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MONDAY MORNING RISK MONITOR: CYPRUS DOESN'T SHAKE SYSTEMIC CONFIDENCE

Takeaway: Morgan Stanley looks like an obvious short-term reflation catalyst as well as GS. Citi ranks third.

Key Takeaways

 

* Systemic Risk vs. Local Risk. The most interesting callout in this week's risk monitor is the divergence between Euribor-OIS and EU bank swaps. Euribor-OIS was tighter week-over-week, moving from 12.70 bps to 12.20 bps. Meanwhile, bank swaps across Europe were meaningfully wider. This speaks to Cyprus not being a systemic risk to the banking system in spite of the media's best efforts at making it one, or at least the markets didn't see it that way. The obvious long play here is Morgan Stanley, which was down 6% last week, the worst of the U.S. global banks. Close behind MS is GS, down 5.3%.

 

Financial Risk Monitor Summary

 • Short-term(WoW): Negative / 3 of 12 improved / 5 out of 12 worsened / 5 of 12 unchanged

 • Intermediate-term(WoW): Negative / 5 of 12 improved / 5 out of 12 worsened / 3 of 12 unchanged

 • Long-term(WoW): Positive / 11 of 12 improved / 1 out of 12 worsened / 1 of 12 unchanged

 

MONDAY MORNING RISK MONITOR: CYPRUS DOESN'T SHAKE SYSTEMIC CONFIDENCE - 15

 

1. American Financial CDS -  The global U.S. banks widened as expected in response to Cyprus. Bank of America and Morgan Stanley were hardest hit, widening by 18 and 15 bps, respectively. 

 

Tightened the most WoW: ALL, UNM, XL

Widened the most WoW: BAC, JPM, C

Tightened the most WoW: MTG, MBI, RDN

Widened the most MoM: MMC, AON, BAC

 

MONDAY MORNING RISK MONITOR: CYPRUS DOESN'T SHAKE SYSTEMIC CONFIDENCE - 1

 

2. European Financial CDS - Not surprisingly, EU bank swaps widened sharply last week. French banks were among the hardest hit with BNP wider by 26 bps, Credit Agricole wider by 35 bps and Soc Gen wider by 39 bps. German, Italian and Spanish banks followed suit.

 

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3. Asian Financial CDS - Swaps across China and Japan were tighter last week, while India saw swaps widen.

 

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4. Sovereign CDS – Despite the turmoil, global sovereign swaps were only modestly wider last week. Portugal was teh worst performer, widening by 18 bps WoW. The U.S. was flat. 

 

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5. High Yield (YTM) Monitor – High Yield rates rose 0.6 bps last week, ending the week at 5.80% versus 5.79% the prior week.

 

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6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 2.2 points last week, ending at 1783.92.

 

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7. TED Spread Monitor – The TED spread rose 2.1 basis points last week, ending the week at 21.66 bps this week versus last week’s print of 19.61 bps.

 

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8. Journal of Commerce Commodity Price Index – The JOC index rose 0.5 points, ending the week at 9.58 versus 9.1 the prior week.

 

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9. Euribor-OIS Spread – The Euribor-OIS spread tightened by 1 bps to 12 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 – In spite of the turmoil in Cyprus, ECB overnight deposits were unchanged last week. 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 tightened 4 bps, ending the week at 84 bps versus 88 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 rose 0.9% last week, or 32 yuan/ton, to 3686 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 tightened to 166 bps, 10 bps tighter 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 – Our Macro team’s quantitative setup in the XLF shows 1.7% upside to TRADE resistance and 1.3% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: CYPRUS DOESN'T SHAKE SYSTEMIC CONFIDENCE - 14

 

Joshua Steiner, CFA


U.S. Dollar Strength

Client Talking Points

Good for the Dollar, Bad for Commodities

The US Dollar Index is now up for six of the last seven weeks, and , in turn, the CRB Commodities Index is down for six of the last seven weeks. The dollar and commodities, then are inversely correlated. Oil, copper and rice have have very high inverse correlations, for example.

Emerging Markets Impact

Watch the emerging markets, too, to gauge the strengthening US dollar’s impact. In those emerging markets that do not have a peg to the dollar, we are seeing localized inflation. In those countries whose equity markets are commodity-linked, like Brazil for example, we are seeing declines. Brazil is down 9.4% for the year.

Asset Allocation

CASH 32% US EQUITIES 24%
INTL EQUITIES 20% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 24%

Top Long Ideas

Company Ticker Sector Duration
DRI

Darden stands to be a beneficiary from a housing recovery and an improved employment picture, which boosts casual dining trends. Darden reported earnings today that beat Wall Street expectations, though net income declined 18%.

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.

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.

