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MONDAY MORNING RISK MONITOR: TIME TO PANIC?

Takeaway: Prior to this weekend, Europe's banking system was healing. We doubt Cyprus will have a game-changing effect on Europe's global banks.

Key Takeaways:

 

* We'll buy fear for now. It remains to be seen what impact Cyprus will have on EU deposit perceptions. We think the lesson of the last 15 months has been that the ECB will do everything in its power to prevent interbank counterparty problems, reinforcing the too-big-to-fail dynamic among Europe's largest banks. Deposit safety fear, should it grow, should ultimately benefit the large EU banks as they'll be seen as relative safe havens. This should, in turn, minimize counterparty risk for the U.S. global banks seen as at risk from Cyprus contagion woes. The ECB's success thus far is evident in the move from 100 bps to 13 bps in Euribor-OIS, the measure of European interbank counterparty risk. While we would expect a nominal backup in this key risk indicator, we'll be focused on whether this Cyprus news results in a sustained rise in the Euribor-OIS spread over the coming weeks. 

 

* XLF Macro Quantitative Setup – Based on this morning's open, the XLF is sitting just above trade support of $18.23. 

 

2-10 Spread – Last week the 2-10 spread widened 10 bps to 176 bps.

 

* Chinese Steel – Steel prices in China fell 2.8% last week, or 105 yuan/ton, to 3654 yuan/ton. This brings the month-over-month change to -3.6%. Weakening Chinese steel prices are reflecting slowing demand for new construction.

 

Financial Risk Monitor Summary

 • Short-term(WoW): Positive / 6 of 12 improved / 2 out of 12 worsened / 5 of 12 unchanged

 • Intermediate-term(WoW): Positive / 6 of 12 improved / 2 out of 12 worsened / 5 of 12 unchanged

 • Long-term(WoW): Positive / 11 of 12 improved / 0 out of 12 worsened / 2 of 12 unchanged

 

MONDAY MORNING RISK MONITOR: TIME TO PANIC? - 15

 

1. U.S. Financial CDS -  Large cap U.S. financials were notably tighter last week. In fact, it was a perfect week in that 27 out of 27 institutions improved week-over-week. We'll see how much of those gains are retraced this week on Cyprus. 

Tightened the most WoW: C, AGO, MS

Tightened the least WoW: PRU, UNM, ALL

Tightened the most WoW: MTG, RDN, MBI

Widened the most/ tightened the least MoM: AON, MMC, PRU

 

MONDAY MORNING RISK MONITOR: TIME TO PANIC? - 1

 

2. European Financial CDS - Unfortunately, these quotes are all as of Friday night. Clearly, that renders them rather stale. If we rewind to before Cyprus, what we see is a very uneventful week (last week) for EU financials across the board. Italian banks were slightly wider WoW, but otherwise it was extremely quiet. 

 

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3. Asian Financial CDS - Last week was uneventful for Asian banks, with most narrowly tighter. The biggest move of the week came from Nomura, which tightened by 8 bps.

 

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4. Sovereign CDS – The European periphery continues to move wider, while the core tightens further. The U.S., Germany and France were all tighter last week, while Spain, Italy, Ireland and Japan all widened.

 

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5. High Yield (YTM) Monitor – High Yield rates fell 6.7 bps last week, ending the week at 5.79% versus 5.86% the prior week.

 

MONDAY MORNING RISK MONITOR: TIME TO PANIC? - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 5.4 points last week, ending at 1781.69.

 

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7. TED Spread Monitor – The TED spread rose 0.5 basis points last week, ending the week at 19.61 bps this week versus last week’s print of 19.11 bps.

 

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8. Journal of Commerce Commodity Price Index – The JOC index rose 2.4 points, ending the week at 9.86 versus 7.5 the prior week.

 

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9. Euribor-OIS Spread – As of Friday's close, the The Euribor-OIS spread was flat week-over-week at 13 bps. We'll stay tuned for an update as of the close today. 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 at the ECB continued to decline in the latest week, albeit this data is through Friday. It remains to be seen how the Cyprus deposit tax will impact things. 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 were narrowly tighter, ending the week at 88.2 bps versus 91 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. 

