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European Banking Monitor: Tightening on the Week

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 - 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.

 

European Banking Monitor: Tightening on the Week - uu. banks

 

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. 

 

European Banking Monitor: Tightening on the Week - uu sov 1

 

European Banking Monitor: Tightening on the Week - uu sov 2

 

European Banking Monitor: Tightening on the Week - uu sov3

 

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. 

 

European Banking Monitor: Tightening on the Week - uu euribor

 

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.  

 

European Banking Monitor: Tightening on the Week - uu. facility


DEAD CATS BOUNCING

Client Talking Points

JAPAN

The #WeimarNikkei showed some impressive follow through  following Friday’s +3.8% ramp. It closed up another +1.3 overnight (and more importantly, above our TREND line of 13,369). The USD/YEN continued lower, testing 99.74 resistance now. Commodities usually try to reflate on any USD correction. The immediate-term correlation between Gold and USD is -0.92. In other words, it's very high correlation. 

DAX

A rather ugly PMI print out of Germany for June at 48.6. Believe it or not, this was actually worse than Italy and Spain this month. Yes that is saying something! The DAX snapped key TREND support of 8079 in June and is seeing follow through selling this morning. Careful here: there's no support to 7613.

COMMODITIES

Dead cats bouncing. And no, that’s not what you want to see from a US #GrowthAccelerating perspective. Commodity Deflation is of course good for US Consumption. For all you home gamers out there, Consumer Discretionary was the best S&P Sector ETF in June at +0.5% vs SPY -1.5%. The CRB Index probed its year-to-date lows at -6.6%.

Asset Allocation

CASH 60% US EQUITIES 12%
INTL EQUITIES 6% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 22%

Top Long Ideas

Company Ticker Sector Duration
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. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.

MPEL

Gaming, Leisure & Lodging sector head Todd Jordan says Melco International Entertainment stands to benefit from a major new European casino rollout.  An MPEL controlling entity, Melco International Development, is eyeing participation in a US$1 billion gaming project in Barcelona.  The new project, to be called “BCN World,” will start with a single resort with 1,100 hotel beds, a casino, and a theater.  Longer term, the objective is for BCN World to have six resorts.  The first property is scheduled to open for business in 2016. 

HCA

Health Care sector head Tom Tobin has identified a number of tailwinds in the near and longer term that act as tailwinds to the hospital industry, and HCA in particular. This includes: Utilization, Maternity Trends as well as Pent-Up Demand and Acuity. The demographic shift towards more health care – driven by a gradually improving economy, improving employment trends, and accelerating new household formation and births – is a meaningful Macro factor and likely to lead to improving revenue and volume trends moving forward.  Near-term market mayhem should not hamper this  trend, even if it means slightly higher borrowing costs for hospitals down the road. 

Three for the Road

TWEET OF THE DAY

RUSSIA: -0.43% continues lower, -16.5% YTD and remains one of our fav shorts

@KeithMcCullough

QUOTE OF THE DAY

Your time is limited, so don’t waste it living someone else’s life.

–Steve Jobs

STAT OF THE DAY

Record bond-fund redemptions in the month ended June 24 surpassed the previous high of $41.8 billion set in October 2008, according to TrimTabs. In the most-recent period, investors pulled $52.8 billion from bond mutual funds and $8.9 billion from ETFs.


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

 

MONDAY MORNING RISK MONITOR: ASIA REMAINS THE PLACE TO WATCH - 15

 

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

 

MONDAY MORNING RISK MONITOR: ASIA REMAINS THE PLACE TO WATCH - 1

 

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.

 

MONDAY MORNING RISK MONITOR: ASIA REMAINS THE PLACE TO WATCH - 17

 

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. 

 

MONDAY MORNING RISK MONITOR: ASIA REMAINS THE PLACE TO WATCH - 18

 

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

 

MONDAY MORNING RISK MONITOR: ASIA REMAINS THE PLACE TO WATCH - 4

 

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.

 

MONDAY MORNING RISK MONITOR: ASIA REMAINS THE PLACE TO WATCH - 5

 

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

 

MONDAY MORNING RISK MONITOR: ASIA REMAINS THE PLACE TO WATCH - 6

 

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.

 

MONDAY MORNING RISK MONITOR: ASIA REMAINS THE PLACE TO WATCH - 8

 

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. 

 

MONDAY MORNING RISK MONITOR: ASIA REMAINS THE PLACE TO WATCH - 9

 

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.  

 

MONDAY MORNING RISK MONITOR: ASIA REMAINS THE PLACE TO WATCH - 10

 

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. 

 

MONDAY MORNING RISK MONITOR: ASIA REMAINS THE PLACE TO WATCH - 11

 

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.

 

MONDAY MORNING RISK MONITOR: ASIA REMAINS THE PLACE TO WATCH - 12

 

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.

 

MONDAY MORNING RISK MONITOR: ASIA REMAINS THE PLACE TO WATCH - 13

 

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.

 

MONDAY MORNING RISK MONITOR: ASIA REMAINS THE PLACE TO WATCH - 14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT


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.


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


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


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