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European Banking Monitor: Momentum Remains Broadly Positive

Takeaway: Globally, bank swaps tightened last week, while sovereign swaps widened. Euribor-OIS is continuing its slow, but steady, rise.

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:

 

* European Bank CDS: In Europe, swaps were tighter in nearly all banks we track. 36 out of 37 bank swaps tightened. German and French banks saw considerable tightening along with banks from Spain and the U.K. Interestingly, Mario Monti, prime minister of Italy, resigned overnight. All in all, Monti's resignation came as a surprise and may increase uncertainty in Italy and in the Eurozone.   

 

* Euribor-OIS: The Euribor-OIS spread, a measure that gauges European counter party risk, rose 2 bps last 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.

 

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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

 

(o)

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European Financials CDS Monitor – European bank swaps posted an impressive rally last week with 36 out of the 37 reference entities we track tighter. Banks in France, Germany, Italy, the United Kingdom and Spain all were notably tighter. 

 

European Banking Monitor: Momentum Remains Broadly Positive  - 22. banks

 

Euribor-OIS spread – The Euribor-OIS spread widened by 2 bps to 14.2 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: Momentum Remains Broadly Positive  - 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: Momentum Remains Broadly Positive  - 22. facility


The Global Connection

Client Talking Points

Saving Europe

Europe is back in the spotlight, just in time to distract us from the mess in the United States known as the fiscal cliff. While the 10-year yields on various Eurozone countries are relatively low compared to levels we saw during the summer of this year, global growth continues to slow. France’s Industrial Production growth is down 1.1% for October after a -2.5% drop in September, Italy’s GDP growth is down -2.4% year-over-year for Q3 of 2012 and Japan’s GDP growth is down -3.5% quarter-over-quarter SAAR for Q3 of 2012. For anyone who thought things were peachy keen, think again. Factor in the fact that we’re two weeks away from hitting the debt ceiling and there’s plenty of cause for concern. 

Asset Allocation

CASH 52% US EQUITIES 12%
INTL EQUITIES 6% COMMODITIES 0%
FIXED INCOME 18% INTL CURRENCIES 12%

Top Long Ideas

Company Ticker Sector Duration
YUM

New unit openings in China and strength in YRI and US should offset China weakness in 1H13. China SRS growth is sensitive to the economy but new unit growth and ROIIC are likely to be supported by continuing growth of the consuming class in China. Looking at operating income by geography for YUM/MCD/SBUX, we can see that YUM is the most geographically diverse. This is manifest in YUM’s more stable EPS growth and price performance over the last 10 years.

SBUX

Uncertainty in US from a macro perspective (jobless claims uptick) gives us pause from TRADE perspective although coffee prices will serve as a tailwind going forward. Company is becoming more complex, taking on risk as it acquires new brands. Longer-term, we view Starbucks, along with YUM, as one of the most attractive global growth stories in our space.

FDX

Margins are in a cycle trough as the USPS is on the brink. FDX is taking more share in the U.S. and following the recent $TNT news flow we think $UPS is in a tough spot.

Three for the Road

TWEET OF THE DAY

“Your dad's "distribution model" is crumbling.” -@ReformedBroker

QUOTE OF THE DAY

“None but a coward dares to boast that he has never known fear.” -Ferdinand Foch

STAT OF THE DAY

McDonald’s saw a stronger-than-expected 2.4% rise in sales in November. Same  restaurant sales rose 1.4% in Europe, US sales at established restaurants rose 2.5%.


MONDAY MORNING RISK MONITOR: MOMENTUM REMAINS BROADLY POSITIVE

Takeaway: Globally, bank swaps tightened last week, while sovereign swaps widened. Euribor-OIS is continuing its slow, but steady, rise.

Key Takeaways

 

* U.S. Bank CDS: American bank swaps were tighter week-over-week with the average issuer seeing roughly 10 bps of improvement. Moneycenter banks and large brokers were tighter by 7 bps on average while consumer finance companies and Insurance companies tightened by 5 bps and 2 bps, respectively. Conspicuous movers (i.e. those that widened) included SLM widening by 2 bps, MBI widening by 116 bps, and MMC widening by 1 bps.  

