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MONDAY MORNING RISK MONITOR: MORE MANIPULATION BY DRAGHI

Takeaway: Bank swaps tightened across the board globally. Sovereign swaps followed suit. The 2-10 spread widened and rates on junk bonds fell.

Key Takeaways

 

* Last week American and European bank swaps tightened across the board fueled by ECB comments about assistance for Spain and an initially strong perception of the US labor situation. However, Friday's softening by the close coupled with this morning's performance around the world is suggesting the labor-based rally may be short-lived.

 

* Sovereign CDS - Sovereign swaps mostly moved in tandem with bank swaps around the world, tightening across the board. The one notable divergence was the United States, which saw its sovereign swaps rise by 26.4% (9 bps) to 42 bps from 33 bps in the prior week.

 

* The rate on high-yield corporate debt fell 14.5 bps last week, ending the week at 6.67% versus 6.81%

 

* The 2-10 spread widened by 8 bps last week, bringing the spread to 148 bps. As we've noted in the past we like to look at the 2-10 spread as a leading indicator for bank margin pressure. While we welcome the widening that we saw last week, we continue to expect tightening going forward.

 

* Our Macro team’s quantitative setup in the XLF shows 0.4% upside to TRADE resistance and 2.0% downside to TRADE support.

 

Financial Risk Monitor Summary

 • Short-term(WoW): Positive / 8 of 12 improved / 0 out of 12 worsened / 5 of 12 unchanged

 • Intermediate-term(WoW): Positive / 8 of 12 improved / 1 out of 12 worsened / 4 of 12 unchanged

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

 

MONDAY MORNING RISK MONITOR: MORE MANIPULATION BY DRAGHI - Summary

 

1. American Financial CDS -  Swaps tightened significantly vs. last week with 25 out of 27 domestic financial institutions showing WoW improvement, for an average gain of 21 bps. Among the large caps, BAC and C showed the sharpest improvement at 22 and 21 bps, respectively.  

Tightened the most WoW: MTG, BAC, C

Widened the most/ tightened the least WoW: MBI, MMC, AGO

Tightened the most WoW: MTG, HIG, AIG

Widened the most/ tightened the least MoM: MBI, JPM, AGO

 

MONDAY MORNING RISK MONITOR: MORE MANIPULATION BY DRAGHI - American

 

2. European Financial CDS - European bank swaps were tighter across the board with Italian, Spanish and French banks showing the sharpest week-over-week improvement. Overall, swaps were tighter for 35 out of 37 reference entities with an average tightening of 29 bps. 

 

MONDAY MORNING RISK MONITOR: MORE MANIPULATION BY DRAGHI - Europe

 

3. Asian Financial CDS - In Asia, Chinese and Indian bank swaps were tighter while Japanese banks were generally wider. Overall, 8 out of the 12 reference entities that we track tightened. 

 

MONDAY MORNING RISK MONITOR: MORE MANIPULATION BY DRAGHI - Asian

 

4. Sovereign CDS – European sovereign swaps were sharply tighter across the board last week. Italian sovereign swaps tightened by -12.5% (-45 bps to 312 bps) and U.S. sovereign swaps widened by 26.4% (9 bps to 42 bps).

 

MONDAY MORNING RISK MONITOR: MORE MANIPULATION BY DRAGHI - Sov Table

 

MONDAY MORNING RISK MONITOR: MORE MANIPULATION BY DRAGHI - Sov 1

 

MONDAY MORNING RISK MONITOR: MORE MANIPULATION BY DRAGHI - Sov 2

 

5. High Yield (YTM) Monitor – High Yield rates fell 14.5 bps last week, ending the week at 6.67% versus 6.81% the prior week.

 

MONDAY MORNING RISK MONITOR: MORE MANIPULATION BY DRAGHI - HY

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 3.2 points last week, ending at 1732.

 

MONDAY MORNING RISK MONITOR: MORE MANIPULATION BY DRAGHI - LLI

 

7. TED Spread Monitor – The TED spread fell 1.2 bps last week, ending the week at 25.2 bps this week.

 

MONDAY MORNING RISK MONITOR: MORE MANIPULATION BY DRAGHI - TED

 

8. Journal of Commerce Commodity Price Index – The JOC index rose 1.3 points, ending the week at 6.43 versus 5.2 the prior week.

 

MONDAY MORNING RISK MONITOR: MORE MANIPULATION BY DRAGHI - JOC

 

9. Euribor-OIS spread – The Euribor-OIS spread tightened by less than 1 bp 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. 

