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Treasuries: Fighting For Yield

The yield on the 10-year Treasury surged to 1.75% this morning as investors stopped worrying so much about having a safe haven for money and are keen to take advantage of the performance offered in other markets like the US stock market. Still, investors need to get bullish on growth ASAP. No point in putting your money in a low-yield device like the 10-year when the S&P 500 is making new all-time highs each week.

 

Treasuries: Fighting For Yield - USTperf


European Banking Monitor: Credit Markets Get Even More Comfortable

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .

 

Key Takeaways:

 

European Financial CDS - Europe's financial system continues to heal, in spite of the occasional headline to the contrary. With the exception of one Greek bank, all European Financials saw swaps tighten. Big moves came in Spain, Italy, France and the U.K. 

 

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European Financial CDS - With the exception of one Greek bank, all European Financials saw swaps tighten. Big moves came in Spain, Italy, France and the U.K. 

 

European Banking Monitor: Credit Markets Get Even More Comfortable - pp. banks

 

Sovereign CDS – Sovereign swaps were tighter around the globe last week with the largest improvements coming in Portugal (-40 bps), Spain (-25 bps), and Italy (-20 bps). The U.S. tightened by 2 bps to 32 bps, while Germany and Japan were unchanged.

 

European Banking Monitor: Credit Markets Get Even More Comfortable - pp. sov1

 

European Banking Monitor: Credit Markets Get Even More Comfortable - pp. sov2

 

European Banking Monitor: Credit Markets Get Even More Comfortable - pp. sov3

 

Euribor-OIS Spread – The Euribor-OIS spread tightened by 1 bps to 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. 

 

European Banking Monitor: Credit Markets Get Even More Comfortable - pp. euribor

 

ECB Liquidity Recourse to the Deposit Facility – Deposits were relatively unchanged week-over-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.  

 

European Banking Monitor: Credit Markets Get Even More Comfortable - pp. facility


Burning The Yen

The value of the Japanese Yen continues to plummet thanks to the monetary policies of the Bank of Japan. The Yen is losing ground against the US dollar this morning, falling below our TREND line of support at 97.11. We'll look for a bounce to short it.

 

Burning The Yen - FXYYTD


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Morning Reads From Our Sector Heads

Keith McCullough (CEO):

 

Yen Falls 3rd Day on Signs U.S. Economy Improving; Ringgit Rises (via Bloomberg)

 

Dinosaur Skeleton to Be Returned to Mongolia (via NY Times)

 

Kevin Kaiser (Energy):

 

Twilight of a Stock-Market Darling (via Barron's)

 

Matthew Hedrick (Europe):

 

Sweden a Crisis Casualty No More Shows How to Get Haven Glow (via Bloomberg)

 

Josh Steiner (Financials):

 

Bank of America Settlement Clears Hurdle (via WSJ)

 

N.Y. Plans Homeowner Enforcement Against Financial Firms (via Bloomberg)

 

Jamie Dimon might find strength in surrendering (via STL Post-Dispatch)

 

Brian McGough (Retail):


ILO Formulates Plan for Worker Safety as Rana Plaza Death Toll Increases (via WWD)

 

 

 

 

 






MONDAY MORNING RISK MONITOR: CREDIT MARKETS GET EVEN MORE COMFORTABLE

Takeaway: The positive correlation between plunging high yield rates and sinking muni default risk continues, for now. All systems remain go.

Key Takeaways:

 

* XLF Macro Quantitative Setup – Risk reward appears to be short term negatively asymmetric. Our Macro team’s quantitative setup in the XLF shows 0.7% upside to TRADE resistance and 2.5% downside to TRADE support.

 

* Markit MCDX Index – The decline in muni risk is relentless. Last week spreads tightened a further 16 bps in the 16-v1 series MCDX, ending the week at 42.5 bps versus 59.2 bps the prior week. The Markit MCDX is a measure of municipal credit default swaps.  

 

* High Yield (YTM) – The market continues to jump into the HY pool head first, as rates fell 27 bps last week, ending the week at 5.27% versus 5.53% the prior week. 

 

European Financial CDS - Europe's financial system continues to heal, in spite of the occasional headline to the contrary. With the exception of one Greek bank, all European Financials saw swaps tighten. Big moves came in Spain, Italy, France and the U.K. 

 

Financial Risk Monitor Summary

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

 • Intermediate-term(WoW): Positive / 7 of 12 improved / 2 out of 12 worsened / 4 of 12 unchanged

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

 

MONDAY MORNING RISK MONITOR: CREDIT MARKETS GET EVEN MORE COMFORTABLE - 15

 

1. U.S. Financial CDS -  Aside from MBIA, all domestic financials tightened. MS, GS and BofA tightened by 12, 10 and 10 bps, respectively. Mortgage Insurers continued their relentless advance, dropping by 42 and 35 bps, respectively (MTG & RDN). Overall, swaps tightened for 26 out of 27 domestic financial institutions.

