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MONDAY MORNING RISK MONITOR: DATA DETERIORATES IN LAST WEEK OF THE YEAR

Takeaway: The widening TED Spread, Chinese banks and Japanese yields are all cause for increased vigilance. Mortgage insurers continue to rally.

Key Takeaways

 

TED Spread: The TED spread posted another notable increase last week, rising 5 bps to 30 bps. The move came principally from the Treasury side, where yields at the short end compressed notably week-over-week. This series has been quietly breaking out after a long hibernation, which historically has been a warning sign.  

 

* Chinese Banks: Chinese banks were conspicuously wider last week. China Development Bank widened 22 bps to 109 bps, while Export-Import Bank of China widened 21 bps to 107 bps. Bank of China was also wider by 12 bps to 109 bps. 

 

* Japanese Sovereign Swaps: The only notable move in sovereign swaps last week was Japan, widening by a further 8 bps, bringing the two week move to 13 bps. While that may not sound like a lot, it's off a base of 69 bps. Clearly, linking fiscal control to monetary policy explicitly has the market concerned (finally) about longer-term solvency issues. 

 

* High Yield: The average rate on high yield corporate debt rose 50 bps week-over-week from 6.28% to 6.77% 

 

Financial Risk Monitor Summary  

• Short-term(WoW): Negative / 1 of 12 improved / 5 out of 12 worsened / 7 of 12 unchanged

• Intermediate-term(WoW): Negative / 4 of 12 improved / 5 out of 12 worsened / 4 of 12 unchanged

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

 

MONDAY MORNING RISK MONITOR: DATA DETERIORATES IN LAST WEEK OF THE YEAR - Summary

 

1. American Financial CDS –  Large cap banks and brokers were all wider last week, rising by an average of 5 bps. MS was the laggard with a 10 bps rise. Meanwhile, mortgage insurers MTG and RDN continue to tighten on the housing recovery. Swaps for the two remaining pure-play MIs are tighter by just under 200 bps month-over-month, though their swaps are still in the range. Insurance swaps were largely flat week over week with the exception of bond guarantor MBIA, which widened by 50 bps. 

 

Widened the most WoW: C, MS, WFC

Tightened the most WoW: RDN, MTG, ALL

Widened the most/ tightened the least MoM: MBI, SLM, WFC

Tightened the most WoW: GNW, AIG, RDN

 

 

MONDAY MORNING RISK MONITOR: DATA DETERIORATES IN LAST WEEK OF THE YEAR - American

 

2. European Financial CDS – Banco Popular of Spain widened by 45 bps to 481 bps, making it the largest mover on the week. The only notable tightening came from Greece's banks, which saw spreads compress by an average of 39 bps, albeit off of very high levels. The rest of Europe's banks were largely uneventful last week.  

 

MONDAY MORNING RISK MONITOR: DATA DETERIORATES IN LAST WEEK OF THE YEAR - European

 

3. Asian Financial CDS – Chinese banks were conspicuously wider last week. China Development Bank widened 22 bps to 109 bps, while Export-Import Bank of China widened 21 bps to 107 bps. Bank of China was also wider by 12 bps to 109 bps. Japanese financials were largely unchanged week over week, as were Indian banks. 

 

MONDAY MORNING RISK MONITOR: DATA DETERIORATES IN LAST WEEK OF THE YEAR - Asia

 

4. Sovereign CDS – The only notable move in sovereign swaps last week was Japan, widening by a further 8 bps. In the prior week, Japan widened by 5 bps. Japanese sovereign CDS have moved from 69 bps to 81 bps in two weeks on the heels of an explicit linking of fiscal control to monetary policy, which is an interesting development worth keeping an eye on. European sovereign swaps were broadly higher last week, though only by a few basis points. Italy widened by 9 bps, making it the most noteworthy EU sovereign in an otherwise uninteresting week. 

 

MONDAY MORNING RISK MONITOR: DATA DETERIORATES IN LAST WEEK OF THE YEAR - Sov Table

 

MONDAY MORNING RISK MONITOR: DATA DETERIORATES IN LAST WEEK OF THE YEAR - Sov1

 

MONDAY MORNING RISK MONITOR: DATA DETERIORATES IN LAST WEEK OF THE YEAR - Sov2

 

5. High Yield (YTM) Monitor – High Yield rates rose 50 bps last week, ending the week at 6.77% versus 6.28% the prior week.

