European Banking Monitor: RISK COOLING OFF FOR NOW

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:


* US/European bank swaps were broadly tighter last week on the heels of favorable Greek elections and Moody's downgrades being less bad than feared. We'd remind investors that (a) even if Greek austerity terms are eased, the rate of contraction in the Greek economy will make compliance nearly impossible, setting the stage for another showdown, and (b) Moody's downgrades have costs. While we saw lots of commentary about funding costs not being affected by the downgrades, the more salient takeaway is that institutions that moved to triple-B should see derivatives flow move away, on the margin.   


* Risk took a breather last week as large declines in high yield, MCDX and higher leveraged loan prices were indications that the temporary calm in Europe was enough for a broad-based rally. Interestingly, the one measure you'd have expected to contract actually expanded: Euribor-OIS.


 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




European Financials CDS Monitor – 31 of the 39 European financial reference entities we track saw spreads tighten last week. The median tightening was 7.4% and the mean tightening was 1.8%. It's notable that the Spanish banks were the worst performers of the group.


European Banking Monitor: RISK COOLING OFF FOR NOW - dd. 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 has been moving higher of late for the first time in a long time. It ended the week at 43 bps.


European Banking Monitor: RISK COOLING OFF FOR NOW - dd. 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. This data shows through Thursday.  


European Banking Monitor: RISK COOLING OFF FOR NOW - dd. facility


Security Market Program – For the fifteenth straight week the ECB's secondary sovereign bond purchasing program, the Securities Market Program (SMP), purchased no sovereign paper for the latest week ended 6/22, to take the total program to €210.5 Billion.


European Banking Monitor: RISK COOLING OFF FOR NOW - dd. smp

Teaspoon Bailout

This note was originally published at 8am on June 11, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“I could as easily bail out the Potomac River with a teaspoon as attend to all the details of the army.”

-Abraham Lincoln


So, in the last 3 trading days, you’ve had begging for Bernanke, a Chinese rate cut, and now another European bank bailout. Nice. Sounds like this must have been the bull case all along. Losers win.


To Lincoln’s point, these people have issues. Bigger issues than a 9 handle pre-market rally in the S&P Futures are going to solve (it was 16 handles on the “news” last night). Piling more debt-upon-debt-upon-debt is the last thing that global consumers need.


As a reminder, short-term Big Government Interventions (money printing and debt leverage) stoke commodity (oil) price inflations. Policies To Inflate then slow global economic growth. They also eradicate whatever is left of investor trust.


Back to the Global Macro Grind


Without credible markets, you don’t solve the #1 issue people have with Global Macro markets right now – trust. Without trust, conflicted and compromised politicians will do just about anything to attempt to save their short-term political career risk. That’s no long-term economic plan for prosperity.


This Teaspoon Bailout strategy is not new obviously. You only have to go back to 2008 when ex-Goldman CEO (and credit derivatives market leader), Hank Paulson, brought out the US Bank Bailout Bazooka. The market rallied into the event (inside information), then rallied for about a nanosecond on the “news” to lower-highs, then resumed its decline.


Then, the former Dartmouth football player (Hank) was seen puking in his garbage can…


Have no fear however, Timmy is still here. There is no question in my mind that central planning pool boy in Chief, Tim Geithner, advised the Europeans to do the same thing he advised America’s politically compromised back then. Having never worked a day outside of Washington’s political elite in his born life, this is what Geithner was sent by his god on this earth to do – bailout banks.


This concentration of conflicted political power gets scarier when you think about how close Geithner is to both the President of the United States and the Washington based (and US tax payer backed) IMF. Geithner is fighting for his short-term political life. And, in the long-run, my grand-children are not yet dead.


As a reminder, Big Government Interventions in what were our free-markets:

  1. Shorten Economic Cycles (through short-term asset price inflations)
  2. Amplify Market Volatility (through made-up bailouts and rules mid-game)

That’s just a bit off versus the Fed’s Congressional mandate for:

  1. Full Employment
  2. Price Stability

Regardless, in exchange for a 9 handle pop in the US futures and Spanish stocks going from down -31% from their YTD peak to -24% (i.e. still crashing), global consumers get themselves a nice pop in taxes, back up to $100/barrel Brent oil.


Dollar down, Euro up, Oil up. Nice.


Just when I was starting to get bullish, from a price (1283 long-term TAIL support), the #1 factor that made for our #GrowthSlowing call in February-March, gets put back on the table via Bernanke begging and Europe bailing. There is nothing that slows real (inflation adjusted) growth faster than food/energy prices rising.


Now if you are in the March 2012 bull market camp that “this time is different” and the world is “de-coupling”, that’s perfectly fine. That’s what makes a market. Piling more debt-upon-debt in Europe is only going to make this structurally low-growth and no-trust market environment worse.


