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MONDAY MORNING RISK MONITOR: MOVING AWAY FROM RISK

Takeaway: From EU sovereign and bank swaps to the US yield curve to municipal default probabilities, the market moved away from risk last week.

Key Takeaways

 

* Europe takes a breather from its rally. Germany, France, Italy and Spain all saw material widening in their sovereign swaps last week. Rising uncertainty around both Germany's economic health and Spain and Italy's ability to manage through the crisis without recession-inducing austerity commitments weighed on the continent's outlook. The relative winners this week were Portugal and Ireland. Portuguese and Irish sovereign swaps tightened by 53 bps and 8 bps, respectively.

 

* Warren Buffett accomplishes what three California municipal bankruptcies cannot. Finally, the MCDX gauge of municipal bond default risk widens. 

 

* Chinese steel prices continue to steamroll lower, falling another 2.0% last week, underscoring the growing weakness in China's construction market.

 

* The 2-10 spread contracted by 12 bps WoW, taking back much of the improvement seen in 3Q. This marked the first real retrenchment in the last month and a half.  

 

* Our Macro team’s quantitative setup in the XLF shows 1.0% upside to TRADE resistance and 0.2% downside to TRADE support. 

  

 

Financial Risk Monitor Summary  

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

• Intermediate-term(WoW): Positive / 9 of 12 improved / 3 out of 12 worsened / 1 of 12 unchanged  

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

 

MONDAY MORNING RISK MONITOR: MOVING AWAY FROM RISK - Summary

 

1. American Financial CDS -  Swaps widened narrowly at the money center banks and large brokers. Overall, swaps tightened for 17 out of 27 domestic financial institutions.

 

Tightened the most WoW: RDN, LNC, GNW

Widened the most WoW: COF, MTG, JPM

Tightened the most WoW: RDN, LNC, JPM

Widened the most/ tightened the least MoM: MTG, COF, UNM

 

MONDAY MORNING RISK MONITOR: MOVING AWAY FROM RISK - Americann

 

2. European Financial CDS -  German bank swaps widen while Spanish bank swaps tighten. 

 

MONDAY MORNING RISK MONITOR: MOVING AWAY FROM RISK - European

 

3. Asian Financial CDS - Chinese and Indian bank default swaps were narrowly wider WoW while Japanese bank swaps were generally flat.  

 

MONDAY MORNING RISK MONITOR: MOVING AWAY FROM RISK - Asian

 

4. European Sovereign CDS – Germany, France, Italy and Spain all saw material widening in their sovereign swaps. Rising uncertainty around both Germany's economic health and Spain and Italy's ability to manage through the crisis without recession-inducing austerity commitments weighed on the continent's outlook. The winners this week were Portugal and Ireland. Portuguese and Irish sovereign swaps tightened by 53 bps and 8 bps, respectively. 

 

MONDAY MORNING RISK MONITOR: MOVING AWAY FROM RISK - Sov Table

 

MONDAY MORNING RISK MONITOR: MOVING AWAY FROM RISK - Sov CDS 1

 

MONDAY MORNING RISK MONITOR: MOVING AWAY FROM RISK - Sov CDS 2

 

5. High Yield (YTM) Monitor – High yield rates fell 1 basis point last week, ending at 7.14 versus 7.15 the prior week.

 

MONDAY MORNING RISK MONITOR: MOVING AWAY FROM RISK - High Yield

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 5 points last week, ending at 1704.

 

MONDAY MORNING RISK MONITOR: MOVING AWAY FROM RISK - LLI

 

7. TED Spread – The TED spread fell 4 bps last week, ending the week at 33 bps this week versus last week’s print of 37 bps.

 

MONDAY MORNING RISK MONITOR: MOVING AWAY FROM RISK - TED

 

8. Journal of Commerce Commodity Price Index – The JOC index rose 4.6 points, ending the week at -2.52 versus -7.1 the prior week.

