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MONDAY MORNING RISK MONITOR: US SOV SWAPS CONTINUE TO RIP / INTERBANK MEASURES STABLE FOR NOW

Takeaway: US sovereign swaps continue to spike, rising another 10 bps last week. Meanwhile, EU sovereign swaps & EU bank swaps continue to tighten.

Key Takeaways:

We're watching for interbank risk measures to rise as an indicator that the markets are becoming genuinely nervous. TED Spread, Euribor-OIS and Shifon are the three we watch actively. As of Friday's close, none of them were showing any signs of a breakdown.

 

* Sovereign CDS – The real trade here remains shorting the US and being long the PIIGS. US Swaps widened 10 bps (+31%) again last week bringing the level to 41 bps. The M/M change has risen to +19 bps (+85%). For reference, US swaps peaked at 64 bps in late-July 2011, the last time the US Govt budget process was in total dysfunction. Meanwhile, Italian, Spanish, Portguese and Irish swaps were all notably tighter on the week. 

 

* European Financial CDS - EU bank swaps tightened further on the week. Spanish, Italian and French banks all came in notably. On average, swaps tightened by 10 bps last week and are lower by 27 bps, on average, vs the prior month. One of the few EU Financials that posted deterioration was Sberbank of Russia, which saw swaps widen by 14 bps WoW.

 

 

Financial Risk Monitor Summary

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

 • Intermediate-term(WoW): Positive / 8 of 13 improved / 3 out of 13 worsened / 2 of 13 unchanged

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

 

MONDAY MORNING RISK MONITOR: US SOV SWAPS CONTINUE TO RIP / INTERBANK MEASURES STABLE FOR NOW - 15

 

1. U.S. Financial CDS -  The biggest mover on the week was GS with swaps widening by +8 bps. On the other end of the spectrum, MGIC saw its swaps tighten by 11 bps. Surprisingly, swaps overall were largely unfazed by the US Govt shutdown. Overall, swaps widened for 15 out of 27 domestic financial institutions.

 

Tightened the most WoW: AXP, CB, MTG

Widened the most WoW: TRV, GS, LNC

Tightened the most WoW: AXP, ALL, COF

Widened the most MoM: MBI, AGO, RDN

 

MONDAY MORNING RISK MONITOR: US SOV SWAPS CONTINUE TO RIP / INTERBANK MEASURES STABLE FOR NOW - 1

 

2. European Financial CDS - EU bank swaps tightened further on the week. Spanish, Italian and French banks all came in notably. On average, swaps tightened by 10 bps last week and are lower by 27 bps, on average, vs the prior month. One of the few EU Financials that posted deterioration was Sberbank of Russia, which saw swaps widen by 14 bps WoW.

 

MONDAY MORNING RISK MONITOR: US SOV SWAPS CONTINUE TO RIP / INTERBANK MEASURES STABLE FOR NOW - 2

 

3. Asian Financial CDS - Asian Financials were largely uneventful last week. Chinese banks were nominally tighter, dropping an average 2 bps W/W. Japanese financials were mostly unchanged with the biggest movers at +5 bps (Mizuho) and -3 bps (Nomura). Indian banks were also mixed. Two out of three widened, but IDB Bank of India tightened 9 bps to 340 bps.

 

MONDAY MORNING RISK MONITOR: US SOV SWAPS CONTINUE TO RIP / INTERBANK MEASURES STABLE FOR NOW - 17

 

4. Sovereign CDS – The real trade here remains shorting the US and being long the PIIGS. US Swaps widened 10 bps (+31%) again last week bringing the level to 41 bps. The M/M change has risen to +19 bps (+85%). For reference, US swaps peaked at 64 bps in late-July 2011, the last time the US Govt budget process was in total dysfunction. Meanwhile, Italian, Spanish, Portguese and Irish swaps were all notably tighter on the week.

 

MONDAY MORNING RISK MONITOR: US SOV SWAPS CONTINUE TO RIP / INTERBANK MEASURES STABLE FOR NOW - 18

 

MONDAY MORNING RISK MONITOR: US SOV SWAPS CONTINUE TO RIP / INTERBANK MEASURES STABLE FOR NOW - 3

 

MONDAY MORNING RISK MONITOR: US SOV SWAPS CONTINUE TO RIP / INTERBANK MEASURES STABLE FOR NOW - 4

 

5. High Yield (YTM) Monitor – High Yield rates were almost unchanged, falling a modest 0.2 bps last week, ending the week at 6.29% versus 6.30% the prior week.

 

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6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 1.0 points last week, ending at 1807.

 

MONDAY MORNING RISK MONITOR: US SOV SWAPS CONTINUE TO RIP / INTERBANK MEASURES STABLE FOR NOW - 6

 

7. TED Spread Monitor – The TED spread fell 1.3 basis points last week, ending the week at 22 bps this week versus last week’s print of 23.34 bps.

 

MONDAY MORNING RISK MONITOR: US SOV SWAPS CONTINUE TO RIP / INTERBANK MEASURES STABLE FOR NOW - 7

 

8. CRB Commodity Price Index – The CRB index rose 0.2%, ending the week at 286 versus 286 the prior week. As compared with the prior month, commodity prices have decreased -1.5% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

MONDAY MORNING RISK MONITOR: US SOV SWAPS CONTINUE TO RIP / INTERBANK MEASURES STABLE FOR NOW - 8

 

9. Euribor-OIS Spread – The Euribor-OIS spread widened by 1 bp to 14 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: US SOV SWAPS CONTINUE TO RIP / INTERBANK MEASURES STABLE FOR NOW - 9

 

10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index fell 2 basis points last week, ending the week at 3.13% versus last week’s print of 3.15%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.

