European Banking Monitor: More Manipulation By Draghi

Takeaway: Bank swaps tightened across the board globally. Sovereign swaps followed suit.

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:


* 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.


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 to date.



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 – 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. 


European Banking Monitor: More Manipulation By Draghi  - 22. banks


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. 


European Banking Monitor: More Manipulation By Draghi  - 22. 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: More Manipulation By Draghi  - 22. facillity


Matthew Hedrick

Senior Analyst


WMT: Financing The Masses

Takeaway: Walmart and American Express both stand to benefit from the Bluebird program with the former getting shoppers and the latter getting fees.

American Express (AXP) and Walmart (WMT) have teamed up to offer a prepaid debit card targeted at lower income consumers. The program is called Bluebird and what makes it noteworthy is the fact that Walmart is a partner in the program, which allows for  widespread distribution across the United States.


The card is similar to existing American Express prepaid cards; you sign up, get the card and can load it up via a checking account, direct deposit or reload packs called Bluebird Feeder Packs. With money going right from someone’s paycheck on to the Bluebird card, Walmart stands to benefit from cardholders spending their paychecks at their stores because they’re suddenly feeling “flush” with cash. 


Keep in mind that Walmart already offers prepaid debit card and check cashing services for its customers. This is another move for Walmart as it tries to get a toehold in financial services which it has been trying to do for years. WMT also has an interchange fee advantage. They are likely paying close to nothing on interchange rates when these cards get used in their store. Overall, the program will be a hit with AXP, WMT and lower income consumers.

The Value Of A Dollar







If you get the US dollar right, you get a lot of other things right. This is very important to remember when you’re trading and investing on a daily basis. The moves the dollar makes correlate to things like crude oil, commodities and the euro, so you need to keep an eye on it even if you’re not a currency trader. Bernanke has continued to devalue our currency year after year for nearly half a decade at this point. Some claim that it’s the way out of the great recession we’ve been in. We don’t buy that nonsense.




Everything is slowing down, like Neo in The Matrix when he’s dodging bullets. Seriously, though. Growth continues to slow as the recession drags on, cycles continue to peak and roll over and commodities inflate. We also have earnings slowing with the likes of FedEx (FDX) and Caterpillar (CAT) showing us what it’s like when they have to lower guidance for 2013. This sort of thing will continue to happen as more companies report; just watch and see. 






Cash:                UP


U.S. Equities:   DOWN


Int'l Equities:   DOWN   


Commodities: Flat


Fixed Income:  Flat


Int'l Currencies: Flat  








Remains our top long in casual dining as new sales layers (pizza) and strong-performing remodels (~5% comps) should maintain sales momentum. The company is continuing to enhance returns for shareholders through share buybacks . The stock trades at a discount to DIN (7.7x vs 9.3x EV/EBITDA) and in line with the group at 7.3x.

  • 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



This company’s on track to post $3Bn in revenues by ’14 – impressive given a $1.5Bn print in 2011. Perhaps more impressive is the breadth of growth drivers that will get it there – women’s, accessories, new underwear platform etc. in addition to footwear. UA is gaining share in both apparel and footwear quarter-to-date. While some may be concerned over the loss of UA’s SVP/Sourcing we’re 8% ahead of the Street in the upcoming quarter and buyers on weakness.

  • TAIL:      LONG







“#Dow starts the week 3.91% away (554 pts) from an all-time high. $$” -@carlquintanilla




“History teaches us that men and nations behave wisely once they have exhausted all other alternatives.” -Abba Eban




Chile SEP inflation (CPI) rises to +2.8% YoY from 2.6%




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Elegant Outcomes

This note was originally published at 8am on September 24, 2012 for Hedgeye subscribers.

“Not everything I say is elegant.”

-Mitt Romney


For 5 straight weeks both Romney and the US Dollar took a public brow-beating from both Obama and Bernanke. We’ll see where the Hedgeye Election Indicator scores Romney tomorrow. For now, all I can tell you is that last week the US Dollar just had its 1st up week in six.


Can Policies To Inflate, deflate? Oil just did, fast. Gold, Silver, and US Stocks are on their way lower this morning too. Did last night’s 60 Minutes moment for Romney mark a short-term top for Obama? Intrade had him at a fresh new high of 70% last week. At a bare minimum, that has some short-term mean reversion risk heading into the 1st debate (October 3rd).