Three for the Road

TWEET OF THE DAY

“Love that #OldWall mentality – everyone else had it wrong. So it’s ok (pay us).” – @KeithMcCullough

 

QUOTE OF THE DAY

“Be yourself; everyone else is already taken.” – Oscar Wilde

STAT OF THE DAY

15, the seed of Florida Gulf Coast, which became the first 15th seed in NCAA men’s basketball tournament history to make the round of 16.


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – March 25, 2013


As we look at today's setup for the S&P 500, the range is 22 points or 0.89% downside to 1543 and 0.52% upside to 1565.          

                                                                                                                     

SECTOR PERFORMANCE


THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

EQUITY SENTIMENT:


THE HEDGEYE DAILY OUTLOOK - 10


CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 1.70 from 1.68
  • VIX  closed at 13.57 1 day percent change of -3.00%

MACRO DATA POINTS (Bloomberg Estimates):

  • U.S. Rates Weekly Agenda
  • 8:30am: Chicago Fed Natl Activity Index, Feb (prior -0.32)
  • 10:30am: Dallas Fed Manuf., March, est. 3.5 (prior 2.2)
  • 11am: Fed to buy $1.25b-$1.75b notes in 2036-2043 sector
  • 11:30am: U.S. to sell $35b 3-mo. bills, $30b 6-mo. bills
  • 12:15pm: Fed’s Dudley speaks at Economic Club of New York
  • 1:15pm: Fed’s Bernanke, BoE’s King, IMF’s Blanchard speak

GOVERNMENT:

    • Washington Week Ahead
    • House meets in pro forma session, Senate not in session
    • Fed’s Bernanke, IMF’s Olivier Blanchard join public discussion chaired by BoE Gov. Mervyn King, 1:15pm
    • Supreme Court hears arguments on whether drugmakers, would-be rivals who make generic versions are engaged in what U.S. calls anti-competitive “pay for delay” practices when they sign deals to delay introduction of lower-cost medicines, 11am
    • U.S. Chamber of Commerce holds discussion on regional trade agreements, w/ New Zealand Minister of Trade Tim Groser, 8:30am
    • ITC announces whether to review finding that Chinese manufacturer wasn’t infringing patents owned by closely held Standard Innovations for the We-Vibe sex toy, 5pm

WHAT TO WATCH

  • Dell said to get Blackstone, Icahn bids rivaling founder’s
  • Michael Dell likely to sweeten buyout bid to save legacy
  • Cyprus salvaged after deal with EU shuts bank to get $13b bailout
  • Apple buys indoor location-services startup WiFiSLAM
  • U.S. regulators should apply domestic derivatives rules to overseas firms when foreign laws don’t demand comparable requirements: SEC Chairman Walter
  • Sinopec said would form JV w/parent to buy overseas oil, gas assets
  • Italian 10-yr govt. bonds erase post-election decline
  • Westfield raises $700m from sale of Florida mall stakes
  • “The Croods” tops N.A. box office w/ $44.7m in sales
  • Vodafone may withdraw from U.S. with $135b sale: Sunday Times
  • Former Morgan Keegan directors in settlement talks with SEC: WSJ
  • U.S. has asked Liechtenstein to hand over data on foundations that may have been used to hide untaxed American money from IRS
  • 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
  • Weekly Eco Preview: Consumer-spend gains help drive orders
  • Cyprus, U.S. Data, Supreme Court, BRICS: Week Ahead March 25-30

EARNINGS:

    • JA Solar (JASO), 6am, ($1.36)
    • Apollo Group (APOL) 7am, $0.19
    • Dollar General (DG) 7am, $0.90
    • Sonic (SONC) 4:01pm, $0.05
    • AuRico Gold (AUQ) After-mkt, $0.06
    • China Gold International (JINFF), $0.21 (FY12)

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • WTI Oil Rises to One-Month High on Cyprus; Brent Spread Narrows
  • Hedge Funds Most Bearish Ever on Copper, Favor Gold: Commodities
  • Copper Falls in London as China’s Usage May Slow; Lead Advances
  • Gold Falls in London as Equities Climb After Cyprus Agreement
  • Corn, Soybeans Decline as Feed Use Slows, Farmers Boost Sowing
  • Zhengzhou Bourse Said to Plan Adding U.S. Cotton for Deliveries
  • Palm Oil Drops as Rally to One-Month High Seen Reducing Demand
  • Rebar Gains After Inventory Declines From Record, Cyprus Bailout
  • NRG Skirts Utilities Going Straight to Power Consumers: Energy
  • Sugar Declines in New York on Ample World Supplies; Coffee Gains
  • Central African Rebel Leader Vows to Maintain Unity Government
  • Paris Wheat May Climb on Fibonacci Breach: Technical Analysis
  • Bullish Natural Gas Bets Surge as Fuel Hits $4: Energy Markets
  • Rubber Gains as Yen Weakens After Euro Chiefs Reach Cyprus Deal

THE HEDGEYE DAILY OUTLOOK - comm

 

CURRENCIES


THE HEDGEYE DAILY OUTLOOK - 6

 

GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - global

 

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

 

 

 

 

 

 

 

 


Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

Strong Dollar Knowledge

This note was originally published at 8am on March 11, 2013 for Hedgeye subscribers.

