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European Banking Monitor: Moving Away From Risk

Takeaway: Germany, France, Italy and Spain all saw material widening in their sovereign swaps last week. Winners were Portugal and Ireland.

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:

 

* 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.

 

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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

 

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Security Market Program – For the 23rd straight week the ECB's secondary sovereign bond purchasing program, the Securities Market Program (SMP), purchased no sovereign paper for the latest week ended 8/24, to take the total program to €208.5 Billion.

 

Following President Draghi’s conference call remarks on 8/2 in which he addressed rising yields in the periphery and said that the ECB “may undertake” non-standard  measures, the market continues to be disappointed – there has been no buying.

 

We also think it’s unlikely that we’ll get definitive color on secondary peripheral buying at the ECB’s next meeting on Thursday 9/6, however this is the next immediate catalyst. Instead, we expect Draghi to be on hold with rates and will likely not act (buy) until after there’s clarity from the German Constitutional Court’s decision on the ESM and fiscal compact on 9/12. Improving preliminary PMIs from Europe and the CPI on hold at 2.4% help support this position.

 

European Banking Monitor: Moving Away From Risk  - aa. smp

 

European Financials CDS Monitor German bank swaps widen while Spanish bank swaps tighten. 

 

European Banking Monitor: Moving Away From Risk  - aa. banks

 

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. 

 

European Banking Monitor: Moving Away From Risk  - 11. 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.  

 

European Banking Monitor: Moving Away From Risk  - aa. facility


SOLID WEEK IN MACAU

Average daily table revenues were a strong HK$775 million last week, down from the HK$996 the prior week, but the 2nd highest since Golden Week in May.  For the full month of August including slots, we have narrowed our projection range to HK$25.5-26.0 billion, up 6-8% YoY.  We continue to believe that July marked the low of the year and September YoY growth should be better than August.  We are hearing of a little more liquidity for the junkets here in August and more activity on the Mass floor.  Obviously, we are closely monitoring the China macro situation.

 

SOLID WEEK IN MACAU - macau1

 

LVS lost share in the past week, probably due to hold, but its share is in-line with the 3-month average.  We expect share to go back up even before the September 20th opening of the Sheraton rooms.  MPEL seems to be having the best month of the bunch when measured by market share gains. 

 

SOLID WEEK IN MACAU - macau2

 


Begging For QE

BEGGING FOR QE

 

 

CLIENT TALKING POINTS

 

BEGGING FOR QE

The time has come and rightfully so. With the Federal Reserve meeting this  week at Jackson Hole, everyone and their mother is expecting some form of quantitative easing that they can swallow and use to buoy the market higher. This, despite lower highs being made in European equities over the last two weeks and Chinese equities continuing to go lower like it’s going out of style. People need to remember that Bernanke has not delivered on the last two meetings he’s participated in. Basically, everyone is riding the wave of hope, thinking he’ll come through despite essentially proving he won’t.

 

 

MANAGING THE RISK

You need to manage the risk and the range. We’ve said this over and over again. Look at the levels, see what the market’s doing and make proper decisions. Last week, many investors were keen on putting on shorts at covering highs and selling fixed-income on the lows. That’s not proper risk management! With the S&P 500 and 10-year yield dropping, we covered shorts in the Virtual Portfolio and our Asset Allocation Model, which we should note are two entirely different products.

 

 

AVOIDING COMMODITIES

As you’ve probably noticed, our asset allocation for commodities remains 0%. For believers in QE, that’s just wishful thinking. To quote Keith: “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).” Yeah. That’s about right. People are going gah gah for gold and oil contracts. And when the Fed comes out at Jackson Hole and is all like “Sorry, no relief, bozos.” A lot of people are going to be disappointed.

 

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ASSET ALLOCATION

 

Cash:                  UP

 

U.S. Equities:   DOWN

 

Int'l Equities:   Flat   

 

Commodities: Flat

 

Fixed Income:  Flat

 

Int'l Currencies: DOWN  

 

 

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TOP LONG IDEAS

 

NIKE INC (NKE)

Nike’s challenges are well-telegraphed. But the reality is that its top line is extremely strong, and the Olympics has just given Nike all the ammo it needs to marry product with marketing and grow in the 10% range for the next 2 years. With margin pressures easing, and Cole Haan and Umbro soon to be divested, the model is getting more focused and profitable.

  • TRADE:  LONG
  • TREND:  LONG
  • TAIL:      LONG            

 

FIFTH & PACIFIC COMPANIES (FNP)

The former Liz Claiborne (LIZ) is on the path to prosperity. There’s a fantastic growth story with FNP. The Kate Spade brand is growing at an almost unprecedented clip. Save for Juicy Couture, the company has brands performing strongly throughout its entire portfolio. We’re bullish on FNP for all three durations: TRADE, TREND and TAIL.

  • TRADE:  LONG
  • TREND:  LONG
  • TAIL:      LONG

 

LAS VEGAS SANDS (LVS)

LVS finally reached and has maintained its 20% Macau gaming share, thanks to Sands Cotai Central (SCC). With SCC continuing to ramp up, we expect that level to hold and maybe, even improve. Macau sentiment has reached a yearly low but we see improvement ahead.

  • TRADE:  LONG
  • TREND:  NEUTRAL
  • TAIL:      NEUTRAL

  

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THREE FOR THE ROAD

 

TWEET OF THE DAY

“$CL_F trendguide...nice spike up overnight on Issac heading towards the oil producing GOM...high of $97.72 so far. twitpic.com/ao9e9e”.-@Bain_Energy

 

 

QUOTE OF THE DAY

“A man is not idle because he is absorbed in thought. There is a visible labor and there is an invisible labor.”–Victor Hugo

                   

 

STAT OF THE DAY

Sinopec posted a 40% decline in earnings as high crude costs squeezed its refining unit and exposure to government-mandated price controls.


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 80.32%
  • SHORT SIGNALS 78.49%

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.



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