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European Banking Monitor: Getting Better

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 - Full disclosure, EU bank swap quotes are becoming more and more sporadic. We pull our data from Bloomberg and recently have been receiving a lot of "NA" data points on numerous EU banks. When we asked Bloomberg what was going on, they explained that they source quotes from multiple market makers and if they can't find at least two separate quotes for a security they don't publish. We think that it's a referendum of sorts on the declining risk profile of the EU banking system as a whole, that interest in insuring against default at many of Europe's larger banks has now slowed to a trickle. Overally, EU banks were little changed on the week, tightening by a median of 1 bp.

 

European Banking Monitor: Getting Better - ww. banks

 

Sovereign CDS – Sovereign swaps tightened across the board last week. Portuguese sovereign swaps tightened by -10.4% (-58 bps to 498 bps) after rising last week by 83 bps. Nevertheless, they remain 89 bps higher than levels one month ago. It's also worth flagging the U.S. U.S. default swaps are now at 24 bps, this is down 3 bps WoW and 6 bps MoM. For reference, U.S. default swaps touched their recent multi-year lows on 9/30/09 at 19 bps and their recent multi-year highs of 64 bps on 7/29/11. Within that reference frame (19-64 bps), we are only 5 bps away from the low, or roughly in the bottom decile of the trading range of the last several years.

 

European Banking Monitor: Getting Better - ww. sov 1

 

European Banking Monitor: Getting Better - ww. sov 2

 

European Banking Monitor: Getting Better - ww. sov 3

 

Euribor-OIS Spread – The Euribor-OIS spread tightened by 1 bps 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: Getting Better - ww. euriborpng

 

ECB Liquidity Recourse to the Deposit Facility – Deposits fell almost 12 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: Getting Better - ww. facility


MONDAY MORNING RISK MONITOR: YOU HAVE TO ADMIT IT'S GETTING BETTER ....

Takeaway: Numerous callouts on the risk front this week, though mostly to the positive.

Key Takeaways:

While you were focusing on earnings from major banks last week, there were a number of notable developments on the macro risk front. In short, risk continues to fall globally. A client forwarded us this a while back and, frankly, it seems apropos for the moment. You Have to Admit ... 

 

* European Financial CDS - Full disclosure, EU bank swap quotes are becoming more and more sporadic. We pull our data from Bloomberg and recently have been receiving a lot of "NA" data points on numerous EU banks. When we asked Bloomberg what was going on, they explained that they source quotes from multiple market makers and if they can't find at least two separate quotes for a security they don't publish. We think that it's a referendum of sorts on the declining risk profile of the EU banking system as a whole, that interest in insuring against default at many of Europe's larger banks has now slowed to a trickle. Overally, EU banks were little changed on the week, tightening by a median of 1 bp.

 

* Sovereign CDS – Sovereign swaps tightened across the board last week. Portuguese sovereign swaps tightened by -10.4% (-58 bps to 498 bps) after rising last week by 83 bps. Nevertheless, they remain 89 bps higher than levels one month ago. It's also worth flagging the U.S. U.S. default swaps are now at 24 bps, this is down 3 bps WoW and 6 bps MoM. For reference, U.S. default swaps touched their recent multi-year lows on 9/30/09 at 19 bps and their recent multi-year highs of 64 bps on 7/29/11. Within that reference frame (19-64 bps), we are only 5 bps away from the low, or roughly in the bottom decile of the trading range of the last several years.

 

* High Yield (YTM) Monitor – High Yield rates fell 35.1 bps last week, ending the week at 5.96% versus 6.31% the prior week. However, yields remain well above their recent lows of 5.17% on 5/9/13.

 

* Markit MCDX Index Monitor – In spite of Detroit filing for the largest municipal bankruptcy in U.S. history on Friday, Markit MCDX municipal default swaps were narrowly changed, rising a mere 3 bps on the day and actually falling 2 bps week-over-week. #PricedIn

 

* Chinese Steel – Steel prices in China rose 1.2% last week, or 41 yuan/ton, to 3450 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

 

XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.5% upside to TRADE resistance and 3.1% downside to TRADE support. #AsymmetricShortTermSetup

 

Financial Risk Monitor Summary

 • Short-term(WoW): Positive / 5 of 13 improved / 2 out of 13 worsened / 6 of 13 unchanged

 • Intermediate-term(WoW): Positive / 5 of 13 improved / 2 out of 13 worsened / 6 of 13 unchanged

 • Long-term(WoW): Positive / 3 of 13 improved / 1 out of 13 worsened / 9 of 13 unchanged

 

MONDAY MORNING RISK MONITOR: YOU HAVE TO ADMIT IT'S GETTING BETTER ....  - 15

 

1. U.S. Financial CDS -  Swaps were sharply tighter last week on the heels of stronger-than-expected earnings that also saw the XLF rise 1.9% (now up 8.1% MoM). GS, MS, BAC and C were the leaders, tightening 13-22 bps on the week. Overall, swaps tightened for 26 out of 27 domestic financial institutions.

