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MONDAY MORNING RISK MONITOR: ASIA REMAINS THE PLACE TO WATCH

Takeaway: While China's deteriorating situation took a breather last week, India remains a total mess.

Key Takeaways:

Asia remains the most interesting focal area for global risk right now. After roughly a month of negative headlines and deteriorating conditions, China's situation has stabilized (for now). We saw a sharp reversal in Chinese bank swaps - the first since the crisis began. Meanwhile, Indian banks continue to look awful. The three major Indian banks are now all at or near 300 bps on their CDS and the rise has been remarkable. We think not enough attention is being paid to this situation. We've also been calling out High Yield as a key focal area. Fortunately, it finally settled out this past week, but it's less-often mentioned cousin, levered loans, continues to sell off.

 

* Asian Financial CDS - China & India divergence continues to grow. Chinese bank swaps reversed course last week, tightening significantly WoW, while Indian bank swaps continue to blow out. India's three major banks are all now above or near the 300 bps "Lehman line". Japanese banks were relatively uneventful on the week, posting small average increases.

 

* Leveraged Loan Index Monitor – The Leveraged Loan Index fell -6.8 points last week, ending at 1783.36.

 

* High Yield (YTM) Monitor – High Yield rates fell 1.3 bps last week, ending the week at 6.62% versus 6.63% the prior week.

 

* 2-10 Spread – Last week the 2-10 spread widened 28 bps to 220 bps. 

 

* XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 2.6% upside to TRADE resistance and 0.7% downside to TRADE support.

 

* Sovereign CDS – Sovereign swaps globally last week, with the exception of France, which saw its swaps widen 2 bps to 80 bps. Germany was unchanged at 32 bps. Japan tightened by 8 bps to 78 bps. 

 

Financial Risk Monitor Summary

 • Short-term(WoW): Positive / 5 of 13 improved / 0 out of 13 worsened / 8 of 13 unchanged

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

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

 

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1. U.S. Financial CDS -  It was a mixed week for U.S. Financials, although overall more reference entities tightened than widened. On balance, swaps tightened for 21 out of 27 domestic financial institutions we track. The large cap U.S. banks were largely uneventful with the largest move coming from MS (-7 bps).

 

Tightened the most WoW: PRU, MET, MMC

Widened the most WoW: AGO, MTG, JPM

Widened the least WoW: MMC, SLM, MET

Widened the most MoM: MBI, RDN, GS

 

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2. European Financial CDS - Swaps were generally tighter among European banks last week, mirroring the trend we saw in EU sovereigns. We've been calling out Sberbank of Russia as a laggard in recent weeks with the commodity crack-up casting a shadow over its outlook. Last week we saw some reprieve for Russia's largest bank with swaps tightening 27 bps to 250 bps.

 

MONDAY MORNING RISK MONITOR: ASIA REMAINS THE PLACE TO WATCH - 2

 

3. Asian Financial CDS - China & India divergence continues to grow. Chinese bank swaps reversed course last week, tightening significantly WoW, while Indian bank swaps continued to blow out. India's three major banks are all now above or near the 300 bps "Lehman line". Japanese banks were relatively uneventful on the week, posting small average increases.

 

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4. Sovereign CDS – Sovereign swaps globally last week, with the exception of France, which saw its swaps widen 2 bps to 80 bps. Germany was unchanged at 32 bps. Japan tightened by 8 bps to 78 bps. 

 

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MONDAY MORNING RISK MONITOR: ASIA REMAINS THE PLACE TO WATCH - 3

 

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5. High Yield (YTM) Monitor – High Yield rates fell 1.3 bps last week, ending the week at 6.62% versus 6.63% the prior week.

 

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6. Leveraged Loan Index Monitor – The Leveraged Loan Index fell -6.8 points last week, ending at 1783.36.

 

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7. TED Spread Monitor – The TED spread rose 1.0 basis points last week, ending the week at 24.01 bps this week versus last week’s print of 22.975 bps.

 

MONDAY MORNING RISK MONITOR: ASIA REMAINS THE PLACE TO WATCH - 7

 

8. Journal of Commerce Commodity Price Index – The JOC index fell -3.1 points, ending the week at -4.43 versus -1.4 the prior week.

 

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9. Euribor-OIS Spread – The Euribor-OIS spread tightened by 1 bp to 11 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 – Overnight deposits rose 7.1 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.  

 

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11. Markit MCDX Index Monitor – Last week spreads tightened 12 bps, ending the week at 94.3 bps versus 106 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 fell 0.9% last week, or 32 yuan/ton, to 3358 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 widened 28 bps to 220 bps. 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 2.6% upside to TRADE resistance and 0.7% downside to TRADE support.

