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TUESDAY MORNING RISK MONITOR: HOW LONG CAN GOLDILOCKS LAST?

Takeaway: Europe's malaise lasts two weeks while the muni market pushes to new highs. Yields widen while risk declines; a very favorable backdrop.

Key Takeaways:

 

* In spite of the sentiment asymmetry (Financials sentiment remains an 8-9 on a 10 scale based on current levels of short interest), pressing the risk side of the trade continues to work for now. While we remain cautious that the data will show signs of turning in the intermediate term, the short-term shows no red flags as yet. For now, higher-beta Financials should continue to outperform.

 

* TED Spread – The TED spread fell 3.3 basis points last week, ending the week at 19.11 bps this week versus last week’s print of 22.4 bps. For reference, this is the lowest level for the TED Spread since a brief stint in late July 2011 in the 16-19 bps range.

 

* Markit MCDX Index Monitor – Spreads on 2016 muni bonds tightened by a further 10 bps, ending the week at 90.25 bps versus 100.49 bps the prior week. This index has been rapidly declining since year-end, and has been generally trending lower since its late 2011 highs (230 bps) following a call for the conditions of the municipal finance sector to deteriorate significantly. 

 

* 2-10 Spread – While spreads tightened 3 bps in the latest week to 171 bps, the trend here has been generally higher over the last two months. Spreads are up 30-40 bps since mid-December last year. 

 

Financial Risk Monitor Summary

 • Short-term(WoW): Positive / 6 of 12 improved / 0 out of 12 worsened / 7 of 12 unchanged

 • Intermediate-term(WoW): Positive / 7 of 12 improved / 2 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

 

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1. American Financial CDS -  All U.S. financials tightened except for Sallie Mae (+8 bps), Aon (+2 bps) and Marsh & McLennan (+7 bps). Large-cap U.S. Financials continue to post steadily decreasing risk profiles. Swaps tightened for 24 out of 27 domestic financial institutions.

Tightened the most WoW: RDN, MET, PRU

Widened the most WoW: MMC, AON, SLM

Tightened the most WoW: AGO, RDN, MBI

Widened the most MoM: MMC, COF, SLM

 

TUESDAY MORNING RISK MONITOR: HOW LONG CAN GOLDILOCKS LAST? - 1

 

2. European Financial CDS - EU financials CDS was near universally tighter last week, with the exception of Greek banks. The largest improvements were at French, Spanish and Italian banks. British and German banks were also improved.

 

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3. Asian Financial CDS - Swaps of major Aisan Financial companies were lower across the board with the exception of Daiwa, which was wider by 8 bps. Chinese banks posted the largest improvement.

 

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4. Sovereign CDS – Italy, Spain and Portugal posted sharp improvements with swaps tightening 30, 29 and 13 bps, respectively. Ireland was close behind with 12 bps of tightening. Portugal remains the most risky major EU country (ex-Greece) at 382 bps. Spain is next at 255 bps. The recent run-ups in these countries have faded and they are again trading near their multi-year lows. 

 

TUESDAY MORNING RISK MONITOR: HOW LONG CAN GOLDILOCKS LAST? - 18

 

TUESDAY MORNING RISK MONITOR: HOW LONG CAN GOLDILOCKS LAST? - 3

 

TUESDAY MORNING RISK MONITOR: HOW LONG CAN GOLDILOCKS LAST? - 4

 

5. High Yield (YTM) Monitor – High Yield rates fell 3.2 bps last week, ending the week at 6.08% versus 6.11% the prior week.

 

TUESDAY MORNING RISK MONITOR: HOW LONG CAN GOLDILOCKS LAST? - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 3.6 points last week, ending at 1769.

 

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7. TED Spread Monitor – The TED spread fell 3.3 basis points last week, ending the week at 19.11 this week versus last week’s print of 22.4. For reference, this is the lowest level for the TED Spread since a brief stint in late July 2011 in the 16-19 bps range.

 

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8. Journal of Commerce Commodity Price IndexThe JOC index fell -1.2 points, ending the week at 11.54 versus 12.7 the prior week.

 

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9. Euribor-OIS Spread – The Euribor-OIS spread was unchanged at 13 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. 

 

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10. ECB Liquidity Recourse to the Deposit Facility – Deposits with the ECB Liquidity Facility continue to drop. Deposits are currently 124 billion Euros, down from 400 billion Euros in mid-2012, and down from over 800 billion throughout the first half of 2012. 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.  

 

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11. Markit MCDX Index Monitor – Last week spreads on 2016 muni bonds tightened by a further 10 bps, ending the week at 90.25 bps versus 100.49 bps the prior week. This index has been in total freefall since year-end, and is generally trending lower since its late 2011 highs (230 bps) following a call for the muni market to deteriorate. 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. 