 

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12. Chinese Steel – Steel prices in China fell 2.8% last week, or 105 yuan/ton, to 3654 yuan/ton. 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 widened to 176 bps, 10 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

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14. XLF Macro Quantitative Setup – Based on this morning's open, the XLF is sitting just above trade support of $18.23.  

 

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Joshua Steiner, CFA


Podcast: Cyprus? Really?

Here’s our investment call from this morning –  Keith tells you what the situation in Cyprus really means. 


HUGE NUMBERS OUT OF MACAU, AGAIN

ADTR grew 23% YoY to HK$955 million this past week in Macau and month to date is up 29%.  We are hearing that hold percentage may have been above normal but revenues are just too strong to be just hold related.  We are raising our full month GGR forecast to HK$29-30 billion which would represent YoY growth of 20-24%.  These numbers are tremendous and will likely result in higher Q2 estimates (we had just raised them for MPEL, LVS, and Galaxy).  Our thesis of sluggish VIP volumes appears to have been shorter-lived (Jan and Feb) than we thought.

 

HUGE NUMBERS OUT OF MACAU, AGAIN - m55

 

Market shares MTD are generally in-line with recent trends with the exception of LVS giving up share to SJM.  We’ll have to wait and see how much of that is hold related.

 

HUGE NUMBERS OUT OF MACAU, AGAIN - m66


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End of the World?

Client Talking Points

End of the World?

While the world of Old Media wrings its hands and furrows its brow over the situation in Cyprus, we don’t for a second think it’s the end of the world by any means. Here’s some context. In the last year, the market’s down 62%; in the last three months, it’s off 16%; and in the last month it’s down 8% in the last month. In other words, this is not news. It’s been happening for a while.

There Goes the VIX

The US Equity Volatility index was down 10.2% last week to a fresh five-year weekly closing low of 11.30. It’s also down 41% since the last time many could have freaked out, Italian Election Day on February 25. So, don’t get too freaked out today about the situation in Cyprus.

Asset Allocation

CASH 40% US EQUITIES 18%
INTL EQUITIES 18% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 24%

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

“If you were a Cypriot, would you prefer a) deposit tax of 7-9% or b) a Venezuela style devaluation of 40%?” – HedgeyeDJ, our own director of research, Daryl Jones

QUOTE OF THE DAY

“Mr. Dimon’s failure on this score comes from the hubris of having too much power in his hands.” – John Liu, the New York City Comptroller on the way JP Morgan’s CEO Jamie Dimon handled the London Whale trading losses

STAT OF THE DAY

12.14%, the year-to-date change in the Russell 2000


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – March 18, 2013


As we look at today's setup for the S&P 500, the range is 32 points or 1.65% downside to 1535 and 0.40% upside to 1567.  

                                                                                                                             

SECTOR AND GLOBAL PERFORMANCE


THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 4

 

EQUITY SENTIMENT:


THE HEDGEYE DAILY OUTLOOK - 10


CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 1.70 from 1.74
  • VIX  closed at 11.30 1 day percent change of 0.00%

MACRO DATA POINTS (Bloomberg Estimates):

  • U.S. Rates Weekly Agenda
  • 10am: NAHB Housing Market Index, March, est. 47 (prior 46)
  • 11am: Fed to buy $1.25b-$1.75b notes in 2036-2043 sector
  • 11:30am: U.S. Treasury to sell $35b 3M bills, $30b 6M bills

GOVERNMENT:

    • Senate to consider continuing resolution to keep govt funded past March 27
    • Boehner says mtgs w/ Obama didn’t ease budget standoff
    • Senate Judiciary Cmte holds hearing on immigration law, 2pm
    • U.S., U.K., France, China, Russia and Germany meet w/ Iran to review a proposal presented last mo.; sides will meet in Istanbul to discuss confidence-building steps
    • ITC Judge Thomas Pender releases findings in an infringement case by Dover’s Knowles Electronics against Analog Devices over microphones in digital devices
    • Washington Week Ahead

