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MONDAY MORNING RISK MONITOR: US & EU BANKS DIVERGE

Takeaway: A divergence between US and EU financials in the latest week, with US bank swaps moving wider by 6 bps while EU bank swaps fell 10 bps.

Key Takeaways

 

* American financial swaps were generally wider last week, while European financial swaps were mostly tighter. 

 

* Sovereign Swaps around the world were largely flat week-over-week with the largest single move coming from Ireland, where swaps tightened 28 bps to 253 bps. Spain and Portugal saw their swaps widen by 4 and 8 bps, respectively, while France and Italy saw their swaps tighten by 4 and 8 bps, respectively.

 

* The 2-10 spread continued to fall last week, declining ~9 bps to end the week at 140 bps. As WFC reminded us on Friday with its 25 bps QoQ NIM decline, it's hard to fight the gravity of falling long-term rates. 

 

* Even-Steven. Our Macro team’s quantitative setup in the XLF shows 0.8% upside to TRADE resistance and 0.8% downside to TREND support.

 

Financial Risk Monitor Summary  

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

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

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

 

MONDAY MORNING RISK MONITOR: US & EU BANKS DIVERGE - Summary2

 

1. American Financial CDS –   Money center banks and large brokers saw their swaps widen between 4 and 8 bps, respectively, with the exception of MS, where swaps tightened 1 bp. The median US Financial swap widened by 6 bps, and, overall, swaps widened for 16 out of 27 domestic financial institutions. 

 

Widened the most WoW: MTG, WFC, BAC

Tightened the most WoW: HIG, ALL, PRU

Widened the most MoM: WFC, MBI, AXP

Tightened the most WoW: HIG, AIG, UNM

 

MONDAY MORNING RISK MONITOR: US & EU BANKS DIVERGE - America

 

2. European Financial CDS –  It was a fairly uneventful week for default swap action on European banks. The trend was broadly lower (swaps tightened) with a median improvement of 10 bps WoW, and an average decline of 6 bps. Overall, 28 out of 37 European reference entities we track tightened.

 

MONDAY MORNING RISK MONITOR: US & EU BANKS DIVERGE - Europe

 

3. Asian Financial CDS Asian financial swaps were mixed last week, but generally went sideways. 

 

MONDAY MORNING RISK MONITOR: US & EU BANKS DIVERGE - Asia

 

4. Sovereign CDS – Sovereign Swaps around the world were largely flat week-over-week with the largest single move coming from Ireland, where swaps tightened 28 bps to 253 bps. Spain and Portugal saw their swaps widen by 4 and 8 bps, respectively, while France and Italy saw their swaps tighten by 4 and 8 bps, respectively. 

 

MONDAY MORNING RISK MONITOR: US & EU BANKS DIVERGE - Sov Table

 

MONDAY MORNING RISK MONITOR: US & EU BANKS DIVERGE - Sov 1

 

MONDAY MORNING RISK MONITOR: US & EU BANKS DIVERGE - Sov 2

 

5. High Yield (YTM) Monitor – High Yield rates fell 0.6 bps last week, ending the week at 6.66% versus 6.67% the prior week.

 

MONDAY MORNING RISK MONITOR: US & EU BANKS DIVERGE - HY

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 3.1 points last week, ending at 1735.

 

MONDAY MORNING RISK MONITOR: US & EU BANKS DIVERGE - LLI

 

7. TED Spread Monitor – The TED spread fell 2 bps last week, ending the week at 23.5 bps. Like Euribor-OIS, the TED Spread has moving steadily lower YTD.

 

MONDAY MORNING RISK MONITOR: US & EU BANKS DIVERGE - TED

 

8. Journal of Commerce Commodity Price Index – The JOC index fell 6.0 points, ending the week at 0.4 versus 6.4 the prior week.

 

MONDAY MORNING RISK MONITOR: US & EU BANKS DIVERGE - JOC

 

9. Euribor-OIS spread – The Euribor-OIS spread tightened by 1 bp to 12 bps, and continues to make new, multi-year lows. 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: US & EU BANKS DIVERGE - Euribor OIS

 

10. ECB Liquidity Recourse to the Deposit Facility – This series has been generally trending lower since July of this year. 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: US & EU BANKS DIVERGE - ECB

 

11. Markit MCDX Index Monitor – Last week spreads widened 3 bps, ending the week at 138 bps versus 135 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: US & EU BANKS DIVERGE - MCDX

 

12. Chinese Steel –  Chinese steel prices ended the week at 3,806 ton/Yuan. As a reminder, there were no Chinese steel quotes in the prior week because of  the Mid-Autumn Festival holiday. The general trend over the last few months has been down. However, over the last month, Chinese Steel has rallied 9.3%.  