 

Tightened the most WoW: GS, BAC, C

Widened the most/ tightened the least WoW: XL, ACE, CB

Tightened the most WoW: MET, PRU, AIG

Widened the most/ tightened the least MoM: AGO, CB, JPM

 

MONDAY MORNING RISK MONITOR: YOU HAVE TO ADMIT IT'S GETTING BETTER ....  - 1

 

2. European Financial CDS - Full disclosure, EU bank swap quotes are becoming more and more sporadic. We pull our data from Bloomberg and recently have been receiving a lot of "NA" data points on numerous EU banks. When we asked Bloomberg what was going on, they explained that they source quotes from multiple market makers and if they can't find at least two separate quotes for a security they don't publish. We think that it's a referendum of sorts on the declining risk profile of the EU banking system as a whole, that interest in insuring against default at many of Europe's larger banks has now slowed to a trickle. Overally, EU banks were little changed on the week, tightening by a median of 1 bp.

 

MONDAY MORNING RISK MONITOR: YOU HAVE TO ADMIT IT'S GETTING BETTER ....  - 2

 

3. Asian Financial CDS - Asia tightened across the board last week with Chinese banks leading the way. Chinese banks tightened an average 11 bps WoW, while Indian banks were narrower by an average 7 bps. Japanese banks tightened by 2 bps, on average.

 

MONDAY MORNING RISK MONITOR: YOU HAVE TO ADMIT IT'S GETTING BETTER ....  - 17

 

4. Sovereign CDS – Sovereign swaps tightened across the board last week. Portuguese sovereign swaps tightened by -10.4% (-58 bps to 498 bps) after rising last week by 83 bps. Nevertheless, they remain 89 bps higher than levels one month ago. It's also worth flagging the U.S. U.S. default swaps are now at 24 bps, this is down 3 bps WoW and 6 bps MoM. For reference, U.S. default swaps touched their recent multi-year lows on 9/30/09 at 19 bps and their recent multi-year highs of 64 bps on 7/29/11. Within that reference frame (19-64 bps), we are only 5 bps away from the low, or roughly in the bottom decile of the trading range of the last several years.

 

MONDAY MORNING RISK MONITOR: YOU HAVE TO ADMIT IT'S GETTING BETTER ....  - 18

 

MONDAY MORNING RISK MONITOR: YOU HAVE TO ADMIT IT'S GETTING BETTER ....  - 3

 

MONDAY MORNING RISK MONITOR: YOU HAVE TO ADMIT IT'S GETTING BETTER ....  - 4

 

5. High Yield (YTM) Monitor – High Yield rates fell 35.1 bps last week, ending the week at 5.96% versus 6.31% the prior week. However, yields remain well above their recent lows of 5.17% on 5/9/13.

 

MONDAY MORNING RISK MONITOR: YOU HAVE TO ADMIT IT'S GETTING BETTER ....  - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 8.9 points last week, ending at 1804.75.

 

MONDAY MORNING RISK MONITOR: YOU HAVE TO ADMIT IT'S GETTING BETTER ....  - 6

 

7. TED Spread Monitor – The TED spread rose 0.7 basis points last week, ending the week at 24.17 bps this week versus last week’s print of 23.46 bps.

 

MONDAY MORNING RISK MONITOR: YOU HAVE TO ADMIT IT'S GETTING BETTER ....  - 7

 

8. Journal of Commerce Commodity Price Index – The JOC index rose 1.4 points, ending the week at -1.6 versus -3.0 the prior week.