 

MONDAY MORNING RISK MONITOR: MORE MANIPULATION BY DRAGHI - 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: MORE MANIPULATION BY DRAGHI - ECB liquidity facility

 

11. Markit MCDX Index Monitor –  Last week spreads tightened , ending the week at 135 bps versus 136 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: MORE MANIPULATION BY DRAGHI - MCDX

 

12. Chinese Steel - Due to "Golden Week" ( also known as Mid-Autumn Festival), a 7-day Chinese national holiday, there are no quotes for Chinese steel this week.

 

MONDAY MORNING RISK MONITOR: MORE MANIPULATION BY DRAGHI - CHIS

 

13. 2-10 Spread –  Last week the 2-10 spread widened to 148 bps, 8 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure. 

 

MONDAY MORNING RISK MONITOR: MORE MANIPULATION BY DRAGHI - 2 10

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.4% upside to TRADE resistance and 2.0% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: MORE MANIPULATION BY DRAGHI - XLF

 

Margin Debt - August: +0.73 standard deviations 

NYSE Margin debt rose to $287 billion in August from $278 billion in July. We like to to look at margin debt levels as a broad contrarian sentiment indicator. For reference, our approach is to look at margin debt levels in standard deviation terms over the period 1. Our analysis finds 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 significant risk in the equity market. The preceding two instances were followed by the equity market losing roughly half its value over the following 24-36 months. 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 August. 

 

MONDAY MORNING RISK MONITOR: MORE MANIPULATION BY DRAGHI - Margin Debt 

 

Joshua Steiner, CFA

 

Robert Belsky

 

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THE WEEK AHEAD

The Economic Data calendar for the week of the 8th of October through the 12th 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 - Week


CHART DU JOUR: CRUISERS VS VEGAS

They compete and demographics favor the cruise lines

 

  • The breakout for cruisers by age group hasn’t changed much relative to 2004 and it remains in a fairly tight distribution.
  • For Vegas, the 65+ age group rose from 20% of visitors in 2002 to 35% in 2011. 
  • Casino visitors continue to age, confirming our thesis that the younger generations are not playing slots.

 

CHART DU JOUR: CRUISERS VS VEGAS - cruiser

 

CHART DU JOUR: CRUISERS VS VEGAS - casino1


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.

Weekly European Monitor: Spain’s bailout is Rumor Off

Takeaway: Spain’s bailout is "Rumor Off" in a week of ECB rate inaction and continued weak fundamental data.

-- For specific questions on anything Europe, please contact me at to set up a call.

 

Positions in Europe: Short EUR/USD (FXE); Long German Bonds (BUNL)

 

 

Asset Class Performance:

  • Equities:  The STOXX Europe 600 closed up +2.1% week-over-week vs -2.6% last week. Top performers:  Cyprus +19.0%; Greece +12.3%; Italy +5.2%; Austria +4.0%; Portugal +3.6%; Czech Republic +3.4%; Spain +3.2%; France +3.0%; Netherlands +2.9%. Bottom performers:  Ukraine -4.4%; Russia (RTSI) -0.4%.  [Other: Germany +2.5%; UK +2.2%].
  • FX:  The EUR/USD is up +1.33% week-over-week.  W/W Divergences: PLN/EUR +1.13%; CZK/EUR +1.02%; HUF/EUR +0.91%; ISK/EUR +0.80%; DKK/EUR -0.02%; CHF/EUR -0.20%; NOK/EUR -0.59%; RON/EUR -0.67%; GBP/EUR -1.42%; SEK/EUR -1.89%.
  • Fixed Income:  The 10YR yield for sovereigns were lower for the peripheral on the week, while the core rose marginally.   Portugal declined the most week-over-week at -68bps to 8.32%, followed by Greece -50bps to 19.0% and Spain -27bps to 5.78%.  France gained the most at +10bps to 2.28% on the week and Germany gained +6bps to 1.82%.
  • Sovereign CDS:  Sovereign CDS were lower on the week. On a week-over-week basis Italy led the charge, declining -44bps to 318bps, followed by Portugal -41bps to 476bps, Spain -37bps to 355bps, and Ireland -34bps to 289bps.