 

MONDAY MORNING RISK MONITOR: US & EU BANKS DIVERGE - 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 to 140 bps, 9 bps tighter than a week ago.

 

MONDAY MORNING RISK MONITOR: US & EU BANKS DIVERGE - 2 10

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.8% upside to TRADE resistance and 0.8% downside to TREND support.

 

MONDAY MORNING RISK MONITOR: US & EU BANKS DIVERGE - XLF

 

Margin Debt - August: +0.73 standard deviations 

NYSE Margin debt rose to $287 billion in August from $278 billion in July. It's interesting to note that this most recent print brings the two series back into convergence. 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: US & EU BANKS DIVERGE - Margin Debt

 

Joshua Steiner, CFA

 

Robert Belsky

 

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THE M3: NEW S'PORE CASINO BILL; S'PORE HOME SALES; PACKAGE DATA

The Macau Metro Monitor, October 15, 2012

 

 

NEW CASINO LAWS HERE AFTER MONTH-LONG CONSULTATION Strait Times

Several new rules were introduced by the Singapore Parliament with regards to the two IRs, including one to limit how many times a person who is "financially vulnerable" can visit the casinos.  This first step in amending the law on casinos comes after a month-long consultation on various proposed changes to the Casino Control Act.  Another change is the setting up an evaluation panel to assess the overall performance of the resorts, to ensure that Marina Bay Sands and Resorts World Sentosa constantly develop and promote their non-gaming components to remain attractive to tourists.

 

The full bill can be viewed here: \http://www.parliament.gov.sg/sites/default/files/Casino%20Control%20(Amendment)%20Bill%2028-2012.pdf

 

SINGAPORE'S HOME SALES REBOUND TO HIGHEST IN THREE YEARS Bloomberg

According to the Urban Redevelopment Authority, home sales in September climbed to 2,621 units from 1,427 units in August.  That’s the highest since July 2009.  For 3Q, sales climbed 7.7% to 5,999 units.  Sales climbed after developers slowed marketing their projects in August due to the “Hungry Ghost Month,” which is considered an unlucky time to buy according to Chinese tradition.

 

PACKAGE TOURS AND HOTEL OCCUPANCY RATE FOR AUGUST 2012 DSEC

Visitor arrivals in package tours increased by 24.8% YoY to 913,613 in August 2012.  Visitors from Mainland China (674,949) went up by 28.3%, with 280,952 coming from Guangdong Province; besides, those from Taiwan (77,749); Hong Kong (36,183); Republic of Korea (33,169) and Japan (27,518) increased by 41.2%, 4.0%, 8.6% and 36.4% respectively.  The average length of stay decreased by 0.18 night to 1.3 nights.

 



IDEA ALERT: SHORT MGM

Keith added MGM on the short side to our Real-Time Positions at $10.24. MGM's  TREND resistance is $10.71 with no TRADE support to $9.41.

 

 

The Las Vegas Strip is back in a slump.  Slot volume, which we believe is the most important barometer of the Strip, has declined for five consecutive months and the bleeding will likely continue through Q1 2013.  Slot revenue has outpaced slot volume growth for years as the player payout has declined.  We don’t think a strategy of “price increases” through worse player odds is sustainable.  Table volume ex baccarat has also worsened recently, which suggests the only lifeline for the Strip is the always volatile baccarat business.  Demographics are partly to blame.  Younger generations are just not interested in slot machines.  The average casino visitor continue to rise, with 65+ year olds rising to 35% of the visitors.  And Baby boomers won't live forever.

 

While we are positive on Macau, MGM is still generates the majority of its EBITDA in the US and most of that on the LV Strip.  We are negative on the long-term fundamentals of domestic gaming.  Over the near-term, we see earnings risk.  We're currently 3% below the Street for Q3 EBITDA for MGM.  

 

 

IDEA ALERT:  SHORT MGM - MGM


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Noisy Truth

“We think we want information, when we really want knowledge.”

-Nate Silver

 

Within the context of the always-on tweeter-net, I thought that was a really thoughtful quote from the introduction to Nate Silver’s new book, The Signal and The Noise. I’ll be reviewing his framework for forecasting in the coming weeks.

