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European Banking Monitor

Takeaway: Sovereign swaps moved in tandem with bank swaps in Europe (and around the world), widening across the board.

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 .


On OMTs Reporting: The ECB has stated that Aggregate Outright Monetary Transaction holdings and their market values will be published on a weekly basis and the average duration of Outright Monetary Transaction holdings and the breakdown by country will take place on a monthly basis. There is no indication that the OMTs has been initiated.


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





European Financials CDS Monitor There was widening across the board in European financials last week, with Spanish and Italian banks leading the charge higher. France saw 3 of of 4 French bank swaps widen.    


European Banking Monitor - aa1


Euribor-OIS spread – The Euribor-OIS spread tightened by 2 bps to 13 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 - aa2


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 - aa3

The Industrial Recession?

Takeaway: Growth is still slowing and the latest data doesn't lie. Companies are careful offering 2013 guidance and with good reason.

There’s no spinning it; the latest industrial data coming out in the US and abroad is weak. It coincides with our macro theme of growth slowing and ISM, durable goods and corporate earnings data backs it up. We’ve seen companies like FedEx (FDX) and Caterpillar (CAT) become cautious about 2013 earnings guidance and revenue growth across large US companies continues to slow.


Looking at the charts below, you can see that the ISM Manufacturing Orders Index has been below 50 for the past three months and is on the decline. And the latest durable goods number was abysmal. Throw in the slowdown that’s been occurring for months now in China and it paints a grim tale. If you wanted proof we’re still in a recession, you certainly have it now.


The Industrial Recession?  - ISMindex


The Industrial Recession?  - durablegoods

The Intervention







When you think of an intervention, perhaps a friend who drinks too much comes to mind. But we’re thinking of an intervention that’s far too big to control and one that involves Big Government. Ben Bernanke’s intervention in the global marketplace has given us false markets with gilded data. We now have shorter economic cycles (per each QE announcement) and heightened market volatility. Keep in mind that each announcement related to QE is NOT a good thing. Just because you have a short-term gain doesn’t mean you’ll escape the long-term pain. Stocks are down for the last 8 out of 10 days; does that sound awesome to you?




After watching HBO’s latest hit “Boardwalk Empire” last night, we ask ourselves: who’s more crooked? The politicians of today or yesteryear? At this rate, it doesn’t even matter anymore. Romney should be out there saying he’ll get rid of Bernanke and returning strength and trust to the US dollar. Meanwhile, Obama is doing much of the same old nonsense we’ve experienced for the last four years. As long as the market is up according to some metric, that’s good in an election year. Keith summed it up quite nicely this morning in his Early Look:


The Obama/Bernanke money printing theory suggests that if A) you devalue your currency, B) you’ll see “exports” rise. Whereas, in the real world, when you print money A) input + consumer costs rise, and B) real-inflation-adjusted growth slows.”






Cash:                UP


U.S. Equities:   DOWN


Int'l Equities:   DOWN   


Commodities: Flat


Fixed Income:  Flat


Int'l Currencies: Flat  








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.

  • TAIL:      LONG            



Emissions regulations in the US focusing on greenhouse gases should end the disruptive pre-buy cycle and allow PCAR to improve margins. Improved capacity utilization, truck fleet aging, and less volatile used truck prices all should support higher long-run profitability. In the near-term, Paccar may benefit from engine certification issues at Navistar, allowing it to gain market share. Longer-term, Paccar enjos a strong position in a structurally advantaged industry and an attractive valuation.

  • TAIL:      LONG



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.

  • TAIL:      NEUTRAL







“I can't wait for Friday's Jobs Report to see how many jobs QE3 created already #sarcasm” -@jfahmy




“Facts do not cease to exist because they are ignored.” -Aldous Huxley




Spanish government bonds rose for the third straight day post-stress tests with the 10-year yield dropping six basis points to 5.88%.




Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

Insanely Great

“This country is insanely great.”

-Steve Jobs


That’s what Steve Jobs told President Obama at a fundraising dinner in California in February of 2011. He went on to add that what he was worried about “is that we don’t talk enough about solutions.”


I disagree with Jobs on the 2nd part of that statement. America’s academic and political elite talk plenty about solutions. What worries me is that they’re always talking about government solutions.


