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European Banking Monitor: Bank Swaps Reflect Fiscal Cliff Resolution

Takeaway: Bank Swaps Reflect Fiscal Cliff Resolution; Extension of Basel liquidity requirements is another tailwind.

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 Financial CDS - With the exception of Greece and one Spanish Bank (Caja de Ahorros del Mediterraneo), European bank swaps were tighter across the board on US fiscal cliff resolution. Italian and Spanish banks were the most improved, while German and French banks were close behind. We’d note that the Basel Committee’s decision to award banks a four-year delay to meet international liquidity requirements may provide a near-term tailwind for the banks and their risk profiles.


* 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 – With the exception of Greece and one Spanish Bank (Caja de Ahorros del Mediterraneo), European bank swaps were tighter across the board on US fiscal cliff resolution. Italian and Spanish banks were the most improved, while German and French banks were close behind.


European Banking Monitor: Bank Swaps Reflect Fiscal Cliff Resolution  - 33  banks


Euribor-OIS spread – The Euribor-OIS spread widened by roughly half a basis point to 12.5 bps in the latest week. 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: Bank Swaps Reflect Fiscal Cliff Resolution  - 33. 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: Bank Swaps Reflect Fiscal Cliff Resolution  - 33. facillity


The primary takeaway from this post is the most important macro indicators are continuing to confirm our bearish stance on casual dining. 


Employment trends within the industry suggest a possible sequential deceleration in same-restaurant casual dining sales. The deceleration of employment growth within casual dining versus quick service and the broader leisure and hospitality industry is worth noting.


Knapp Track Casual Dining sales data track BLS employment growth data for the full-service and leisure and hospitality industries.  Within casual dining, we are bearish on DRI, BWLD, and TXRH




EMPLOYMENT DATA CONFIRMING BEARISH CASUAL DINING STANCE - leisure   hospitality vs full service employment growth



Employment by Age


Employment growth by age cohort implies that quick service restaurants are benefitting from strong employment growth among core consumers while casual dining’s struggles are being caused, at least in part, by decelerating employment growth of one of the sector’s core demographics. 


The chart below illustrates a strong end to the year for employment growth among the younger age cohorts.  Job growth in the 20-24 years of age cohort remained in the 3% range while growth in the number of employed 23-34 year olds accelerated to 1.2% in December from 0.7% the month prior.  This is positive data point for QSR. 


Employment growth among 55-64 year olds remains robust, accelerating to 5.6% in December, but softer trends in the 45-54 years of age cohort is a concern for casual dining. 





Industry Hiring


If we assume that hiring within the restaurant industry serves as a decent proxy for operator confidence, it seems that QSR operators have a very different outlook than casual dining operators.


The continuing sideways trajectory of Leisure & Hospitality employment growth suggests that employment growth in limited service restaurants could be overstretching at this point.  However, with consumers trading down and quick service chains investing in enhancing the consumer’s experience at their restaurants, it is difficult to come to a firm conclusion.


Sequential Moves

  • Leisure and Hospitality: Employment growth at 2.38% in December (+1.7 bps seq acceleration)
  • Limited Service: Employment growth at 4.29% in November (-5.3 bps seq deceleration)
  • Full Service: Employment growth at 1.93% in November (-47.8 bps seq deceleration)



Howard Penney

Managing Director


Rory Green

Senior Analyst


Do You Believe? SP500 Levels, Refreshed

Takeaway: My sense is enough people missed the biggest up week for stocks in a year for me to believe just about anything.



Stocks got immediate-term overbought as bonds got oversold on Friday. Immediate-term TRADE overbought is as overbought does, so just be smart where you make those gross and net exposure decisions. Timing matters.


Do you believe we make a higher-high versus 1466? Or, maybe a better question, did you believe that we could test 1466 before we did? My sense is enough people missed the biggest up week for stocks in a year for me to believe just about anything.


Across our core risk management durations, here are the lines that matter to me most:


  1. Immediate-term TRADE overbought = 1482
  2. Immediate-term TRADE support = 1439
  3. Intermediate-term TREND support = 1419


In other words, the SP500 could drop 20 handles from today’s intraday low as fast as it could tack on another 20 from here. What do you do with that? I say you keep moving and risk manage this tape with a bullish bias until the research factors (#GrowthStabilizing) and/or risk signals change.




Keith R. McCullough
Chief Executive Officer


Do You Believe? SP500 Levels, Refreshed - SPX

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MACAU: A December To Remember

December was an impressive month for Macau with high VIP gold and strong gross gaming revenue. With 20% hold growth on a year-over-year basis and mass market growth up 32%, it was a month that really paid off for Macau operators with the exception of Wynn Resorts (WYNN). Sands China’s (LVS) properties generated the best year-over-year growth at 52% but MGM’s 34% growth was surprising although certainly hold-aided. Wynn was the biggest loser in term of market share this month losing 1.8% to just 10.3% while LVS, MGM, MPEL and Galaxy put up strong numbers.