From Greenspan/Bernanke asset price bubbles (Internet stocks in 2000, Housing in 2007, and Commodities in 2012) to mean reversion and correlation risks, Macro hasn’t been elegant over the course of the last 15 years. Neither is writing about the truth.


Back to the Global Macro Grind


With 43 days to the #Election and 99 days to the #FiscalCliff, both the US Dollar’s direction and the Obama vs. Romney Spread matter to markets – big time. Causality (policy) is driving correlation in market pricing right now. When that changes, we’ll let you know.


Correlation Risk Update (30-day immediate-term USD correlations, across asset classes):

  1. Gold = -0.98
  2. Copper = -0.97
  3. Silver = -0.96
  4. Coffee = -0.84
  5. CRB Commodities Index = -0.82
  6. SP500 = -0.89

In other words, if Obama gets the Dollar right (down), he should be fine for the next 30 days. If he doesn’t, Dollar up may very well be read as Romney building momentum off his mid-September lows.


Partisan people may not like this analysis, but the math is quite elegant when you show it in bullet point form. With the US Dollar Index up +0.6% last week, here’s what Big Macro data did:

  1. CRB Commodities Index = down -3.8%
  2. Oil = down -6.2%
  3. Copper = down -1.6%
  4. Coffee = down -4.1%
  5. SP500 = down -0.34%
  6. Russell2000 = down -1.0%
  7. Chinese stocks = down -4.6%
  8. Italian stocks = -3.8%
  9. Russian stocks = -3.8%
  10. Gold = +0.2%

Yes, Gold prices diverged from the rest of reality last week – but they aren’t this morning. That’s an interesting callout, if only because Gold was the last holdout in Bernanke’s Bubble (Commodities) to not make higher all-time highs.


The all-time high (not pricing it in rice beans or Thai Baht) in nominal Gold was established in February of 2012. And if you really want to think bubbly, it makes sense for it to potentially have topped before Bernanke printed to “Infinity & Beyond.” After all, Gold has been up for 12 consecutive years, discounting something, no?


What’s next?


If the US Dollar falls again from here and Gold recovers this morning’s losses to make higher-all-time-highs, I’ll likely cover my short position in GLD. If it doesn’t, well, I guess that’s not going to be my problem.


Within the weekly CFTC futures/options contract data, Gold is as frothy right now as Corn was in mid-August (Corn, by the way, is down -11% since then, in a straight line):


Here’s the update on Commodity speculation within that CFTC data:

  1. Total contracts finally fell wk-over-wk (-1.7%) after hitting their February 2012 highs of 1.33M contracts last week
  2. Gold contracts ripped another +8% wk-over-wk (up 5 weeks in a row with USD down) to a February high of 178,426 contracts
  3. Oil contracts made higher YTD highs into and out of Bernanke = +6% wk-over-wk to 214,647 contracts

All the while, Commodity speculation on Farm Goods (corn, wheat, soy, etc.) dropped -7% wk-over-wk, AFTER corn prices fell, not before. Super secret: hedge funds chase commodity beta high and sell it low (they’ll sell oil today, watch) – that’s why these prices whip around so much within the construct of Bernanke’s broken promise of “price stability.”


In other Contrarian Signal news, Fund Flows may be negative in Equities (ex-ETFs, Equity Fund outflows were another -$1.9B last wk), but they dog-piled into Raw Material/Commodity funds last week at +$2.36B (per EPFR data), and Goldman just upped their “Commodities” forecast to another +18% from here!


If Goldman and Obama are right, I’ll be wrong on Gold and Oil highs for 2012 being in the rear-view mirror. And the USA will probably be in a recession within 6-12 months. Don’t take my word for it on that - ask the bond market. Policies To Inflate slow growth. To Keynesians advising Bush and Obama, that hasn’t been an elegant economic outcome either.


My immediate-term risk ranges in Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1731-1762, $107.60-111.44, $78.69-79.96, $1.28-1.30, 1.69-1.79%, and 1455-1474, respectively.


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Elegant Outcomes - Chart of the Day


Elegant Outcomes - Virtual Portfolio

Broken America?

“America feels broken.”

