prev

MONDAY MORNING RISK MONITOR: THE TAIL THAT WAGS THE DOG

Key Takeaways

* Last week we flagged the divergence between European bank swaps and European sovereign swaps as the former were moving higher while the latter tightened. Apparently the banks remain the tail wagging the dog in Europe, as this week European sovereign swaps are higher as uncertainty once again dominates headlines. This week there is less ambiguity. German, Italian and Spanish bank swaps were broadly wider last week while French bank swaps were mixed. This is consistent with what we saw in the sovereigns. 

 

* Interestingly, US Banks broadly improved last week (both swaps and stocks). This surprises us for two reasons. First, the emerging Libor scandal will be an enormous overhang for the US banks involved in setting Libor rates. However, as it did with mortgage putbacks, this could take some time for the markets to fully synthesize the size and scope of what's going on here. Second, with European banks and sovereigns moving lower, the positive divergence in US banks seems unsustainable.

 

* One possible justification for the positive move in US banks was the the ECB and the People’s Bank of China decision to cut their benchmark rates last week while the Bank of England increased the size of its asset-purchase program. We would again be skeptical. Rate cuts, when rates are already as low as they are, offer little incremental stimulus. Moreover, encouraging more borrowing through cheaper money is not the solution to Europe's problem of overindebtedness.

 

* UK banks were big losers last week as the Libor scandal heats up. Barclays was the outsized loser as its swaps rose 27 bps to 232 bps.

 

* XLF: Slightly more upside. Our Macro team’s quantitative setup in the XLF shows 3.3% upside to TREND resistance of $14.95 and 2.2% downside to TRADE support at $14.15.

 

Financial Risk Monitor Summary  

• Short-term(WoW): Positive / 3 of 12 improved / 2 out of 12 worsened / 8 of 12 unchanged  

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

• Long-term(WoW): Positive / 4 of 12 improved / 2 out of 12 worsened / 7 of 12 unchanged

 

MONDAY MORNING RISK MONITOR: THE TAIL THAT WAGS THE DOG - JOC 2

 

1. US Financials CDS Monitor – Swaps tightened across all 27 major domestic financial company reference entities last week.   

Tightened the most WoW: MTG, RDN, MBI

Widened the most/ tightened the least WoW: Met, UNM, HIG

Tightened the most MoM: WFC, RDN, MBI

Widened the most/ tightened the least MoM: LNC, UNM, GNW

 

MONDAY MORNING RISK MONITOR: THE TAIL THAT WAGS THE DOG - American CDS

 

2. European Financial CDS -  UK, Spanish, Italian French and German banks saw swaps widen last week. Greek banks tightened.

 

Overall, 21 of the 39 European financial reference entities we track saw spreads widened last week. The median widening was 0.33% and the mean widening was 1.03%. 

 

MONDAY MORNING RISK MONITOR: THE TAIL THAT WAGS THE DOG - European Financials

 

3. Asian Financial CDS -  11 of the 12 Asian banks we track saw swaps tighten last week. 

 

MONDAY MORNING RISK MONITOR: THE TAIL THAT WAGS THE DOG - Asian Financials

 

4. European Sovereign CDS Spain and Portugal widened sharply while Italy widened nominally. Ireland was significantly tighter week over week on the heels of their re-entry into the sovereign debt market.  

 

MONDAY MORNING RISK MONITOR: THE TAIL THAT WAGS THE DOG - Sov Table

 

MONDAY MORNING RISK MONITOR: THE TAIL THAT WAGS THE DOG - Sov1

 

MONDAY MORNING RISK MONITOR: THE TAIL THAT WAGS THE DOG - Sov 2

 

5. High Yield (YTM) Monitor – High Yield rates fell 19 bps last week, ending the week at 7.34 versus 7.54 the prior week.

 

MONDAY MORNING RISK MONITOR: THE TAIL THAT WAGS THE DOG - HY

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 6 points last week, ending at 1667.