“Knowledge, indeed is a desirable, a lovely possession.”

-Thomas Jefferson

 

Part I of John Meacham’s Thomas Jefferson – The Art of Power is called “The Scion” (Beginnings to 1774). I absolutely loved it. It brought me back to Jefferson’s formative years. Like Einstein, he was very much self-taught and self-motivated to challenge perceived wisdoms.

 

Jefferson studied fifteen hours a day, rising at dawn and reading until two o’clock each morning… for Jefferson laziness was a sin.” He’d say “of all the cankers of human happiness, none corrodes it with so silent, yet so baneful, a tooth, as indolence.” (pg 19)

 

To a degree, this is how I think about doing Global Macro Research. There is absolutely no other way to contextualize short to intermediate-term market risks without studying the longest of long-term histories. Knowledge isn’t allocated – it’s hard work.

 

Back to the Global Macro Grind

 

Having been on the road talking to clients about our Commodity Bubble theme for the better part of the last 3 months, I still don’t think the long-term investment implications of  #StrongDollar Knowledge is as pervasive as the US Dollar’s strength has been for 2013 YTD.

 

That’s not to say everyone doesn’t get it. Some clients know this cold. It’s just a friendly reminder that the fulcrum piece of our bullish view of the US stock market isn’t what consensus bulls consider bullish, yet.

 

As you can see from Darius Dale’s Chart of The Day, #StrongDollar = Strong America:

  1. Reagan: Avg price of USD during Presidency = $115.25; avg price of Oil = $16.53/barrel
  2. Clinton: Avg price of USD during Presidency = $97.89; avg price of Oil = $19.69/barrel
  3. Obama: Avg price of USD during Presidency = $79.52; avg price of Oil = $102/barrel

In other words, if President Obama figures this out (like Clinton did, getting fiscally responsible under a Republican House in his 2nd term), this could be the biggest economic opportunity he has seen yet. Barry, think legacy my man.

 

Really? Why? How?

  1. Fiscal and Monetary Policy are causal to currency moves
  2. Fiscal opportunity = Sequestration (tighter, and more conservative on spending, is bullish for the US Dollar)
  3. Monetary opportunity = get Bernanke’s Policy To Inflate out of the way (i.e. out of market expectations)

The first (fiscal) step is A) trivial and B) already in motion. The second (monetary policy) step is A) nuanced and B) being handicapped by market participants, daily. Do you think the currency, commodity, stock, and bond markets are going to wait for Bernanke’s permission to sell their over-indexed position to US Treasuries? C’mon.

 

Market players are data dependent. And the risk to Bernanke’s ZIRP (zero percent rate policy) has always been his forecast. His 6.5% unemployment rate target was based on his own expectation that labor market conditions wouldn’t improve until he is long gone from his seat (2016-2017). With the unemployment rate now at 7.7%, our call for a “6-handle” on the US unemployment rate by Q413 remains intact.

 

There is nothing more dangerous in this game than someone’s forecast – so don’t take our word for it on this. Ask Mr Market:

  1. US Dollar Index just closed up for the 5th consecutive week at a 3.5 year high of $$82.71 (+4.6% in 5wks)
  2. US 10yr Treasury Yield was up big (+20bps) last week; now trading at a 6-mth high of 2.05% this morning
  3. US Stocks (SP500 and Russell2000) are trading at their YTD highs and all-time highs (Russell = 942), respectively

Sure, 6 month and 3.5 year highs might not get the long-term investors knowledge on #StrongDollar impact triggered, yet – but all-time highs (a long-time) in stocks has them asking themselves the questions: “what am I missing? what’s next?”

 

How about more of the same? Look at expectations for commodity inflation (weekly CFTC futures and options contract data):

  1. Total Commodity Net Long Positions = down another -9% last wk to 405,885 (down 70% from the Bernanke Top in SEP12!)
  2. Gold net long contracts = down another -27% last wk to 39,631 (down -61% YTD!)
  3. Oil net long contracts = down only -4% last wk to 167,498

Again, because we know Obama calls them “middle class folks”, we know this is a huge opportunity for him. Imagine seeing him get on TV, weekly, championing what Reagan and Clinton did – Strong Dollar, Down Oil! It’s a Tax Cut!

 

With the immediate-term TRADE correlation between Brent Oil and the US Dollar now at -0.97, that Presidential leadership message (and getting the Bernanke put out of the way), would eviscerate what’s left of the net long position in Oil, fast. And, to borrow from Jefferson’s knowledge, oh what a “lovely possession” that would be for most of us, indeed.

