prev

European Banking Monitor: Financial Swaps Mostly Wider

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 .

 

For our most recent outlook on Europe titled "Where's Europe At?" please see: http://app.hedgeye.com/feed_items/28511  

---

 

European Financial CDS - French, Spanish and Italian banks saw swaps mostly widen last week. Overall, swaps were wider, by a median of 6 bps.

 

European Banking Monitor: Financial Swaps Mostly Wider - y. banks

 

Sovereign CDS – Italy, Portugal and Japan all dropped 6-8 bps WoW. Elsewhere, swaps were flat to down 2 bps. The world remains a calm place for now.

 

European Banking Monitor: Financial Swaps Mostly Wider - y. sov 1

 

European Banking Monitor: Financial Swaps Mostly Wider - y. sov2

 

European Banking Monitor: Financial Swaps Mostly Wider - y. sov3

 

Euribor-OIS Spread – The Euribor-OIS spread was unchanged week-over-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. 

 

European Banking Monitor: Financial Swaps Mostly Wider - y. euribor

 

ECB Liquidity Recourse to the Deposit Facility – Deposits declined week over week by 37.6 billion Euros. 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: Financial Swaps Mostly Wider - y. facility

 

 

Matthew Hedrick

Senior Analyst


MACAU NORMALIZES AFTER MAY HOLIDAY

As expected, average daily table revenues slowed from the May holidays but were up strongly over last year.  We’re still projecting 16-20% YoY GGR growth to HK$29.5-30.5 billion for the full month of May.  This past week’s ADTR of $798 million climbed 12% YoY, following up on May’s first week’s 24% YoY increase.  I was in Macau late last week and the operators were overwhelmingly bullish as were other market participants.

 

In terms of market share, MGM and Sands China made big jumps week over week, although LVS remains below trend albeit only slightly.  Thus far, MGM and Wynn are the big winners versus trend.

 

MACAU NORMALIZES AFTER MAY HOLIDAY - macau

 

MACAU NORMALIZES AFTER MAY HOLIDAY - macau2


MCDONALD'S NOT GOING TO HIT NUMBERS

Takeaway: If we're right on McDonald's numbers, the underperformance in the stock could become even worse for shareholders.

This note was originally published May 08, 2013 at 11:14 in Restaurants

The upside in McDonald’s stock is not being driven by the company’s fundamentals. The underperformance in the stock since we added it to our Best Ideas list on April 25, is likely to continue and, if we are right on the numbers, could become worse for shareholders.

 

The company has a lot of work to do to turn its operational performance around and we are not seeing any indication that this reversal will transpire any time soon. Management's recital of the (stale) tenets of the current Plan to Win, “optimize our menu, modernize the customer experience and broaden accessibility to brand McDonald's around the world”, as an answer to all ills, does not instill confidence that the current leadership is coming up with new ideas to counteract the company’s current operating headwinds. 

 

 

April SRS vs Consensus (Consensus Metrix)

  • US Beat: +0.7% versus consensus -0.1%
  • Europe Missed: -2.4% versus consensus -1.0%
  • APMEA Missed: -2.9% versus consensus -1.4%
  • Global Missed: -0.6% versus consensus -0.5%

United States: “Premium McWraps, compelling value options and the ongoing popularity of McDonald's breakfast contributed to the month's results.

 

Europe: “positive performance in the U.K. and Russia more than offset by Germany, France and other markets.”

 

APMEA: Results reflected “the impact of Avian influenza, primarily in China, and softer results in Japan and Australia.”

 

 

Without Sales Growth, Earnings Growth Will Be Difficult

 

In 1Q13, McDonald’s posted revenue growth of +0.9% on systemwide sales growth of 0%. One month into the second quarter, MCD systemwide sales have decreased -0.4%.  The Street is expecting 3% revenue growth in the second quarter.