 

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12. Chinese Steel – Steel prices in China were flat last week at 3,790 yuan/ton. While there is some concern this morning about Chinese property values, the price of Chinese steel has been moving generally higher since late November of 2012. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

 

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13. 2-10 Spread – Last week the 2-10 spread tightened to 171 bps, -3 bps tighter than a week ago. Bigger picture, however, the 2-10 yield spread has been tracking generally wider since mid-December of last year, when it was in the mid-130 bps range. We track the 2-10 spread as an indicator of bank margin pressure.

 

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14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.0% upside to TRADE resistance and 1.5% downside to TRADE support.

 

TUESDAY MORNING RISK MONITOR: HOW LONG CAN GOLDILOCKS LAST? - 14

 

Joshua Steiner, CFA


Good Growth

Client Talking Points

Level Playing Field

You can fight the market all you want, but sometimes, you have to go with the (fund) flow. Any permabears that have stayed short the S&P 500 since November 2012 are cringing as they wake up to margin calls and headaches that won’t go away. Our strategy in the global macro arena has been to stay long the US dollar while short the Japanese Yen, long US and Asian equities (staying away from Europe) and short gold and Treasuries. You’ve seen the run up in the US stock market and the beatdown Treasuries, gold and the Yen have received since then.  It’s all part of deflating the inflation that was originally brought on by Ben Bernanke and his posse at the Federal Reserve. Commodity prices coming down help spur consumption which in turn, helps spur growth. Growth = good. Simple as that.

Asset Allocation

CASH 52% US EQUITIES 15%
INTL EQUITIES 15% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 18%

Top Long Ideas

Company Ticker Sector Duration
ASCA

We believe ASCA will receive a higher bid from another gaming competitor. Our valuation puts ASCA’s worth closer to $40.

FDX

With FedEx Express margins at a 30+ year low and 4-7 percentage points behind competitors, the opportunity for effective cost reductions appears significant. FedEx Ground is using its structural advantages to take market share from UPS. FDX competes in a highly consolidated industry with rational pricing. Both the Ground and Express divisions could be separately worth more than FDX’s current market value, in our view.

HOLX

HOLX remains one of our favorite longer-term fundamental growth companies given growing penetration of its 3D Tomo platform and high leverage to the 2014 Insurance Expansion from the Affordable Care Act.

Three for the Road

TWEET OF THE DAY

“Back from lunch to hear the rumour of S&P downgrade of UK tonight ... hmmm” -@NicTrades

QUOTE OF THE DAY

“Before God we are all equally wise - and equally foolish.” -Albert Einstein

STAT OF THE DAY

SPX risk range = 1516-1524 as volatility gets crushed



real-time alerts

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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.

EXPERT CALL: AN INSIDER'S LOOK INTO PRICING AND THE RESTAURANT INDUSTRY

EXPERT CALL: AN INSIDER'S LOOK INTO PRICING AND THE RESTAURANT INDUSTRY - restaurant call pricing

 

We will be hosting an expert call titled "An Insider's Look into Pricing and the Restaurant Industry" on Wednesday, February 20th at 1:00pm EST. The call, featuring Leslie Kerr of Intellaprice, will offer expert analysis on current industry trends as well as an opportunity to explore pricing power as we move through Q1 2013.  

 

OBJECTIVE:

  • The aim of this call is for us and our clients to develop a better understanding of companies' view of pricing as a strategy to absorb inflation in operating expenses over the next couple of years. 

 

The call will be held Wednesday, February 20th at 1:00pm EST. Please dial in 5-10 minutes prior to the 1:00pm EST start time using the number provided below. A link to the presentation will be distributed before the call, if you have any further questions email .

  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 946362#

 

KEY TOPICS WILL INCLUDE:

  • How brands define pricing power
  • Methods companies typically use to measure traffic sensitivity to pricing
  • Macroeconomic factors that are worth monitoring to ascertain pricing power of the industry or a given company
  • Personnel within a restaurant company that are typically charged with making pricing decisions
  • The pitfalls of using test markets to measure pricing power
  • Any standard calculations that our expert or companies use in measuring pricing power

 

ABOUT LESLIE KERR

  • President & founder of Intellaprice, a pricing advisory firm for the restaurant industry
  • Built the pricing function for Dunkin' Donuts, formerly Allied Domecq Retailing US
  • While at Allied Domecq, she also held roles in strategy, finance, and brand management for Baskin-Robbins
  • Previously held roles in operations at PepsiCo Restaurant Services Group and in finance for Disney Consumer Products
  • Worked with Customer Relationship Management at Berkeley Enterprise Partners
  • Gained pricing and research experience at Coopers and Lybrand's Compensation Consulting practice
  • Earned her bachelor's degree in marketing and entrepreneurial management from the University of Pennsylvania's Wharton School
  • Earned her MBA at Duke University's Fuqua School of Business