 

MONDAY MORNING RISK MONITOR: YOU HAVE TO ADMIT IT'S GETTING BETTER ....  - 8

 

9. Euribor-OIS Spread – The Euribor-OIS spread tightened by 1 bps 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: YOU HAVE TO ADMIT IT'S GETTING BETTER ....  - 9

 

10. ECB Liquidity Recourse to the Deposit Facility – Deposits fell almost 12 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: YOU HAVE TO ADMIT IT'S GETTING BETTER ....  - 10

 

11. Markit MCDX Index Monitor – Last week spreads tightened 2 bps, ending the week at 93.03 bps versus 95.02 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: YOU HAVE TO ADMIT IT'S GETTING BETTER ....  - 11

 

12. Chinese Steel – Steel prices in China rose 1.2% last week, or 41 yuan/ton, to 3450 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: YOU HAVE TO ADMIT IT'S GETTING BETTER ....  - 12

 

13. 2-10 Spread – Last week the 2-10 spread tightened to 219 bps, -6 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR: YOU HAVE TO ADMIT IT'S GETTING BETTER ....  - 13

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.5% upside to TRADE resistance and 3.1% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: YOU HAVE TO ADMIT IT'S GETTING BETTER ....  - 14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


Morning Reads on Our Radar Screen

Takeaway: A quick look at stories on Hedgeye's radar screen.

Keith McCullough – CEO

High-End Smartphone Boom Ending as Price Drop Hits Apple (via Bloomberg)

China's Gansu province hit by powerful earthquakes (via BBC)

Australia’s Waning Boom Saps Mining Area Housing Demand (via Bloomberg)

 

Morning Reads on Our Radar Screen - earth1

 

Daryl Jones – Macro

Japan's Abe has chance to show true colors after big election win (via Reuters)

Turkey headed for a recession (via Sober Look)

 

Josh Steiner – Financials

Existing home sales take a breather, but prices soar (via Reuters)

Higher Rates Aren't Enough to Stall Housing (via WSJ)

 

Howard Penney – Restaurants

McDonald's outlook weakens on competition in U.S., slower European sales (via Reuters)

CHART: MCD - its only a matter of time before the BLUE line (stock) catches up with the RED line (EPS) (via Hedgeye)

 

Jonathan Casteleyn – Financials

Wall Street Commodity Trading in Jeopardy Amid Fed Review (via Bloomberg)

 

Matt Hedrick – Macro

Portugal’s Coelho Wins Backing From President to Complete Term (via Bloomberg)

 

Jay Van Sciver – Industrials

Lennox International 2nd-Quarter Net Rose 44%; Raises Year View (via WSJ)   

                  

Tom Tobin – Healthcare

Health Insurance Exchange Rates Surprisingly Low (via Health Leaders Media)


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MACAU SOFTENS

We are lowering our full month GGR growth projection to 14-19% following a softer week in Macau.  Average daily table revenue for the week was HK$781 million, up only 1% from last year and down 11% from June’s rate.  We are hearing that VIP volumes were sluggish this past week. 

 

MPEL and MGM continue to pace below trend in terms of market share while Galaxy and SGM are trending better.

 

MACAU SOFTENS - h1

 

MACAU SOFTENS - h2


(Still) Turning Japanese

Client Talking Points

YEN

It was Burning Yen (and up Nikkei) into the Japanese elections, so the Yen caught a bid to cover on the news, and the Nikkei only closed up +0.5% as a result. It's called a crowded trade. It's just how immediate-term market moves roll. No change to the bearish Yen or bullish Nikkei TRENDs.

GOLD

Well, so much for the short position that Gold and Bond bulls kept highlighting. CFTC futures/options contracts showed a +56% week-over-week ramp in the net long Gold position last week. Bernanke was the catalyst, as usual. +55,000 net longs now. Gold is banging the top end of my $1241-1318 risk range this morning. Up Yen, Down rates helped too. Fading all of it.

UST 10YR

Yields are re-testing the low-end of our 2.45-2.75% immediate-term risk range this morning. This should provide another short selling opportunity in Treasuries as they make lower-highs. See our #RatesRising Macro Theme deck for the intermediate-term call on that. Flows should continue into US Equities.

Asset Allocation

CASH 48% US EQUITIES 19%
INTL EQUITIES 10% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 23%

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

TREASURIES: 10yr yield down to start the wk to 2.47%; creates another short selling opportunity in t-bonds

@KeithMcCullough

QUOTE OF THE DAY

"The Federal Reserve is not currently forecasting a recession."

