prev

MONDAY MORNING RISK MONITOR: GREEN MEANS GO

Takeaway: European fears further recede while the great U.S. yield hunt continues. Big bank swaps place low probability on Brown-Vitter passsage.

Key Takeaways:

 

* High Yield (YTM)  – Investors continue to discount risk, pushing High Yield rates lower by another 13.6 bps last week, ending the week at 5.53% versus 5.67%.

 

* European Financials - There are a lot of roses coming up in Europe lately. European banks were tighter across the board last week as Cyprus-related fears shifted from the back burner to ancient memory. Italian banks tightened an average of 30 bps, boosted by finally having a government.

 

* U.S. Financials -  Bank of America was the big mover on the week, tightening 11 bps to 122 bps. Pretty remarkable, when you consider that BofA was at 483 bps on 11/25/11 and that its lows since 2009 have been around 100 bps. Goldman and Morgan followed BofA's lead, tightening 8 bps and 6 bps, respectively. The mortgage insurers continued to see their bankruptcy profiles plunge, as swaps tightened 67 bps and 64 bps at MTG and RDN.

 

 

Financial Risk Monitor Summary

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

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

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

 

MONDAY MORNING RISK MONITOR: GREEN MEANS GO - 15 2

 

1. American Financial CDS -  Bank of America was the big mover on the week, tightening 11 bps to 122 bps. Goldman and Morgan followed BofA's lead, tightening 8 bps and 6 bps, respectively. The mortgage insurers continued to see their bankruptcy profiles plunge, as swaps tightened 67 bps and 64 bps at MTG and RDN.

 

Tightened the most WoW: RDN, MTG, AXP

Widened the most/ tightened the least WoW: AON, MBI, WFC

Tightened the most WoW: RDN, MTG, AXP

Widened the most MoM: MBI, SLM, MMC

 

MONDAY MORNING RISK MONITOR: GREEN MEANS GO - 1

 

2. European Financial CDS - European banks were tighter across the board last week as Cyprus-related fears shifted from the back burner to ancient memory. Italian banks tightened an average of 30 bps, boosted by finally having a government.

 

MONDAY MORNING RISK MONITOR: GREEN MEANS GO - 2

 

3. Asian Financial CDS - Asian bank swaps were mixed, though modest last week. Chinese banks narrowly tightened, while Japanese banks were mostly wider. State Bank of India was the biggest mover with a 10 bps tightening.  

 

MONDAY MORNING RISK MONITOR: GREEN MEANS GO - 17

 

4. Sovereign CDS – So much for Cyprus. European sovereign swaps continue to tighten. Italy, Spain, Portugal and Ireland all came in by 9-19 bps week-over-week, and are down 19-50 bps over the past month. Meanwhile, the U.S., Germany, France and Japan all remain a yawn with 1 bp moves.

 

MONDAY MORNING RISK MONITOR: GREEN MEANS GO - 18

 

MONDAY MORNING RISK MONITOR: GREEN MEANS GO - 3

 

MONDAY MORNING RISK MONITOR: GREEN MEANS GO - 4

 

5. High Yield (YTM) Monitor – High Yield rates fell another 13.6 bps last week, ending the week at 5.53% versus 5.67% the prior week.

 

MONDAY MORNING RISK MONITOR: GREEN MEANS GO - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 2.5 points last week, ending at 1796.

 

MONDAY MORNING RISK MONITOR: GREEN MEANS GO - 6

 

7. TED Spread Monitor – The TED spread fell 0.6 basis points last week, ending the week at 22.3 bps this week versus last week’s print of 22.1 bps.

 

MONDAY MORNING RISK MONITOR: GREEN MEANS GO - 7

 

8. Journal of Commerce Commodity Price Index – The JOC index was essentially flat last week at 7.48 versus 7.5 in the prior week.

 

MONDAY MORNING RISK MONITOR: GREEN MEANS GO - 8

 

9. Euribor-OIS Spread – The Euribor-OIS spread remained flat last week 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. 

 

MONDAY MORNING RISK MONITOR: GREEN MEANS GO - 9

 

10. ECB Liquidity Recourse to the Deposit Facility – ECB deposits were up 5.8 billion Euros 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.  

 

MONDAY MORNING RISK MONITOR: GREEN MEANS GO - 10

 

11. Markit MCDX Index Monitor – Last week spreads tightened 7 bps, ending the week at 59.2 bps versus 65.7 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. 

 

MONDAY MORNING RISK MONITOR: GREEN MEANS GO - 11

 

12. Chinese Steel – Steel prices in China fell 0.6% last week, or 21 yuan/ton, to 3574 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: GREEN MEANS GO - 12

 

13. 2-10 Spread – Last week the 2-10 spread tightened to 148 bps, -2 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR: GREEN MEANS GO - 13

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 2.0% upside to TRADE resistance and 1.5% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: GREEN MEANS GO - 14

 

Joshua Steiner, CFA

 


GOLD: Ignore The Bounce?

