“I’m whatever I need to be.”
-Gemma (Sons of Anarchy)
Sons of Anarchy is not Married With Children; and Gemma Teller Morrow is not Peggy Bundy. Katey Sagal won a deserved Golden Globe in 2011 for portraying pretty much everything you probably aren’t married to.
Probably is the right word to use there – because you never know. There are some unique characters on Old Wall and I’ll never rule never out of the question. There’s always a chance!
There’s also a chance that you are feeling the market’s love right about now. After 8 consecutive up days for the SP500 and yet another all-time closing high, I think it’s time we start calling Mr. Market. Mrs. Gemma would like that.
Back to the Global Macro Grind…
USA style Charming, CA. Yep. Not only is that the name of the fictional town in Sons of Anarchy, it’s also what Mrs. Market has delivered you, on no-volume, for July to-date:
You can twist it, whine about it, love it, kiss it, and/or yell about it – this USA stock market move is whatever she wants to be. Despite US Equity volume being down -31% versus my TREND based average yesterday (that’s bad), you have to deal with the game that’s in front of you. There is a real-time score.
On yesterday’s Q3 Global Macro Themes conference call (ping if you’d like the replay), I focused a lot on the flow. No, I don’t mean Charlie Hunnam’s flow (he’s the buff blond who plays Jax Teller in Sons). I mean Mrs. Market’s flow.
If you didn’t know that capital flows, now you know. Capital flows chase performance both ways too – that’s why we call them inflows and outflows. One of the main assets Mrs. Market (USA Equities) has going for her now is that capital is running out of places to go.
Since our Top 3 Macro Themes for Q312 are:
Our New Haven, CT club’s strategy suggests you should not be flowing fresh assets into:
And we aren’t particularly keen on buying anything (currencies, stocks, or bonds) in Europe right now either.
So… where does the flow go?
Yep, right back into the mother’s milk of all things liquidity:
Now don’t get me wrong here - there are plenty of dysfunctional (and illiquid) equity markets out there in this world that are performing marvelously YTD. Check out the ghost of Chavez’ devalued peso past – Venezuelan stocks are +165% YTD, baby!
I know, you like it when Mrs. Market talks perf to you like that, don’t you bros. So why not chase some of the mo mo and triple down on the 3x Abu Dhabi ETF or something like that too? Dubai and Abu Dhabi are ripping, +47% and +44% YTD, respectively!
#kidding (not on the illiquid equity market performance part though)
2013 Reality Flow Show: there are only two really deep and liquid markets that are really ripping:
And in a world of #RisingRates, #DebtDeflation, and #EmergingOutflows – don’t let anyone from b-school teach you otherwise bros - size and liquidity definitely matters right now.
So where do you go from here? Stay with the process and wait for the next pullback to immediate-term TRADE supports for both the SP500 and the Russell 2000 (and probably the #WeimarNikkei too).
While chasing markets up here isn’t my style, I always need to remind myself that Mrs. Market doesn’t particular care about anyone’s style. Her rules are simple – and everyone eventually needs to be whatever her performance chasing year-end bogeys become.
Our immediate-term Risk Ranges are now as follows (we also have 12 daily Global Macro ranges in our new Daily Trading Ranges product, fyi):
UST 10yr yield 2.45-2.76%
Brent Oil 107.04-110.29
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
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TODAY’S S&P 500 SET-UP – July 16, 2013
As we look at today's setup for the S&P 500, the range is 48 points or 1.93% downside to 1650 and 0.92% upside to 1698.
CREDIT/ECONOMIC MARKET LOOK:
MACRO DATA POINTS (Bloomberg Estimates):
WHAT TO WATCH
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
The Hedgeye Macro Team
THE MACAU METRO MONITOR, JULY 16, 2013
TOURIST PRICE INDEX FOR 2Q 2013 DSEC
Macau's Tourist Price Index (TPI) for the 2Q 2013 increased by 6.08% YoY and 6.22% QoQ, attributable to higher charges for hotel accommodation and restaurant service.
Takeaway: Portugal is posting a massive negative divergence vs the rest of the world. Sovereign CDS are going parabolic. Greece/Cypress II?
This note was originally published July 15, 2013 at 09:44 in Financials
Portuguese sovereign swaps rose 83 bps last week to 556 bps, and are up 185 bps in the last month (+50%). Since 5/22, Portguese swaps have doubled off their lows of 274 bps. By comparison, the rest of Europe is up 7-12% MoM. It's worth asking whether Portugal is going to soon become a new hotbed of focus.
Meanwhile, the situation in the U.S. continues to improve following Bernanke's talk-down on tapering mid-last week. High yield rates fell 27.0 bps last week, ending the week at 6.31% versus 6.58% the prior week. Currently long-term rates are heading toward what we consider higher lows after recently putting in a higher high.
Financial Risk Monitor Summary
• Short-term(WoW): Positive / 7 of 13 improved / 1 out of 13 worsened / 5 of 13 unchanged
• Intermediate-term(WoW): Negative / 2 of 13 improved / 5 out of 13 worsened / 6 of 13 unchanged
• Long-term(WoW): Positive / 4 of 13 improved / 0 out of 13 worsened / 9 of 13 unchanged
1. American Financial CDS - Swaps tightened for 27 out of 27 domestic financial institutions. Mortgage insurers posted sharp improvements WoW, with MTG and RDN dropping 43 and 49 bps, respectively. We've been using MI swaps as a proxy of sorts around sentiment of the rate of recovery in the housing market. After stalling out for a month or so, it's a worthwhile takeaway to see swaps again moving (aggressively) in the right direction.
Tightened the most WoW: ACE, XL, GNW
Tightened the least WoW: COF, AGO, WFC
Tightened the most WoW: MET, XL, AIG
Widened the most MoM: GS, MBI, AGO
2. European Financial CDS - Most of Europe's banking system was uneventful last week. Spanish, Portguese and some Italian banks posted noteworthy increases, however.
3. Asian Financial CDS - After seeing risk profiles steadily deteriorate for weeks, Chinese and Indian financials saw their high water mark swap quotes recede further last week. Chinese banks were down an average of 16 bps WoW, while Indian swaps came in 31 bps, on average
4. Sovereign CDS – Sovereign swaps were almost universally tighter last week, with one major exception. Portuguese swaps widened 83 bps WoW to 556. In the past month, Portuguese swaps have widened out 185 bps. This is a significant negative divergence from the rest of Europe. Is it too soon to begin asking whether Portugal is beginning to fulfill its destiny as Greece II? The data is starting to suggest that.
5. High Yield (YTM) Monitor – High Yield rates fell 27.0 bps last week, ending the week at 6.31% versus 6.58% the prior week.
6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 11.0 points last week, ending at 1795.83.
7. TED Spread Monitor – The TED spread rose 0.3 basis points last week, ending the week at 23.46 bps this week versus last week’s print of 23.19 bps.
8. Journal of Commerce Commodity Price Index – The JOC index rose 2.2 points, ending the week at -0.95 versus -3.1 the prior week.
9. Euribor-OIS Spread – The Euribor-OIS spread tightened by 1 bps to 12 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.
10. ECB Liquidity Recourse to the Deposit Facility – Deposits fell by 17 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.
11. Markit MCDX Index Monitor – Last week spreads tightened 1 bp, ending the week at 95.02 bps versus 96.04 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.
12. Chinese Steel – Steel prices in China rose 0.1% last week, or 3 yuan/ton, to 3409 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.
13. 2-10 Spread – Last week the 2-10 spread widened to 227 bps, 15 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.
14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.3% upside to TRADE resistance and 2.3% downside to TRADE support.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT
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