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TUESDAY MORNING RISK MONITOR: INDIA REMAINS A MESS WHILE THE REST OF THE WORLD REMAINS CALM

Takeaway: Most of last week was uneventful from a risk monitoring standpoint, but India's banking system continues to slide.

Key Takeaways:

 

* Indian Financial CDS - Indian financials continue to deteriorate. Last week, 2 of 3 major Indian banks widened. ICICI was wider by 6 bps, IDB widened by 14 bps and State Bank of India tightened by 3 bps. Both ICICI and IDB are now knocking on the door of 400 bps (395 bps apiece), while State Bank is at 365 bps. This is the one area of geographical meltdown globally from a systemic banking standpoint.

 

 

Financial Risk Monitor Summary

 • Short-term(WoW): Negative / 3 of 13 improved / 5 out of 13 worsened / 5 of 13 unchanged

 • Intermediate-term(WoW): Positive / 5 of 13 improved / 4 out of 13 worsened / 4 of 13 unchanged

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

 

TUESDAY MORNING RISK MONITOR: INDIA REMAINS A MESS WHILE THE REST OF THE WORLD REMAINS CALM - 15

 

1. U.S. Financial CDS -  Overall, swaps for US financials were essentially unchanged, tightening by 2 bps on average. Large caps were mixed with C and MS tighter, but JPM wider. Specialty Finance swaps were tighter among both cards and MIs. Insurance swaps were flat to tighter. Overall, swaps tightened for 17 out of 27 domestic financial institutions.

 

Tightened the most WoW: AXP, C, MBI

Widened the most WoW: JPM, GS, PRU

Tightened the most WoW: C, COF, MET

Widened the most MoM: MBI, JPM, TRV

 

TUESDAY MORNING RISK MONITOR: INDIA REMAINS A MESS WHILE THE REST OF THE WORLD REMAINS CALM - 1

 

2. European Financial CDS - European financial swaps were wider almost across the board last week, though only by a small amount. The average and median widening was 3 and 5 bps, respectively. Tighteners included Sberbank and Greek banks.

 

TUESDAY MORNING RISK MONITOR: INDIA REMAINS A MESS WHILE THE REST OF THE WORLD REMAINS CALM - 2

 

3. Asian Financial CDS - Indian financials continue to deteriorate. Last week, 2 of 3 major Indian banks widened. ICICI was wider by 6 bps, IDB widened by 14 bps and State Bank of India tightened by 3 bps. Both ICICI and IDB are now knocking on the door of 400 bps (395 bps apiece), while State Bank is at 365 bps. Chinese and Japanese financials were both nominally tighter.

 

TUESDAY MORNING RISK MONITOR: INDIA REMAINS A MESS WHILE THE REST OF THE WORLD REMAINS CALM - 17

 

4. Sovereign CDS – Italy, Spain and Portugal all widened on the week, by 6, 7 and 41 bps, respectively. Ireland and Japan were also wider by 6 and 2 bps, respectively. The US, Germany and France were all unch'd. 

 

TUESDAY MORNING RISK MONITOR: INDIA REMAINS A MESS WHILE THE REST OF THE WORLD REMAINS CALM - 18

 

TUESDAY MORNING RISK MONITOR: INDIA REMAINS A MESS WHILE THE REST OF THE WORLD REMAINS CALM - 3

 

TUESDAY MORNING RISK MONITOR: INDIA REMAINS A MESS WHILE THE REST OF THE WORLD REMAINS CALM - 4

 

5. High Yield (YTM) Monitor – High Yield rates fell 7.4 bps last week, ending the week at 6.48% versus 6.55% the prior week.

 

TUESDAY MORNING RISK MONITOR: INDIA REMAINS A MESS WHILE THE REST OF THE WORLD REMAINS CALM - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 2.0 points last week, ending at 1802.

 

TUESDAY MORNING RISK MONITOR: INDIA REMAINS A MESS WHILE THE REST OF THE WORLD REMAINS CALM - 6

 

7. TED Spread Monitor – The TED spread rose 0.3 basis points last week, ending the week at 23.7 bps this week versus last week’s print of 23.41 bps.