 

MONDAY MORNING RISK MONITOR: DATA DETERIORATES IN LAST WEEK OF THE YEAR - High Yield

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 2.5 points last week, ending at 1749.

 

MONDAY MORNING RISK MONITOR: DATA DETERIORATES IN LAST WEEK OF THE YEAR - LLI

 

7. TED Spread Monitor – The TED spread rose 5 bps last week, ending the week at 30 bps this week versus last week’s print of 25 bps.

 

MONDAY MORNING RISK MONITOR: DATA DETERIORATES IN LAST WEEK OF THE YEAR - TED

 

8. Journal of Commerce Commodity Price Index – The JOC index rose 1.6 points, ending the week at 6.7 versus 5.1 the prior week.

 

MONDAY MORNING RISK MONITOR: DATA DETERIORATES IN LAST WEEK OF THE YEAR - JOC

 

9. Euribor-OIS spread – The Euribor-OIS spread tightened by less than 1 bp to 12 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: DATA DETERIORATES IN LAST WEEK OF THE YEAR - 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: DATA DETERIORATES IN LAST WEEK OF THE YEAR - ECB

 

11. Markit MCDX Index Monitor – Last week spreads widened , ending the week at 140 bps versus 137 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: DATA DETERIORATES IN LAST WEEK OF THE YEAR - MCDX

 

12. Chinese Steel –Steel prices in China rose 0.5% last week, or 19 yuan/ton, to 3642 yuan/ton. Since their recent highs on Oct 10, Chinese construction steel prices have fallen ~4.9%. 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: DATA DETERIORATES IN LAST WEEK OF THE YEAR - 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 145 bps, -4 bps tighter than a week ago.

 

MONDAY MORNING RISK MONITOR: DATA DETERIORATES IN LAST WEEK OF THE YEAR - 2 10

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.9% upside to TRADE resistance and 0.3% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: DATA DETERIORATES IN LAST WEEK OF THE YEAR - XLF

 

Margin Debt  – November: +1.37 Standard Deviations

NYSE Margin debt rose to $327 billion in November from $318 billion in October. 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 November.   

 

MONDAY MORNING RISK MONITOR: DATA DETERIORATES IN LAST WEEK OF THE YEAR - Margin Debt

 

Joshua Steiner, CFA

 

Robert Belsky

 



Second-Hand Dealers

“There is little that the ordinary man of today learns about events or ideas except through the medium of this class.”

-Hayek

 

After spending plenty of time with common sense people (my family and friends) for the last week, I’ve reinforced an entrenched view in my thick hockey skull about America’s #PoliticalClass – they don’t get free-market liberty and/or economics.

 

By the 1960s, F.A. Hayek thought the same about Europe’s political elite but he was, as Joseph Schumpeter argued “in his review of Hayek’s Road to Serfdom, polite to a fault.” (Classical Liberalism and The Austrian School, page 119).

 

Particularly when I have to get up at this hour on family vacation, I’m not always polite; especially to politicians who are lying to me. When a Republican is arguing for a new calculation for “chained CPI” and a Democrat for changing the rules to raise the US Debt Ceiling, I’ll call them out for who they are (Hayek called them this first) – “Second-Hand Dealers in ideas.”  (The Intellectuals and Socialism, Hayek 1976).

 

Back to the Global Macro Grind

 

Want a deal on the #KeynesianCliff? Here’s the latest deal that encroaches on your liberty:

 

  1. SPENDING – after the US government has changed how they calculate inflation 9x since 1996, the Republicans Second-Hand Idea is to cut spending on old people and screw them over with an understated COLA (cost of living adjustment in Social Security). Both Bush and Obama did this with Bernanke – change the calculation for inflation so that there never is any inflation to report.
  2. DEBT CEILING – right on time with Hedgeye’s forecast that the US would bonk the debt ceiling by the end of December, Geithner “officially warned” Congress of the math (thanks for the early look buds). If you didn’t know why Pelosi wants Obama to have a veto (not having to have Congress vote on raising the US Debt Ceiling beyond $16.394 TRILLION), now you know.