 

* European Bank CDS: In Europe, swaps were tighter in nearly all banks we track. 36 out of 37 bank swaps tightened. German and French banks saw considerable tightening along with banks from Spain and the U.K. Interestingly, Mario Monti, prime minister of Italy, resigned overnight. All in all, Monti's resignation came as a surprise and may increase uncertainty in Italy and in the Eurozone.  

  

* Sovereign CDS: Sovereign swaps widened week-over-week. Ireland was the worst performer, widening by 18 bps. Spain and Italy were also laggards, widening by 14 and 10 bps, respectively.  Portugal was the positive outlier, tightening by 4.9% week-over-week.

 

* Euribor-OIS: The Euribor-OIS spread, a measure that gauges European counter party risk, rose 2 bps last week. 


* Quantitative Setup: Our Macro team’s quantitative setup in the XLF shows no upside to TRADE resistance and 1.5% downside to TRADE support.

 

Financial Risk Monitor Summary  

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

• Intermediate-term(WoW): Positive / 6 of 12 improved / 2 out of 12 worsened / 5 of 12 unchanged  

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

 

MONDAY MORNING RISK MONITOR: MOMENTUM REMAINS BROADLY POSITIVE - Summary

 

1. U.S. Financial CDS   Following Europe's lead, U.S. financials were broadly tighter week-over-week. The sole exception was MBIA, which widened by 116 bps. Swaps tightened for 24 out of 27 domestic financial institutions. 

Tightened the most WoW: AIG, LNC, GNW

Widened the most WoW: MBI, MMC, SLM

Tightened the most WoW: C, GS, BAC

Widened the most MoM: ACE, RDN, MBI

 

MONDAY MORNING RISK MONITOR: MOMENTUM REMAINS BROADLY POSITIVE - American CDS

 

2. European Financial CDS  European bank swaps posted an impressive rally last week with 36 out of the 37 reference entities we track tighter. Banks in France, Germany, Italy, the United Kingdom and Spain all were notably tighter. 

 

MONDAY MORNING RISK MONITOR: MOMENTUM REMAINS BROADLY POSITIVE - Europe2

 

3. Asian Financial CDS - Asian financials tightened broadly last week with 11 out of 12 reference entities we track better week over week. Japanese and Indian bank swaps were all tighter week-over-week. The largest improvements were at Japanese brokers and Indian banks.

 

MONDAY MORNING RISK MONITOR: MOMENTUM REMAINS BROADLY POSITIVE - Asia

 

4. Sovereign CDS  With the exception of Portugal, European Sovereign Swaps widened last week. Portuguese sovereign swaps tightened by -24 bps to 474 bps. Ireland was the worst performer with swaps widening 18 bps to 197 bps. 

 

MONDAY MORNING RISK MONITOR: MOMENTUM REMAINS BROADLY POSITIVE - Sov Table

 

MONDAY MORNING RISK MONITOR: MOMENTUM REMAINS BROADLY POSITIVE - Sov1

 

MONDAY MORNING RISK MONITOR: MOMENTUM REMAINS BROADLY POSITIVE - Sov2

 

5. High Yield (YTM) Monitor High Yield rates fell 24.1 bps last week, ending the week at 6.32% versus 6.56% the prior week.

 

MONDAY MORNING RISK MONITOR: MOMENTUM REMAINS BROADLY POSITIVE - HY

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 8.6 points last week, ending at 1739.

 

MONDAY MORNING RISK MONITOR: MOMENTUM REMAINS BROADLY POSITIVE - LLI

 

7. TED Spread Monitor – The TED spread fell less than a basis point last week, ending the week at 22.6 this week versus last week’s print of 23.15.

 

MONDAY MORNING RISK MONITOR: MOMENTUM REMAINS BROADLY POSITIVE - TED

 

8. Journal of Commerce Commodity Price Index – The JOC index rose 2.7 points, ending the week at 1.6 versus -1.1 the prior week.