 

TUESDAY MORNING RISK MONITOR: INDIA REMAINS A MESS WHILE THE REST OF THE WORLD REMAINS CALM - 7

 

8. CRB Commodity Price Index – The CRB index rose 1.0%, ending the week at 291 versus 288 the prior week. As compared with the prior month, commodity prices have increased 2.1% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

TUESDAY MORNING RISK MONITOR: INDIA REMAINS A MESS WHILE THE REST OF THE WORLD REMAINS CALM - 8

 

9. Euribor-OIS Spread – The Euribor-OIS spread was unchanged last week 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. 

 

TUESDAY MORNING RISK MONITOR: INDIA REMAINS A MESS WHILE THE REST OF THE WORLD REMAINS CALM - 9

 

10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index fell 31 basis points last week, ending the week at 2.96% versus last week’s print of 3.27%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.

 

TUESDAY MORNING RISK MONITOR: INDIA REMAINS A MESS WHILE THE REST OF THE WORLD REMAINS CALM - 10

 

11. Markit MCDX Index Monitor – Last week spreads widened 10 bps, ending the week at 106 bps versus 96 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.

 

TUESDAY MORNING RISK MONITOR: INDIA REMAINS A MESS WHILE THE REST OF THE WORLD REMAINS CALM - 11

 

12. Chinese Steel – Steel prices in China fell 0.3% last week, or 12 yuan/ton, to 3598 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

 

TUESDAY MORNING RISK MONITOR: INDIA REMAINS A MESS WHILE THE REST OF THE WORLD REMAINS CALM - 12

 

13. 2-10 Spread – Last week the 2-10 spread tightened to 238 bps, -5 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

TUESDAY MORNING RISK MONITOR: INDIA REMAINS A MESS WHILE THE REST OF THE WORLD REMAINS CALM - 13

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.5% upside to TRADE resistance of $19.74 and 1.0% downside to TREND support of $19.24.

 

TUESDAY MORNING RISK MONITOR: INDIA REMAINS A MESS WHILE THE REST OF THE WORLD REMAINS CALM - 14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


September Morn...

Client Talking Points

JAPAN

After a big move on bullish European economic data yesterday, a +3% move higher got the party started early in Japanese Equities as the Yen (versus the US Dollar) remains below 96.89 TREND resistance. The Nikkei is up almost 36% year-to-date. Ka-boom! But holding Hedgeye's TREND support of 13,362 is the more important risk management point. We like Japan. The rest of Asia? Not so much.

UK

Paul Krugman? He can stop writing about austerity crushing the UK economy now. The UK economic data sees #GrowthAccelerating yet again in August (so did the USA’s PMI print of 53 on Friday, don’t forget). Witness the blockbuster Construction PMI print of 59.1 this morning (versus 57 in July). Both the FTSE and Pound are bullish TREND in our Hedgeye model.

UST 10YR

Got #RatesRising? In case you missed it, the 10-year US Treasury yield corrected a whopping 4 basis points last week. Well, it bounced again this morning and is making yet another higher-low here trading back to 2.83%. There is no resistance up to 2.93%. Our Hedgeye immediate-term risk range is 2.71-2.93%. We are still bearish on bonds. And yes, we are still bullish on US growth stocks. The yield spread has widened back to +242 basis points. The Financials (XLF)? They like that.

Asset Allocation

CASH 26% US EQUITIES 27%
INTL EQUITIES 23% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 24%

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

Yield Spread backs up to +242bps wide (10s minus 2s); should be bullish for $BAC today @KeithMcCullough

QUOTE OF THE DAY

"No matter what business you're in, you can't run in place or someone will pass you by. It doesn't matter how many games you've won." - Jim Valvano

STAT OF THE DAY

#RatesRising? The average rate for high-yield and investment-grade U.S. corporate debt surged almost a full percentage point from May to June. Even with the jump to 4.3%, rates are below the average of 6.9% in the decade before the start of the bull market.(Bloomberg)


Macro Tricks

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

“We were forever inventing new tricks.”

