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MONDAY MORNING RISK MONITOR: SPAIN, ITALY, MONEY CENTER BANKS, YIELD CURVE, CHINESE STEEL ALL BAD

Key Takeaways

 

* Money center banks (JPM, BAC, C, WFC) and the large domestic global brokerages all saw their credit default swaps widen on renewed EU and growth slowing fears. 

 

* Spanish and Italian bank and sovereign swaps were wider week over. In contrast, German bank and sovereign swaps tightened

 

Steel prices in China fell 3.7% last week, or 147 yuan/ton, to 3,799 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.  

 

* The 2-10 spread widened 1 bps to 125 bps last week, but this morning it's hitting a new YTD low at 120 bps.


* Our Macro team’s quantitative setup in the XLF shows 0.4% upside to TRADE resistance ($14.43) and 1.1% downside to TRADE support ($14.21).

 

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 / 7 of 12 improved / 2 out of 12 worsened / 4 of 12 unchanged  

• Long-term(WoW): Positive / 5 of 12 improved / 2 out of 12 worsened / 6 of 12 unchanged

 

MONDAY MORNING RISK MONITOR: SPAIN, ITALY, MONEY CENTER BANKS, YIELD CURVE, CHINESE STEEL ALL BAD - Summary

 

1. US Financials CDS Monitor – The money center banks (JPM, BAC, C, WFC) and the large U.S. brokers (GS, MS) all saw credit default swaps widen, primarily on renewed Europe and growth slowing fears. 

  

Tightened the most WoW: MET, ALL, HIG

Widened the most WoW: JPM, WFC, GS

Tightened the most MoM: RDN, ALL, AGO

Widened the most MoM: MTG, UNM, C

 

MONDAY MORNING RISK MONITOR: SPAIN, ITALY, MONEY CENTER BANKS, YIELD CURVE, CHINESE STEEL ALL BAD - American CDS

 

2. European Financial CDS -  Spanish and Italian banks widened across the board while German banks mostly tightened. 3 out of 4 French banks widened. Overall, 24 of the 39 European financial reference entities we track saw spreads widen last week.

 

MONDAY MORNING RISK MONITOR: SPAIN, ITALY, MONEY CENTER BANKS, YIELD CURVE, CHINESE STEEL ALL BAD - European CDS

 

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

 

MONDAY MORNING RISK MONITOR: SPAIN, ITALY, MONEY CENTER BANKS, YIELD CURVE, CHINESE STEEL ALL BAD - Asian CDS 

 

4. Sovereign CDS – Italian, Spanish, and Irish sovereign swaps widened week over week. German, French, and Portuguese sovereign swap tightened over the same time period. German sovereign swaps tightened by 12.9% (-11 bps to 76 ) and Spanish sovereign swaps widened by 4.3% (25 bps to 592).

 

MONDAY MORNING RISK MONITOR: SPAIN, ITALY, MONEY CENTER BANKS, YIELD CURVE, CHINESE STEEL ALL BAD - Sov Table

 

MONDAY MORNING RISK MONITOR: SPAIN, ITALY, MONEY CENTER BANKS, YIELD CURVE, CHINESE STEEL ALL BAD - Sov 1

 

MONDAY MORNING RISK MONITOR: SPAIN, ITALY, MONEY CENTER BANKS, YIELD CURVE, CHINESE STEEL ALL BAD - Sov 2

 

5. High Yield (YTM) Monitor – High Yield rates fell 8 bps last week, ending the week at 7.31 versus 7.39 the prior week.

 

MONDAY MORNING RISK MONITOR: SPAIN, ITALY, MONEY CENTER BANKS, YIELD CURVE, CHINESE STEEL ALL BAD - High Yield

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 4.5 points last week, ending at 1683. Notably, this series continues to make new highs.

 

MONDAY MORNING RISK MONITOR: SPAIN, ITALY, MONEY CENTER BANKS, YIELD CURVE, CHINESE STEEL ALL BAD - LLI

 

7. TED Spread Monitor – The TED spread fell -0.6 bps last week, ending the week at 36.3 bps this week versus last week’s print of 36.9 bps.

 

MONDAY MORNING RISK MONITOR: SPAIN, ITALY, MONEY CENTER BANKS, YIELD CURVE, CHINESE STEEL ALL BAD - TED spread

 

8. Journal of Commerce Commodity Price Index – The JOC index rose 4.5 points, ending the week at -7.88 versus -12.4 the prior week.