 

MCDONALD'S NOT GOING TO HIT NUMBERS - mcd sales eps leverage1

 

MCDONALD'S NOT GOING TO HIT NUMBERS - mcd 13 eeg

 

MCDONALD'S NOT GOING TO HIT NUMBERS - mcd systemwide sales

 

 

May and June will be crucial months for McDonald’s.  A sequential acceleration in two-year average trends of 105 bps is needed to meet May consensus comparable sales growth in the U.S. So far this year, the two-year trend in U.S. comps has decelerated every month by an average of 83 basis points.

 

MCDONALD'S NOT GOING TO HIT NUMBERS - mcd global comps

 

MCDONALD'S NOT GOING TO HIT NUMBERS - mcd us comps

 

MCDONALD'S NOT GOING TO HIT NUMBERS - mcd eu comps

 

MCDONALD'S NOT GOING TO HIT NUMBERS - mcd apmea comps

 

 

Long-Term Trend Remains Discouraging

 

MCDONALD'S NOT GOING TO HIT NUMBERS - mcd srs global ttm

 

 


GET THE HEDGEYE MARKET BRIEF FREE

Enter your email address to receive our newsletter of 5 trending market topics. VIEW SAMPLE

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.

MONDAY MORNING RISK MONITOR: U.S. FINANCIALS SWAPS PLUNGE

Takeaway: Risk remains low, though last week's rate of improvement decelerated vs. the past month. U.S. Financials saw exceptional improvement WoW.

Key Takeaways:

 

XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.4% upside to TRADE resistance and 3.3% downside to TRADE support.

 

2-10 Spread – Last week the 2-10 spread widened 9 bps to 156 bps. 

 

High Yield – High Yield rates fell 4.5 bps last week, ending the week at 5.22% versus 5.27% the prior week.

  

Financial Risk Monitor Summary

 • Short-term(WoW): Positive / 3 of 12 improved / 2 out of 12 worsened / 8 of 12 unchanged

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

 • Long-term(WoW): Positive / 5 of 12 improved / 0 out of 12 worsened / 8 of 12 unchanged

 

MONDAY MORNING RISK MONITOR: U.S. FINANCIALS SWAPS PLUNGE - 15

 

1. U.S. Financial CDS -  Swaps were sharply tighter for US financials last week. BofA and MS saw swaps tighten 16 and 10 bps, respectively. MTG & RDN dropped another 51 and 38 bps, while MBIA dropped 670 bps on a favorable resolution of their BofA litigation. MBIA swaps are now trading just inside the "Lehman line" at 299 bps. Overall, all 27 major U.S. financials we track saw swaps tighten week-over-week. 

 

Tightened the most WoW: MBI, TRV, XL

Tightened the least WoW: UNM, MET, COF

Tightened the most WoW: MBI, RDN, AXP

Tightened the least MoM: WFC, UNM, JPM

 

MONDAY MORNING RISK MONITOR: U.S. FINANCIALS SWAPS PLUNGE - 1

 

2. European Financial CDS - French, Spanish and Italian banks saw swaps mostly widen last week. Overall, swaps were wider, by a median of 6 bps.

 

MONDAY MORNING RISK MONITOR: U.S. FINANCIALS SWAPS PLUNGE - 2 2

 

3. Asian Financial CDS - Relatively uneventful week for Asian financial swaps.  

 

MONDAY MORNING RISK MONITOR: U.S. FINANCIALS SWAPS PLUNGE - 17

 

4. Sovereign CDS – Italy, Portugal and Japan all dropped 6-8 bps WoW. Elsewhere, swaps were flat to down 2 bps. The world remains a calm place for now.

 

MONDAY MORNING RISK MONITOR: U.S. FINANCIALS SWAPS PLUNGE - 18

 

MONDAY MORNING RISK MONITOR: U.S. FINANCIALS SWAPS PLUNGE - 3

 

MONDAY MORNING RISK MONITOR: U.S. FINANCIALS SWAPS PLUNGE - 4

 

5. High Yield (YTM) Monitor – High Yield rates fell 4.5 bps last week, ending the week at 5.22% versus 5.27% the prior week.