-Hans Bethe

 

From a strategy and teamwork perspective, one of the most fascinating aspects of reading American Prometheus (The Triumph and Tragedy of Robert Oppenheimer) has been how well these to-be-famous scientists collaborated with one another.

 

Hans Bethe, who eventually won the Nobel Prize in Physics in 1967, said “the intellectual experience was unforgettable.” (page 182). Since he was working alongside Oppenheimer, Feynman, and Bohr, I don’t doubt that for one second!

 

I’m not making a political statement on nuclear. I’m simply pointing out how a culture of trust and collaboration can incubate innovation. While the powers that be will likely never acknowledge the Global Macro models we are building here @Hedgeye, we are getting more and more respect from you, the practitioners, every day. On behalf of my team, thank you for this experience.

 

Back to the Global Macro Grind

 

One of the most interesting realities embedded in our independent research process is that we don’t know where we are going to end up next. Our Global Macro Themes are born out of intermediate-term market signals and then contextualized by long-cycle research. If it feels like we’re forever inventing new themes, that’s because the market’s ecosystem is forever reinventing itself.

 

Since #RatesRising and #DebtDeflation have been the two Q313 themes most of our clients want to talk about, that’s what I have focused my time ranting about. That, however, doesn’t mean that our 3rd major Macro Theme for Q3 doesn’t exist. In fact, today is as glaring an example as any in which #AsianContagion should be jumping off your screens.

 

Reviewing the risks of #AsianContagion:

  1. Some overvalued Asian currencies are breaking down from an intermediate-term TREND perspective
  2. Some Asian debt markets are getting increasingly nervous about the negative deficit impact of a weakening currency
  3. When both a country’s currency and debt deflate, you get local inflation and local #RatesRising – that’s bad

From a process perspective, our Senior Asia analyst, Darius Dale, called out the following equity divergences 24 hours ago:

  • Indonesia -5.6% DoD vs. a regional median delta of -0.2%
  • Thailand -3.3% DoD vs. a regional median delta of -0.2%
  • India -9.1% MoM vs. a regional median delta of -1.2%

Then, on Indonesia in particular, he called out yesterday’s key economic data point:

  • 2Q Current Account Balance - current account deficit widened to a record on both a nominal basis and as a % of GDP

And finally, we get this morning’s Bloomberg headlines (under Economy):

 

A)     “Rupiah Forwards Plunge To Lowest Since 2009 As Bond Risk Surges”

B)      “Rupee Drops To Record on Fed Tapering Concern”

 

These macro headlines (i.e. old news) come after Indian, Indonesian, and Thai markets move. The proactive risk management Macro Trick is to know they are moving (and why) before consensus realizes it. This macro theme is 1.5 months old.

 

Indonesian stocks are -11% in the last 3 days and India’s stock market continues to be one of the worst in the world for 2013 YTD – all for Hedgeye playbook reasoning (this kind of stuff confuses Keynesians who think weak FX is a good thing!).

 

Again, to review in the most simplest of complexity’s terms:

  1. Currency Burns, then local  
  2. Inflation Accelerates and Growth Slows; and finally          
  3. Deficit worries (and credit risk) rise; and bonds fall (#DebtDeflation)

If you want to be really worried about something other than the US Bond market crashing, we’d suggest Asia (ex-Japan). That’s not a new Hedgeye Jedi Macro mind trick as of this morning either. That’s what was already trending.