 

MONDAY MORNING RISK MONITOR: SPAIN, ITALY, MONEY CENTER BANKS, YIELD CURVE, CHINESE STEEL ALL BAD - JOC

 

9. Euribor-OIS spread – The Euribor-OIS spread tightened by 2 bps to 35 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: SPAIN, ITALY, MONEY CENTER BANKS, YIELD CURVE, CHINESE STEEL ALL BAD - Euribor OIS

 

10. ECB Liquidity Recourse to the Deposit Facility – The sharp drop from two weeks earlier reflects the ECB's deposit rate change to 0.0%. Since that time, the index has been roughly flat. 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: SPAIN, ITALY, MONEY CENTER BANKS, YIELD CURVE, CHINESE STEEL ALL BAD - ECB2

 

11. Markit MCDX Index Monitor – Municipal default swaps widened 4 bps last week, ending the week at 162 bps versus 158 bps the prior week. Frankly, we're surprised that this index is widening more given the spate of recent municipal bankruptcies. 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: SPAIN, ITALY, MONEY CENTER BANKS, YIELD CURVE, CHINESE STEEL ALL BAD - MCDX

 

12. Chinese Steel - Steel prices in China fell 3.7% last week, or 147 yuan/ton, to 3,799 yuan/ton. This index is reflecting significant weakness in China's construction market. 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.  

 

MONDAY MORNING RISK MONITOR: SPAIN, ITALY, MONEY CENTER BANKS, YIELD CURVE, CHINESE STEEL ALL BAD - CHIS

 

13. 2-10 Spread – We track the 2-10 spread as an indicator of bank margin pressure.  Last week the 2-10 spread widened to 125 bps, 1 bps wider than a week ago, although this morning it's hitting new lows at 120 bps.

 

MONDAY MORNING RISK MONITOR: SPAIN, ITALY, MONEY CENTER BANKS, YIELD CURVE, CHINESE STEEL ALL BAD - 2 10

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.4% upside to TRADE resistance and 1.1% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: SPAIN, ITALY, MONEY CENTER BANKS, YIELD CURVE, CHINESE STEEL ALL BAD - XLF

 

Margin Debt - June: +0.72 standard deviations 

NYSE Margin debt rose in June to $285 billion from $279 billion in May. 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 June. 

 

MONDAY MORNING RISK MONITOR: SPAIN, ITALY, MONEY CENTER BANKS, YIELD CURVE, CHINESE STEEL ALL BAD - NYSE margin debt

 

Joshua Steiner, CFA

 

Robert Belsky

 

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Riding Horses

“Comanches adapted to the horse earlier and more completely than any other plains tribe.”

-S.C. Gwynne

 

Man is competitive. So am I. As a team, we wake up to this world every risk management morning looking for a better way. That’s progressive. That’s how we evolve as a people. Anyone in this profession who does not get this will be left behind.

 

The aforementioned quote comes from the American Indian history book I have recently cited, Empire of The Summer Moon. It’s a stiff reminder of how harsh life has been. Not every man who attempted to settle in 18th century Texas was given a sticker.

 

Since launching our Q3 Global Macro Themes in early July, we’ve been riding the same horse that has had us calling for #GrowthSlowing since March. Our horse uses modern day math and machines. We don’t ask the Old Wall for permission to make calls on the direction of Growth Slowing’s Slope. We let Mr. Macro Market tell us which way our horse needs to ride next.

 

Back to the Global Macro Grind

 

Evidently, shorting the SP500 at its 1375 TREND level was a better than bad risk management decision to make. Friday’s -1% selloff in the US stock market came on the heels of both Spain and Italy closing down -6.3% and -4.7%, respectively, week-over-week.

 

Not to be confused with the fictional storytelling that global growth is “decoupling”, one of our most stealth front-running horses of Global Economic Growth, South Korea’s KOSPI index, told us the same story as structurally impaired Western Europe did. The KOSPI was down -4.3% week-over-week, testing its YTD lows.

 

This morning, neither Asian nor European Equities are telling you that anything about #GrowthSlowing has changed. Neither is the US bond market. Nor are corporate revenues. Neither are the prices of oil and copper.