 

MONDAY MORNING RISK MONITOR: U.S. FINANCIALS SWAPS PLUNGE - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 5.3 points last week, ending at 1804.9.

 

MONDAY MORNING RISK MONITOR: U.S. FINANCIALS SWAPS PLUNGE - 6

 

7. TED Spread Monitor – The TED spread rose 0.7 basis points last week, ending the week at 23.4 bps this week versus last week’s print of 22.7 bps.

 

MONDAY MORNING RISK MONITOR: U.S. FINANCIALS SWAPS PLUNGE - 7

 

8. Journal of Commerce Commodity Price Index – The JOC index fell -0.9 points, ending the week at 5.51 versus 6.4 the prior week.

 

MONDAY MORNING RISK MONITOR: U.S. FINANCIALS SWAPS PLUNGE - 8

 

9. Euribor-OIS Spread – The Euribor-OIS spread was unchanged week-over-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: U.S. FINANCIALS SWAPS PLUNGE - 9

 

10. ECB Liquidity Recourse to the Deposit Facility – Deposits declined week over week by 37.6 billion Euros. 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: U.S. FINANCIALS SWAPS PLUNGE - 10

 

11. Markit MCDX Index Monitor – Last week spreads widened from 43 to 61 bps on the 16-v1 series. 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.  

 

MONDAY MORNING RISK MONITOR: U.S. FINANCIALS SWAPS PLUNGE - 11

 

12. Chinese Steel – Steel prices in China rose 0.4% last week, or 13 yuan/ton, to 3584 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: U.S. FINANCIALS SWAPS PLUNGE - 12

 

13. 2-10 Spread – Last week the 2-10 spread widened to 156 bps, 9 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR: U.S. FINANCIALS SWAPS PLUNGE - 13

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.4% upside to TRADE resistance and 3.3% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: U.S. FINANCIALS SWAPS PLUNGE - 14

 

Joshua Steiner, CFA

 


Gold Bugs Out

Client Talking Points

Gold Not Glittering

Gold has been front-running the Fed since Fed Chief Ben Bernanke said he’d print to infinity and beyond (September 2012). On the heels of John Hilsenrath’s Wall Street Journal article on Friday night, the Gold price is down another -1.3% this morning to $1427/oz. That’s the worst year-to-date start since 1982.

Consumption Growth

Retail sales grew 0.1% in April, beating expectations and confirming Hedgeye’s broad macro theme that US consumption is increasing and that growth is accelerating. Consumption has been strengthening both as the US dollar strengthens, and as a result, commodities prices fall.

Asset Allocation

CASH 33% US EQUITIES 18%
INTL EQUITIES 18% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 31%

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

“I’ve never been more happy that all my trading algos/models aren’t locked into windows someone could have viewed.”

--@KeithMcCullough

QUOTE OF THE DAY

“All generalizations are false, including this one.” – Mark Twain

STAT OF THE DAY

0.1%, the increase in retail sales for April


Predicting The Past

This note was originally published at 8am on April 29, 2013 for Hedgeye subscribers.

“The problem with the future is that it isn’t as clear as the past.”

-John Lewis Gaddis

 

On a flight to Denver yesterday I had the opportunity to dig into John Lewis Gaddis’ most recent history book, George F. Kennan. Gaddis, professor of Military and Naval History at Yale, won the Pulitzer Prize for Biography with this book last year.

 

Kennan’s life is obviously a fascinating one, and I’ll draw on some of his Russian thoughts in upcoming Early Looks, but what I found most interesting was the deep simplicity of Gaddis’ process in writing about history. Empathy is a primary focus.

 

“The writing of biography particularly requires empathy, which is not the same as sympathy. It asks a very simple question: What exactly would I, knowing what they knew then, have done differently?” (pg 146).

 

Back to the Global Macro Grind

 

Last week I geeked out with some Chaos Theory in order to attempt to explain what it is that I do. In many ways, my Early LookContext Matters” draws, partly, on the process that Gaddis explains. Research and Risk Factors are my content and time is my context.