Into and out of the Bernanke Begging last week, we cut our US Equity asset allocation back down to 0%. After starting the week at 12% US Equity allocation, that made for a good week. That puts our current Hedgeye Asset Allocation Model in the following pre-game position:

  1. Cash = 76% (down from 82% last Monday)
  2. International Currency = 12% (all US Dollar, all the time = UUP)
  3. Fixed Income = 12% (US Treasuries and German Bunds = TLT and BUNL)
  4. US Equities = 0%
  5. International Equities = 0%
  6. Commodities = 0%

In other words, we’re already losing today. And we expect to be held accountable for those losses.


While I could say what I would have done if I had this Spanish inside information on Friday afternoon, I won’t. I won’t say that if some conflicted and compromised politician in Washington called me with a look-see that I’d pick up the phone either.


Last I checked, in most parts of the country, cheating and bailing out banks is still un-American.


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, and EUR/USD, and the SP500 are now $1542-1602, $95.61-100.91, $80.02-82.63, $1.24-1.27, and 1305-1344, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Teaspoon Bailout - Chart of the Day


Teaspoon Bailout - Virtual Portfolio


The Macau Metro Monitor, June 25, 2012




Visitor arrivals and gaming revenue in VIP business have declined sharply in the recent two months, triggering concerns over tightening of the Individual Visit Scheme by Guangdong authorities.  Gaming industry insiders said that the gaming revenue was most affected by the tightened overseas spending limit by China UnionPay rather than the enforcement of visa endorsement by mainland authorities.  It is predicted that the gaming revenues for the whole year would maintain a single-digit growth.



Macau Chief Executive Fernando Chui Sai On said he accepted Leonel Alves’ explanation regarding the alleged payment requests by a high-ranking Beijing official to Sands China Ltd.  Alves he had personally explained the issue to Chui, while once again rebuffing claims of any wrongdoing in the case.

The Beijing official in the case claimed he could help Sands China gain government authorization to sell units at its Four Seasons luxury apartment hotel in Cotai.  The deal would also include a settlement in the on-going litigation process between Sands and Taiwanese Asian American Entertainment Corporation Ltd, led by businessman Marshall Hao.  The amount requested was US$300 million (MOP2.4 billion).

Aside from being a lawyer and Sands China Ltd legal adviser, Alves is also a legislator in Macau and a member of the city’s executive council, an advisory body to the Macau government.  He is also a member of the Chinese People’s Political Consultative Conference.



Singapore CPI in May was +5.0% YoY, down from +5.4% in April, as prices for accommodation and oil-related items rose at a slower pace.  This was better than economists' forecast of +5.1%. 

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 80.46%
  • SHORT SIGNALS 78.35%


TODAY’S S&P 500 SET-UP – June 25, 2012

As we look at today’s set up for the S&P 500, the range is 17 points or -1.27% downside to 1318 and 0.00% upside to 1335. 












    • Up from the prior day’s trading of -1901
  • VOLUME: on 6/22 NYSE 1577.41
    • Increase versus prior day’s trading of 82.18%
  • VIX:  as of 6/22 was at 18.11
    • Decrease versus most recent day’s trading of -9.81%
    • Year-to-date decrease of -22.61%
  • SPX PUT/CALL RATIO: as of 6/22 closed at 1.65
    • Down from the day prior at 1.81 


  • TED SPREAD: as of this morning 38
  • 3-MONTH T-BILL YIELD: as of this morning 0.08%
  • 10-Year: as of this morning 1.62
    • Decrease from prior day’s trading at 1.67
  • YIELD CURVE: as of this morning 1.33
    • Down from prior day’s trading at 1.37 

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Chicago Fed Nat Activity Index, May (prior 0.11)
  • 10am: New Home Sales, May, est. 345k (prior 343k)
  • 10:30am: Dallas Fed Manf. Activity, June (prior -5.1)
  • 11am: Fed to sell $8-8.75b notes in 3/15/2014-10/31/2014 range
  • 11:30am: Treasury to sell $30m 3-mo. bills, $27m 6-mo.
  • 4pm: USDA crop progress report 


