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MONDAY MORNING RISK MONITOR: DATA REMAINS SUPPORTIVE FOR NOW

Takeaway: Our risk monitor continues to flash benign readings on most fronts, though the overt positives are fewer than in recent weeks.

* 2-10 Spread – Last week the 2-10 spread tightened 3 bps to 159 bps. 

 

* Markit MCDX Index Monitor – Last week spreads tightened 8bps, ending the week at 113 bps versus 121 bps the prior week.  

 

* Sovereign CDS – Sovereign Swaps were mostly wider last week with Japan putting on a major move. Japanese CDS widened by 13 bps last week to 87 bps (a move of 17.8%). Meanwhile, the US also widened by 5 bps to 44 bps. This means the US now trades outside Germany (40 bps). Elsewhere in Europe, swaps were relatively unchanged. 

 

* XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.5% upside to TRADE resistance and 1.3% downside to TRADE support.

 

 

Financial Risk Monitor Summary

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

 • Intermediate-term(WoW): Positive / 6 of 12 improved / 3 out of 12 worsened / 4 of 12 unchanged

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

 

MONDAY MORNING RISK MONITOR: DATA REMAINS SUPPORTIVE FOR NOW - 19

 

1. American Financial CDS -  Swaps were mostly wider in US financials last week, but AGO, MBIA and Genworth all posted notable week-over-week tightening. Overall, swaps widened for 18 out of 27 domestic financial institutions.

Tightened the most WoW: GNW, AGO, TRV

Widened the most WoW: MTG, C, COF

Tightened the most WoW: GNW, AGO, MMC

Widened the most MoM: GS, C, WFC

 

MONDAY MORNING RISK MONITOR: DATA REMAINS SUPPORTIVE FOR NOW - 1

 

2. European Financial CDS - Swaps mostly widened in European Financials last week, though there was nothing especially noteworthy.

 

MONDAY MORNING RISK MONITOR: DATA REMAINS SUPPORTIVE FOR NOW - 2

 

3. Asian Financial CDS - Japanese banks widened by 6-12 bps, following the sovereign wider. Chinese banks did the same, widening by 4-11 bps. India's banks were mixed.

 

MONDAY MORNING RISK MONITOR: DATA REMAINS SUPPORTIVE FOR NOW - 17

 

4. Sovereign CDS – Sovereign Swaps were mostly wider last week with Japan putting on a major move. Japanese CDS widened by 13 bps last week to 87 bps (a move of 17.8%). Meanwhile, the US also widened by 5 bps to 44 bps. This means the US now trades outside Germany (40 bps). Elsewhere in Europe, swaps were relatively unchanged. 

 

MONDAY MORNING RISK MONITOR: DATA REMAINS SUPPORTIVE FOR NOW - 18

 

MONDAY MORNING RISK MONITOR: DATA REMAINS SUPPORTIVE FOR NOW - 3

 

MONDAY MORNING RISK MONITOR: DATA REMAINS SUPPORTIVE FOR NOW - 4

 

5. High Yield (YTM) Monitor – High Yield rates fell 2 bps last week, ending the week at 5.90% versus 5.92% the prior week.

 

MONDAY MORNING RISK MONITOR: DATA REMAINS SUPPORTIVE FOR NOW - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 5.8 points last week, ending at 1768.96.

 

MONDAY MORNING RISK MONITOR: DATA REMAINS SUPPORTIVE FOR NOW - 6

 

7. TED Spread Monitor – The TED spread fell 0.8 bps last week, ending the week at 22.8 bps this week versus last week’s print of 23.6 bps.

 

MONDAY MORNING RISK MONITOR: DATA REMAINS SUPPORTIVE FOR NOW - 7

 

8. Journal of Commerce Commodity Price Index – The JOC index rose 3.1 points, ending the week at 10.5 versus 7.4 the prior week.

 

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9. Euribor-OIS Spread – The Euribor-OIS spread was flat week-over-week at 11 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 REMAINS SUPPORTIVE FOR NOW - 9

 

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 REMAINS SUPPORTIVE FOR NOW - 10

 

11. Markit MCDX Index Monitor – Last week spreads tightened 8bps, ending the week at 113 bps versus 121 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 government finances. 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 are currently tracking the 16-V1 series.

 

MONDAY MORNING RISK MONITOR: DATA REMAINS SUPPORTIVE FOR NOW - 11

 

12. Chinese Steel – Steel prices in China fell 0.5% last week, or 20 yuan/ton, to 3730 yuan/ton. 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 REMAINS SUPPORTIVE FOR NOW - 12

 

13. 2-10 Spread – Last week the 2-10 spread tightened 3 bps to 159 bps. We track the 2-10 spread as an indicator of bank margin pressure.   

 

MONDAY MORNING RISK MONITOR: DATA REMAINS SUPPORTIVE FOR NOW - 13

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.5% upside to TRADE resistance and 1.3% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: DATA REMAINS SUPPORTIVE FOR NOW - 14

 

Joshua Steiner, CFA

 



Let's Do This

“C’mon! Let’s do this.”