Weekly European Monitor: Spain’s bailout is Rumor Off - dd. yields

 

Weekly European Monitor: Spain’s bailout is Rumor Off - dd. cds a

 

Weekly European Monitor: Spain’s bailout is Rumor Off - dd. cds b

 

Weekly European Monitor: Spain’s bailout is Rumor Off - dd  eur usd

 

Weekly European Monitor: Spain’s bailout is Rumor Off - dd. cftc

 

 

The European Week Ahead:

 

Sunday – Sep. Germany Wholesale Price Index (Oct. 7-12)

 

Monday - Eurogroup Meeting in Luxembourg (Oct. 8-9); Oct. Eurozone Sentix Investor Confidence; Aug. Germany Imports, Exports, Current Account, Trade Balance, Industrial Production; Sep. UK BRC Sales Like-For-Like, RICS House Price Balance; Sep. France BoF Business Sentiment

 

Tuesday – Aug. UK Industrial Production, Manufacturing Production, Visible Trade Balance, Total Trade Balance; Aug. France Central Government Balance, Trade Balance; Aug. Spain House Transactions; 2Q Italy Deficit to GDP; Sep. Greece Consumer Price Index

 

Wednesday – Aug. France Industrial Production, Manufacturing Production; Aug. Italy Industrial Production; Sep. Greece Industrial Production

 

Thursday – Oct. Bloomberg Economic Survey for the Eurozone, Germany, UK, France, Spain, Italy and Greece; ECB Publishes Monthly Report; Sep. Germany Consumer Price Index – Final; Sep. France Consumer Price Index; Sep. Spain Consumer Price Index – Final; Sep. Italy Consumer Price Index Jul. Greece Unemployment

 

Friday – Aug. Eurozone Industrial Production; Aug. France Current Account; Italy CPI - Final

 

 

Call Outs:

 

Greece - Greek Prime Minister Samaras said in an interview with the German business daily Handelsblatt that Athens will run out of cash in November if the troika does not approve the next installment (~€31B) of its support package. Note that Athens and the troika have yet to even reach an agreement on a €13.5B package of spending cuts and tax measures over the next two years.

 

Germany - Germany's claims on the Eurosystem's Target2 system fell to €695.5B at the end of September from €751B at the end of August, the lowest level since April.

 

Germany - Is pushing the EU to improve proposals for a Eurozone banking supervisor so that countries outside of the EUR might be persuaded to join.

 

Spain - Bank of Spain Governor Luis Maria Linde said that the government's budget forecasts for the economy and tax income look optimistic, adding that deficit reduction targets (which Madrid reiterated just last week) may be missed. He told parliament that the economy would likely contract by -1.5% next year, while the government's budget is based on a -0.5% contraction.

 

Spain - Moody's said on Monday that Spanish banks face a capital shortfall of €70B-€105B (almost 2x the estimate from the stress test results on Friday). The test used a 6% core capital ratio under a stressed scenario, while the ratings firm assumed capital ratios of 8-10%.

 

Portugal - The government unveiled what it described as "enormous" tax increases to help keep the bailout program on track. The measures include an additional 4% tax on 2013 earnings, an increase in the average income tax rate to 11.8% from 9.8% and new taxes on capital income and homes worth more than €1M - will replace a "fiscal devaluation" program that the government was forced to scrap due to anti-austerity protests.

 

Portugal - Completed a €3.76B bond swap on Wednesday. It purchased bonds maturing in September 2013 and sold bonds maturing in October 2015. It was the country's first foray into the bond market since it requested a bailout last year. Recall that Portugal has to meet a September 2013 bond redemption of ~€10B without the support of its rescue program. In addition, the ECB has established the process of returning to the bond market as a condition for its new intervention program.

 

ECB and Banking Authority - ECB Executive Board member Joerg Asmussen said on Monday that the ECB will not rush through "half-baked" plans for a new pan-European supervisor.

 

Cyprus - Plans to seek an €11B bailout, or ~ 62% of the country's GDP. It added that the funds will be used to recapitalize its banks and pay its bills. Recall that when Cyprus became the fifth Eurozone country to seek aid in late-June, no amount was specified for the rescue.