    • Washington Week Ahead: Supreme Court may rule on health law
    • Supreme Court may rule on challenge to health-care law
    • House, Senate in session
    • Senate to take up long-term flood insurance reauthorization
    • Heather Zichal, White House energy and climate adviser, speaks on hydraulic fracturing at New Policy Institute, 12pm
    • Export-Import Bank President Fred Hochberg speaks at Center for American Progress, 12pm
    • Treasury Undersecretary for International Affairs Lael Brainard  speaks at Women’s Foreign Policy Group discussion on “International Financial Diplomacy,” 1pm
    • George Walz, VP at Financial Industry Regulatory Authority’s Office of Risk, joins panel discussion on “FINRA Examination Data Collection Process,” 1:30pm
    • HHS, CMS advisory panel meets on Medicare Economic Index price, productivity measurements, 8:30am
    • WTO dispute settlement body meets in Geneva
    • International Trade Commission to say whether it will review findings by 2 of its judges that MSFT, AAPL infringed Motorola Mobility patents
    • Governmental Accounting Standards Board meets in Conn. to vote on state, local pension-reporting rules that would reduce funded levels of plans  


  • AB Inbev said to near Modelo takeover for more than $12b
  • Supreme Court announces decisions; may rule on challenge to health-care law: preview
  • ITC to say whether it will review findings that MSFT, AAPL infringed Motorola Mobility patents
  • Fitch downgrades Republic of Cyprus to junk
  • European leaders prepare for summit on currency union
  • Tropical Storm Debby may spare Gulf of Mexico oilfields
  • Russell Indexes to post final membership lists for indexes
  • Shire falls after FDA unexpectedly approved a generic version of its hyperactivity medicine Adderall
  • Pixar’s “Brave” opens at No. 1 in U.S./Canada theaters with $66.7m for parent Walt Disney
  • JPMorgan to let CIO make potentially risky investments: WSJ
  • Sales of new homes probably rose in May for 2nd month to 346k annual rate, according to median forecast by Bloomberg News
  • New York settled a lawsuit for $410m with J. Ezra Merkin over claims that Merkin funds secretly placed client money with Bernard L. Madoff
  • Banks need “healthy push” to avoid prolonging crisis: BIS
  • Vivendi, whose mgmt met during the weekend to discuss strategy, said it had nothing to update investors with
  • Bain said to pay $1b for 50% stake in Japanese TV company
  • India plans measures to support rupee, spurring inflation
  • No IPOs expected to price today: Bloomberg data
  • Weekly Industry Agendas: Finance, Media/Entertainment, Industrials, Energy, Real Estate, Consumer, Health, Transports, Technology, IPOs, Canada Oil & Gas, Canada Mining
  • U.S. Health Care, EU Summit, Google: Week Ahead June 23-30 


    • HB Fuller (FUL) After-mkt, $0.55
    • Synnex (SNX) 4:01pm, $0.90
    • Apollo Group (APOL) 4:05pm, $0.97  


  • Bulls Proven Wrong as Prices Slump Into Bear Market: Commodities
  • Gold Set to Decline in London as Stronger Dollar Curbs Demand
  • Oil Trades Below $80 for a Third Day Amid European Debt Concern
  • Grains Climb as Dry Weather Wilts U.S. Crops, Threatening Supply
  • Copper Seen Advancing for First Day in Four Before EU Meeting
  • Sugar Rebounds on Speculation Prices Fell Too Far; Coffee Slides
  • Fonterra Farmers Approve Plan to Open Exporter to Equity Markets
  • Morgan Stanley Expects Corn, Soybean Prices to Advance on Supply
  • Hong Kong’s LME Deal Spurs Industry’s Steepest Slump: Real M&A
  • Coal Plant Plunge Threatens Billions in Pollution Spend: Energy
  • Hedge Funds Turning Bearish Push Oil Below $80: Energy Markets
  • Florida Orange Trees Threatened on Tropical Storm Debby Floods
  • Oil to End Commodity Currencies’ Divergence: Chart of the Day
  • China Faces Summer Steel Output Cut on Prices: Chart of the Day
  • Silver Seen Extending Drop as Support Breaks: Technical Analysis










RUSSIA – get the Dollar and the Petro price right, and you get the Petro-Dollar equities right – this is obvious in Russian stocks (next to Egypt’s -9% drop last wk, the RTSI led losers at -5% and has now eclipsed Spain on my drawdown sheet for 2012 at -27% from YTD top vs Spain and Italy at -24% and -22%).






CHINA  – Shanghai Composite starting to lead losers in Global Equities as #GrowthSlowing accelerates on the downside (down another -1.6% overnight; down -9.2% since beginning of May) – we highly doubt Bernanke or Geithner have a central plan for China, but you never know…


INDIA – Keynesian economic disasters tend to end with currency debauchery, then local crisis – India’s Rupee is in the middle of one of those and it’s a huge problem domestically as inflation is priced in local FX; but do not worry, India is now saying they are unveiling a “dozen steps to save the Rupee” – almost like a Tony Robbins thing I guess…









The Hedgeye Macro Team

Who Knows?

“Who knows, maybe they are much better off the way they are.”

