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

 

TUESDAY MORNING RISK MONITOR: HOW LONG CAN GOLDILOCKS LAST? - 15

 

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.

 

TUESDAY MORNING RISK MONITOR: HOW LONG CAN GOLDILOCKS LAST? - 2

 

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.

 

TUESDAY MORNING RISK MONITOR: HOW LONG CAN GOLDILOCKS LAST? - 17

 

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.

 

TUESDAY MORNING RISK MONITOR: HOW LONG CAN GOLDILOCKS LAST? - 6

 

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.

 

TUESDAY MORNING RISK MONITOR: HOW LONG CAN GOLDILOCKS LAST? - 7

 

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.

 

TUESDAY MORNING RISK MONITOR: HOW LONG CAN GOLDILOCKS LAST? - 8

 

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. 

 

TUESDAY MORNING RISK MONITOR: HOW LONG CAN GOLDILOCKS LAST? - 9

 

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.  

 

TUESDAY MORNING RISK MONITOR: HOW LONG CAN GOLDILOCKS LAST? - 10

 

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. 

 

TUESDAY MORNING RISK MONITOR: HOW LONG CAN GOLDILOCKS LAST? - 11

 

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.

 

TUESDAY MORNING RISK MONITOR: HOW LONG CAN GOLDILOCKS LAST? - 12

 

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.

 

TUESDAY MORNING RISK MONITOR: HOW LONG CAN GOLDILOCKS LAST? - 13

 

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


7 Tweets Summing Up What You Need to Know About Today's GDP Report

"There's a tremendous opportunity to educate people in our profession on how GDP is stated and projected," Hedgeye CEO Keith McCullough wrote today. Here's everything you need to know about today's GDP report.

read more

Cartoon of the Day: Crash Test Bear

In the past six months, U.S. stock indices are up between +12% and +18%.

read more

GOLD: A Deep Dive on What’s Next with a Top Commodities Strategist

“If you saved in gold over the past 20 to 25 years rather than any currency anywhere in the world, gold has outperformed all these currencies,” says Stefan Wieler, Vice President of Goldmoney in this edition of Real Conversations.

read more

Exact Sciences Up +24% This Week... What's Next? | $EXAS

We remain long Exact Sciences in the Hedgeye Healthcare Position Monitor.

read more

Inside the Atlanta Fed's Flawed GDP Tracker

"The Atlanta Fed’s GDPNowcast model, while useful at amalgamating investor consensus on one singular GDP estimate for any given quarter, is certainly not the end-all-be-all of forecasting U.S. GDP," writes Hedgeye Senior Macro analyst Darius Dale.

read more

Cartoon of the Day: Acrophobia

"Most people who are making a ton of money right now are focused on growth companies seeing accelerations," Hedgeye CEO Keith McCullough wrote in today's Early Look. "That’s what happens in Quad 1."

read more

People's Bank of China Spins China’s Bad-Loan Data

PBoC Deputy Governor Yi says China's non-performing loan problem has “pretty much stabilized." "Yi is spinning. China’s bad-debt problem remains serious," write Benn Steil and Emma Smith, Council on Foreign Relations.

read more

UnderArmour: 'I Am Much More Bearish Than I Was 3 Hours Ago'

“The consumer has a short memory.” Yes, Plank actually said this," writes Hedgeye Retail analyst Brian McGough. "Last time I heard such arrogance was Ron Johnson."

read more

Buffalo Wild Wings: Complacency & Lack of Leadership (by Howard Penney)

"Buffalo Wild Wings has been plagued by complacency and a continued lack of adequate leadership," writes Hedgeye Restaurants analyst Howard Penney.

read more

Todd Jordan on Las Vegas Sands Earnings

"The quarter actually beat lowered expectations. Overall, the mass segment performed well although base mass lagging is a concern," writes Hedgeye Gaming, Lodging & Leisure analyst Todd Jordan on Las Vegas Sands.

read more

An Update on Defense Spending by Lt. Gen Emo Gardner

"Congress' FY17 omnibus appropriation will fully fund the Pentagon's original budget request plus $15B of its $30B supplemental request," writes Hedgeye Potomac Defense Policy analyst Lt. Gen Emerson "Emo" Gardner USMC Ret.

read more

Got Process? Zero Hedge Sells Fear, Not Truth

Fear sells. Always has. Look no further than Zero Hedge.

read more