Jobs’ aforementioned quote comes at the end of the Introduction in The 4% Solution where James Glassman writes “that government needs to get out of the way of enterprise for growth to take off.” I like that. What I don’t like is that the rest of the book goes on and on about more ways the government can help.


Back to the Global Macro Grind


To review last week’s US Economic data: Big Government Intervention continues to A) shorten economic cycles and B) amplify market volatility. The stock market isn’t the economy.


If you think the stock market is the economy, we’ll that didn’t look very healthy last week either. It was the biggest down week for stocks since June and, since Bernanke’s most recent Policy To Inflate top, US stocks are down for 8 of the last 10 days.


Why? Economic Gravity can’t be “smoothed” away by government solutions:

  1. US GDP Growth for Q2 of 2012 was reported last week 69.27% lower than where it was 6 months ago
  2. Chicago’s Purchasing Managers Index (PMI) report for SEP dropped -6.2% mth-over-mth in SEP to 49.7
  3. Within the PMI report, New Orders and Employment dropped from 54.8 and 57.1, to 47.4 and 52, respectively

Whether you want to talk to me about Q2 or the last month of Q3, from a US growth perspective, that’s just nasty. On the inflation front, the news wasn’t much better. Prices Paid (within the same PMI report for September) ripped higher from 57 to 63.2!


Repeat after me: Policies To Inflate Slow Growth. Period.


Plenty a Keynesian academic advisor to Obama will continue to hide from that 1970s like conclusion, until they can’t. Maybe that’s why Romney is finally distancing himself from Harvard Keynesian Economist (and advisor) Greg Mankiw this morning.


The #2 Most Read story on the Economy tab of Bloomberg.com this morning: “Romney Bashing Bernanke Rejects Mankiw’s Monetary Views.” That doesn’t mean Romney is going to be President. It just means he just found a way to land a punch.


Back to the US Economic Data. Here’s how US GDP Growth fell -69.27% in the last 6 months:

  1. Headline quarterly GDP fell from 4.10% in Q411 to 1.26% in Q212
  2. Consumer Goods fell from 1.29% in Q411 to 0.08% in Q212
  3. Fixed Investment fell from 1.19% in Q411 to 0.56% in Q212
  4. Inventories fell from +2.53% in Q411 to down -0.46% in Q212
  5. Exports minus Imports didn’t do a darn thing to move the needle

The Obama/Bernanke money printing theory suggests that if A) you devalue your currency, B) you’ll see “exports” rise. Whereas, in the real world, when you print money A) input + consumer costs rise, and B) real-inflation-adjusted growth slows.


Adjusting for inflation is annoying to government guys who take car service to work because they don’t have to pay for gas or that pastry spread awaiting them at their next Washington meeting. That must be why the aforementioned Real GDP print only implies a +1.52% “Deflator.”


What’s shocking (and sad) is that the US Government’s “Deflator” (the number they subtract from the nominal, inflated, growth in order to print the “real” number) has been marked down by more than 27% since Q4 of 2011 AS PRICES INFLATED!


If Housing was really “back”, shouldn’t we be seeing that in the rental component of US Government reported “inflation”? How about Prices Paid rising +11% in last month’s PMI report alone? Or how about oil prices +30% off the YTD lows, +160% since 2009?


Nope. On the margin, Bernanke sees none of it impacting consumption or costs. No inflation. Touchdown Seahawks!


In a country that used to be considered Insanely Great, I don’t have to wonder how America’s next innovator likes them Apples. We can do a lot better than lying to people. Progress starts with telling people the truth. It’s only from there that we can move forward.


My immediate-term support and resistance risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1, $110.61-112.98, $79.41-80.31, $1.27-1.29, 1.59-1.70%, and 1, respectively.


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Insanely Great - Chart of the Day


Insanely Great - Virtual Portfolio

Vain Hope

This note was originally published at 8am on September 17, 2012 for Hedgeye subscribers.

“I wouldn’t give much for a man who warms himself with the comfort of vain hopes.”



Hope is a lot of things, but it’s not a risk management process. The higher commodity and stock market inflations go, the less likely it is that the global economy recovers.