 

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Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT



Looting The Aristocracy

“All looting would wait until after complete victory.”

-Jack Weatherford

 

Of all the successful wartime innovations of Genghis Kahn versus oppressive 13th century kingdoms, his looting policy was one of the most unique.

 

“He ordered that a soldier’s share be allocated to each widow and to each orphan of every soldier killed” … “this policy ensured him of the support of the poorest people in the tribe, but it also inspired loyalty among his soldiers.”

 

“By controlling the distribution of all the looted goods, he had again violated the traditional rights of the aristocratic lineages...” (Genghis Kahn and The Making of the Modern World, pages 50-51).  The trust of The People was his currency.

 

Back to the Global Macro Grind

 

You can study the last 80 years of economic history or the last 800 and you will come to the same basic conclusion: Politicians eventually plunder The People, until The People push back. The pattern of behavior is not that complicated really. Think it through.

 

On and off for the last 40 years or so, the United States of America has engaged in the same economic plundering that European Aristocratic regimes tried inasmuch as the Ming Dynasty of 14th century China did. It works, until it doesn’t.

 

Economic plundering occurs when people who get paid by their political ascent devalue the purchasing power of their people. Nixon started it in 1971 and Carter continued it; Reagan and Clinton got rid of it; then Bush II and Obama resuscitated it. The only sustainably strong periods of US economic growth (1983-89 and 1993-99) in the last 40 years occurred when the Dollar wasn’t being devalued.

 

But you already know that…

 

As a result, you also know why both real (inflation adjusted) US GDP growth and the US Consumption side of the US stock market has performed so well in the last 6 months. #StrongDollar = #CommodityDeflation.

 

To review the last 6 months:

  1. US Dollar Index = +4.3% YTD
  2. CRB Commodities Index = -6.6% YTD
  3. US Consumer Discretionary Stocks (XLY) = +18.9% YTD

No, this is not new – but last week was a friendly reminder to those who live in fear of #StrongDollar Commodity and Debt Deflation that there is indeed another side to this globally interconnected trade.

 

Last week’s absolute and relative performance of the same was pronounced:

  1. US Dollar Index = +1.1% wk-over-wk to $83.19
  2. CRB Commodities Index = -0.9% wk-over-wk to 275
  3. US Consumer Discretionary (XLY) = +2.5% wk-over-wk to $56.40

And, of course, after the worst month for US stocks in 2013 (SP500 -1.5% for the month of June), Consumer Discretionary (XLY) was the only S&P Sector to close up (+0.5%) for the month.

 

Can we handle a 3-6% stock market correction? Can we handle #RisingRates? Can we handle the truth?

 

Since most Commodities trade via the world’s reserve currency, pervasively bullish moves in that currency (US Dollar) can perpetuate a global consumption #TaxCut.

 

Guys who are marketing 2 and 20 on levered long Gold Funds and/or Super Sovereign Credit Bubble funds (whose base premise is that savers should earn 0% rates of return in perpetuity, and like it) don’t like this at all.

 

But I do. I think The People do too.

 

And why, by the way, should it be any other way? Why should we support aristocrat bond fund managers like Bill Gross begging for Bernanke to superimpose more slow-growth policies on the US Economy?

 

But don’t worry, Paul Krugman agrees with Gross now – so we’ll have to deal with Bernanke being pressured by both “intellectual” and asset management aristocrats for the next 3 months as we try to handicap their tapering whispers.

 

Where to from here? I don’t know. I think I know what the two potential paths look like though:

  1. Fed tapers; the US Dollar continues to strengthen, and we buy back our US Consumption #GrowthAccelerating position
  2. Fed doesn’t taper; the US Dollar is devalued (again), Food, Gold, and Oil prices rip, and we’re back to US #GrowthSlowing (again)

Americans have a choice. But the scarier reality is that so do their politicians. So stand up and be heard, before it’s too late.

 

Our immediate-term Risk Ranges are now:

 

UST 10yr 2.47-2.74%

SPX 1

DAX 7

VIX 15.26-20.97

USD 82.46-84.04

Gold 1171-1278

 

Best of luck out there this week. And Happy Canada Day!

KM

 

Keith R. McCullough
Chief Executive Officer

 

Looting The Aristocracy - DXY vs CRB   XLY

 

Looting The Aristocracy - vp71


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No Easy Money

This note was originally published at 8am on June 17, 2013 for Hedgeye subscribers.

“None of them are easy.”

-Justin Rose

 

Making money in Global Macro markets hasn’t been easy for the last 6 months. It hasn’t been easy for the last 6 years either. I doubt the next 6 weeks will be any different. None of this is easy.