 

If my contextualization of time doesn’t have empathy, can it be considered objective? Of course not. That’s why Predicting The Past in markets and economies isn’t as trivial as it sounds. There are often two competing sides to the story.

 

One side of market history that doesn’t require qualification is the score. What a market price did and when is a fact. You may not like the facts, but that certainly doesn’t mean they cease to exist. For the last 5 months, the US Dollar and US Stocks are up; Commodities down.

 

Moreover, from a historical GDP reporting perspective:

  1. Q1 2013 US GDP #GrowthAccelerated to +2.50% (versus +0.38% in Q412)
  2. Q1 2013 US Consumer Services #GrowthAccelerated to +1.46% (versus +0.27% in Q412)
  3. Q1 2013 Export #GrowthAccelerated to +0.4% (versus -0.4% in Q412)

Dollar Up = Exports Up? Qu’est ce que c’est mes amis? Oui oui, c’est l’economie, eh! 

 

I can write that in the French tongue of Charles de Gaulle (who thought devaluing the French Franc was the best path to economic prosperity). I can translate it into Krugman/Bernanke if you’d like too. But facts don’t lie; economists and politicians do – and a strong currency has always been good for consumers in the United States of America.

 

I know. KM, that is so Q1 – this is Q2, and what have you done for me lately?

 

Well, so far, the US stock market has scored the 1st month of Q213 (April) as follows:

  1. SP500 +0.83%
  2. US Healthcare Stocks (XLV) +3.3%
  3. US Consumer Discretionary Stocks (XLY) +2.8%
  4. US Basic Materials Stocks (XLB) -0.70%
  5. US Energy Stocks (XLE) -2.7%

Looks like the performance divergence between Consumption (XLV, XLY) and Commodities (XLB, XLE) is widening. And with Brent Oil failing at $104.09 resistance again this morning, that is a very good thing (for Consumers).

 

Inclusive of last week’s dead cat bounce from oversold lows, YTD Commodities performance has not been pretty:

  1. CRB Commodities Index -3.3% (versus SP500 +10.9%)
  2. Oil (Brent) -4.6%
  3. Corn -11.1%
  4. Gold -13.3%
  5. Copper -13.3%

While some continue to plead that Commodities crashing is a bearish “internal indicator” for economic demand, I can’t for the life of me find that chapter in either 1983-89 or 1993-1999 US economic or stock market history.

 

That said, I am empathetic to their plight.

 

Plight (defined): “a situation, especially a bad or unfortunate one.” (thefreedictionary.com)

 

To be crystal clear on this, this week I fully expect both Ben Bernanke (Fed) and Mario Draghi (ECB) to continue with their storytelling plight that the world needs to devalue. The FOMC will descend from the high mountain of central planning on Wednesday. Then it’s the ECB’s turn on Thursday. As we’ve been saying for the last few weeks, the probability of the ECB cutting rates is going up, not down.

 

So what if that happens? What if the ECB either cuts rates or alludes to cutting rates? Since it’s all about expectations, market history has already answered part of that for you. The EuroStoxx600 outperformed all major regional indices last week, closing +3.7% - and it’s seeing some follow through buying/covering again this morning.

 

If the Europeans cut rates, that’s bad for the Euro – good for the US Dollar – bad for Commodities - and good for US Consumers. Bernanke disagrees with me on that. Unfortunately, history doesn’t side with his version of the story. Neither does the US stock market or her economy. Ben, empathize with economic gravity – and please, get out of the way. Devaluing the Dollar again would be a disaster.

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, EUR/USD, USD/YEN, UST 10yr Yield, VIX, Russell2000, and the SP500 are now $1340-1481, $97.18-104.09, $82.04-83.32, $1.29-1.31, 97.21-100.92, 1.66-1.76%, 11.77-14.63, 928-955, and 1567-1598, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Predicting The Past - Chart of the Day

 

Predicting The Past - Virtual Portfolio


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.

next