MACAU: A December To Remember - image002


MACAU: A December To Remember - image003

Cliff Jumping 101 . . . Takeaways From Passage of the American Taxpayer Relief Act of 2012

Takeaway: In true political fashion, legislators have solved the fiscal cliff by kicking it down the road two months to March 1st.

The much heralded 11th hour solution to the fiscal cliff really does very little other than kick the can down the road.  While on one hand, a permanent fix of the Bush Tax Cuts for those making less than $400K, an extension of Unemployment and Extended Benefits and a two month stay on cuts to federal discretionary outlays under sequestration are supportive of growth in the very near-term.  Longer term, the Expiration of the 2% payroll tax deduction, higher capital gains and marginal tax rates on those earning >$400K, and the 3.8% tax increase on investment income legislated under ACA will still serve as a drag on growth, probably to the tune of ~1%.  


Notably, the larger goal of enacting structural policy reforms necessary for driving fiscal sustainability once again went unmet.  The half-measures and patchwork policy enacted as part of the 11th hour accord simply perpetuate the fiscal policy uncertainty that has predominated for the better part of the last few years and served as a negative influence on corporate hiring and capital investment decisions.  Both the debt ceiling issue and a larger agreement over a sequestration alternative remain uresolved and will both come to a head on March 1st.  So similar to last year, we can again look forward to a re-crescendo in congressional discord, brinksmanship and last minute “heroics” over the next couple months.


Below we highlight the main provisions from the American Taxpayer Relief Act of 2012 (ATRA 2012), or the fiscal cliff agreement.  The facts of the accord have been fully discussed elsewhere but we would highlight a number of the key dates and prospective growth impacts of the deal:      


Summary of Main ATRA Provisions:

  • Tax Rates:  Permanent extension of current income tax rates for all incomes below $400K. Marginal Tax rates increase to 39.6% from 35% for individuals making over $400K and couples making over $450K
  • AMT:  Permanently patched.
  • Unemployment Benefits:  extended for another year – expected 2Y cost of ~$30B
  • Payroll Tax Holiday:  The 2% payroll tax holiday enacted in 2010 as a stimulus measure expired for all workers.
  • Capital Gains: Capital gains & dividends would be taxed at 20% for those earning over 400K.  Those earning <$400K continue to pay current rate of 15% on LT gains.
  • Health Law Capital Gains Tax:  ATRA does not change the slated 3.8% tax on investment income imposed by ACA for individuals making $200K or couples making $250K
  • Sequestration:  Provides a stay of 2 months before legislated cuts again take effect. 
  • Extenders:  Some 100 general, individual, Business, Energy & Health related (tax) provisions were passed as part of ATRA 2012.  Some represent permanent fixes but most are 1Y extensions that will need to be re-addressed come year end 2013.


As is outlined in the table below, the impact of the ATRA is decidedly negative on the long run deficit.  According to the CBO’s projections, ATRA will lead to a net increase in the deficit of $3.9 trillion through 2022.  So much for fiscal reform. 


Cliff Jumping 101 . . . Takeaways From Passage of the American Taxpayer Relief Act of 2012 - ATRA Budget Impact Table





Growth Impact - CBO Analysis:  Late Friday afternoon, the CBO released a follow-on analysis of the expected impacts of the ATRA legislation as enacted (Here).   According to the CBO’s analysis, while the fiscal cliff deal had the net effect of reducing the magnitude of fiscal tightening by 1.5 – 1.75%, the “components of tightening that are still in place and that we estimated will damp GDP growth in 2013 by roughly 1¼ percentage point.”


Payroll Tax Holiday Impact:  The CBO estimated the combined impact of extending the payroll tax reduction and the Emergency Unemployment benefits at ~$108B for 2013 (Here, p. 7, Table 1.).   Separately, the CBO’s final scoring of the ATRA estimated the cost of extending Emergency Unemployment Benefits at ~$22.4B in 2013, implying an ~$86B drag from the 2% increase in payroll taxes in 2013.  This $86B along with the net impact from the 3.8% tax increase on investment income legislated under ACA and reduced consumption stemming from higher capital gains and marginal tax rates on those earning >$400K comprise the principal direct drag to growth for 2013.  


Sequestration:  Sequestration, the across the board reductions to Federal Discretionary Outlays as legislated under the Budget Control Act (BCA), were given a two month stay.  The cuts will take effect beginning March 1st if congress does not reach an agreement on an alternative route for fiscal consolidation.


