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European Banking Monitor: Sberbank Inflects

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 .

 

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European Financial CDS - The median EU bank widened by 7 bps week-over-week. French, Italian and Spanish banks saw the most significant deterioration. Sberbank of Russia showed the largest WoW % change in swaps (+10.8%), rising 20 bps to 206 bps. This is consistent with the ongoing drop in the commodities complex. 

 

European Banking Monitor: Sberbank Inflects - ww. banks

 

Sovereign CDS – The U.S. and Germany tightened notably WoW, while the rest of the world deteriorated. U.S. swaps came in by 4 bps to 26 bps, while Japanese swaps widened by 6 bps to 78 bps. 

 

European Banking Monitor: Sberbank Inflects - ww.sov 1

 

European Banking Monitor: Sberbank Inflects - ww.sov2

 

European Banking Monitor: Sberbank Inflects - ww.sov3

 

Euribor-OIS Spread – The Euribor-OIS spread was flat 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: Sberbank Inflects - ww.euribor

 

ECB Liquidity Recourse to the Deposit Facility – 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: Sberbank Inflects - ww.facility

 


Morning Reads From Our Research Team

Takeaway: A quick snapshot of some stories on the Hedgeye radar screen.

Josh Steiner - Financials

Investors Square Off In Battle Over Subprime Mortgages (via Financial Times)

Hunch About Bloomberg Brought Rivals Together (via New York Times)

 

Matt Hedrick - Macro

Report of Tobin Tax Death Exaggerated, EU Says (via euobserver.com)

 

Keith McCullough - CEO

Turkey Protests: Clashes Rage in Istanbul's Besiktas (via BBC)

 

Howard Penney - Restaurants

Can a Fast Food Chain Win by Hiring Better People? (via Forbes)

New TV Comedy Puts McDonald's in Spotlight -- But Is It Good Or Bad Break? (via AdAge)

 

Daryl Jones - Macro 

Toilet Paper-Less Venezuela Fueling Bond Sale Talk (via Bloomberg)

BofA $8 Billion Mortgage Deal Before Judge After 2 Years (via Bloomberg)

 

Morning Reads From Our Research Team - coff


MONDAY MORNING RISK MONITOR: CREDIT MARKETS CONTINUE TO TURN DOWN

Takeaway: The risk monitor remains negative on a short term basis. We continue to watch high yield for signs of inflection.

Key Takeaways:

 

* 2-10 Spread – Last week the 2-10 spread widened to 188 bps, 19 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

* High Yield (YTM)  – High Yield rates rose 28.2 bps last week, ending the week at 5.75% versus 5.47% the prior week.

 

* Sovereign CDS – The U.S. and Germany tightened notably WoW, while the rest of the world deteriorated. U.S. swaps came in by 4 bps to 26 bps, while Japanese swaps widened by 6 bps to 78 bps. 

 

Financial Risk Monitor Summary

 • Short-term(WoW): Negative / 1 of 13 improved / 8 out of 13 worsened / 4 of 13 unchanged

 • Intermediate-term(WoW): Positive / 4 of 13 improved / 3 out of 13 worsened / 6 of 13 unchanged

 • Long-term(WoW): Positive / 4 of 13 improved / 2 out of 13 worsened / 7 of 13 unchanged

 

MONDAY MORNING RISK MONITOR: CREDIT MARKETS CONTINUE TO TURN DOWN - 15

 

1. American Financial CDS -  Morgan Stanley was the outlier this week, with its swaps tightening by 2 bps. Everywhere else in the U.S., swaps widened. Noteworthy increases in mortgage insurers this week follow two weeks of no improvement. Sallie Mae saw swaps blow out 62 bps on plans to split the company.

 

Tightened the most WoW: TRV, MS, UNM

Widened the most WoW: SLM, MBI, AIG

Tightened the most WoW: MBI, AGO, MMC

Widened the most MoM: SLM, MET, ACE

 

MONDAY MORNING RISK MONITOR: CREDIT MARKETS CONTINUE TO TURN DOWN - 1

 

2. European Financial CDS - The median EU bank widened by 7 bps week-over-week. French, Italian and Spanish banks saw the most significant deterioration. Sberbank of Russia showed the largest WoW % change in swaps (+10.8%), rising 20 bps to 206 bps. This is consistent with the ongoing drop in the commodities complex. 

 

MONDAY MORNING RISK MONITOR: CREDIT MARKETS CONTINUE TO TURN DOWN - 2

 

3. Asian Financial CDS - Almost universally wider across the board. Chinese banks all widened by 10-11 bps. Japanese financials were all wider. Indian banks were mixed.

 

MONDAY MORNING RISK MONITOR: CREDIT MARKETS CONTINUE TO TURN DOWN - 17

 

4. Sovereign CDS – The U.S. and Germany tightened notably WoW, while the rest of the world deteriorated. U.S. swaps came in by 4 bps to 26 bps, while Japanese swaps widened by 6 bps to 78 bps. 

