LVS DEFYING THE SKEPTICS

June GGR forecast of 17-22% YoY growth

 

 

Macau had another strong week, generating average daily table revenues of HK$756 million.  Our full month June forecast is now for GGR of HK$23.5-24.5 billion or 17-22%.  We believe YoY growth at this level should inspire investors following the single digit growth of May.

 

MACAU AND LVS DEFYING THE SKEPTICS - MACAU111

 

As we expected, LVS continues to gain market share.  While 19.8% might not be sustainable over the near-term, it is representative of the longer term share we expect out of the company and certainly better than the 17% generated in the months prior and after the opening of Sands Cotai Central.  

 

MACAU AND LVS DEFYING THE SKEPTICS - macau333


Early Look

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IS JAPAN OFF THE HOOK FOR NOW?

CONCLUSION: As the chart of Japanese sovereign CDS continues to indicate, intermediate-term event risk in the JGB market continues to dissipate. While Japan’s poor sovereign fiscal metrics and heavy debt burden continue to signal heightened TAIL risk, we think it’s safe to conclude that a JGB crisis is less probable from TRADE and TREND perspective than it was just 3-4 months ago. Thus, it is likely to prove prudent to resist saturated consensus storytelling by avoiding the “widow-maker trade” for now.

 

On slide 59 of our MAR 2 presentation titled: “JAPAN’S DEBT, DEFICIT AND DEMOGRAPHIC RECKONING”, we outlined four catalysts that we felt would expose the JGB market to heightened event risk over the intermediate term: 

  1. The threat of future ratings agency downgrades beyond critical levels (triggering a capital call across the Japanese banking system);
  2. A deterioration of the country’s current account dynamics eroding the country’s net creditor status;
  3. A failure to pass meaningful austerity measures that would slow the growth of Japanese sovereign debt below the growth of domestic assets; and
  4. A structural increase in long-term inflation expectations. 

As things stand today, it is our official view that the risks embedded in each of these four catalysts have receded enough to substantially erode our assessment of TREND-duration risks in the JGB market. Moreover, this view is consistent with our work since early APR, which, among other things, has mainly focused on tempering expectations of an intermediate-term Japanese sovereign debt crisis.

 

As it relates to catalyst #1, on MAY 22, Fitch became the first of the “Big 3” ratings agencies to downgrade Japan’s L/T L/C issuer rating to single-A status (A+ w/ a negative outlook). Moody’s currently has a Japan at Aaa with a stable outlook; Standard and Poor’s has Japan at AA- with a negative outlook. We suspect both agencies will be on hold indefinitely given the resolution of catalyst #3, which is new as of this morning and a major delta from the previous status quo, which centered on LDP demands for a dissolution of the Diet (in hopes to regain the ruling mandate though a popular vote) prior to participating in negotiations on the proposed legislation.

 

To that point, the DPJ, led by prime minster Yoshihiko Noda, reached an agreement late yesterday night with senior delegates of the two largest opposition groups (LDP and New Komeito Party) on a deal to double the nation’s 5% VAT in a two-step process ending in OCT 2015. Reaching the deal took a fair amount of political compromise on Noda’s behalf, including the recent reshuffling of his cabinet to remove two controversial members from key posts and shelving a DPJ-backed plan to introduce a minimum guaranteed pension. Moreover, hiking the VAT has become increasingly unpopular as Japan’s TREND-duration economic outlook becomes more cloudy (56% of voters opposed the bill in JUN vs. 51% last month per Asahi News). All involved parties hope to have the deal officially ratified by the end of the current Diet session, which concludes on JUN 21.

 

As we demonstrated in our APR 3 research note titled: “DIGGING DEEPER INTO JAPANESE SOVEREIGN DEBT RISK”, hiking the VAT tax leaves much to be desired in the way of fiscal consolidation and outright debt burden reduction for the Japanese sovereign – using the Cabinet Office’s own official projections! Incorporating more grounded numbers into our scenario analyses, we concluded that Japanese policymakers needed to adopt a far more dramatic fiscal consolidation plan to make a material dent in the growth of Japan’s sovereign debt burden.

 

That all being said, however, we would be remiss to ignore the positive headline risk associated with agreeing upon and ultimately passing the VAT hike bill in the immediate term, as it is highly likely to buy the Japanese sovereign a meaningful amount of time as it relates to the timing of future ratings downgrades and/or shifts in the supply/demand dynamics of the JGB market itself.