-Chris Hayes


That about sums it up. That’s the opening line to what I’ve found to be a surprisingly thought provoking book just published by MSNBC’s Chris Hayes, Twilight of The Elites.  Hayes is not Chris Matthews. He’s half his age, and he has much better hair.


Hays also has a much more balanced approached in attempting to explain the sometimes un-explainable - the zeitgeist of the US Political Economy: “Over the course of the last decade, a nation accustomed to greatness and progress has had to reconcile itself to an economy that seems to be lurching backwards.” (page 1)


That’s why people got so fired up about the Jack Welch suggestion about the US jobs report on Friday. Conspiracy theories are no longer conspiracy theories when they are proven to be true. The truth is that we have both a failed Keynesian spending jobless recovery and money printing induced inflation. Any government “report” suggesting otherwise only perpetuates The People’s distrust.


The other thing I like about Hayes is that he actually thinks about what I attempt to explain every morning from a completely different perspective. He grew up in the Bronx and was a Philosophy major at Brown. In Chapter 1 of his book he introduces the framework of “Insurrectionists and Institutionalists.” I am one of the former, and appreciate his making up a word for those I criticize as the latter.


“Whatever my own insurrectionist sympathies – and they are considerable – I am also stalked by the fear that the status quo, in which discredited elites and institutions retain their power, can just as easily produce destructive and antisocial impulses as it can spur transformation and reform… when people come to view all formal authority as fraudulent, good governance becomes impossible.”


Again, that’s why what Welch said is still driving the “institutionalist” media batty again this morning – but they are missing the point. Hayes nails it, calling this a “Crisis of Authority”… and the longer it “persists, the more it runs the risk of metastasizing into something that could threaten what we cherish most about American life: our ability to self-correct.” (page 29)


Back to the Global Macro Grind


It’s not my job to be a Bull, Bear, Republican or a Democrat. My job is to empathize with both sides of the debate, and attempt to probability-weight which way the crowd will lean in and around those polarized perspectives. If you listen to both sides closely enough, you can actually hear that both make some great points.


Last week, the US Dollar was down for the 1st week in 3, so stocks and commodities were up. That’s not a political point. That’s just what’s happening today in markets. They are completely correlated to currency moves. Hugo Chavez has nailed this inasmuch as both Bush and Obama did – he devalued his currency, stocks ripped another +31% higher last week to +245% YTD, and boom – re-election!


Even if you don’t have an education, you probably get the math – if I devalue what’s in your pocket, you can buy less of what you need with what’s left in your pocket. From 1920’s Germany to Charles de Gaulle in France, Policies to Inflate have been around for a lot longer than polarized journalists attempting to spin easy money any other way.


But what do we do when all that asset price inflation deflates?

  1. We get Bernanke to call it what 21% of people in France suffer from (depression)
  2. We beg and plea for more bailout policies to re-flate
  3. We say “it’s different this time”, just so we can feel better about it

All the while, economic gravity has proven to bite both Democrat and Republican politicians in the behind. Politicians have never been able to “smooth” either the Global Growth or US #EarningsSlowing cycles – and this morning, we have to once again deal with both.


At 130PM EST, Daryl Jones and I will host our Q4 2012 Global Macro Themes Conference Call (email for access) where we’ll take a closer look at the following intermediate-term TREND to longer-term TAIL risks:

  1. Earnings Slowing – what does it mean when corporate margins are coming off all-time peaks?
  2. Bubble #3 – what do Bernanke Bubbles (Commodities) do now that he’s out of communication bullets?
  3. Keynesian Cliff – what happens if the USA bonks the Debt Ceiling before The Cliff?

Sadly, some of these themes are political. That’s a direct function of our governing elite fundamentally believing that they are the solution (rather than the cause) to our economic problems.


Both Neil Barofsky (Democrat author of Bailout) and Sheila Bair (Republican ex-Chairperson of the FDIC) have recently called the likes of Timmy Geithner out in their tell-all books about the reality of our situation. The problem with government is government itself.


America isn’t broken; your trust in your government is.


My immediate-term risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, 10yr UST Yield, and the SP500 are now $1, $108.44-112.45, $79.24-80.25, $1.29-1.31, 1.59-1.74%, and 1, respectively.


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Broken America? - Chart of the Day


Broken America? - Virtual Portfolio