 

MONDAY MORNING RISK MONITOR: THE TAIL THAT WAGS THE DOG - LLI

 

7. TED Spread Monitor – The TED spread rose 0.7 bps last week, ending the week at 38.41 this week versus last week’s print of 37.69.

 

MONDAY MORNING RISK MONITOR: THE TAIL THAT WAGS THE DOG - TED spread

 

8. Journal of Commerce Commodity Price IndexThe JOC index rose 4.8 points, ending Thursday at -11.1 versus -15.9 the prior Friday.

 

MONDAY MORNING RISK MONITOR: THE TAIL THAT WAGS THE DOG - JOC index 2

 

9. Euribor-OIS spread – The Euribor-OIS spread widened by 1 bps to 42 bps.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. 

 

MONDAY MORNING RISK MONITOR: THE TAIL THAT WAGS THE DOG - Euribor OIS

 

10. ECB Liquidity Recourse to the Deposit Facility This index remains near its all time peak. 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 chart shows data through Thursday. 

 

MONDAY MORNING RISK MONITOR: THE TAIL THAT WAGS THE DOG - ECB 2

 

11. Markit MCDX Index Monitor – Municipal spreads widened 4 bps last week, ending at 159 bps. 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. 

 

MONDAY MORNING RISK MONITOR: THE TAIL THAT WAGS THE DOG - MCDX

 

12. Chinese Steel - Steel prices in China fell 1.1% last week, or 45 yuan/ton, to 4,011 yuan/ton. Notably, Chinese steel rebar prices have been generally moving lower since August of last year. 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. 

 

MONDAY MORNING RISK MONITOR: THE TAIL THAT WAGS THE DOG - CHIS

 

13. 2-10 SpreadLast week the 2-10 spread tightened by 7 bps to 127 bps. While admittedly imperfect, we think this is a useful reference for bank margin pressure.

 

MONDAY MORNING RISK MONITOR: THE TAIL THAT WAGS THE DOG - 2 10

 

14. XLF Macro Quantitative Setup Slightly more upside. Our Macro team’s quantitative setup in the XLF shows 3.3% upside to TREND resistance of $14.95 and 2.2% downside to TRADE support at $14.15.

 

MONDAY MORNING RISK MONITOR: THE TAIL THAT WAGS THE DOG - XLF

 

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. 

 

MONDAY MORNING RISK MONITOR: THE TAIL THAT WAGS THE DOG - 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. 



Farmers Fight

“Farmers are good fighters but poor politicians.”

-Victor Davis Hanson

 

I spent last week with my family up on the big lake they call Gitchee Gumee. It was a much needed vacation where I was finally able to dig into a book that has been recommended to me multiple times, The Soul of Battle, by Victor Davis Hanson.

 

The first part of the book focuses on a Theban general Cicero called “The First Man of Greece” (Epaminondas) and the epic story of how he led a bunch of Boeotian farmers to crush the Spartans. These were not King Leonidas’ warriors from the movie “300” who held Thermopylae in 480BC. These were the tired and passionless troops of 371BC Sparta who fought for politicians.

 

Since introducing our Q2 Global Macro Theme of The Last War: Fighting The Fed, we have been pounding our pitchforks into the keyboards reminding you that an end to a politicized US Dollar could bring about the return of the King. Since April, that King has been Cash. The People who use US Dollars as their currency will continue to fight alongside us.

 

Back to the Global Macro Grind

 

Last week’s highlight in the Global Macro matrix was the US Dollar’s charge to fresh YTD highs. This is a currency war, so the other team (Europe’s currency) losing matters. With the Euro down -3.2% on the week, the USD Index closed up +2.1% to $83.38.

 

Strong Dollar Deflates The Inflation – some of us who like to buy things on red enjoy that. It allows us to invest some of our hard earned Dollars at better prices. With the US Dollar up last week, here’s how some of the week-over-week price deflation looked:

  1. WTIC Oil = -0.9%
  2. Gold = -1.3%
  3. Silver = -1.8%
  4. Copper = -2.2%
  5. Cotton = -1.9%
  6. SP500 = -0.5%

Behold, a 50 basis point deflation in the US stock market. Call in the cavalry, we need Qe5!