 

MONDAY MORNING RISK MONITOR: MOVING AWAY FROM RISK - JOC

 

9. Euribor-OIS spread – The Euribor-OIS spread tightened by 4 bps to 22 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: MOVING AWAY FROM RISK - 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: MOVING AWAY FROM RISK - ECB

 

11. Markit MCDX Index Monitor – Last week, on the news that Buffett was reducing his risk exposure to the municipal market, MCDX spreads widened 11 bps, ending the week at 150 bps versus 139 bps the prior week.  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: MOVING AWAY FROM RISK - MCDX

 

12. Chinese Steel - Steel prices in China fell 2.0% last week, or 72 yuan/ton, to 3549 yuan/ton. In the last few months, Chinese construction steel prices have fallen ~10%.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: MOVING AWAY FROM RISK - CHIS

 

13. 2-10 Spread – We track the 2-10 spread as an indicator of bank margin pressure.  Last week the 2-10 spread tightened by 12 bps to 141 bpsThis marks its first real week of reversal in the last month and a half.

 

MONDAY MORNING RISK MONITOR: MOVING AWAY FROM RISK - 2 10

 

14. XLF Macro Quantitative Setup Our Macro team’s quantitative setup in the XLF shows 1.0% upside to TRADE resistance and 0.2% downside to TRADE support. 

 

MONDAY MORNING RISK MONITOR: MOVING AWAY FROM RISK - XLF2

 

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: MOVING AWAY FROM RISK - NYSE 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.

 

 

 


THE M3: SANDS NEW TROUBLES; POKER RULES; MACAU E-PASS; UNEMPLOYMENT; JOCKEY CLUB; CHINA SLOT BUST

The Macau Metro Monitor, August 27, 2012

 

 

SANDS BULLISH ABOUT MASS MARKET Macau Business

Sands China president and CEO Edward Tracy is bullish about continued growth for Mass.  Tracy told TDM over the weekend that he expects this segment to continue to grow as transport and immigration infrastructure between the mainland and Macau improves.  Meanwhile, LVS is in fresh trouble.

 

A Reuters report says LVS's Venetian Las Vegas transferred a US$100,000 (MOP800,000) gambling credit to the Sands Macau in January 2009 on behalf of Charles Heung Wah Keung, chairman of Hong Kong-listed China Star Entertainment Ltd, which owns and operates hotel-casino Lan Kwai Fong Macau.  A 1992 U.S. Senate subcommittee probe into Asian organised crime identified Heung as a triad member.  He has always denied such links and has never been convicted of being a triad member.

 

DICJ DENIED NEW ACCOUNTING RULES FOR TABLE GAMES Macau Daily News, Macau Business

DICJ has denied a new accounting method for poker tables which would count up to 25 poker tables as one table.  But several gaming industry sources contacted by Business Daily say otherwise, adding the government decided to do a U-turn on the new counting method once it was reported in the media.

 

MAINLAND MIGHT LAUNCH E-PASS TO TRAVELERS TO EASE BORDER CROSSING Macau Daily News

Mainland is examining the feasibility to issue e-pass for travelers so to shorten the border crossing time to Macau.  Some travelers claimed that they spent around 2 hours in line to cross the border and claimed if they are issued with e-pass, this will increase their number of visits.  With the e-pass, visitors can access the automated passenger clearance system (also known as e-channel), which has been available for Macau residents and frequent visitors.

 

In addition, the expansion project at the Gongbei border is expected to be completed by the end of 2012 and operational in early 2013.

 

EMPLOYMENT SURVEY FOR MAY-JULY 2012 DSEC

Macau unemployment rate for May-July 2012 receded to 2.0%, down by 0.1% point over the previous period (April-June 2012).  Total labour force increased by 2,500 from the previous period to 348,000; the labour force participation rate stood at 72.2%, up by 0.3% point. 

 

JOCKEY CLUB EXPECTS DROP IN BETTING VOLUME Macau Business

The Macau Jockey Club is expecting to record a drop of at least 10% in the amount of bets for the horseracing season that ended the past weekend.  The club’s betting controller, Ronnie Chan Yiu Jok, told media that the decrease is attributed to an overall trend of falling bets in the global horseracing market.

 

The previous horseracing season, which ended in August last year, recorded bets of over MOP1.6 billion while the club posted a loss of MOP17.8 million last year.