 

Before I come back to touching dogmatic taboo of “growth is fine and earnings are great”, let’s grind through some of the aforementioned risk management signals:

  1. US Equity Futures down 14 handles
  2. Japanese Stocks (Nikkei 225) = -1.9% (down -17% since March, remaining in a Bearish Formation)
  3. Chinese Stocks (Shanghai Comp) = -1.3% (down -13% since May, remaining in a Bearish Formation)
  4. Hang Seng -3.0%, KOSPI -1.8%, and India’s Sensex -1.4% (all Bearish Formations)
  5. European Stocks (EuroStoxx50) = -2.2% (down -16% since March, breaking TREND again)
  6. Spanish Stocks (IBEX) = -4.3% (crashing, down -33% since March)
  7. Italian Stocks (MIB) = -3.3% (crashing, down -26% since March)
  8. Russian Stocks (RTSI) = -3.2% (crashing, down -23% since March)
  9. Oil (Brent) = -3.2% (backing off hard from where we shorted it on Thursday)
  10. Copper = -2.7% (backing off at its intermediate-term TREND line of 3.64/lb, much like the SP500 did)
  11. Treasuries (UST 10yr) = down another -5bps this morning to 1.41% (new lows)
  12. Yield Spread (10s minus 2s) = down another -6bps this morning to 120bps wide (narrowest YTD)
  13. Euro (vs USD) = down, again, testing $1.20 (after snapping its 2010 lows last week and now confirming)

I’ll stop there, at lucky thirteen.

 

How about that beloved “earnings season”? With almost 200 of 500 companies in the SP500 having reported, at least 50% of them have already missed on revenue expectations (worst quarter since 2008).  Two of the key Sectors in the SP500 (Financials and Industrials) look nothing like the “SP500 is flat for July” as they are down -1.8% (XLF) and -1.4% (XLI) for the month-to-date.

 

Oh, but never mind the revenues, ‘earnings are good.’ Really?

  1. Earnings are lagging indicator (not a leading one) anyway
  2. Revenues are leading indicators for Growth Slowing’s Slope

As our everything Financials guru, Josh Steiner, wrote in his research note to clients on Friday afternoon, the expectations mismatch between “reported” earnings and revenues is widening to the bearish side of Growth’s Slope:

 

1.   EPS: 17 out of 33 companies (52%) have beat consensus EPS estimates, while 11 were in line, and 5 have missed. Keep in mind that we are looking at the optical (unadjusted) numbers.

 

2.   Revenues: 6 out of 33 companies (18%) have beat consensus revenue estimates, while 20 were in line and 7 missed. For reference, we consider 2% or greater above the estimate a beat.

 

In other words, whether it’s GDP in Spain or the top line revenues of a company, get Growth’s Slope right, and you’ll get a lot of other things less wrong.

 

Oh, and if you’re in a performance foot race and want to be right instead of less wrong, ride a Global Macro horse.

 

My immediate-term support and resistance risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, Spain’s IBEX, and the SP500 are now $1, $103.01-108.16, $83.18-83.99, $1.20-1.22, 5, and 1, respectively.

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Riding Horses - Chart of the Day

 

Riding Horses - 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 WEEK AHEAD

The Economic Data calendar for the week of the 23rd of July through the 27th 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 - WeekAhead


HedgeyeRetail Visual: Massive E-Commerce Stat

40% of people intend to shop on-line for this back-to-school, per the NRF’s annual survey. This compares to 32% last year, and 21% in 2007. In other words, 42% of the 5-year increase in on-line intent has taken place over the past 12 months. If this survey is accurate, this is big.

 

Flying in the face of a deceleration in sales out of eBay’s GSI Commerce yesterday, the NRF released its back-to-school survey with surprising results. We usually take many of the National Retail Federation’s surveys and statistics with a grain of salt, but this one is tough to ignore. Per its latest survey, 39.6% of consumers intend to shop online for back-to-school supplies and clothes. While that’s a big number in itself, it is nearly an 800bp acceleration from the 31.7% ‘intent to purchase online’ surveyed exactly one year ago. The rate was 21.4% back in 2007. Translation – ecommerce is accelerating meaningfully. This is why we like companies who are moving forward with a strategy to get 40-50% of sales online. They might not ever get there, but these draconian moves are necessary. Companies that target just 8-10% will be left in the dust.

 

HedgeyeRetail Visual: Massive E-Commerce Stat - BTS COTD


Industrial Indicator: CAT in Last Resource Investment Bubble

Chart of the Day: CAT in 70s Resource Investment Bubble

  • Investment in mining and resources in the US and globally at cyclical highs, which has helped capital equipment producers like CAT. 
  • Below, we can see what happened to CAT when the 1970s resource investment boom gave way
  • CAT upped its exposure to these markets with the acquisition of Bucyrus last year, at what looks like the peak of resource investment spending
  • If history rhymes in this investment cycle, CAT holders may be looking at years of relative underperformance

 

Industrial Indicator: CAT in Last Resource Investment Bubble - cat lt rel

 

 

 

Industrial Indicator: CAT in Last Resource Investment Bubble - perf 7202012


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