 

 

Data Dump:

 

Weekly European Monitor: Spain’s bailout is Rumor Off - dd. pmi table

 

Weekly European Monitor: Spain’s bailout is Rumor Off - dd. pmi chart

 

Eurozone Unemployment Rate 11.4% AUG vs 11.4% JUL (revised from 11.3%)

Eurozone Retail Sales -1.3% AUG Y/Y (exp. -1.9%) vs -1.4% JUL   [0.1% AUG M/M (exp. -0.1%) vs 0.1% JUL]

Eurozone PPI 2.7% AUG Y/Y vs 1.6% JUL   [0.9% AUG M/M vs 0.3% JUL]

 

German Factory Orders -4.8% AUG Y/Y (exp.-4.3%) vs -4.6% JUL   [-1.3% AUG M/M (exp. -0.5%) vs 0.3% JUL]

German Machinery Orders (VDMA) -11.0% AUG Y/Y vs -2.0% JUL

Germany VDIK New Passenger Car Registrations -11.0% SEPT Y/Y  

 

French Car & Light Vehicle Registrations -17% SEPT Y/Y to 166,891

Italy Unemployment Rate 10.7% AUG vs 10.7% JUL

Spain Jobless +1.7% SEPT Y/Y to 4.7M vs August +0.83%

Spain Industrial Output WDA -3.2% AUG Y/Y vs -5.5% JUL (down for 12th straight month)

 

UK New Car Registrations 8.2% SEPT Y/Y vs 0.1% AUG

UK M4 Money Supply-4.1% AUG Y/Y vs -4.6% JUL

UK Nationwide House Prices -1.4% SEPT Y/Y (exp. -0.7%) vs -0.7% AUG   [-0.4% SEPT M/M vs 1.1% AUG]

UK Halifax House Prices -1.2% SEPT Y/Y vs -0.9% AUG

UK PMI Construction 49.5 SEPT (exp. 49.9) vs 49 AUG

 

Switzerland Retail Sales 5.9% AUG Y/Y vs 2.9% JUL

Ireland Unemployment Rate 14.8% SEPT vs 14.8% AUG

Ireland Consumer Confidence 60.2 SEPT vs 70 AUG

Netherlands CPI 2.5% SEPT Y/Y vs 2.5% AUG

Belgium Unemployment Rate 7.4% AUG vs 7.5% JUL

 

Ireland Industrial Production -0.6% AUG Y/Y vs -4.2% JUL

Denmark Industrial Production -2.3% AUG M/M vs 4.4% JUL

Norway Industrial Production WDA 5.6% AUG Y/Y vs 7.6% JUL

 

Romania Producer Prices 7.2% AUG Y/Y vs 5.7% JUL

Romania Retail Sales 4.7% AUG Y/Y vs 4.4% JUL

 

Russia CPI 6.6% SEPT Y/Y vs 5.9% AUG

 

Estonia CPI 3.8% SEPT Y/Y vs 3.8% AUG

Czech Republic Retail Sales -0.8% AUG Y/Y vs 0.3% JUL

Hungary Industrial Production (Preliminary) 1.4% AUG Y/Y vs -2.2% JUL

 

Romania Q2 GDP Final 0.5% Q/Q [UNCH vs previous estimate];   1.1% Y/Y [vs 1.2% initial]

Romania Industrial Sales 4.7% AUG Y/Y vs 5.0% JUL

 

Turkey CPI 9.19% SEPT Y/Y vs 8.88% AUG

Turkey PPI 4.03% SEPT Y/Y vs 4.56% AUG

 

 

Interest Rate Decisions:

 

(10/3) Poland Base Rate Announcement UNCH at 4.75 [consensus expected 25bps cut]

(10/3) Iceland Sedlabanki Interest Rate UNCH at 5.75%

(10/4) BOE UNCH at 0.50% and asset purchase program UNCH at 375 B GBP

(10/4) ECB UNCH at 0.75% (Deposit Facility UNCH at 0.00%)

(10/5) Russia Refinancing Rate UNCH at 8.25% [as expected]

(10/5) Russia Overnight Deposit Rate UNCH at 4.25%

(10/5) Russia Overnight Auction-Based Repo UNCH at 5.50%

 

Matthew Hedrick

Senior Analyst


Ni Hao Dwayne Wade

Takeaway: Nike's Converse division lost Dwayne Wade in a huge win for Chinese footwear brand Li Ning.

Nike's Converse division lost Dwayne Wade in a huge win for Chinese footwear brand Li Ning.

 

An important distinction is that if Nike really wanted to keep Wade, it would have kept him. They have the deepest pockets.

 

But this one is really surprising. Wade is what's known as a 'crossover athlete' in that he can be on the cover of GQ and SI in the same month. He appeals to most target groups -- white, black, hispanic, tall, and short (height is a factor in endorsements). 