 

Tightened the most WoW: ALL, AXP, SLM

Widened the most/ tightened the least WoW: MBI, CB, TRV

Tightened the most WoW: RDN, MTG, AXP

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

 

MONDAY MORNING RISK MONITOR: CREDIT MARKETS GET EVEN MORE COMFORTABLE - 1

 

2. European Financial CDS - With the exception of one Greek bank, all European Financials saw swaps tighten. Big moves came in Spain, Italy, France and the U.K. 

 

MONDAY MORNING RISK MONITOR: CREDIT MARKETS GET EVEN MORE COMFORTABLE - 2

 

3. Asian Financial CDS - Indian banks saw sharp drops in credit default swap premiums. Chinese banks were narrowly tighter, while Japanese banks were mostly unchanged. Daiwa and Nomura, however, both saw swaps drop by 10 and 9 bps, respectively.

 

MONDAY MORNING RISK MONITOR: CREDIT MARKETS GET EVEN MORE COMFORTABLE - 17

 

4. Sovereign CDS – Sovereign swaps were tighter around the globe last week with the largest improvements coming in Portugal (-40 bps), Spain (-25 bps), and Italy (-20 bps). The U.S. tightened by 2 bps to 32 bps, while Germany and Japan were unchanged.

 

MONDAY MORNING RISK MONITOR: CREDIT MARKETS GET EVEN MORE COMFORTABLE - 18

 

MONDAY MORNING RISK MONITOR: CREDIT MARKETS GET EVEN MORE COMFORTABLE - 3

 

MONDAY MORNING RISK MONITOR: CREDIT MARKETS GET EVEN MORE COMFORTABLE - 4

 

5. High Yield (YTM) Monitor – High Yield rates fell 26.8 bps last week, ending the week at 5.27% versus 5.53% the prior week.

 

MONDAY MORNING RISK MONITOR: CREDIT MARKETS GET EVEN MORE COMFORTABLE - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 3.6 points last week, ending at 1799.64.

 

MONDAY MORNING RISK MONITOR: CREDIT MARKETS GET EVEN MORE COMFORTABLE - 6

 

7. TED Spread Monitor – The TED spread rose 0.4 basis points last week, ending the week at 22.71 bps this week versus last week’s print of 22.26 bps.

 

MONDAY MORNING RISK MONITOR: CREDIT MARKETS GET EVEN MORE COMFORTABLE - 7

 

8. Journal of Commerce Commodity Price Index – The JOC index fell -0.7 points, ending the week at 4.63 versus 5.3 the prior week.

 

MONDAY MORNING RISK MONITOR: CREDIT MARKETS GET EVEN MORE COMFORTABLE - 8

 

9. Euribor-OIS Spread – The Euribor-OIS spread tightened by 1 bps to 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: CREDIT MARKETS GET EVEN MORE COMFORTABLE - 9

 

10. ECB Liquidity Recourse to the Deposit Facility – Deposits were relatively unchanged week-over-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: CREDIT MARKETS GET EVEN MORE COMFORTABLE - 10

 

11. Markit MCDX Index Monitor – Last week spreads tightened 16 bps, ending the week at 42.5 bps versus 59.2 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: CREDIT MARKETS GET EVEN MORE COMFORTABLE - 11

 

12. Chinese Steel – Steel prices in China fell 0.1% last week, or 3 yuan/ton, to 3571 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: CREDIT MARKETS GET EVEN MORE COMFORTABLE - 12

 

13. 2-10 Spread – Last week the 2-10 spread tightened to 146 bps, -1 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR: CREDIT MARKETS GET EVEN MORE COMFORTABLE - 13

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.7% upside to TRADE resistance and 2.5% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: CREDIT MARKETS GET EVEN MORE COMFORTABLE - 14

 

Joshua Steiner, CFA


Making Moves

Client Talking Points

The 10-Year Fight

Treasuries are widely held and people put on massive positions in the 10-year as a flight to safety or whatever you feel like calling it. The point  is that at 1.75% yield, more people are hooked on being safe then on getting out there and buying growth directly via XLY or XLP. We'll see what happens with the 10-year this week.

Burning The Yen

Tough cookies for the Japanese Yen yet again. The country's currency will continue to be debauched. 99.36 vs the USD after we saw the USD/YEN cross test and fail at our 1st line of 97.11 TRADE support; no legitimate resistance (or policy shift to stop it) for that cross to 110 according to KM. Better watch out and you better not complain about FXY holdings. 

Asset Allocation

CASH 18% US EQUITIES 26%
INTL EQUITIES 20% COMMODITIES 0%
FIXED INCOME 6% INTL CURRENCIES 30%

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

"Don't whine about the market you want; risk manage the one you have" -@KeithMcCullough

QUOTE OF THE DAY

"People who like this sort of thing will find this the sort of thing they like." -Abraham Lincoln

STAT OF THE DAY

S&P 500 is up +13.3% year-to-date - how higher can the market go?


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.33%
  • SHORT SIGNALS 78.49%
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