Gold caught a 20 point bounce this morning to around $1470/oz. While that's fine and dandy for those who bought gold near the top and are reeling from that pain trade, the reality is that gold remains in bearish formation. We have yet to re-short gold via the SPDR Gold Trust ETF (GLD) but we did re-short the Market Vectors Gold Miners ETF (GDX) last week. The precious metal remains down -13% year-to-date and we gather it'll drop back below $1400/oz sooner than later.

 

GOLD: Ignore The Bounce? - GLDGDX ytdchart


MACAU REBOUNDS

Takeaway: MPEL the stalwart in the high growth Macau market

Macau posted a solid performance last week with average daily table revenues of HK$886 million, up 15% YoY and 15% from last week’s HK$775 million.  Our full month projection is now HK$26.5-27.0 billion, up 9-11% YoY.  We expect May YoY growth to accelerate to mid-teens which could keep up the momentum in the Macau stocks.  

 

With 23 deaths thus far, the H7N9 virus may be impacting the tour group business but doesn't appear to be affecting gaming revenues.  In fact, less congestion during the May holidays could actually boost VIP activity.  May holidays start today and end on May 3rd.

 

In terms of market share, MPEL continues to shine with 16.3% share well above recent trend.  MPEL remains our favorite stock in the group.  LVS is also performing well in April and we expect that trend to continue for the rest of the year.  Wynn and Galaxy are the laggards here in April.

 

MACAU REBOUNDS - aa

 

MACAU REBOUNDS - bb


the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

Morning Reads From Our Sector Heads

Keith McCullough (CEO):

 

Philippines Mulls Adjusting Deposit Facility as Peso Climbs (via Bloomberg)

 

Ebbing Inflation Means More Easy Money (via Bloomberg)

 

Howard Penney (Restaurants):

 

Mind your franchisees, Mayor McCheese (via Crain's Chicago Business)

 

Jay Van Sciver (Industrials):

 

Eaton First Quarter Operating Earnings Per Share of $0.84 Exceed Midpoint of Guidance by 12 Percent (via Eaton)

 

Rob Campagnino (Consumer Staples):

 

Analysts await details of financing for ADM's GrainCorp bid (via The Australian)

 

Brian McGough (Retail):

 

Under Armour Drops Low Cost Fleece Sources In Favor of Costlier But Prompt, Reliable Delivery (via Sourcing Journal Online)

 

Kevin Kaiser (Energy):

 

What If We Never Run Out of Oil? (via The Atlantic)

 

Josh Steiner (Financials):

 

Influential economist says Wall Street is full of 'crooks' (via NY Post)

 

The CFPB issues Civil Penalty Fund rule (via CFPB)

 

JPMorgan promotes Zames in shake-up (via FT)

 

Todd Jordan (GLL):


Sands Casino Says Auditor Quits Account (via WSJ)

 

Tom Tobin (Healthcare):

 

CMS ISSUES PROPOSED INPATIENT PAYMENT REGULATION (via CMS)



Heightened Expectations

Client Talking Points

You Down With ECB?

Rate cuts have become the norm in the "new economy" we live in. The next big one should come out of Europe, specifically from Mario Draghi at the European Central Bank (ECB). The EuroStoxx 600 index was up +3.7% last week, which shows that stocks do expect and care about rate changes. Spain and Italy rallied the most out of the great big melting pot so if Draghi doesn't cut rates soon, it's going to be a mess over there.

Crude Mood

Brent crude oil is in bearish formation across all three of our durations: TRADE, TREND and TAIL. Last week's bounce is unlikely to hold and that's a positive for consumption (Americans are quite fond of lower gas prices). Our immediate-term risk range for Brent crude oil is $97.18-104.09 and there are plenty of speculators who need to unwind their long positions.

Asset Allocation

CASH 22% US EQUITIES 26%
INTL EQUITIES 18% COMMODITIES 0%
FIXED INCOME 6% INTL CURRENCIES 28%

Top Long Ideas

Company Ticker Sector Duration
IGT

Decent earnings visibility, stabilized market share, and aggressive share repurchases should keep a floor on the stock.  Near-term earnings, potentially big orders from Oregon and South Dakota, and news of proliferating gaming domestically could provide near term catalysts for a stock that trades at only 11x EPS.  We believe that multiple is unsustainably low – and management likely agrees given the buyback – for a company with the balance sheet and strong cash flow as IGT.  Given private equity’s interest in WMS (they lost out to SGMS) – a company similar to IGT that unlike IGT generates little free cash – we wouldn’t rule out a privatizing transaction to realize the inherent value in this company. 

WWW

WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. 

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

"Consumer spending report at 8:30 kicks off a week chock full of data" -@BenEisen

QUOTE OF THE DAY

"Facts are stubborn things, but statistics are more pliable." -Mark Twain

STAT OF THE DAY

U.S. consumer spending rises 0.2% in March.