With a 0% asset allocation to commodities and a time stamped short position in the SP500 (SPY), I obviously lost last week’s battle with Ben Bernanke. That doesn’t make this war with Keynesian Academics over. It means it has just begun.


If Bernanke thinks that compressing the next 3 years of Equity returns into the last 3 months before a US Election is “price stability”, that probably means things are just about to get volatile, again.


Back to the Global Macro Grind


I get things wrong. But when I do, I don’t put the country’s long standing liberties and structural employment at risk. Bernanke does. If I have one sincere hope for this country, it’s that this un-elected man thinks about that before he goes to bed at night.


To obfuscate the truth about currency debasement and real-time inflation expectations is one thing. To not be held accountable to these economic realities by the President of the United States is entirely another. Both Bush and Obama own this legacy of Bernanke’s economic storytelling.


Immediate and intermediate-term facts about Inflation Expectations:

  1. 10-yr breakevens (Inflation Expectations) moved right back to record highs last week (not YTD highs, record highs)
  2. CRB Commodities Index Inflation just crashed to the upside, +2.9% wk-over-wk, and +20% since June
  3. Oil price inflation (Brent) was up over +2.7% last week, +33% since June; US gas prices are now pushing back to $4

Sure, US and Russian stocks were up +1.9% and +7.4%, respectively, last week on that – but that’s nothing compared to the +153% YTD move in Venezuelan stocks post a Chavez currency devaluation! What did that do for the economic health of the Venezuelan people again?


With Bernanke Burning The Buck (see Chart of The Day), the US Dollar Index was down for the 5th consecutive week. In the face of its -1.7% wk-over-wk inverse “to infinity and beyond” money printing move, here’s what other things priced in Dollars did:

  1. Coffee +11.1%
  2. Natural Gas +10.4%
  3. Rubber +6.7%

I know, I know. Instead of picking Copper, Gold, and Oil that inflated +2-6% last week, I’m cherry-picking some stuff you might need as you take tax-payer funded car service to your office in Washington D.C. every day.


Heck, maybe there’s going to be what Keynesian students of economic theories-failed call “substitution” and “multiplier” effects… and you’re going to start drinking Red Bull instead of coffee in the morning – right pumped to chase the market even higher!


Another way to look at Inflation Expectations Rising is, of course, the futures and options markets (CFTC data):

  1. Last week’s CFTC options contracts were up another +0.3% at all-time highs (1.33 million contracts outstanding)
  2. Gold contracts = up another +14% wk-over-wk (after being up +35% and +10% in the 2 wks prior) to their February highs
  3. Oil contracts shot north of 203,000, their highest level since Oil topped in February-March 7% higher than Friday’s close

People who trade market expectations, run long-term money, and/or do math obviously get this. That’s why the biggest macro call I missed in the last 6 months was probably issued during a super special deflationary dinner in Jackson Hole in August.


Do you think Bernanke and his boys told anyone he was going to do this? That’s just a question, not an answer – and one, looking back, that you should have asked yourself during the Hank Paulson TARP. Does it help people trust our markets more or less?


Sadly, this is how the Old Wall still works - but where it counts for The People (cost of living, jobs, etc.), it’s not working. If this man thinks his Vain Hope of a +2.5-3% US GDP recovery in 2013 is kidding this accurate GDP Growth forecasting firm, he’s going to be in for a long battle with some fact-based Tweet-heat. If anything, the probability of a US Recession in 2013 just went up.


*2007-2012 Federal Reserve Money Printing Fact: Policies To Inflate via currency devaluation slow real-inflation adjusted economic global growth. China’s stock market fell -2.1% last night (down -15.5% since May) after Singapore reported a nasty -10.6% export growth report for August as commodity price margin pressures continued to rise, dampening demand.


My immediate-term support and resistance risk ranges for Gold, Oil (Brent), US Dollar Index, EUR/USD, UST 10yr Yield, and the SP500 are now $1731-1784, $114.83-116.94, $78.57-80.31, $1.28-1.31, 1.70-1.87%, and 1433-1473, respectively.


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Vain Hope - Chart of the Day


Vain Hope - Virtual Portfolio

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