 

Our sense is that he wasnt getting the love he wanted at Converse, which is a division that Nike lets operate on its own. It does not have access to all the same technology as Nike or Jordan. That could have changed for Wade, but Li Ning likely came on too hard and heavy for Nike to react.

 

It's a tough loss. Hey, at least they've still got LeBron and Bosch.

 

Ni Hao Dwayne Wade - wade


The Spaghetti Western of Employment

Takeaway: The unemployment rate is down to 7.8% driven by participation, or lack thereof.

As many of you know, my colleagues and I at Hedgeye are fans of the legendary actor Clint Eastwood.  We say this despite his less than stellar performance at the Republican convention.  One of his most well known movies is The Good, the Bad and the Ugly.  In terms of film genre, this movie is in the category of Spaghetti Western.

 

The title of the movie itself is likely the best description of the employment data today – which we will touch on in more detail shortly – but the genre of the movie probably best describes the manic commentary around this report.  Republicans from Jack Welch on down are claiming there is some grandiose manipulation of the numbers ahead of the election. 

 

Meanwhile, Democrats are using this as a data point that validates the Obama economic plan and justifies his re-election.  Just as we should be a little reticent letting Italians make Westerns (or Canadians make operas for that matter), let’s take a look at this report outside of the partisan lens.

 

The Good

 

The headline unemployment is positive for Obama and perhaps positive on the margin for confidence (very marginally). This comes despite consensus misses across the board on month-over-month non-farm, private and manufacturing payrolls, but because the focus for much of the punditry is on the actual rate.  On the positive, total employed did rise by 873,000 which is the first meaningful increase in three months (although 600,000 of these were part-time jobs).

 

At 7.8%, the unemployment rate is now the same as when Obama took office and down from the 8.1% rate of August.  It also deflates, at least partially, a key refrain from Romney’s debate strategy which is to highlight that unemployment has been above 8% for the duration of the Obama Presidency.  The political analysis from the manic media on the jobs report is as simplistic as can be expected with the headline on USA Today currently being a prime example:

 

“Political analysis: Jobs report boosts Obama”

 

We will go into detail shortly as to why this employment number is actually far from stellar, but the sentiment is what it is and this will marginally benefit Obama.  This is already being reflected on Intrade where the Obama contract has rallied about four points from 65 to 69.

 

The Bad

 

In the bad category, there are a number of favorable items that were one time in nature that may have made this number look better than reality.  Specifically, the government uses a seasonal adjustment that we have touched on numerous times.  As our Financials Sector Head Josh Steiner wrote last week:

 

“We've harped on seasonality a lot, but to again reiterate, we think the two charts below speak for themselves. They illustrate quite plainly that in the last three years, ALL improvement in both initial jobless claims and nonfarm payrolls occurs in the September through February period while March through August stagnates or deteriorates. This seasonality distortion will again be present this year and next year.”

 

The point is that there is some manipulation in these numbers.  This isn’t a partisan fact, but simply something we’ve observed based on looking at this data for the past three years.  So, this “positive” report shouldn’t surprise anyone or be considered a panacea of economic recovery.  The chart below outlines this seasonality.

 

The Spaghetti Western of Employment - 1

 

The Ugly

 

The ugly is related to not just this jobs report but the economic environment in the U.S. that has Americans leaving the workforce in mass.  In the chart below we’ve adjusted today’s labor report for the 10-year average labor force participation rate (LFPR).  Given this analysis, the unemployment rate in September would have been 10.8%.  This would have been a decent improvement over the adjusted August number of 11.3%, but is still very elevated.

 

Interestingly, if you adjust the headline figure for the LFPR on Obama’s first day in office, the SEP unemployment rate would have been 11.1% – substantially elevated from the comparable 7.8% figure he inherited from Bush. What this suggests is that, over the last four years, President Obama has seen the U.S. unemployment rate tick up +330bps when accounting for all the disgruntled civilians who’ve completely given up looking for work since the president took over the leadership reigns of the U.S. economy.  The first chart below shows the trend of the participation rate over the past decade, which is down and to the right.

 

In the short run, this report will likely be positive, at least for the President’s re-election chances.   In the long run, U.S. employment remains solidly in the bad to ugly category. 

 

 

Daryl G. Jones

Director of Research

 

Darius Dale

Senior Analyst

 

The Spaghetti Western of Employment - 2

 

The Spaghetti Western of Employment - 3

 

The Spaghetti Western of Employment - 4

 


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