 

Turing to point #2, we also received resolution on this front as well, with Prime Minister Noda agreeing on JUN 16 to restart the first two of the country’s 50 idled nuclear reactors. Per the statement, two reactors at Kansai Electric Power Co.’s Ohi nuclear plant can now be operated safely. The key takeaway here is that Japanese policymakers have now signaled that A) political hurdles to restart reactors are being cleared, which will increasingly reduce Japan’s need to import fossil fuels (supportive of Japan’s current account surplus, which had posted its two lowest monthly readings ever in the YTD), and B) there exists a new willingness to go against popular sentiment on this front; as recently as last month the government was busy issuing official projections for mandated rolling blackouts, which amount to cuts in consumer and corporate energy consumption.

 

IS JAPAN OFF THE HOOK FOR NOW? - 1

 

This change of heart strikes us as being highly politically motivated and reminds us who really runs the show in Japan (i.e. big corporations). The Kansai region of western Japan (accounting for ~20% of Japanese GDP) is home to the industrial cities of Osaka, Kobe and Kyoto, as well as the headquarters of Panasonic Corp., Sharp Corp. and Nintendo Co. As previously mentioned, the decision is quite unpopular among Japanese voters; 71% of respondents in a Mainichi poll opposed an expedited restart to the Ohi reactors; 70% of respondents in a Pew Research Center poll said the country should reduce its reliance on nuclear energy and 52% of respondents of that same poll said they felt that they or members of their family had been exposed to radiation.

 

Lastly, in accessing the development of point #4, we look no further than the slope of Japan’s 5yr breakeven inflation rate, which we identified earlier in the year as the key indicator to watch as it relates to a structural increase in long-term inflation expectations within the JGB market. That slope, which had been straight up and to the right for nearly 10 months, has now inflected; this inflection coincides quite nicely with the Bank of Japan’s recent unwillingness to succumb to elevated political and market pressure to incrementally ease monetary policy in pursuit its +1% inflation target (adopted in FEB; latest rejection of consensus pleading on JUN 15).

 

IS JAPAN OFF THE HOOK FOR NOW? - 2

 

We still see risk, here, but as we have been pointing out in recent notes, the BOJ’s reluctance to acquiesce to consistent demands that it aggressively expand its balance sheet has taken a fair amount of immediate-to-intermediate-term reflation risk off of the table in Japan. That, in conjunction with a proactively-predictable compression in global interest rate differentials, has led us to anticipate the latest bout of JPY strength in spite of our bearish TAIL-duration view.

 

Pertaining to that duration, it is still our view that personnel changes among the BOJ’s monetary policy board – particularly current governor Shirakawa’s term expiration in APR ’13 – will bring about a new era of meaningful BOJ balance sheet expansion, which is an outcome that has multi-partisan political support out of the Diet. The latest developments on this front are the nominations of Takahide Kiuchi of Nomura Securities Co. and Takehiro Sato of Morgan Stanley MUFG Securities Co. Both are sell-side economists and, most importantly, both are open to the idea of the BOJ being more aggressive in its efforts to help Japan overcome persistent deflation.

 

We will continue to keep an eye on S/T-L/T JGB nominal yield spreads as indications of A) whether the BOJ will extend the maturities of JGBs targeted as part of its Asset Purchase Program (at 1-3yrs currently) and B) whether the BOJ convinces the JGB market to start pricing in the threat of inflation – something market participants haven’t had to do in decades.

 

IS JAPAN OFF THE HOOK FOR NOW? - 3

 

All told, as the chart of Japanese sovereign CDS continues to indicate, intermediate-term event risk in the JGB market continues to dissipate. This is supported by what we feel are either meaningful positive developments within or resolutions of each of the key negative catalysts we outlined back in MAR. While Japan’s poor sovereign fiscal metrics and heavy debt burden continue to signal heightened TAIL risk, we think it’s safe to conclude that a JGB crisis is less probable from TRADE and TREND perspective than it was just 3-4 months ago. Thus, it is likely to prove prudent to resist saturated consensus storytelling by avoiding the “widow-maker trade” for now. 

 

Darius Dale

Senior Analyst

 

IS JAPAN OFF THE HOOK FOR NOW? - 4


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. 


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