 

SLOT MACHINES SEIZED IN MAINLAND CHINA Macau Daily News

The Mainland police busted a network that produced and supplied gambling machines to game centers in 30 provinces for operating illegal casinos in an anti-gambling crackdown.  The police arrested 1,500 people, 20,000 machines found and over $16 million yuan of cash.  The police found that an electronics company and an animation company in Guangzhou jointly operated casinos with other parties in the 30 provinces across the country.



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 80.65%
  • SHORT SIGNALS 78.64%

Bear Bangers

“Bear banger is a slang or colloquial term sometimes used to describe exploding projectile wildlife deterrents.”

-Ursus International

 

Bear spray or bear banger? When you go for a run down by the McCullough Lake House in Northwestern Ontario, what do you use? Inquiring Risk Manager minds want to know.

 

After running up to a bear during our family vacation last week, my wife Laura asked the original Thunder Bay Bear (my Dad) for some reinforcements. Instead of the go-to bear mace that most locals use, he opted to buy her something that makes noise.

 

The twist on the noisemaking part is that Bear Bangers sound more like a shotgun than a firecracker. I wouldn’t put a loaded one in your running shorts.

 

Back to the Global Macro Grind

 

Running from your US or European Equity shorts at last week’s short covering highs was not a good risk management idea. Neither was selling your Fixed Income exposures at last week’s lows. Bear Banging works, but your timing matters.

 

Last week’s intra-week high for the SP500 was 1426. The intra-week low for 10-year US Treasury Bonds was close to 1.90%. However, those weren’t closing highs and lows. And it’s closing prices that matter most in our globally interconnected macro model.

 

From those no-volume intraday levels to the other side of the risk management trade:

  1. SP500 dropped a full -2% to 1398 intraday on Friday morning
  2. 10yr US Treasury Yields dropped just over -10% to close the week at 1.69%

So, I covered all but 4 shorts in the Hedgeye Portfolio at 1398 and sold almost 50% of our Fixed Income Exposure in the Hedgeye Asset Allocation Model week-over-week.

 

For those of you who are new to what we do, the Hedgeye Portfolio and the Hedgeye Asset Allocation Model are 2 mutually exclusive risk management products.

 

The Hedgeye Portfolio is simply a real-time idea list of risk managed long/short ideas that focuses on Rule #1 (don’t lose money), whereas the Asset Allocation Model attempts to be more dynamic than the Old Wall’s 60/40 stocks/bonds thing.

 

As time and prices change, we do.

 

When confronted with a live bull or bear, sometimes you have to move fast; sometimes you don’t have to move at all. If you’ve survived the last 5 years of this whipsaw, you get that the only perma you need to be is permanently flexible.

 

To be clear, I wouldn’t dare set foot in the Shuniah dump pit with a baby black bear (and no mama bear in sight) inasmuch as I’d short-and-hold stocks into a central planning event at Jackson Hole…

 

Being bearish on bonds at last week’s bottom was as bad a decision as buying last week’s 1426 top in US stocks. Being bearish on bonds means you believe growth isn’t slowing. Being bullish on stocks, at any price, just means you don’t sell on green.

 

Being bullish on commodities up here is something that I am not. While Bernanke claims “price stability and full employment”, what’s really happening here is that people are front-running him, getting all lathered up in what slows real (inflation adjusted) consumption growth (rising commodity prices).

 

Got causality? Last week’s CFTC (Commodities Futures Trading Commission) data revealed an all-time high in outstanding futures and options contracts:

  1. Week-over-week gain in total contracts of +10% to 1.32 million (eclipsing the Feb/Mar 2012 highs)
  2. Gold contracts were up a stunning +35% wk-over-wk to 110,623
  3. Oil contracts were up another +18% wk-over-wk to 179,526

Fed inspired (US Dollar Debauchery) commodity inflation is not growth. It slows growth. And when this entire centrally planned game of Bailout Begging ends, the 3rd of the Greenspan/Bernanke asset bubbles (commodities) will be in for one heck of a Bear Banger.

 

Our immediate-term risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, 10yr UST Yields, and the SP500 are now $1, $112.31-115.87, $81.16-82.11, $1.23-1.25, 1.65-1.76%, and 1, respectively.