- Ben Bernanke on January 10, 2008


STAT OF THE DAY

Netflix has become the best performing U.S. stock in the S&P 500 Index in 2013 and the second most expensive. The company’s stock reached a 52-week closing high of $267.92 on July 17 and now trades at 383 times 12-month profit, surpassed only by Alcoa. Its estimated price/earnings ratio for 2013 is 184. (Bloomberg)


Lest Occasion Be Given

This note was originally published at 8am on July 08, 2013 for Hedgeye subscribers.

“Idleness is the enemy of the soul.”

-Saint Benedict

 

There were some major contradictions in Benedict of Nursia’s “rules.” Monks not being able to openly debate what they were being told to read was one of them. I started reading Stephen Greenblatt’s Pulitzer Prize Winner, The Swerve – How The World Became Modern, this weekend. That’s what has me thinking about that.

 

Benedictine Rule provided the foundations for western monasticism. “Let there be complete silence. No whispering, no speaking – only the reader’s voice should be heard there… no one should presume to ask a question about the reading or about anything else, lest occasion be given.” (The Swerve, pg 27)

 

Reading and writing makes me think. Thinking requires what Einstein called for – constant questioning of premise. Some people don’t question either Keynesian Economics or the US Federal Reserve’s policies whatsoever. Markets, on the other hand, take occasion to debate policy makers all of the time. They front-run the next decision that will be imposed on us from upon high.

 

Back to the Global Macro Grind

 

From the holy heights of Chaos Theory the globally interconnected ecosystem gives us this thing called economic gravity. As US employment #GrowthAccelerating continues to surprise on the upside, expectations for Fed tapering get pulled forward.

 

Last week’s market pricing of gravitational-risk was as closely aligned with what has been happening for 6 months as any week in 2013. Here were the big week-over-week moves, bundled within our core Hedgeye Global Macro Themes:

  1. #StrongDollar – US Dollar Index +1.6% on the week; up for 3 weeks in a row, and +5.9% for 2013 YTD
  2. #RatesRising – UST 10yr Yield +25 basis points on the week to a fresh weekly closing YTD high of 2.74%
  3. #EmergingOutflows – MSCI Emerging Markets and Latam Equity indexes -2.4% and -4.3% on the week, respectively

Yes, our Macro call for the last 6 months still has some serious flow to it:

  1. Dollar Up = Commodities Down
  2. Commodities Down = Commodity Linked Emerging Markets Down
  3. Emerging Markets Down = Emerging Outflows Up

Follow the flow. All that moulah has to, eventually, flow somewhere; especially as money’s prior flows start going the other way (at an accelerating rate).

 

So, you can either be long US Dollars and US Consumption Equities on the following fundamentals:

  1. Employment #GrowthAccelerating
  2. #HousingsHammer ripping a +12.2% y/y gain in US Home Prices (wealth effect)
  3. Consumption #GrowthAccelerating from 1.0-1.2% to 2.0-2.4% in the last 6 months

And/or, you can being long US Dollars and US Consumption Equities because you can’t be long anything else!

 

Lots of clients are asking us what we’re going to do with Gold, Treasuries, and Emerging Markets from here. And our answer is more of the same. We update our dynamic asset allocation model daily. Here’s the latest on that:

  1. Commodities = 0%
  2. Fixed Income = 0%
  3. Int’l Equities = 0%

Zero percent is about as clear a statement as we can make. And while we’ve had 0% in Commodities and Fixed Income for some time now, I don’t think last week’s combination of #StrongDollar + #RatesRising gets us less confident in that positioning.

 

Why would it? In macro there is this thing called momentum that trumps valuation. When negative PRICE MOMENTUM meets VOLATILITY and OUTFLOWS  (all at once), that’s uber bearish.

 

Having 0% asset allocation to International Equities is probably the position we’ll hold for the least amount of time. But, with Emerging Markets (MSCI EM) -13% and Latin American Equities (MSCI Index) -19.7% YTD, respectively, we’re in no rush.

 

For now, with both the Russell 2000 (IWM) and US Consumer Discretionary (XLY) US Equity market indexes hitting fresh all-time highs at +18.4% and +21.8%, respectively, occasion has been granted by the gods of our meritocracy to keep questioning consensus and reading more books.

 

Our immediate-term Risk Ranges are now:

 

UST 10yr 2.55-2.74%

SPX 1617-1639

VIX 14.14-16.49

USD 83.39-84.59

Yen 99.13-101.71

Gold 1179-1242

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Lest Occasion Be Given - Chart of the Day

 

Lest Occasion Be Given - Virtual Portfolio


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