 

Justin Rose turned pro in 1998 and won his first Major Championship golf tournament yesterday. Rose is still only 32 years old but he is a veteran of the game. He is a South African born Brit who lives in the US. He is highly respected by his peers. He is a grinder.

 

Usually it takes a while, but eventually most grinders in both this business and in life find a way to win. Progressively building a repeatable process that you can evolve is the key. There are no easy wins. You have to keep learning.

 

Back to the Global Macro Grind

 

Getting out of the way on the long side of both the US Dollar and the US stock market last week was another win for us. Today, with the Dollar and US Equity Futures up, we’ll probably get tagged with a loss.

 

But what is it that we do when we have a bad day? Do we fold on the process or do we embrace its challenges. Justin Rose was the 1st British player to win the US Open since Tony Jacklin (1970), and he won by shooting over par. Winning is always a challenge.

 

One day obviously doesn’t a TRADE never mind a TREND make – so today will be a critical one to test if it ultimately refutes or confirms what’s been developing out there in Global Macro for the last few weeks. This is all relatively new (and bearish for US stocks):

  1. US Dollar Index snapping $81.21 TREND support
  2. USD/YEN breakdown below 96.31 TREND support
  3. US Equity Volatility (VIX) breakout above immediate-term TRADE support of 14.52

Not unlike the greens at Marion Golf Club in northwest Philadelphia, there are plenty of elements striking down on us all at the same time out here. Whether it’s overnight buy-and-hope from Japan or gusts of wind slowing Chinese growth (Singapore Exports -4.6% y/y for May), it’s all out there. There’s No Easy Money.

 

At the same time as Down Dollar drove Up Oil (bearish for consumption) last week, we have a Syrian conflict to consider. We also have The Bernank’s almighty central planning to deal with this week. The latter scares me more than the former. Bernanke can, at any time, directly confiscate my ball and #StrongDollar theme. The dudes in Syria would at least need some lightning to get me off the course.

 

So what will our anti-free-market overlord say? Or better yet, what will he do? Will he say he will taper the green? Or will he allude to his Caddy Shack style gopher “communication tools” that can appear and disappear with a whisper of a Washington “consultant”?

 

Who knows (some in the aristocracy of connections actually do), but into Ben’s decision, here’s the bond market’s setup:

  1. US Treasury Yields (10yr) have bullish immediate-term TRADE support at 2.06%
  2. US Treasury Yields (10yr) have bullish intermediate-term TREND support at 1.83%
  3. Immediate and intermediate-term resistance for the 10yr are 2.27% and 2.41%, respectively

In other words, after another outstanding US weekly Jobless Claims report and US Retail Sales #GrowthAccelerating last week, economic gravity is pushing bond yields higher and Bernanke thinks he has to try to “smooth” that.

 

But how does a man bend and smooth gravity? And what would it mean, God forbid, if he just stopped with the nonsense of it all and just got out of the way? We are half a decade past the pin on an economic crisis that will only re-appear without tapering.

 

If he pushes out the tapering – he’s going to push down the Dollar. If he pushes down the Dollar, he is going to press oil and commodity prices higher. If commodities re-flate, real (inflation adjusted) US Consumption growth is going to stop accelerating.

 

But you already know that …

 

#StrongDollar is the path of least resistance to a sustained US economic growth recovery. And it’s getting less easy for Bernanke to spin the ball away from gravity’s hole using his anti-dog-eat-dogmatic government driver.

 

Our immediate-term Risk Ranges for Gold, Oil, US Dollar, USD/YEN, UST 10yr Yield, VIX, and the SP500 are now $1361-1412, $105.84-108.66, $80.09-81.21, 93.56-96.31, 2.06-2.27%, 14.52-18.67, and 1605-1651, respectively.

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

No Easy Money - Chart of the Day

 

No Easy Money - Virtual Portfolio


July 1, 2013

July 1, 2013 - DTR

 

BULLISH TRENDS

July 1, 2013 - 10yr

July 1, 2013 - nik2

July 1, 2013 - VIX

July 1, 2013 - dxy

 

BEARISH TRENDS

July 1, 2013 - dax

July 1, 2013 - euro

July 1, 2013 - yen

<3hart9>

July 1, 2013 - natgas

July 1, 2013 - gold

July 1, 2013 - copper


CHART DU JOUR: A TURN FOR THE WORSE

June numbers should show that regionals are not out of the woods


  • May’s YoY GGR growth looked better than recent months but that’s what the Math had predicted
  • The Math is projecting a sequential drop in GGR growth – down 4-5% from June of last year
  • The states’ should start releasing data - as soon as this week – and estimate reductions are likely for PNK, ASCA, BYD, and PENN

CHART DU JOUR: A TURN FOR THE WORSE - sss


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