-Mitchell Zuckoff


That’s a quote that I underlined this weekend in an unbelievably true WWII story of disaster, discovery, and survival – Lost In Shangri-La, by a professor of Journalism at Boston University, Mitchell Zuckoff.


Since last Thursday I’ve been lost in my own cash position. It’s weird, people keep asking me when and where I am going to put some cash to work. Who Knows? I’m in no hurry. All I can tell you is that I am getting longer of books, in US Dollars.


If you can tell me, precisely, how this all ends (other than not well), I’ll have to risk manage the timing of your view. These markets are as volatile and reactionary as the central planners who are attempting to “smooth” them.


Back to The Global Macro Grind


I have no idea what risk management moves I am going to make each and every day. I wake-up in the morning, put one shoe on at a time, then grind through the process. Embracing the uncertainty of what Mr. Market is going to signal is what I do.


Last week’s uncertainty was solely concentrated on 1 central planning event – Ben Bernanke’s presser. After he didn’t deliver the drugs, the Dollar went straight back up – and everything big beta priced in US Dollars went straight back down.


Here’s how that looked week-over-week:

  1. US Dollar Index = +0.77% (up for the 1st week in 3)
  2. SP500 = down -0.5% (down for the 1st week in 3)
  3. CRB Commodities Index = down -1.8%
  4. WTIC Oil = down -5.2% (crashing, down -27% since February)
  5. Gold = down -3.9% (testing down for 2012 YTD)
  6. Russian stocks (RTSI) = -5.1%

Russian stocks? Yep. Russian stocks have been crashing alongside the price of The Petro since March. That’s why we call Russia a Petro-Dollar tape. Get the Petro and the Dollar right, and you’ll get Russian stocks right.


Whatever happened to the bull case for “de-coupling”? Is Oil going down because of the Dollar or Demand? They’ve changed their bullish thesis so many times already in 2012 that it’s getting hard to keep track.


Who Knows?


What I do know is that people who didn’t pay attention to the Correlation Risk in this market are Lost In Q2. Where do we go from here? Do we beg, print, and bail some more? Maybe doing more of the same will work this time? Maybe ‘this time is different.’


Right. And Ben Bernanke is going to bailout China this morning too.


Chinese stocks have been leading decliners for the last few weeks as Chinese #GrowthSlowing appears to be accelerating on the downside. Last night the Shanghai Composite Index was down another -1.6%. It’s been down -9.2% since the beginning of May.


At the beginning of May, there was plenty of opportunity to get out of stocks and commodities. But that’s not how consensus rolls. Instead, those addicted to the Qe drugs keep going back to the same old well of hope.


Look at last week’s CFTC Commodities speculation data (ahead of the Fed decision):

  1. Net long contracts on the Commodities basket were up +7% wk-over-wk to 628,540 contracts
  2. Agriculture bets ripped a +13% wk-over-wk move
  3. Gold saw a net long ramp of +5% wk-over-wk to the highest net long (notional) position since May 1st

Go back to May 1st and tell me how buying Gold around $1660 played out. Or go back to the beginning of last week, when these net long contracts perked back up, and tell me how not selling into the expectation of a Bernanke Bailout bounce to $1628 paid.


It’s all the same trade, over and over, and over again. With the difference being that this time Ben S. Bernanke’s Fed is out of bullets. Could he poke his head back into our lives in the coming days, weeks, or months? Who Knows. All I can do is proactively prepare for what I can see in front of me and, at the same time, have Mr. Market signal to me whatever else I might be missing.


In the US, I’m not missing this week’s Macro Catalyst Calendar:

  1. Monday: US New Home Sales “expected” to be a lofty 346,000 (an acceleration from April’s high, Who Knows?)
  2. Tuesday: US Consumer Confidence (June) “expected” to rise to 63.5 vs 61.9 in May? (Who Knows?)
  3. Wednesday: US Durable Goods (May) “expected” to rise +0.5% vs May (doubt that, but Who Knows?)
  4. Thursday: Will US GDP for Q1 be revised lower than 1.9%? Will Jobless Claims eclipse last week’s high for 2012?
  5. Friday: US PMI for June “expected” to be in-line with May’s 52.7, Who Knows?

All the while, of course, we’ll have the Eurocrats saving the world by piling more debt-upon-debt (EU Summit June 27-28th). Even though the German Parliament needs to ratify anything ESM after the EU Summit (June 29th); and even though the Italians are publically patronizing the Germans ahead of that vote; Who Knows?


All I know is that I don’t know until I know. And that’s why, for now, I’m largely in Cash.


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, German DAX, and SP500 are now $1, $89.06-94.79, $81.95-82.62, $1.24-1.26, 6075-6235, and 1, respectively.


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Who Knows? - ChartoftheDay


Who Knows? - vp 6 25

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