 

Oh, and then there’s taxes – but who wants to read about #ClassWarfare and taxes anymore anyway? These second-hand Marxist ideas are as old socialism itself. As of this weekend, even the French Court agrees, saying “non, non” on 75% tax rates for les “riches.”

 

All the while, for the last few weeks (actually US stocks are down for 3 of the last 4 weeks taking December to-date for the SP500 to -1%; SP500 down -4.9% from the September YTD top), people are starting to freak-out about “what the cliff will do to the US recovery.”

 

Please don’t let these central planners freak you out. Fire them, and let them freak-out.

 

First Hand Idea: the only sustainable US economic recovery you are ever going to have is through Strong Dollar, Down Commodity Inflation. It worked for Reagan in the 1980s. It worked for Clinton in the 1990s. Keynesian Policies To Inflate didn’t work for Bush or Obama.

 

On the monetary policy side, getting Bernanke out of the way has helped – now we need to get Congress out of the way. So rise above the couch – and turn your TV off while these people perpetuate a crisis that they created. Don’t pay them a lick of your free time or respect.

 

To review, since Bernanke’s Top (September 14th, 2012) where he said he’d print to infinity and beyond:

 

  1. US Dollar Index = up for 10 of 14 weeks (making higher all-time lows, holding $78.11 long-term TAIL support)
  2. CRB Commodities Index = down -8.4% (easily the worst performing major asset class in the world over that time-period)
  3. Gold = down -13.1% in 3 months (yes, real inflation-adjusted economic growth stabilizing is bad for bonds and gold)

 

Yes, on the margin, that’s what I am talking about – bring on the spending cuts and stick a cap on that US debt clock while you are at it. That’s all good for the US Dollar. What’s good for the Dollar is bad for food and energy prices – that’ll be your real-time tax cut.

 

Expectations update on Bernanke’s Bubble (Commodities):

 

  1. CFTC Futures & Options net long positioning dropped another -11% wk-over-wk to 675,625 contracts
  2. CFTC net longs are now down -49.6% from their all-time high (1.34 million contracts) in SEP 2012, post Qe4
  3. Gold’s net long position fell another -9% last week to 101,922 contracts (lowest since August 2012)

 

As commodity inflation (real-world inflation as opposed to this cochamamy Keynesian concept of “chained CPI”) fell, real inflation-adjusted global growth stabilized. That’s not a Second-Hand Idea. That’s a fact:

 

  1. Chinese PMI manufacturing for DEC hit its highest level since May of 2011 (at 51.5)
  2. Chinese Stocks (Shanghai Composite) closed up another +1.6% overnight (up +15.8% in a straight line in DEC alone!)
  3. South Korean Inflation (CPI) dropped to a 4-month low in DEC (1st Asian inflation reading for DEC) to 1.4%

 

Do you think people in Asia who are trying to put food on their family table for the holidays care about what a politicized donkey is doing in D.C. this morning? Get real. They can think for themselves too.

 

Our immediate-term Risk Ranges (support and resistance) for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1, $109.71-111.48, $3.51-3.61, $79.52-79.97, $1.31-1.33, 1.70-1.78%, and 1, respectively.

 

From my family and firm to yours, we’d like to wish you a happy, healthy, and free 2013,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Second-Hand Dealers - Chart of the Day

 

Second-Hand Dealers - Virtual Portfolio


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.

Praying For Courage

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

“Courage is rightly esteemed the first of human qualities because it guarantees all others.”

-Winston Churchill

 

That’s a quote from Churchill in “Great Contemporaries” that is cited by Paul Reid in the preamble to The Last Lion. “He believed in virtue and right … he taught himself well and created a code he could live by.” (page 23)

 

While I don’t think there are any words I can write to comfort families in my neighboring town of Newtown, CT, I just wanted to take time this morning to say that they are in our thoughts and prayers.

 

Back to the Global Macro Grind

 

US stocks closed down for the 2nd consecutive day on Friday, taking their 2-day correction to -1%. Despite the fanfare of “stocks being up YTD”, US stocks have been weak since mid-September. For Q4 of 2012, the SP500 and Nasdaq are down -1.9% and 4.7%, respectively.