WHAT TO WATCH

  • Europe braces for more turmoil; Cyprus deposit levy at risk
  • Anastasiades seeks support from Cyprus political parties
  • Cypriot bank levy “ominous” for bondholders: Barclays
  • Banks raise cross-border lending by least in 13 yrs: BIS
  • Fed’s Fisher says too-big-to-fail banks should be broken up
  • Airbus said to win order for >200 planes from Lion Air
  • SpiceJet weighs switch to Airbus from Boeing on tech, cost
  • Chesapeake must meet w/BNY Mellon over weekend on call trial
  • SAC’s Plotkin may have been tipped by convicted SAC analyst
  • Office Depot Mexico sale talks said to go past deadline
  • Panasonic considers selling its health-care business
  • Dex One, SuperMedia file for bankruptcy to complete merger
  • AMR CEO Horton’s $20m severance draws U.S. objection
  • Boeing boosted CEO’s pay 20% year before Dreamliner grounding
  • AB InBev, U.S. seek lawsuit delay as Modelo talks progress
  • DuPont sued by retailers on price-fixing claim for pigment
  • Idemitsu, Mitsui consider U.S. petrochem plant on cheap gas
  • “Oz” leads NA box-office sales a second week w/ $42m
  • Osborne plans austere U.K. budget as political attacks ease
  • Li urges paring China state role to fuel 7.5% growth to 2020
  • Xiao quits Bank of China to head up securities regulator
  • U.S. Weekly Agendas: Finance, Industrials, Energy, Health, Consumer, Tech, Media/Ent, Real Estate, Transports
  • North American M&A Agenda
  • Canada Weekly Agendas: Energy, Mining
  • Eco Week Preview: Homebuilding probably climbed w/ sales
  • FOMC, Obama in Israel, U.K. Budget, HP: Wk Ahead March 16-23

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Commodities Slump as Cyprus Sparks Declines From Oil to Copper
  • Bullish Bets Jump Most Since July as Gold Rebounds: Commodities
  • Cocoa Deficit Lasting Two More Years on Pest, Disease, ICCO Says
  • Gold Advances Above $1,600 for First Time This Month on Cyprus
  • Copper Touches 4-Month Low as Cyprus Rescue Fuels Crisis Concern
  • WTI Drops From Three-Week High on Cyprus; Libyan Pipeline Shuts
  • Wheat Drops for Second Day as Global Supplies Set to Increase
  • India’s Cabinet to Consider Ending State Curbs on Sugar Mills
  • Russia Adopts Texas Drilling to Revive Soviet Oil Fields: Energy
  • Ivory Coast Holds Cocoa Farmer Price and Sets Mid-Crop Start
  • AngloGold Ashanti Loses 20,000 Ounces in South African Power Cut
  • Palm Oil Declines as Malaysian Export Tax Seen Curbing Demand
  • Japan’s Bid to Enter Trade Talks Opens Export Route for U.S. LNG
  • Stronger U.S. Dollar May Not Limit Commodities: Morgan Stanley

THE HEDGEYE DAILY OUTLOOK - 5

 

CURRENCIES


THE HEDGEYE DAILY OUTLOOK - 6

 

EUROPEAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 7

 

ASIAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 8

 

MIDDLE EAST


THE HEDGEYE DAILY OUTLOOK - 9

 

 

The Hedgeye Macro Team

 

 

 

 

 

 


Commodity Gap

This note was originally published at 8am on March 04, 2013 for Hedgeye subscribers.

“Icy with anger, warm with satisfaction, sharp with concern”

-Emmet Hughes

 

Allegedly, that’s how President Eisenhower reacted to Russian intelligence briefings in July of 1956. While he didn’t sign off on the depth of the American U2 spy plane mission to begin with, “the President’s skepticism (about Russia) had been confirmed by just five days of aerial reconnaissance. The Bomber Gap was a myth.” (Ike’s Bluff, pg 215) The Russians didn’t have anything real.