Golden Crisis

This note was originally published at 8am on April 15, 2013 for Hedgeye subscribers.

“The difficulty is that no one is ever prepared to move except in a crisis.”

-Paul Volcker

 

That’s what Paul Volcker had to say about where central planners found themselves post Nixon’s re-election. It was 1973 and the US had just devalued the Dollar for the 2nd time in two years. One of Gold’s great policy driven inflations was on the move.

 

George Shultz (Treasury Secretary at the time in 1973) “said that the increase in the official gold price from $38.00 and ounce to $42.22 an ounce was a technical change.” (Volcker: The Triumph of Persistence, pg 117)

 

“Technical”, yep. Technically, both the Nixon/Carter and Bush/Obama central planning teams (back to back Republican/Democrat Administrations) spent their time looking for ways to devalue the currency of the American people. These were the two worst post WWII decades in US Consumer Confidence. When someone takes away your purchasing power, that’s how it feels.

 

Back to the Global Macro Grind

 

We’ve affectionately referred to the most recent decade-long inflation in the Gold price as Bernanke’s Bubble. Since both Greenspan and Congress deserve some credit, it’s not entirely fair to blame it all on Ben. But I like to pick on him. So call me a bully.

 

The fact remains that a 40yr low in the US Dollar (2011) coincided with a 40yr top in Gold and Commodity prices (2011). This all happened on Bernanke’s watch. Historical prices can be annoying; especially if they don’t fit the narrative a professor is trying to paint.

 

This morning’s move in Gold futures is gnarly. On my scorecard, on our immediate-term TRADE duration, this is almost a 5 standard deviation move to the downside. Gold prices are now officially crashing from their all-time high (-26%).

 

This shouldn’t surprise any readers of my rants – since cutting our Hedgeye Asset Allocation to Commodities to 0% in September of 2012, then labeling 1 of our Top 3 Global Macro Themes in Q412 “Bubble #3 (Commodities)”, we’ve been crystal clear on this.

 

It hasn’t been clear to the Gold and Commodity Bulls. One way I like to show their disbelief (that commodity prices can indeed go a lot lower) is the weekly net long positions in futures and options contracts (CFTC data) – on that score, here’s what happened last week:

  1. Gold’s net long position was up +19% wk-over-wk to +56,084
  2. Oil’s net long position finally started to break-down, -4.4% on the week to +196,330
  3. Farm Goods net long position continues to crash, down another -45% last wk to +56,404

In other words:

  1. Gold bulls who thought last week’s -5% decline in price was the bottom will see a new bottom this morning
  2. Oil (which has been in a Bearish Formation in our model for 2 months) will finally start to deflate, faster
  3. Food Prices will remain under pressure providing for a Consumption Tax Cut, globally

Consensus didn’t think this could happen (commodities down, US stocks up) 1, 2, and 3 months ago – but it’s happening. Last week we obviously registered an all-time closing high in the SP500 again (1593) with Commodity prices (CRB Index) down again on the week.

 

If you look at the complexion of the SP500’s Sector returns for April to-date, it’s the same story (Consumption vs Commodities):

  1. US Healthcare Stocks (XLV) = +4.18% for APR to date
  2. US Consumer Discretionary (XLY) = +2.66% for APR to date
  3. Basic Materials (XLB) and Energy (XLE) = -1.65% and -1.12% for APR to date, respectively

Like I said last week – it’s not that complicated.

 

What is complicated is explaining to people who are in the business of marketing gold and/or fear that this Golden Crisis is a tremendous opportunity for US politicians to force their conflicted and compromised central planners into getting out of the way on the most ultra dovish US Dollar policy since Nixon/Carter.

 

This isn’t a conspiracy theory. This is the way monetary policy in this country really works. In late 1971 (Nixon’s re-election campaign), “the president wanted more. The day before Christmas, he told his budget director, George Shultz, “If I have to talk to him (Burns) again, I’ll do it. Next time I’ll just bring him in.” (Volcker, pg 105)

 

Burns, as in Arthur Burns, was the closest thing to Ben Bernanke that the United States of America ever had (he monetized the US Debt, and De-valued US Dollar). Shortly after Burns left (1978), the speculative bid to the price of Gold left. I still think Bernanke will be gone by the end of his term this year. And the $1700-1900 all-time highs for the price of Gold will be long gone too.

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, EUR/USD, VIX, Russell2000 and the SP500 are now $1410-1523, $100.28-105.61, $82.03-82.76, 97.35-102.18, $1.27-1.31, 11.56-13.15, 935-955, and 1571-1601, respectively.

 

Congratulations to Yale Hockey on winning the NCAA National Championship! Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Golden Crisis - Chart of the Day

 

Golden Crisis - Virtual Portfolio


Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.

next