 

Where do we go from here?

 

If it wasn’t for Apple (AAPL) and #EarningsSlowing (Schlumberger, the #3 component of the Energy Sector ETF (XLE) guided down on Friday), everything would be pseudo-fine this morning. But you can’t back those things out – they are big things.

 

So is the Global Growth Cycle – and while we aren’t raging bulls suggesting that growth is back, we are seeing the causal factor that stabilizes global economic growth (Commodity Price Deflation) start to take hold where it matters most – price and expectations.

 

On the expectations front, check out last week’s CFTC Futures and Options net long positioning in commodities:

  1. Total Net Long commodity contracts fell another -11% wk-over-wk to 802,817
  2. Net long commodity contracts continue to crash from their all-time high (SEP 2012), down -40%!
  3. Sugar contracts had their biggest 1 wk drop in 5 years at -68% last week to 6,056 contracts
  4. Wheat contracts plummeted -67% wk-over-wk to 11,219 net long contracts
  5. Oil net long positions were down -21% wk-over-wk (biggest drop since May)
  6. Farm Goods dropped another -10% in the aggregate to 484,088 net longs

While expected commodity deflation is crystal clear in the futures/options market at this point, prices and expectations don’t always agree. Gold is the not-so-shining example of that statement:

  1. Gold bets actually keep going up as the price goes down (price = down for 3 straight wks; net longs up for 4 of the last 5 wks)
  2. Net long contracts in Gold went up another +3% last week to 129,865
  3. Gold is down another -0.33% this morning to $1690, and remains bearish TRADE and TREND in our model

With Gold’s TRADE and TREND resistance overhead at $1709 and $1719, respectively, this makes for an interesting debate (ask Sales@Hedgeye.com for Darius Dale’s Gold research note from Friday if you didn’t read it). Long-term TAIL support of $1670 is the only big line left of support for Gold. If that holds, consensus bets on the net long side could be ok, but only if they own the right strikes.

 

If Gold’s TAIL breaks, watch-out below.

 

That’s how we thought about AAPL (see Chart of The Day, TAIL = $561). That’s how we think about TAIL risk. We have a line that moves dynamically as price/volume/volatility does, and we use that as our headlights. Is the probability of incremental risk rising or falling? That’s another way to simplify how we think about that. It’s not perfect, but it’s a consistent risk management code I can live by.

 

If you go back to the 3-factor Global Growth Model I’ve been calling out for the last 3 weeks:

  1. Chinese stocks (Shanghai Composite)
  2. Bond Yields (US Treasuries)
  3. Copper

There’s emerging evidence that supports a shift from global #GrowthSlowing to #GrowthStabilizing. We’re not wedded to this – we’re just courageous enough to embrace the market’s uncertainty and change our minds as markets suggest we do.

 

Bond Yields had a big move last week with the 10yr Treasury Yield not only rising from 1.62% to 1.70% on the week, but closing above my TREND line of 1.69%. This morning, the 10yr yield is up another 2 basis points to 1.72%, confirming the move.

 

That’s also bearish for Gold. Rising bond yields always have been bearish for Gold because they compete with the long-standing expectation of #GrowthSlowing embedded in both Bond market and Gold bubbles.

 

On Friday, that’s why I cut our Fixed Income asset allocation to 0%, raised our Global Equities allocation, and stayed with what’s served us well since mid-September (0% asset allocation to Commodities).

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1684-1709, $105.71-108.93, $79.41-79.99, $1.29-1.31, 1.69-1.76%, and 1408-1431, respectively.

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Praying For Courage - Chart of the Day

 

Praying For Courage - Virtual Portfolio


The Week Ahead

The Economic Data calendar for the week of the 31st of December through the 4th of January 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 - 44. calendar


TRADE OF THE DAY: GLD

Today we shorted gold via the SPDR Gold Trust ETF (GLD) at $160.71 a share at 9:45 AM EDT in our Real-Time Alerts. Gold's long-term TAIL line of resistance was tested and tried (and failed) on the bounce today. Our long-term view of the great Commodity Bubble remains a big Hedgeye Macro Theme.

 

TRADE OF THE DAY: GLD - Unknown 1


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