-Ray Lewis

 

If Japanese policy makers really want to get nuts, they should sign Ray Lewis for the 2014 Money-Printing season. After taking down the Patriots this weekend, the 13x Pro Bowler is going back to the Super Bowl. It’ll be his last game. If Baltimore wins, it will be epic.

 

“You’ve got to go out and show them that I’m a different creature now than I was 5 minutes ago, cause I’m pissed off for greatness. Cause if you ain’t pissed off for greatness, that just means you’re okay with being mediocre.”

 

Yep. That’s what I am talking about Japan – some ole school Raven rants in those BOJ pressers.

 

Back to the Global Macro Grind

 

Evidently, the global currency market didn’t get the BOJ’s marketing message overnight. The Japanese Yen rallied a full +1% on the “news”, and Japanese stocks snapped immediate-term TRADE support for the first time in months. Isn’t a #QuadrillYen fun?

 

PM Shinzo Abe called the BOJ’s “2% inflation” targeting and asset purchase plan both “bold” and “epoch making.” That might sound like some serious stuff, but the new asset purchases don’t start until January of 2014 – so there’s this little thing called timing that people short the Yen today are getting Taro Aso’d by in the meantime.

 

If you didn’t know the Global Currency War is on, now you know. The Russians and South Koreans talked about it last week, and the President of the Bundesbank (Germany) is calling it out, explicitly, in the FT (Financial Times) this morning. If you want to show the world you are a “different creature”, you’re going to have to one-up The Bernank’s 2012 performance.

 

That’s no easy task – neither is seeing the US Dollar stabilize alongside weekly US economic growth data:

  1. US Dollar Index closed up another +0.6% last week and continues to make a series of higher long-term lows
  2. US Housing Demand (MBA weekly mortgage applications) ripped a +12.9% move, taking the MBA series to 205
  3. US Weekly Jobless Claims dropped to fresh new intermediate-term lows at 335,000

If what’s bad for a country’s currency is eventually really bad for that country’s real (inflation adjusted) economic growth, the opposite should hold true when a country’s currency stabilizes.

 

What if a stabilizing US Dollar became a strengthening one? How about strengthening the US Dollar +15% (from here) and hammering energy/food inflation next? Didn’t the President of the United States say “we, the people, are all in this together” now?

 

Can you think of a more galvanizing, progressive, and uniquely American marketing message than Strong Dollar = Strong America? I bounced it off the Keynesians in the Romney camp, and they didn’t get it either. But you, The People can get this – Yes You Can!

 

In other major global #GrowthStabilizing news:

  1. Chinese monthly data for December (Industrial Production and Retail Sales) accelerated versus November
  2. Chinese Exports for December ramped by +14.1% (versus +2.9% NOV)
  3. Germany’s ZEW Index (reported this morning) just hit a 2.5 year high (31.5 DEC vs 6.9 in NOV)

It’s been a while here, folks – but, setting aside the economic disaster that is Japan for a minute, we have the other 3 major global engines no longer stalling/slowing (USA, China, and Germany). That’s better than bad. And so is sentiment.

 

The problem with sentiment, of course, is that it tends to turn after markets move. And right now that’s precisely what many of my key sentiment indicators are starting to flag:

  1. US Equity Volatility (VIX) = immediate-term TRADE oversold at a 5-year low of 12.46
  2. II Bull/Bear Spread (Bulls minus Bears) = 3,090 basis points wide (53.2% Bulls, 22.3% Bears)
  3. Fund Flows (to US Equities, ex-ETFs) = +3.8B last week (versus +7.5B in the week prior)

In addition to last week’s -6.7% drop in the VIX, we’re seeing aggregate short interest in US Equities fall fast from their late November highs (that was a bullish signal) at the same time that NYSE Margin Debt rips to the high-end of its 5-year range (perma bulls lever themselves up on the long side at the end of a move trying to chase performance).

 

So, it’s all out there – the economic data; the price action; the sentiment indicators – and, no, they don’t always signal that you should be doing the same thing at the same time. But that doesn’t mean you don’t have to get out there every morning and get it. As Japan’s new ‘let’s get nuts’ prospect, Ray Lewis, might add: “Effort, is between you, and you, and nobody else.”

 

Our immediate-term Risk Ranges for Gold, Oil, US Dollar Index, USD/YEN, UST 10yr Yield, AAPL, and the SP500 are now $110.75-112.35 (Oil is back above TAIL support, bearish for Consumption), $1, $79.75-80.17, 88.58-90.61, 1.84-1.91% (Bonds continue to signal #GrowthStabilizing), $482-561 (into Earnings tomorrow), and 1, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Let's Do This - Chart of the Day

 

Let's Do This - Virtual Portfolio


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THE M3: PYE CASINO DEAL; CPI

The Macau Metro Monitor, January 22, 2013

 

 

PYE SHAREHOLDERS APPROVE BOUTIQUE CASINO DEAL Macau Business

Paul Y. Engineering Group Ltd shareholders approved a deal allowing the company to hold land, raise share capital and sell bonds for a boutique casino in Macau.  Paul Y. Engineering Group – a unit of separately-listed ports and infrastructure business PYI Corporation Ltd – plans to raise funds for the US$800 million (MOP6.4 billion) casino hotel scheme by issuing shares on the Hong Kong Stock Exchange and by selling convertible bonds.