The DEBT CEILING:  ATRA carries no explicit provisions related to the Debt Ceiling and no discernable progress was made towards reaching a bipartisan resolution on the issue. The Treasury has estimated they have enough accounting maneuverability to extend the debt ceiling timeline for approximately two months.  Geithner provided a hard dollar estimate of $200B in available capacity.  Assuming similar funding requirements, the mid-point of the issuance precedent over the last three years would suggest we have until ~March 1st to reach a debt ceiling accord.  Note that this march 1st date corresponds with the march 1st deadline date for reaching a deal on a sequestration alternative.     


Bottom Line:  By delaying the implementation of sequestration cuts and permanently fixing lower tax rates for all those earning less than $400K, we avoided the full brunt of  the fiscal cliff to the start the year.  However, outside of the tax rate fix we made no substantial progress towards solving the larger outstanding budget issues or in bridging the Dem-GOP divide over spending, Entitlement reform, or large scale Tax Code reformation.   By simply extending tens of general, individual, & business tax provisions - amounting to hundreds of billions of dollars (you can find the itemized cost, estimated by the Joint Committee on Taxation, for the extension of each tax provision Here) - for one year, we managed yet another can kick and ensured ourselves yet another replay of the same debate come year-end 2013.    The Debt Ceiling and impending cuts slated under BCA are part and parcel of the same issue of unsustainable profligacy at the federal level.  These issues remain unresolved, will both come to head on March 1st, and ensure the policy uncertainty and political dynamics that characterized December 2013 and the summer months preceding resolution of Debt Ceiling 1.0 in 2011 will likely  characterize February 2013 as well.  


Cliff Jumping 101 . . . Takeaways From Passage of the American Taxpayer Relief Act of 2012 - Debt Ceiling Timeline 010713



Investment Considerations:  We got the relief rally, now what?

Outside of an expectation for a clean, non-draconian resolution, it’s hard to make a compelling case for being long the uncertainty of the Debt Ceiling event catalyst in isolation.   We’ve already seen the post-event run-up, the SPX is trading at higher cycle highs, and forward multiples are near the top end of the multi-year range.  Independent of the Debt Ceiling, however, global growth and price signals continue to support a bullish bias towards equities.  Below are a number of the factors we’d like to continue to see trend positively for us to maintain our bullish tilt.        

  1. Price Confirmation:  SPX currently sits Bullish TRADE & Bullish TREND in the Hedgeye Quant model with TREND support down at 1419.  With all nine sectors bullish and the SPX in Bullish Formation, price remains supportive of net long positioning in equities
  2. #GrowthStabilization:  The slope of growth, activity, and employment measures across the EU & APAC regions continues to improve.  From a price, the transition from growth slowing to growth stabilizing represents a buying opportunity within a positive growth inflection. 
  3. Commodity Deflation:  Energy and Commodity deflation represents a real-time tax cut for consumer’s, globally.  A burning Yen, dissention among the ranks at the fed, Geithners departure, and some measure of American fiscal sobriety could all play positively for the dollar and, by extension, augur lower commodity prices for consumers and input costs for business. 
  4. Housing & employment:  Employment growth remains tepid but positive, jobless claims continue to track <385K level necessary for seeing tangible improvement in unemployment, and the positive, reflexive, price ßà demand dynamic continues to drive a parabolic recovery in housing. 
  5. Asset Rotation:  Bond yields have backed up, fund flows to bonds have slowed, and the major move in high yield is now likely rearview with the earnings yield in the SPX now running at a positive spread to the yield on high yield.  If bond investors begin to sniff out 6+% unemployment and look to front run Bernanke, we could begin to see the rotation to equities panglossian stock bulls have been looking for for the past four years.     
  6. Seasonal Adjustments:  Seasonal Adjustments will remain a tailwind to the reported employment & economic data thru February.
  7. Growth Estimates:    Consensus growth estimates for 2013 have tracked the data steadily lower over 2H12 and currently sit at 2% for full year 2013.  While estimates may hold some further downside, a material drawdown in expectations from here may provide a favorable sentiment backdrop provided the above dynamics continue to trend positively.    


Christian B. Drake

Senior Analyst


Cliff Jumping 101 . . . Takeaways From Passage of the American Taxpayer Relief Act of 2012 - 2013 GDP Estimate 010713


Cliff Jumping 101 . . . Takeaways From Passage of the American Taxpayer Relief Act of 2012 - SPX Earnings Yield


Cliff Jumping 101 . . . Takeaways From Passage of the American Taxpayer Relief Act of 2012 - SPX PE 010713



Chinese Rebar On The Rise

Here at Hedgeye, we like to observe the price of Chinese steel rebar. It’s a decent barometer of Chinese construction activity and subsequently, growth. The spot price for Chinese rebar jumped 3% day-over-day and is now back to the highest price since November. Combined with our macro team’s research that signals growth accelerating throughout Asia, rebar is another catalyst that shows that the growth slowing days are over.


Chinese Rebar On The Rise - 3

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.48%
  • SHORT SIGNALS 78.35%