 

Silver says the “signal is the truth” and “the noise is what distracts us from the truth” (page 17). Without having read the bulk of the book yet, I can already assure you that doesn’t hold when attempting to proactively predict Risk Ranges in real-time markets.

 

Our most immediate-term risk management duration (TRADE) is, by definition, noisy. Whereas our intermediate and long-term (TREND and TAIL) work can often be mistaken as truth when the noise isn’t confusing our confirmation biases.

 

Back to the Global Macro Grind

 

Whether we like hearing it or not, we all have confirmation biases. That’s because we are human. At a bare minimum, I think Nate Silver and I agree on that. Thinking, Fast and Slow’s Daniel Kahneman would too.

 

Our risk management day involves grinding quantitative economic realities (data) with behavioral finance (timing). In order to make a probability-weighted forecast (taking a long or short position) we always look back, across durations, before looking ahead.

 

For us, the signal (and the noise) is real-time market prices – here’s what they did last week, across asset classes:

  1. US Dollar Index =up +0.4%, closing up for the 3rd week in the last 4 at $79.65 (bullish on both TRADE and TAIL durations)
  2. EUR/USD = down -0.7%, looking like the upside down of the USD Index (bearish on both TRADE and TAIL durations)
  3. CRB Commodities Index = down -0.3% (down -4.7% from the Bernanke Top, printing to Infinity & Beyond)
  4. Oil (blended Brent and WTIC) = up +2% (WTIC down -4.3% from the Bernanke Top)
  5. Gold = down -1.4%, as it continues to make a series of lower long-term highs (vs the 2011 Bernanke Bubble top)
  6. Copper = down -2.2% (bearish on both TRADE and TAIL durations)
  7. SP500 = down -2.2% (bearish TRADE resistance = 1448; bullish TREND support = 1419)
  8. Nasdaq = down -2.9% (bearish TRADE resistance = 3129; bullish TREND support = 3022)
  9. US Equity Volatility (VIX) = up +12.6% (bullish on both TRADE and TAIL durations)
  10. US 10yr Treasury Bond Yield = down -5% to 1.66% (bearish on both TRADE and TAIL durations)

In other words, there were plenty of signals and noises, across durations, in last week’s closing prices. There is also a confirmation bias in attempting to describe what happened because I, unlike Keynesian policy makers, believe that central planners are the primary causal factor in driving currency values and market correlations.

 

In the private sector, it’s ok to have a confirmation bias – you just have to be right more than you are wrong. If you’re wrong more than you are right, it’s ok - just go work for the government.

 

What do you do when you are wrong? For us, it’s pretty simple – we hold ourselves accountable to the mistake, try to learn from it, and grow. What other people do when they face adversity is up to them.

 

With the SP500 not having an up day in the last 6, what is the truth? Do growth and #EarningsSlowing matter? Or did it from the price where a lot of people thought Bernanke’s money printing meant the “fundamentals don’t matter”?

 

What are the fundamentals?

  1. US GDP Growth of 1.26% in Q2 2012, or consensus expectations of +3-4% growth 6 months ago?
  2. Global GDP Growth of 1.3% (Singapore just reported that for Q3 2012) or +3% as far as the excel model can see?
  3. The worst preannouncement ratio (4:1) of #EarningsSlowing misses since Q3 of 2001, or stocks are “cheap”?
  4. US Technology Sector (XLK) down -3.5% in the last month, or what it’s “up YTD”?
  5. US Financials Sector (XLF) down -1.6% last week on JPM/WFC earnings, or what they are “up YTD”?
  6. Chinese inflation down sequentially to +1.9% (SEP) or India wholesale inflation up sequentially to +7.8% (SEP)?

Some might say all of this doesn’t matter, and all you need to do is know where a 1-factor/1-duration simple moving average model tells you where the market is and everything is either fine. Some might say that all of it matters and is measurable. That’s closer to the Noisy Truth.

 

Our signals say all this noise adds up to us having 12 LONGS and 9 SHORTS for this morning’s US stock market open. Provided that the SP500 doesn’t close > 1448, we’ll likely sell on green bounces, and buy on red corrections closer to 1419.

 

Our immediate-term risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1, $112.68-115.08, $79.34-80.05, $1.28-1.30, 1.61-1.71%, and 1, respectively.

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Noisy Truth - Chart of the Day

 

Noisy Truth - Virtual Portfolio


THE WEEK AHEAD

The Economic Data calendar for the week of the 15th of October through the 19th 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


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