 

MONDAY MORNING RISK MONITOR: CREDIT MARKETS CONTINUE TO TURN DOWN - 18

 

MONDAY MORNING RISK MONITOR: CREDIT MARKETS CONTINUE TO TURN DOWN - 3

 

MONDAY MORNING RISK MONITOR: CREDIT MARKETS CONTINUE TO TURN DOWN - 4

 

5. High Yield (YTM) Monitor – High Yield rates rose 28.2 bps last week, ending the week at 5.75% versus 5.47% the prior week.

 

MONDAY MORNING RISK MONITOR: CREDIT MARKETS CONTINUE TO TURN DOWN - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index fell -5.2 points last week, ending at 1799.41.

 

MONDAY MORNING RISK MONITOR: CREDIT MARKETS CONTINUE TO TURN DOWN - 6

 

7. TED Spread Monitor – The TED spread rose 1.3 basis points last week, ending the week at 24.725 bps this week versus last week’s print of 23.475 bps.

 

MONDAY MORNING RISK MONITOR: CREDIT MARKETS CONTINUE TO TURN DOWN - 7

 

8. Journal of Commerce Commodity Price Index – The JOC index fell -1.4 points, ending the week at 3.16 versus 4.5 the prior week.

 

MONDAY MORNING RISK MONITOR: CREDIT MARKETS CONTINUE TO TURN DOWN - 8

 

9. Euribor-OIS Spread – The Euribor-OIS spread was flat 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: CREDIT MARKETS CONTINUE TO TURN DOWN - 9

 

10. ECB Liquidity Recourse to the Deposit Facility – 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 CONTINUE TO TURN DOWN - 10

 

11. Markit MCDX Index Monitor –  Last week spreads widened 4.7 bps, ending the week at 66.3 bps versus 61.7 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: CREDIT MARKETS CONTINUE TO TURN DOWN - 11

 

12. Chinese Steel – Steel prices in China fell 1.9% last week, or 67 yuan/ton, to 3469 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 CONTINUE TO TURN DOWN - 12

 

13. 2-10 Spread – Last week the 2-10 spread widened to 188 bps, 19 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR: CREDIT MARKETS CONTINUE TO TURN DOWN - 13

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 2.2% upside to TRADE resistance and 1.1% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: CREDIT MARKETS CONTINUE TO TURN DOWN - 14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


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THE M3: MELCO INTERNATIONAL BARCELONA; MAY GGR; LEVEN INTERVIEW; SJM TABLE LIMIT

THE MACAU METRO MONITOR, JUNE 3, 2013

 

 

MELCO INTERNATIONAL ASKED TO RUN CASINO IN BARCELONA Macau Business

Melco International Development Ltd, one of the controlling shareholders of MPEL, has been invited to take part in a US$1 billion (MOP8 billion) gaming project in Barcelona, Spain at 'Barcelona World', aka BCN World.  The project is being organized via a vehicle called Veremonte.


According to media reports, BCN World will start with a single resort, with 1,100 hotel beds, a casino and a theatre. The project should be in operation by 2016. The long-term aim is for BCN World to have six resorts.

 

MAY GGR DSEC, SCMP

May gross gaming revenues grew 13.5% YoY to 29.589 BN MOP (28.73 BN HKD).  The monthly figures came after torrential rains and flooding hit Macau and nearby Guangdong province.  Macau saw the heaviest rainfall since 1982 during the middle of May while transport access was restricted for close to two days.

 

Infrastructure developments in the coming years are expected to help lift the number of visitors to Macau. Currently most tourists come from Guangdong and other nearby provinces.  A bridge joining Hong Kong, Zhuhai and Macau is set to open by 2016 while expanded intercity rail links will help shorten the time of travel from China’s northern cities to the gambling enclave.  Plans are also in place to upgrade Macau’s capacity-constrained ferry terminals and international airport.

 

MIKE LEVEN IN AN EXCLUSIVE INTERVIEW: "CASINOS WILL BE SMOKE-FREE" Macau Daily Times

LVS COO MIke Leven: "Look I could get fired for telling you this but I think eventually there will be no smoking in these casinos. It’s going to happen like that - or if there is smoking it will be very limited, very limited. And the reason for that is that it’s what’s happening all over the world. I think Angela Leong, who made a big fuss about this, is going to win in the end. Eventually by 2017-18 we’re going to have almost no smoking casinos, inevitably."  The link to the full interview: http://www.macaudailytimes.com.mo/interview/44244-mike-leven-in-an-exclusive-interview%3A-%E2%80%9Ccasinos-will-be-smoke-free%E2%80%9D.html

 

SJM PUSHES MASS-MARKET MINIMUM BETS UP Macau Business

SJM has raised the minimum bets in over 10% of its mass-market tables since the beginning of the year, said CEO Ambrose So.  So explained that the minimum stake is adjusted regularly according to market conditions.  He added that SJM Holdings is looking to increase mass-market tables and raise revenue at the most profitable casinos.  However, So said the company has no plans to purchase any of its own satellite casinos.  Last month, Galaxy announced the acquisition of Grand Waldo, one of its own satellite casinos.