 

MONDAY MORNING RISK MONITOR: MOMENTUM REMAINS BROADLY POSITIVE - JOC

 

9. Euribor-OIS spread – The Euribor-OIS spread widened by 2 bps to 14.2 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: MOMENTUM REMAINS BROADLY POSITIVE - 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: MOMENTUM REMAINS BROADLY POSITIVE - ECB

 

11. Markit MCDX Index Monitor –  Last week spreads tightened 2 bps, ending the week at 131 bps versus 133 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: MOMENTUM REMAINS BROADLY POSITIVE - MCDX

 

12. Chinese Steel –Steel prices in China fell 0.5% last week, or 18 yuan/ton, to 3548 yuan/ton. Since their recent highs on Oct 10, Chinese construction steel prices have fallen ~7%. The broader downward trend, which started August of last year, remains intact and is a sign of ongoing weakness in the Chinese construction market. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

 

 

MONDAY MORNING RISK MONITOR: MOMENTUM REMAINS BROADLY POSITIVE - CHIS

 

13. 2-10 Spread – Last week the 2-10 spread widened by 1 bp to 138 bps. We track the 2-10 spread as an indicator of bank margin pressure.  

 

MONDAY MORNING RISK MONITOR: MOMENTUM REMAINS BROADLY POSITIVE - 2 10

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows no upside to TRADE resistance and 1.5% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: MOMENTUM REMAINS BROADLY POSITIVE - XLF

 

Margin Debt  – October: +1.19 Standard Deviations

NYSE Margin debt rose to $318 billion in October from $315 billion in September. 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 October. 

 

MONDAY MORNING RISK MONITOR: MOMENTUM REMAINS BROADLY POSITIVE - NYSE margin debt

 

Joshua Steiner, CFA

 

Robert Belsky

 

 


real-time alerts

real edge in real-time

This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.


Human Action

“Nations stumble upon establishments which are indeed the result of human action…”

-Hayek

 

That’s a simple but appropriate quote for central planners to noodle over this morning. It comes from Adam Ferguson’s economic history work that is cited by Ralph Raico in the book I am currently studying, Classical Liberalism and the Austrian School (pg 27).

 

Human Action, of course, wasn’t Hayek – it was the title of Ludvig von Misses’ magnum opus in 1949. If you want to begin to attempt to understand the difference between Keneysian and Austrian economics, start there.

 

Inasmuch as there are some differences between Bernanke and Krugman, there are between von Misses and Hayek as well.  In the former versus the latter, we are talking about derivatives of centrally planned versus free-market based economic ideologies.

 

Back to the Global Macro Grind

 

France, Italy, and Japan are “stumbling upon establishments” (Hayek) of Keynesian economic policy decisions again this morning:

  1. FRANCE Industrial Production growth for OCT = down another -1.1% (after a -2.5% drop in SEP)
  2. ITALY GDP Growth = down -2.4% year-over-year for Q3 of 2012
  3. JAPAN GDP Growth = down -3.5% QoQ SAAR for Q3 of 2012

I know. It’s too bad all 3 of these centrally planned economies are out of bullets and couldn’t jack up government spending like the USA did (+9.5% annualized government spending ramp in Q312). Maybe that’s why Italy’s Super Mario Monti says ‘I’m out!’

 

On the globally interconnected risks associated with sovereign Debt & Deficit Spending, as the late Milton Friedman said in 1991, maybe “there’s only one thing left to do: fight.” On that score, instead of being taxed by the #PoliticalClass and signing off on an unlimited US Debt Ceiling, at least some Americans still look ready to stand up for their individual liberties.

 

But what if the USA gets a debt/deficit deal? Short-term, I assume stocks will rip. But, in the long-run, what will happen to the US economy? What will happen to your children’s liberties?

