“I only regret that I have but one life to lose for my country.”
The quote above from Nathan Hale is by many thought to be one of the more patriotic statements made in American history. These words were spoken by Hale shortly before being hung by the British for spying. The 21-year old Yale graduate had been captured by the British after volunteering to go behind enemy lines to report on British troop movement during the Battle of Long Island. Clearly, a willingness to sacrifice your life for your country is the ultimate sacrifice.
Yesterday was Canada Day in Canada and Wednesday will be Independence Day in the United States. While most of us won’t be swearing to give our lives for our respective countries this week, for many of us our patriotism will nonetheless be on display. In many ways, patriotism is a great thing. On the other hand, extreme patriotism is in many instances the root of the more significant military conflicts in modern history. Ultimately at the root of patriotism is a deep seated perspective that your nation’s interests should come ahead of another nation’s interests.
The global equity markets have rallied aggressively over the last couple of days based on perceived positive developments from the European Union summit last week. This is the 20th summit since the European sovereign debt crisis began in 2010 and the ensuing storyline has become somewhat predictable. The leaders of the European Union meet, stories are linked about the possible bailout plans that are in the works, numerous MOUs are signed or agreed to at the end of the summit, and then the markets rally in anticipation of the end of the crisis. Eventually, though, market participants again realize there is no solution and that crisis is far from over. But who knows, perhaps this summit truly was different. Personally, I remain a skeptic.
The ultimate solution in Europe must come from a broad willingness for nations to give up sovereignty on fiscal and budgetary matters. As discussed above, national pride and patriotism run deep, particularly in Europe, therefore relinquishing even some sovereignty for collective fiscal and budgetary decisions will not be an easy matter. So, even if the headlines coming out of the most recent summit are positive, we need to keep in mind that any actual implementation of a broad based solution will not be simple, or quick.
On the economic data front, the Purchasing Managers Index for manufacturing in Europe came out this morning at 45.1. This is the 11th monthly decline and the rate of decline was comparable to that of May, which was the fastest monthly decline in almost three years. Overall, the average reading of 45.4 was the slowest reading since Q2 2009. Most disturbing is likely the fact that Germany is clearly no longer immune from growth headwinds as German PMI came in at 45.0 for the fourth consecutive month of declines. All in all, pretty somber news as it relates to growth, or lack thereof.
The larger emerging issue from Europe’s structural growth problem is that of unemployment. In May, the Eurozone unemployment rate came in at a new record of 11.1% with more than 17 million people unemployed in the 17-nation Eurozone. Consistent with its victory in the European Cup over the weekend, Spain continues to also lead on the unemployment front with unemployment at 24.6%, though is followed closely by Greece at 21.9% and Portugal at 15.2%. There is no question given the current state of the European Union, as most recently indicated by the PMI numbers outlined above, that we have not yet seen highs in unemployment.
Later this week both the European Central Bank and the Bank of England will meet and then give their most recent rate decisions. Similar to the Federal Reserve, both of these central banks are largely out of bullets. It is expected that both banks will cut rates by 25 basis points and approve a 50 billion pound bump in the asset purchase program, respectively. Based on the move we’ve seen in European equities and bonds in the last few days, it seems likely that even coming in line with expectations may actually be a disappointment.
We continue to be very conservatively positioned in both the Hedgeye Asset Allocation Model with 91% cash and in the Hedgeye Virtual Portfolio that now has 5 longs and nine shorts. So, yes, we are now running net short in the Virtual Portfolio as Keith added the following shorts in Friday’s melt up: Discover Financial Services (DFS), Italian equities (via the etf EWI), the Russell 2000 (via the etf IWM), and Brent Oil (via the etf BNO).
As you head into July 4th and celebrate American independence with your friends and family, and despite some of the somber economic news coming out of Europe, it is important to remain optimistic and upbeat. As such, I’d like to leave you with quotes from two American Presidents, a Republican and a Democratic. They are as follows:
“There is nothing wrong with America that cannot be cured with what is right about America.”
-President Bill Clinton
“America has never been an empire. We may be the only great power in history that had the chance, and refused – preferring greatness to power and justice to glory.”
-President George W. Bush
Our immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, Germany’s DAX, and the SP500 are now $1, $92.82-97.66, $81.21-82.16, $1.25-1.27, 6, and 1, respectively.
Enjoy your holiday time this week.
Daryl G. Jones
Director of Research
We have been bullish on Och-Ziff Capital Management (OZM) for some time now. One of the few publicly traded hedge funds, Founder and Portfolio Manager Daniel Och has been one of the best managers of risk on the Street. Remember: it’s not about how much you make these days; it’s about how little you lose. Och was only down 0.052% for the month of May in his Master Fund when everyone else was posting losses above 1% or in some cases, double digit percentages. YTD performance is at 4.55% as of June 1.
Och has been stealthily buying shares of his company for several months now. He began acquiring stock back in December of last year and has been at it through June of 2012. In the last seven months, he has spent a total of $5.85 milion acquiring 805,470 shares in the open market. In June alone he bought $3.4 million of stock.