US Is Oversold

Client Talking Points

JAPAN

Monday morning gut check: The Weimar Nikkei is a little tougher to swallow than getting long SPY on a -2.3% correction. Japanese stocks slid -3.7% overnight with the Yen immediate-term TRADE overbought at 100.09 (vs USD). Get this: Nikkei is down -15.1% since May 22! Ka-boom. Here'a a friendly Hedgeye reminder: Abe’s Policy to inflate is not growth.

OIL

The best economic news of last week (alongside a 58.7 in the PMI, falling rolling jobless claims, and new highs for US consumer confidence) was Brent Oil down another -2.5% on the week. This Bearish Formation for Brent remains an ongoing consumer Tax Cut.

UST 10YR

US bond yields like the trending (bullish) US economic data and oil falling. That is clear. The 10yr is up another +2bps this morning to 2.15%. Look, the 10yr is still breaking out .. despite the 2 hour selloff in US Equities on a month end Friday; PMI and ISM reports up next.

Asset Allocation

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

@KeithMcCullough I SOOOOO hate you for all the money @hedgeye has made me over last month. Why won't you let me be a loser you cruel prick?

@IllusoryMgmt

QUOTE OF THE DAY

"Great spirits have always encountered violent opposition from mediocre minds." - Albert Einstein

STAT OF THE DAY

From 1960 to 2011, total personal expenditures for hospital care in the U.S. increased from $9.0 billion to $850.6 billion.


Nose Diving Expedition

This note was originally published at 8am on May 20, 2013 for Hedgeye subscribers.

“I was very pleased to read a prediction that the price of gold will nosedive.”

-Ronald Reagan

 

Can you imagine if Obama got up in front of his old media paparazzi and talked about Gold like that? Reagan did in 1980. That’s because someone advising him actually understood the marketing message - #StrongDollar, Strong America. It’s pro-growth.

 

Instead of taking a victory lap on that and talking about the most bullish development in American Purchasing Power in a decade, let’s talk about how the IRS scandal is a “partisan fishing expedition designed to distract” Americans.

 

Distract us from what? Our liberty and freedom being encroached upon by conflicted politicians again, or Gold nose diving?

 

Back to the Global Macro Grind

 

If you’ve never been on a fishing expedition, I can hook you up with my peeps (Luch and RP). They’ll take you up into the bushes of Northern Ontario where you might want to bring a gun.

 

Word has it that this year’s Canadian black bear population could be massive. There’s lots of Gold up near Red Lake, Ontario. And with Gold -19.3% now for 2013 YTD, the Gold Bears are hungry.

 

What happens when a commodity bull comes across a hungry Gold bear on a camp trail in the dark? If for only behavioral observations, last week’s CFTC futures and options data might help answer that:

  1. Total Commodities net long contracts were up +1.1% wk-over-wk to +588,482 contracts
  2. Farm Goods saw the biggest net long buyers +15% wk-over-wk to +270,486 contracts
  3. Silver’s net long position was eviscerated (-72% on the week!) to +1,413 contracts

All the while, bears dog piled the total short position in Gold short contracts to its highest position ever (74,432 contracts).

 

So how is it that a bull becomes a bear in the downward dog pile position so fast anyway?

 

I don’t want anything to do with my nose diving into something like that.

 

How about stocks?

 

Last week’s #StrongDollar bulls brought the thunder, with both the US Dollar Index and the SP500 closing at fresh YTD highs. In the year that even a hockey player could do it, here’s the updated score:

  1. US Dollar +1.3% wk-over-wk to +5.6% YTD
  2. Commodities (CRB Index) -0.4% wk-over-wk to -2.5% YTD
  3. SP500 and Russell2000 +2.1% and +2.2% wk-over-wk, to +16.8% and +17.3% YTD, respectively

Get the Dollar right, and you get a long of other things right.

 

How about bonds?

  1. Treasury Bond Yields lagged again this week, big time, with the 10yr UST Yield rising to 1.95%
  2. UST Yield Spread (proxy for economic growth) widened by another 5bps wk-over-wk to +171 basis pts wide
  3. Financials (XLF) love it when Yield Spread widens like that; they’re already +6.7% for May

Sell in May and go away? If US stock market bears just sold Gold and/or Treasuries in May, they’d have nailed it.

 

What else is ripping in May?

  1. #StrongDollar, Strong Consumer Discretionary Stocks (XLY) = +5.4% in May and +21.3% YTD
  2. High Short Interest Stocks = +12.6% in the last month and +21.0% YTD
  3. Low Yield (Higher Growth) Stocks = +11.4% in the last month and +21.9% YTD

It won’t take Americans or their compromised politicians long into their yield chasing expedition to realize that people are bidding up #GrowthAccelerating as bear scraps are issued to the #EOW (end of the world) trade. You should be very please to read that.

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, and the SP500 are now $$1351-1424, $101.32-105.29, $83.18-84.71, 101.21-104.36, 1.88-2.01%, 12.13-13.81, and 1643-1672, respectively.

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Nose Diving Expedition - Chart of the Day

 

Nose Diving Expedition - Virtual Portfolio


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