The casino property is planned to be located next door to the residential complex One Oasis, and will have 236 rooms and up to 66 live gaming tables.

 

CONSUMER PRICE INDEX FOR DECEMBER 2012 DSEC

Macau's inflation rate for 2012 stood at 6.11%.  The Composite CPI for December 2012 increased by 5.83% YoY and 0.85% MoM.

 



Soft Earnings

This note was originally published at 8am on January 08, 2013 for Hedgeye subscribers.

“Never have I seen a country so utterly unprepared for war and so soft.”

-Field Marshall John Dill

 

In one of the more poorly timed British central command comments during WWII, that’s what the Chief of the Imperial General Staff, Sir John Greer Dill, had to say about America just before December 1941 (The Last Lion, page 421).

 

Japan, of course, attacked the US at Pearl Harbor on December 7th, 1941. And, after President Roosevelt told Winston Churchill that “we are all in the same boat now”, America all of a sudden didn’t seem so “soft” anymore.

 

In his memoirs Churchill explained that he was quite happy about the whole turn of events. On the night of the Japanese attack he “slept the sleep of the saved and thankful” (page 423).

 

Back to the Global Macro Grind

 

After watching Notre Dame’s defense last night, I am still pretty sure that soft is as soft does. That’s also one of the Top 3 Global Macro Risks to being really long US Equities here: Soft Earnings.

 

Given our view of Global #GrowthStabilizing, that might confuse come people – but it shouldn’t. Veteran Risk Managers know that earnings are a lagging indicator, while growth is a leading one.

 

That doesn’t mean that #EarningsSlowing won’t matter. We introduced that Global Macro Theme in October of 2012, right before the worst US corporate earnings season since 2006. It too, didn’t matter, until it did.

 

One of the core takeaways from that theme was that this isn’t a ‘one-off’ where we’ll have 1 quarter of down earnings then straight back up again. That’s because US corporate margins are coming off all-time peaks. All-time is a long time.

 

I think #EarningsSlowing will matter, but so will the timing it:

  1. Alcoa (AA) and Monsanto (MON) kick off Earning Season tonight, but they aren’t driving the boat; Financials (XLF) are
  2. Financials Earnings Season starts on Friday, and we expect both Housing and Yield Spread to make that Sector bullish
  3. The biggest sector with #EarningsSlowing risk remains Tech (XLK); we don’t get those reports for a few more weeks

Yes, there’s a big difference between buying US stocks with the SP500 at 1400 and levering up long at a 5-yr closing high (1466). So be mindful of that. Be sector selective and stock specific.

 

Back to the Top 3 Global Macro Risks to being long overbought beta (Equities) here:

  1. #EarningsSlowing
  2. Japanese Policy To Inflate
  3. Rising Oil Prices

The 3rd risk in my Top 3 is the most trivial. Oil’s price, volume, and volatility is measurable within our TRADE/TREND/TAIL process, so as time/price changes, my fundamental research view of how that factor impacts our growth model does.

 

A far less obvious risk remains what could happen to Japan if they pull an Argentina in 2013. I think this old (but new) bureaucrat they have brought back as Japan’s Finance Minister is crazy. That’s not a typo – plenty of politicians are crazy. Especially Keynesian ones.

 

Last night Taro Aso (great name for the history books if he rips his country a new one) said Japan is going to print money and buy ESM debt (as in European Bonds) in order to devalue the Japanese Yen further. We’ll walk through what that means as Japan blows through their 44 TRILLION Yen debt issuance ceiling on our Q1 Macro Themes Call (January 15th). Key word score: Quadrill-Yen.

 

Away from all of that, there’s nothing to worry about out there…

 

“During the first week of December (1941), Churchill regularly telephoned Bletchley to ask about the disposition of the Japanese Combined Fleet (Kido Butai)… Each time Churchill asked, the Bletchley reply remained the same: No intelligence was forthcoming. The Japanese navy had vanished.” (The Last Lion, page 416)

 

I am sure some dude in Spain, Taro Aso, and Obama’s latest son-of-Summers US Treasury bureaucrat (Jack Lew) have all central economic command under control. Full debt printing and deficit spending ahead.

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now, $1639-1646, $110.19-113.06, $3.63-3.75, $79.99-80.49, 1.30-1.31, 1.84-1.96%, and 1438-1483, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Soft Earnings - Chart of the Day

 

Soft Earnings - Virtual Portfolio


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