To us, Och’s buying is a signal of his confidence in his firm’s ability to generate alpha and manage risk. We also like the quantitative setup with OZM, which was a trigger for us to go long OZM last Wednesday.
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* One week ago we published our risk monitor with the title "Risk Cooling Off, For Now". While that didn't seem to be the case on Monday of last week, it certainly played out over the remainder of the week. This morning, we're struck most by the divergence between sovereign and bank default swaps in Spain and Italy. The strength in the sovereign swaps is reflecting the perceived progress made at the EU summit to directly recapitalize the banks. However, you'd expect to see that reflected in reduced default expectations at the banks themselves. This wasn't the case, however, as Spanish and Italian bank CDS was broadly wider last week.
* High yield rates fell sharply WoW while leveraged loan prices moved higher, underscoring the short-term momentum of the risk-on trade following last week's summit.
* Looking at the week ahead, the XLF shows more downside than upside, with 0.5% upside to $14.71 and 2.2% downside to $14.32.
Financial Risk Monitor Summary
• Short-term(WoW): Positive / 4 of 12 improved / 0 out of 12 worsened / 9 of 12 unchanged
• Intermediate-term(WoW): Neutral / 2 of 12 improved / 2 out of 12 worsened / 9 of 12 unchanged
• Long-term(WoW): Positive / 4 of 12 improved / 2 out of 12 worsened / 7 of 12 unchanged
1. US Financials CDS Monitor – In spite of the broad-based rally last week, credit default swaps among the US Financials were broadly worse. They widened at 16 of 27 major domestic financial company reference entities last week.
Widened the most WoW: MTG, LNC, GNW
Tightened the most WoW: SLM, RDN, AGO
Widened the most MoM: LNC, UNM, XL
Tightened the most MoM: SLM, RDN, WFC
European Financial CDS - The most interesting takeaway in this week's risk monitor is that the Spanish and Italian banks swaps were broadly worse week over week, while the sovereign default swaps were much tighter. Considering that the strength in the sovereign swaps was reflecting the plan to directly recap the banks through the ESM, we find it surprising that the individual company default probabilities seem not to have noticed. Overall, 22 of the 39 European financial reference entities we track saw spreads tighten last week. The median tightening was 0.5% and the mean tightening was 1.2%.
3. Asian Financial CDS- Chinese bank default swaps were wider across the board last week, while Indian and Japanese banks posted mixed results.
4. Sovereign CDS – European sovereign default swaps were tighter across the board last week. The largest moves were at Ireland (-104 bps), Spain (-72 bps) and Italy (-56 bps). There were also small moves lower at Portugal (-15 bps), France (-11 bps) and even Germany (-3 bps).
5. High Yield (YTM) Monitor – High Yield rates fell 11.5 bps last week, ending the week at 7.54 versus 7.65 the prior week.
6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 6 points last week, ending at 1660.
7. TED Spread Monitor – The TED spread fell 0.6 bp last week, ending the week at 37.7 bps versus last week’s print of 38.3 bps.
8. Journal of Commerce Commodity Price Index – The JOC index rose 1.5 points, ending the week at -15.87 versus -17.4 the prior week.
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. Last week, the Euribor-OIS spread tightened by 1 bp to 42 bps.
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. As the chart shows, European bank reliance on the ECB remains exceptionally high.
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 series. Last week spreads widened 2 bps, ending the week at 155 bps versus 153 bps the prior week.
12. Chinese Steel - We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy. We look at the average Chinese rebar spot price. Steel prices in China fell 0.61% last week, or 25 yuan/ton, to 4,050 yuan/ton. Notably, Chinese steel rebar prices have been generally moving lower since August of last year.
13. 2-10 Spread – We track the 2-10 spread as an indicator of industry net interest margin pressure. Last week the 2-10 spread tightened another 2 bps, ending the week at 134 bps.
14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.5% upside to TRADE resistance and 2.2% downside to TRADE support.
Margin Debt - May: +0.63 standard deviations
NYSE Margin debt fell in May to $279 billion from $298 billion in April. We like to to look at margin debt levels as a broad contrarian sentiment indicator. For reference, our approach is to look at it margin debt levels in standard deviation terms over the period 1. Our analysis shows that when margin debt gets to +1.5 standard deviations or greater, as it did in April of 2011, it has historically been a signal of extreme risk in the equity market. The preceding two instances were followed by the equity market losing roughly half its value. Overall 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 May.
Joshua Steiner, CFA
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Macau came in at the low end of our expected YoY growth range of 12-17%. GGR was HK$22.7 billion. We have heard the disappointment is volume-related and not necessarily due to hold.
July growth could be even lower as the month faces a more difficult VIP hold comparison than June (3.07% in July 2011 vs. 2.77% in June 2011). We are currently anticipating 10-16% YoY growth for July.
In terms of market share, LVS (finally) and Galaxy are trending above recent trends although it could be argued that LVS should still be doing better. We would be happy with share north of 19% until the rest of the amenities and hotel rooms open in September. Share north of 20% should be the bogey at that point. MGM share looks disappointing following a rebound in May. The June share looks more realistic going forward for MGM.
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