 

Like the “missile gap” concerns that came thereafter, the Bomber Gap was part of the political fear-mongering that kept the American People on edge, building home bunkers, and buying canned foods – essentially preparing to be attacked. But freaking people out with a false story that’s based on logical premise isn’t new in this country. That’s how the #PoliticalClass gets paid.

 

Ultimately, knowing the truth (but keeping it to himself) became Dwight Eisenhower’s advantage in a world that was perpetually on the brink of war. When I see the emerging advantages of sequestration (Strong Dollar born out of fiscal spending sobriety), but hear politicians trying to scare people (when they should just get out of the way), I think about leadership. I also think about Ike.

 

Back to the Global Macro Grind

 

Does President Obama get what a Strong Dollar does for the US Economy? Did George Bush? Nixon and Carter didn’t. Reagan and Clinton did. A pervasively Strong Dollar gave the US Down Oil prices in the two most impressive growth decades since Eisenhower.

 

Last week, the US Dollar Index was up another full +1%. That was the 4th consecutive up week for the US Dollar. At the same time (and not ironically), Commodities (19 component CRB Index) were down for the 4th straight week. Commodity Deflation has been absolute (CRB Index -4.9% in 4 weeks), and now prices are finally scaring expectations.

 

To expect or not to expect Commodity Inflation, remains the question. Let’s look at last week’s CFTC futures and options net long positioning (hedge funds speculating on money printing, Bernanke Policies to Inflate, etc.) for some clues:

 

  1. The net long position in all of commodities collapsed another -16% last wk to 447,106 contracts
  2. Oil’s net long position dropped another -16% wk-over-wk to 175,211 contracts
  3. Farm Goods (think food) net long position crashed (again) another -24% to 145,564 contracts

 

Oh yeah, baby. Strong Dollar – we people who put gas in car, and food in mouth – we love you long time. But what, in this manic market, is a long time?

 

  1. March 2009? Yep. This is the lowest speculative net long position in CFTC contracts (commodity inflation) since 2009
  2. Corn contracts (down -20% last wk) are perpetuating the lowest food inflation expectations since, again, March 2009

 

For those of you still long the consumption related assets you bought after the March 2009 lows (we bought Starbucks, SBUX, at $11.52 in April of 2009, and still have it on #RealTimeAlerts; not a typo!), you are probably quite happy.

 

Freaking-out about the Commodity Gap now isn’t much different than freaking out about it then. I remember then almost like it was yesterday. People were pinging me with live quotes of “Dr. Copper crashing” saying the world was going to end. It didn’t. People who were long of Copper did.

 

Since the #PoliticalClass always asks for “solutions.” Why not try something no US President (under their Keynesian Economics regimes) has tried since the 1990s.  Why doesn’t the President of the United States hold a press conference today saying something like:

 

“Today, folks, is a great day in America. We finally cut spending and we are about to get this Bernanke character out the way on your savings accounts. Your currency is strengthening and your purchasing power is being restored. God Bless a free-market America.”

 

Anyone think that might happen? Bueller? Or does he really get this (and he’s just keeping it to himself)?

In the meantime, all I can tell you is this:

 

  1. WTIC Oil prices snapped our TREND line of $93.41/barrel support last week (-7% in the last month)
  2. Russian Stocks (which trade off oil expectations) snapped TREND of 1566 on the RTSI (-8% in the last month)
  3. Our immediate-term TRADE correlation between WTIC Oil and the US Dollar is now -0.99!

 

Enough of the #ClassWarfare speeches already. Mr. President, if you really want to help people who drive to work every day, tell the truth about Strong Dollar (+4% in the last month) and all its benefits as a real-time Tax Cut! Long live the Commodity Gap (down).

 

Our immediate-term Risk Ranges for Gold, Oil (WTIC), Copper, US Dollar, USD/YEN, UST10yr Yield, VIX, Russell2000, and the SP500 are now $1549-1589, $89.72-92.93, $3.48-3.57, $81.44-82.65, 91.85-94.68, 1.81-1.94%, 11.96-17.18, 901-930, and 1502-1534, respectively.

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Commodity Gap - Chart of the Day

 

Commodity Gap - Virtual Portfolio


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