 

Our immediate-term Risk Ranges are now:

 

UST 10yr 2.70-2.91%

SPX 1642-1676

VIX 13.51-15.36

USD 80.91-81.96

Yen 97.11-98.26

Copper 3.25-3.39

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Macro Tricks - Chart of the Day

 

Macro Tricks - Virtual Portfolio


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September 3, 2013

September 3, 2013 - dtr

 

BULLISH TRENDS

September 3, 2013 - 10yr

September 3, 2013 - spx

September 3, 2013 - dax

September 3, 2013 - nik

September 3, 2013 - dxy

September 3, 2013 - euro

September 3, 2013 - oil

September 3, 2013 - natgas2

 

BEARISH TRENDS

September 3, 2013 - VIX

September 3, 2013 - yen
September 3, 2013 - gold

September 3, 2013 - copper


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – September 3, 2013


As we look at today's setup for the S&P 500, the range is 30 points or 0.12% downside to 1631 and 1.72% upside to 1661.          

                                                                                                                     

SECTOR PERFORMANCE


THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

EQUITY SENTIMENT:


THE HEDGEYE DAILY OUTLOOK - 10


CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 2.41 from 2.39
  • VIX  closed at 17.01 1 day percent change of 1.19%

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:58am: Markit US PMI Final, Aug.
  • 10am: Construction Spending, July, est. 0.4% (prior -0.6%)
  • 10am: ISM Manufacturing, Aug., est. 54 (prior 55.4)
  • 10am: IBD/TIPP Eco. Optimism, Sept., est. 46 (prior 45.1)
  • 11:30am: U.S. to sell $30b 3M, $25b 6M bills
  • 4pm: USDA crop-conditions report

GOVERNMENT:

    • President Obama travels to Sweden for talks on trade

WHAT TO WATCH:

  • Microsoft to buy Nokia’s handset business for $7.2b
  • Microsoft, ValueAct pact has option for Morfit to join board
  • Verizon to buy Vodafone’s 45% stake in Verizon Wireless for $130b
  • Vodafone to look at acquisitions if value creation seen
  • Vodafone U.S. wireless exit not so simple for holders
  • Verizon-Vodafone talked merger before agreeing to stake sale
  • CBS deal ends blackout on Time Warner Cable ahead of NFL season
  • Obama begins push to get Congress behind Syria action
  • Bank of America seeking $1.5b in China Construction Bank offer
  • China PMI manufacturing activity rises to 16-month high
  • Russia detected missiles targeting East Mediterranean, RIA says
  • Jarden to buy Yankee Candle for $1.75b: WSJ
  • BofA $160m Merrill bias deal goes to once-skeptical judge
  • Banks must boost swaps-trade collateral under Basel plan
  • FSB to set creditor-loss rules for failing banks
  • Coca-Cola Femsa to buy Brazil’s Spaipa in $1.86b deal

EARNINGS:

    • ABM Industries (ABM) 5pm, $0.39
    • Guidewire Software (GWRE) 4:01pm, $0.14
    • H&R Block (HRB) 4:03pm, $(0.37)

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Gold Swings Below $1,400 After Report on Mediterranean Missiles
  • Copper Rally Reversing as Glut Expands to ’01 High: Commodities
  • Brent Oil Fluctuates as Lawmakers Urge Military Action on Syria
  • Soybeans Climb Most in Week as Lack of Rain May Hurt U.S. Crops
  • Copper Declines Following Report of Detection of Missile Launch
  • Nickel Seen Falling Toward Four-Year Low: Technical Analysis
  • Sugar Climbs in New York on Signs of Import Demand; Cocoa Gains
  • Natural Gas Rises as Warm-Weather Forecast Boosts Demand Bets
  • Gold Miners Set to Start Strike as South Africa Stoppages Spread
  • Tankers Worst Since 1997 as Africa Oil to China Slows: Freight
  • Carbon’s Four-Month Rally Faces EU Permit Hurdle: Energy Markets
  • Decades of Ruptures From Defect Show Perils of Old Pipe: Energy
  • Steel Demand May Follow Rig Count Higher as Crude Climbs
  • Rebar Falls First Time in Three Days as Demand Trails Futures

THE HEDGEYE DAILY OUTLOOK - 5

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - 6

 

GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 4

 

EUROPEAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 7

 

ASIAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 8

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - 9

 

 

The Hedgeye Macro Team

 

 

 

 

 

 

 

 

 

 

 

 



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