 

Howard Penney

Managing Director

 

Rory Green

Senior Analyst


THE M3: TAIWAN; SANDS CHINA VISITATION; PACKAGE TOURS; PONTE 16; CHINA HOUSING

The Macau Metro Monitor, February 19, 2013

 

 

TAIWAN'S FIRST CASINO MAY BE READY BY 2017: GOVT Macau Business

According to Taiwan's minister of Transportation and Communications, Yeh Kuang-shih, Taiwan’s first casino resort could be completed by the end of 2017.  Yeh said the government has since been working on law amendments and other regulations in order to go ahead with the establishment of a casino resort in Matsu, the China Post newspaper reports.  He added that if the amendments pass without delay and the construction process runs smoothly, Taiwan’s first casino resort will be ready in 2017.

 

SANDS CHINA REPORTS RECORD VISITOR FIGURES FOR CNY Macau Business

Sands China Ltd properties welcomed a record number of visitors during the first week of the Lunar New Year, with 1.7 million visits from February 10 to 16 to its four Macau properties.  The Venetian Macao set its all-time record for visitation on the fourth day of the New Year, with almost 140,000 visits, according to Sands China. “Sands China’s over 9,000 hotel rooms were at or near full capacity almost the entire week,” Gunther Hatt, executive vice president of operations at Venetian Macau.

 

PACKAGE TOURS AND HOTEL OCCUPANCY RATE FOR DECEMBER 2012 DSEC

Visitor arrivals in package tours increased by 8.8% YoY to 887,282 in December 2012.  Visitors from Mainland China (650,389) increased by 10.6%, with 255,780 coming from Guangdong Province; those from Taiwan (62,856) and the Republic of Korea (50,640) increased by 25.4% and 66.6% respectively.  On the contrary, visitors from Hong Kong (31,839) decreased by 25.4%.  For 2012, visitors in package tours reached 9,122,332 (32.5% of total visitor arrivals), up by 21.0% YoY.

 

There were 100 hotels and guesthouses operating at the end of December 2012, providing 26,069 rooms, an increase of 3,713 (+16.6% YoY), of which guest rooms of 5-star hotels accounted for 63.8%.  In December 2012, the hotels and guesthouses received 898,857 guests, up by 9.6% YoY; the average length of stay decreased by 0.09 night to 1.4 nights.

 

SUCCESS UNIVERSE RAISES STAKE IN PONTE 16 CASINO HOTEL Macau Business

Hong Kong-listed Success Universe Group Ltd announced that its indirect, non-wholly owned subsidiary Golden Sun Profits Ltd had received a notice from Maruhan Corp.  The notice is in respect to the exercise of the Maruhan’s option to require Golden Sun
to purchase its entire 10.2% equity interest in World
Fortune Ltd, and the entire amount of the shareholder’s loans provided by Maruhan to World Fortune.


World Fortune is principally engaged in the holding of 49% equity interest in Pier 16 - 
Property Development Ltd, which owns and operates casino hotel Ponte 16. The remaining 51% is controlled by SJM Holdings Ltd. Maruhan is a leading company in the pachinko industry in Japan.


The maximum and minimum option purchase prices are about HK$325 million (US$41.9 million) and HK$195 million, 
but the price has not been determined at this stage, Success Universe said in a stock filing.  After the deal is completed, Success Universe will have full control of World Fortune.  No reason for Maruhan’s decision was disclosed. The company bought its indirect stake in Ponte 16 in 2007.

 

CHINA DEVELOPERS FALL ON PROPERTY CURB CONCERNS: SHANGHAI MOVE Bloomberg

According to China Business News, China may introduce more policies to curb property prices before or after the National People’s Congress annual session next month, as several cities tightened credits of housing provident fund loans.  Home sales in China’s 10 biggest cities almost quadrupled to 8.5 million square meters (91.5 million square feet) in the first five weeks from last year, property data and consulting firm China Real Estate Information Corp. said in an e-mailed statement today.


Market Relationships

This note was originally published at 8am on February 05, 2013 for Hedgeye subscribers.

“Zeus ordained that only in sorrow and in suffering do we find wisdom’s way . . . by suffering we shall gain understanding.”

-AESCHYLUS, Agamemnon

 

A week ago I had memorable birthday and while I’m not quite forty, I’m getting pretty darn close.  As usual, my friends and family delivered in helping me celebrate.  Keith and his wife Laura invited me out to their house for a fine birthday dinner.  I also received a few books, including one called, “How to Be an Adult in Relationships: The Five Key Lessons to Mindful Loving.”