 

Let’s get real here folks. If the US stock market can’t sustain taking a few shots from the only thing that will save her in the end (a strong and credible currency backed by conservative fiscal and monetary policy), America will be looking just like Europe in no time.

 

That’s the long-run. In the shorter-run, given the US equity market’s manic depressive state, we can’t assume that Strong Dollar = Stronger US Consumption and Stronger/Sustainable Growth at the flip of a switch. Getting people off the Qe4 expectation drugs will take time; so will deflating food and energy prices.

 

In the meantime, the market has to deal with 3 very big things aligned with economic gravity this week:

  1. US Growth Slowing (both ISM reports and the unemployment update last week were terrible)
  2. China Growth Slowing (all of the June and Q2 data due this week)
  3. Q2 Earnings Season

Ah, the ole earnings season – what will the “fundamentals” bring?

 

It wasn’t long ago (March-April) that the bull case for US stocks was “growth is back, earnings are great, and stocks are cheap.” Therefore, assuming the bull case isn’t solely based on bailouts, it stands to reason that we should wait and watch for the reaction to #GrowthSlowing, earnings deteriorating, and stocks being valued on the right (instead of hopeful) numbers.

 

What’s already been discounted? I do not know.

 

Do you?

 

All I can tell you is what I have been telling you since we shorted Industrials on March 12th – you do not want to be buying pro-cyclical Sectors (Industrials, Energy, Basic Materials) at the top of another cycle.

 

Industrials (XLI) are already down -1.3% for July (versus the SP500 -0.55%), so I am not going to be willfully blind to the idea that some of the slowdown hasn’t already been priced in. But neither am I going to blindly accept forecasts from politician like CEOs that today’s outlook hasn’t changed dramatically from the conference calls they hosted in April.

 

Farmers Fight about the weather forecast too. But sometimes it’s pretty clear that everyone is getting wet while it’s raining.

 

My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, and the SP500 are now $1, $96.90-103.02, $82.42-83.49, $1.22-1.25, and 1, respectively.

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Farmers Fight - Chart of the Day

 

Farmers Fight - Virtual Portfolio


investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – July 9, 2012


As we look at today’s set up for the S&P 500, the range is 14 points or -0.64% downside to 1346 and 0.39% upside to 1360. 

                                            

SECTOR AND GLOBAL PERFORMANCE


THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

THE HEDGEYE DAILY OUTLOOK - 3

 

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: on 07/06 NYSE -1048
    • Down versus the prior day’s trading of -371
  • VOLUME: on 07/06 NYSE 596.39
    • Decrease versus prior day’s trading of -12.82%
  • VIX:  as of 07/06 was at 17.10
    • Decrease versus most recent day’s trading of -2.29%
    • Year-to-date decrease of -26.92%
  • SPX PUT/CALL RATIO: as of 07/06 closed at 2.31
    • Up from the day prior at 1.50 

CREDIT/ECONOMIC MARKET LOOK:


10yr – US Treasuries have told you all you need to know about growth throughout another US Equity no-volume rally; at 1.51% this morning, the 10yr bond is immediate-term TRADE overbought (we’re long it). New risk range = 1.51-1.62% for the immediate-term as Treasuries remain in a Bullish Formation on the long end. 

  • TED SPREAD: as of this morning 39
  • 3-MONTH T-BILL YIELD: as of this morning 0.07%
  • 10-Year: as of this morning 1.52%
    • Decrease from prior day’s trading at 1.55%
  • YIELD CURVE: as of this morning 1.26
    • Down from prior day’s trading at 1.28 

MACRO DATA POINTS (Bloomberg Estimates):

  • 11 am: Fed to purchase $1.5-2b coupon securities maturing 2/15/2036-05/15/2042
  • 11:30 am: U.S. to sell $30b 3-mo bills; $27b 6-mo bills
  • 11:55 am: Fed’s Williams speaks in Couer d’Alene, Idaho
  • 3pm: Consumer Credit, May, est. $8.5b (prior $6.5b) 