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Bear Bangers - Chart of the Day

 

Bear Bangers - Virtual Portfolio


GALAXY 2Q CONFERENCE CALL NOTES

GALAXY 2Q CONFERENCE CALL NOTES

"We are confident that GEG will continue to deliver results. The accelerated construction of Galaxy Macau Phase 2 was announced in April 2012. Based on our 'World Class, Asian Heart' philosophy, we believe it will serve as a major catalyst for growth for GEG and Macau, attracting customers from across the region and the world."
- Dr. Lui Che-woo, Chairman of GEG 
 

 

 CONF CALL

  • Galaxy Macau 2Q 2012 results includes full quarter, compared to 47 days in 2Q 2011
  • $100MM positive EBITDA impact from high VIP hold of 3.4% at Galaxy Macau
  • $100MM positive EBITDA impact from high VIP hold of 3.1% at StarWorld
  • Will not issue equity for Phase II GM--expected to be the next major project in Macau

Q&A

  • Recent uptick in Galaxy's customer activity in August: increased foot traffic and higher demand for hotel rooms
  • Believes VIP market will pick up
  • Mass segment will continue to grow at 'high 20s, low 30s'
  • No dividend plans right now
  • Other operating expenses up significantly--no comment
  • Residual capex at Phase I of Galaxy Macau is $2BN to be spent over the next 18-months to 2 years
  • Capex for Phase II of GM will be mainly spent in 2014 and 2016
  • Will look at other opportunities worldwide but right now concerned on completing Phase I of GM and efficient operation of StarWorld
  • % of casino customers at hotel: Galaxy Macau has one of the higher casino mixes in Macau
  • They are looking at new amenities at Galaxy Macau for 2H 2012 but did not disclose any details

 

HIGHLIGHTS FROM RELEASE

  • Phase 2 Galaxy Macau (mid-2015)
  • Q2 Group adjusted EBITDA: HK$2.6BN
    • StarWorld Q2 adjusted EBITDA: HK$906MM
    • Galaxy World Q2 adjusted EBITDA: HK$1.6BN
  • Cash at end of 2Q: HK$11BN (HK$1.9 BN restricted cash), up from HK$7BN at end of 2011
  • 2Q Debt: HK$11.090BN
  • Gearing ratio: 7%
  • 2Q Galaxy Macau
    • VIP turnover: HK$186.4BN; VIP win: HK$6.3BN; VIP hold: 3.4%
    • Mass drop: HK$6.0BN; Mass win: HK$1.7BN; Mass hold: 28.4%
    • Slot handle: HK$4.4BN; Slot win: HK$271MM; Slot hold: 6.2%
  • 2Q StarWorld
    • VIP turnover: HK$163BN; VIP win: HK$5.1BN; VIP hold: 3.1%
    • Mass drop: HK$2.37BN; Mass win: HK$0.55BN; Mass hold: 22.5%
    • Slot handle: HK$0.84BN; Slot win: HK$60MM; Slot hold: 7.2%
  • City Clubs 1H EBITDA:  $82MM
  • Construction Materials 1H EBITDA: $228MM

The Deere Hunter: Remaining Cautious

Takeaway: Deere $DE is solid, but needs to drop in price as equipment manufacturers remain cautious moving into the rest of 2012.

We like Deere & Company (DE) as a franchise but it’s exposed to export markets, which has made other equipment manufacturers cautious in recent weeks as they move into the back half of 2012. While equipment sales have remained elevated in recent years, there could soon be a shift in the market that leads to a decline in purchases. Trading around $77, we think the stock is too expensive at the moment to own. $20-30 lower is what we would consider our “sweet spot.”

 

 

The Deere Hunter: Remaining Cautious - DE exportscrops

 

 

A note about the relationship between crop exports and the relationship they share with Deere follows, courtesy of Industrials Sector Head Jay Van Sciver:

 

Exports & Dollar: Over the long-term, crop exports have a significant relationship to DE’s relative performance.  The shares are also generally negatively correlated with the dollar, which has generally been strengthening in recent months.  DE is increasingly less dependent on the US market, which may reduce these relationships over time.


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