 

Our immediate-term Risk Range for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, Russell2000, and the SP500 are now $1549-1585, $109.35-111.34, $82.07-82.91, 93.46-96.15, 1.94-2.06%, 11.68-14.34, 921-949, and 1528-1565, respectively.

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Strong Dollar Knowledge - Strong Dollar   Strong America

 

Strong Dollar Knowledge - Virtual Portfolio



Cave Dwellers

“New is always bad. Never not be afraid.”

-Grug

 

If you don’t know who Grug is, take your kids to see The Croods – the latest American computer-animated family film by Dreamworks that opened this weekend. Nicolas Cage crushes it in this one. We loved it!

 

The movie starts with scarier stuff than Cyprus (Croods fend it off), then Grug’s daughter introduces herself: “My name is Eep and this is my family, the Croods. We never had the chance to explore the outside world because of my Dad’s one rule: Never leave the cave.”

 

I know – I’m too bullish about US Equity markets, life, etc. these days. But, sometimes, it’s ok to look on the bright side. If you have a fear-mongering Cave Dweller in the office, maybe you should take him to see the movie too. Everyone needs to leave the cave.

 

Back to the Global Macro Grind

 

There are plenty of things to worry about out there – and, from a time and price, that will include US Equities too – but for now, the most bullish TREND in America remains your friend: #StrongDollar = Stronger America. Period.

 

We’ll dig deeper on the Dollar on our upcoming Q2 2013 Global Macro Themes presentation, but for now it’s important to review why US Equity Markets are testing all-time highs into the end of Q1 (our Q113 Themes):

  1. #GrowthStabilizing – US GDP Growth bottomed, sequentially, in Q4 of 2012; upside vs consensus in Q1/Q2 2013
  2. #HousingsHammer – consensus is not yet Bullish Enough on US employment and housing reflexivity
  3. #QuadrillYen – as the US Dollar strengthens on domestic factors, it’s picking up the relative (Burning Yen) trade too

What’s good for the US Dollar is bad for Commodities:

  1. US Dollar Index = +0.5% last week to $82.53 (up for 6 of the last 7 weeks)
  2. CRB Commodities Index = -0.6% last wk to 294 (down for 6 of the last 7 weeks)

What’s good for the US Dollar is also bad for Commodities Correlation Risks:

  1. 30-day inverse correlation between USD and Brent Crude Oil = -0.97
  2. 30-day inverse correlation between USD and High Grade Copper = -0.94
  3. 30-day inverse correlation between USD and Rough Rice = -0.86

Rice? Grug didn’t know how to boil water, but it’s still the world’s top consumed food these days.

 

And that’s the other big thing going on out there this year in Global Equity markets – not all markets are going up as the US Dollar does.

 

A)     Emerging Markets that don’t have a US Dollar peg are seeing local inflations (inflation is priced in local FX)

B)      Emerging Markets whose Equity Markets are commodity-linked are losing (Brazil = down -9.4% YTD)

 

On that score, note the following Global Equity market divergences:

  1. SP500 and Russell2000 = +9.1% and +11.4% YTD, respectively
  2. MSCI Emerging Markets (EM) Index = -3.8% YTD
  3. MSCI Emerging Markets (EM) Index = -1.9% last wk vs the Dow -0.013%

If you want to freak yourself right out, there are plenty of securities and markets out there where you can do that. After all, there’s always a bear market somewhere – and the top 3 bearish TRENDs in our macro model continue to be:

  1. Japanese Yen
  2. US Treasuries
  3. Commodities

Within the Commodities Deflation trend, consensus first saw Copper imploding as a “bearish growth signal.” Now, consensus is calling it what it is this morning – the biggest build of Copper inventory on the LME (London Metals Exchange) since 2003. What if you bought SPY in 2003?

 

Yep, LME Copper inventory is up +76% YTD. With supply that high and the Correlation Risk in Copper to #StrongDollar ripping, who cares about anything else? It certainly doesn’t mean the world is ending either.

 

The End of World (#EOW) trade has great marketing programs and tends to get priced into Gold in a hurry. Last week’s net long position in Gold (per CFTC futures/options data) exploded to the upside by 63% week-over-week (to 70,193 net long contracts).

 

But Gold bulls have been going back to this Cave Dweller well of fear for the last 6 months. So that’s not new. Neither is Gold’s price not reacting to the fear-born expectation that it out-performs. Gold is down again this morning, testing $1605 support.

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, USD/YEN, UST 10yr Yield, VIX, and SP500 are now $1, $106.97-108.66, $3.36-3.48, $82.15-83.25, 94.07-96.71, 1.89-1.97%, 10.78-14.92, and 1, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Cave Dwellers - Chart of the Day

 

Cave Dwellers - Virtual Portfolio


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