 

I think the person that sent me this book meant it as a gag gift, although I’m sure, as with most jest, there was some truth imbedded in the gift. Setting aside an analysis of my relationship history, I think we can all agree on the fact that relationships, and fruitful ones, are really the key to success and happiness in life.  As stock market operators, we all have a relationship with a gentleman called Mr. Market.

 

The quote at the start of this note is actually very applicable to the stock market.  The best lessons learned from investing typically come from the mistakes.  Further, as my colleague and Hedgeye restaurant Sector Head tweeted last night:

 

“$YUM is the annual reminder of how humbling this job actually is . . .”

 

In this instance, Howard Penney was referring to the results from Yum Brands, a company he had been favorably disposed to going into the quarter, which provided disappointing guidance based on worse than expected results in China.  Howard gets many more calls right than he gets wrong (see our 300%+ gain in Starbucks as evidence), but his point on $YUM is a good one – just when we are least expecting it the market humbles us. 

 

Speaking of humbling markets, the European sovereign debt market is once again becoming relevant.  In the Chart of the Day today, we look at the Spanish 10-year over the last three weeks.  On January 14th, the Spanish 10-year was yielding 4.95% and today is yielding 5.44%.  In the last three weeks, Spanish yields have spiked 10%. 

 

If I were an investor in Spanish and European sovereign debt generally, I’d probably be demanding a higher yield for the inherent acceleration in risk over the last few weeks.  First, Spanish Prime Minister Mariano Rajoy has been under attack for purportedly taking secret payments over a more than ten year period, with the evidence seemingly well documented.  Secondly, ahead of the EU Summit this week, French President Francois Hollande stated:

 

“A monetary zone must have an exchange rate policy or else it ends up subjected to an exchange rate that does not match the true state of its economy.”

 

The translation from French is simply this: Hollande does not believe the market should determine the price of the Euro.

 

The economic data out of Europe this morning will likely only serve to bolster Hollande’s arguments.  The Eurozone PMI Services numbers were reported this number and on aggregate January came in at 48.6 versus 47.8.  There were a number of positive surprises with the U.K. coming in at 51.5 and Germany at 55.7.  Unfortunately, for Hollande and his government’s policies France was a disaster at 43.6.  The other disaster in European economic data was December retail sales down -3.4% year-over-year. 

 

On one hand, Hollande is correct that with both Japan and the United States actively devaluing their currencies, Europe will be at a disadvantage in terms of exports if they don’t follow suit.  Unfortunately, like most wars, this ongoing currency is destined to end poorly.  The reality remains that no country in the history of the world has devalued its way to prosperity, though the Japanese have certainly tried.

 

On that last point, this morning the Japanese are once again upping the devaluation ante.  Bank of Japan Governor Shirakawa announced late yesterday that he would be leaving office on March 19th, a full three weeks earlier than planned.  At the same, two deputy governors will be leaving office.  It seems Prime Minister Abe realizes that political life in Japan is short, and that he needs new leadership at the Bank of Japan to aid in implementing his inflationary policies as soon as possible.  And so, the currency wars continue.

 

The question related to Japan is just how aggressive will the government get in terms of devaluing.  As my colleague Darius Dale wrote yesterday:

 

“The Japanese yen, which is down roughly -16% since we initially outlined our bearish bias back on 9/27, continues to get Taro Aso’d.

 

The latest developmental jawboning on this front has come in the form of Finance Minster Aso’s recent remarks that the Japanese government is taking a page out of its own historical playbook by pursuing strong anti-deflation policies:

 

“There is no one in the government, the bureaucracy or the BOJ who has experience in anti-deflation policy. We can only learn from history.”

 

-Taro Aso, 2/3/13

 

The history lesson Mr. Aso is referring to is Depression-era Japanese Finance Minster Korekiyo Takahashi’s mandating of the BOJ to directly monetize Japanese sovereign debt (as opposed to open-market operations), which began in 1932 and continued for the next 14 years.

 

During this era, the ratio of JGB issuance financed directly by the BOJ peaked at 89.6% in 1933 and remained elevated throughout the program. This monetization strategy assisted in doubling JGB issuance and boosting Japanese public expenditures by a whopping +34% in 1932 alone.”

 

The short answer is that Japan can get a lot more aggressive and this won’t be positive for the Yen, despite the recent sharp correction.  If you’d like to set up a time for us to do a briefing with you or your firm on the risks associated with Japan, please email sales@hedgeye.com.  Japan is a risk that you should keep front and center because in this day and age, all global markets are related.

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, EUR/USD, USD/YEN, 10yr UST Yield, and the SP500 are now $1649-1686, $114.55-116.88, $79.02-79.83, $1.34-1.36, 90.77-93.22, 1.91-2.10%, and 1489-1513, respectively.

 

Best of luck out there today,

 

Daryl G. Jones

Director of Research

 

Market Relationships - Chart of the Day

 

Market Relationships - Virtual Portfolio


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