GOVERNMENT:

    • House, Senate in session 

WHAT TO WATCH: 

  • Euro drops to two-yr low ahead of EU regional finance meeting
  • Alcoa releases earnings after the close
  • Bank of England’s Tucker to testify on Barclays Libor scandal
  • Sony’s ‘Spider-Man’ tops N.A. box office with $65m in sales
  • Boeing set to win GE jet order of 100 narrow-body 737s
  • Farnborough Air Show coverage
  • Monsanto trial against DuPont over Roundup-Ready crops to start
  • Media moguls gather in Sun Valley, Idaho this week
  • China GDP, JPMorgan, Air Show, Hollande: Week Ahead July 9-14 

EARNINGS:

    • Alcoa (AA) 4:03pm, $0.06
    • WD-40 (WDFC), 4pm, $0.82
    • Pricesmart (PSMT) After-mkt, $0.59 

 COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG) 

  • Chavez Buys Enemy U.S.’s Fuel While Lauding Iran: Energy Markets
  • Alcoa Profit Seen Plunging 81% on Aluminum Smelting Surplus
  • JPMorgan Probe Shows FERC Priority on Policing Energy Markets
  • U.S. Corn Growers Farming in Hell as Heat Spreads: Commodities
  • Oil Rebounds From Biggest Drop in Two Weeks as Norway Halt Looms
  • Corn Jumps While Soybeans Rally to 2008 High on U.S. Dry Weather
  • Gold Set to Decline a Fourth Day as Stronger Dollar Cuts Demand
  • Copper Advances 0.6% to $3.4305 a Pound in New York Trading
  • LME Shareholders to Vote on $2.2 Billion Takeover on July 25
  • El Nino May Widen Indian Rain Deficit as U.S. Flood Risk Gains
  • Palm Oil Gains as Concerns Mount Over El Nino, U.S. Heat Wave
  • Total Said to Buy 35,000 Tons of Naphtha From Bharat Petroleum
  • Farms Break Subsidy Reliance With Record Exports: BGOV Barometer
  • World to Dodge El Nino’s Spur to Cost of Food: Chart of the Day
  • Rain Deficit in India Narrows to 25% as Monsoon Gathers Pace
  • Rubber Declines Most in Two Weeks as Demand Concerns Strengthen 

THE HEDGEYE DAILY OUTLOOK - 4

 

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - 5

 

 

EUROPEAN MARKETS


SPAIN – stocks and bonds are just a mess; after failing at TREND line resistance last week, the IBEX leads losers this morning, -1.6%, remaining solidly in crash mode at -25% from its YTD high. Central planners cannot change growth slowing; instead, more debt schemes perpetuate it.

 

THE HEDGEYE DAILY OUTLOOK - 6

 

 

ASIAN MARKETS


CHINA – growth slowing in China is evidently not yet fully priced in; the Shanghai Comp got crushed again last night -2.4% and the Hang Seng was down -1.9% after failing at intermediate-term TREND resistance (20,091). Chinese inflation (CPI) hit a 29mth low in June (that’s good, but it all came pre the +9% rip in Commodities into 1st wk of July).

 

THE HEDGEYE DAILY OUTLOOK - 7

 

 

MIDDLE EAST


THE HEDGEYE DAILY OUTLOOK - 8

 

 

 

The Hedgeye Macro Team


The Week Ahead

The Economic Data calendar for the week of the 9th of July through the 13th is full of critical releases and events. Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.

 

The Week Ahead - TheWeek


HedgeyeRetail Visual: Unemployment: Who’s to Benefit?

The unemployment rate continues to improve relative to last year across all age groups. The fastest improving demographic is the 25-34 age group which is net positive for much of discretionary retail, while the weakest improvement is in the older consumer (55 and older), who spends less on the margin in the mall and online. 

 

HedgeyeRetail Visual: Unemployment: Who’s to Benefit? - COTD


the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

next