 

In the long-run, for America to achieve sustainable economic growth, it needs:

  1. To restore its competitive advantage as one of the last standing free-market economies
  2. To resuscitate the credibility of her hard earned currency – the world’s reserve currency

The #PoliticalClass, of course, thinks they only get paid if we don’t get what we need. Then they perpetuate pinning us all against one another via class, gender, and race warfare.

 

The good news last week was that the government got out of the way. There was no fiscal deal. There was no Ben Bernanke decision to print to double-infinity and beyond either.

 

With the US Dollar up +0.35% on the week, you also got a real-time tax cut:

  1. CRB Commodities Index (19 commodities) = down another -1% wk-over-wk (down -8.4% from the Bernanke SEP Top)
  2. Brent and WTIC Oil prices = down another -3.7% and -3.3% wk-over-wk, respectively
  3. Corn = down another -2% wk-over-wk (down over 12% from all-time highs in 2012)

At the same time, institutional investors betting that the USA becomes more like France got sacked for the 1st week in the last 3:

  1. CFTC Futures & Options contracts (betting net long commodities) = down -3.4% on the week to 898,000 net long positions
  2. Gold saw net long positions get hammered by the most since March = down -25% wk-over-wk to 127,000 net longs
  3. Wheat got crunched for another -20% wk-over-wk drop in net long positions = down to 34,000 net longs

People who drive to work and eat throughout the day loved it; institutions long inflation didn’t. Last week’s net long positions in farm goods fell -10% wk-over-wk and are down almost 50% from their 2012 all-time highs (Wheat’s net long position is down -57% from its all-time high).

 

Get the government out of the way, and you’ll take expectations for asset price inflation in food and energy prices away. That’s something that you don’t hear out of Bernanke and Geithner do you? You’d think Obama’s “middle class” warfare thing would pick up on the marketing opportunity as well. Not.

 

And that’s really sad because our Human Actions should be better than that. On government policy orders, the difference between Hayek and Von Mises was actually that Hayek was more socially liberal. “For the tradition that Hayek recommends, on the contrary, such order is best understood as coming about through a process of adaptive evolution.” (Raico, page 27).

 

And that’s all I have to write about that. Short commodities on green and buy consumption on red until we really make this Italy.

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1, $106.51-109.53, $80.11-80.67, $1.28-1.30, 1.58-1.65%, and 1, respectively.

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Human Action - Chart of the Day

 

Human Action - Virtual Portfolio


THE M3: JUNKETS; VIP GAMING; SOUTH KOREA

The Macau Metro Monitor, December 10, 2012

 

 

NEPTUNE BOSS SAYS JUNKETS NOT INVOLVED IN CRIME Macau Business

Nicholas Niglio, CEO of Neptune Group Ltd, dismisses rumors that junket operators in Macau are involved in illegitimate businesses.  “They [the promoters] will not give up their credibility for such a small return from illegal activities,” he added, noting the junket activity in Macau is regulated and governed by the Gaming Inspection and Coordination Bureau. As of June-end, Neptune controlled 51 VIP tables.  Around 2,000 licensed agents work for these tables.

 

Niglio also said that the VIP sector in Macau is now facing a consolidation period.  “It is time for industry consolidation as small junket promoters are gradually absorbed by mid-sized ones.”

 

VIP GAMING TO STAY STABLE IN 2013: FRANCIS TAM Macau Business

Secretary Tam said he had not heard anything about any possible restrictions to be imposed by Beijing that could affect the city’s VIP gaming sector.  “We expect that the VIP gaming business will enjoy stable development in the coming year,” said Tam.  The secretary was commenting on rumors that plans by the mainland authorities to strengthen their fight against money laundering and corruption will affect the casino industry.

OKADA EYES CASINO DEAL IN SOUTH KOREA Macau Business

Universal Entertainment Corp last week announced that it has signed a non-disclosure agreement with the Shinsegae Group of South Korea.  “The agreement was signed in preparation for commencing discussions regarding the commercial facilities at the casino resort complex development project at Yeongjongdo Island, Incheon, Korea being undertaken by the Shinsegae Group,” Universal Entertainment said.


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