 

MONDAY MORNING RISK MONITOR: US SOV SWAPS CONTINUE TO RIP / INTERBANK MEASURES STABLE FOR NOW - 10

 

11. Markit MCDX Index Monitor – Last week spreads widened 3 bps ending the week at 89 bps versus 86 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: US SOV SWAPS CONTINUE TO RIP / INTERBANK MEASURES STABLE FOR NOW - 11

 

12. Chinese Steel – Steel prices in China fell 0.2% last week, or 6 yuan/ton, to 3488 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: US SOV SWAPS CONTINUE TO RIP / INTERBANK MEASURES STABLE FOR NOW - 12

 

13. 2-10 Spread – Last week the 2-10 spread widened to 232 bps, 2 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR: US SOV SWAPS CONTINUE TO RIP / INTERBANK MEASURES STABLE FOR NOW - 13

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.6% upside to TRADE resistance and 1.0% downside to TREND support.

 

MONDAY MORNING RISK MONITOR: US SOV SWAPS CONTINUE TO RIP / INTERBANK MEASURES STABLE FOR NOW - 14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 

 


SAD STATE OF AFFAIRS

Client Talking Points

US DOLLAR

I guess if you have the head of the US Treasury in charge of fear-mongering recklessly about a US “debt default,” some people might actually believe him. It also drives ad dollars. Meanwhile, the bond market still doesn’t care. What's going on right now is that the credibility of the US Dollar continues to melt down. As it should. Shame on Lew. It's sad to watch.

UST 10YR YIELD

Bond market has moved 2 basis points this morning to 2.62% on the 10-year. In other words, the bond market still doesn’t believe Jack Lew. The line that matters most in our model is intermediate-term TREND support of 2.58%. We’ll soon see if it holds. Stocks do not like the slow-growth message implied by Down Dollar and #RatesFalling.

OIL

The only good economic news this morning? Brent Oil is down -0.9% and testing a $108.57 TAIL risk breakdown (again). It’s a little like watching a game of ping-pong. But with more than 360,000 net long contracts (futures/options) still out there, John Kerry isn’t the Oil bull’s best-friend-forever this morning with his niceties to Assad.

Asset Allocation

CASH 55% US EQUITIES 12%
INTL EQUITIES 18% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 15%

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.

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.

TROW

Financials sector senior analyst Jonathan Casteleyn continues to carry T. Rowe Price as his highest-conviction long call, based on the long-range reallocation out of bonds with investors continuing to move into stocks.  T Rowe is one of the fastest growing equity asset managers and has consistently had the best performing stock funds over the past ten years.

Three for the Road

TWEET OF THE DAY

GOLD: you'd think Gold bulls would get paid by Congress - nope, -2.2% last wk and flat this morn @KeithMcCullough

QUOTE OF THE DAY

The person who says it cannot be done should not interrupt the person who is doing it. –Chinese Proverb

 

STAT OF THE DAY

The median estimate of more than 60 economists in a Bloomberg survey is for the 10-year yield to rise to 3.36% by the end of 2014; that would still leave it below the average over the past decade of 3.53%. (Bloomberg)


October 7, 2013

October 7, 2013 - dtr

 

BULLISH TRENDS

October 7, 2013 - 10yr

October 7, 2013 - spx

October 7, 2013 - dax

October 7, 2013 - nik

October 7, 2013 - euro

 

BEARISH TRENDS

October 7, 2013 - VIX

October 7, 2013 - dxy

October 7, 2013 - natgas

October 7, 2013 - gold

October 7, 2013 - copper

 


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

Breaking Bad Rates

This note was originally published at 8am on September 23, 2013 for Hedgeye subscribers.

“If personality is an unbroken series of successful gestures, then there was something gorgeous about him, some heightened sensitivity to the promise of life, as if he were related to one of those intricate machines that register earthquakes ten thousand miles away.”

- F. Scott Fitzgerald, “The Great Gatsby”

 

Sunday is the day that many of us spend the evening relaxing in front of the T.V. and, if the advertisers are lucky, watching live sports.  If the advertisers are not so lucky, we are likely catching up on TIVOed or Netflixed T.V. shows (that lack live and targeted commercials).  A fan favorite around the Hedgeye office is Breaking Bad, which coincidentally was awarded the Emmy for Best Drama last night.

 

For those that haven’t watched this Emmy award winning T.V. show, it is about a high school science teacher who, after discovering he has cancer, turns to cooking methamphetamine to pay for his cancer treatments and provide a level of comfort for his family.  No surprise, the protagonist Walter White begins to struggle with returning back to the somewhat simple life of being a high school teacher and ultimately decides to create his own methamphetamine empire.

 

As Walt pursues broadening his drug empire, he becomes increasingly morally corrupt and as the title insinuates, truly begins to “break” bad and make decisions that benefit his short-term gain at the expense of almost all else.  While it would be a stretch to compare the FOMC to drug dealers, even if much of the country is addicted to low interest rates, in the Chart of the Day we’ve taken a look at the 10-year yield over the last three weeks and titled it, “Breaking Bad Rates.”

 

To be fair, lower interest rates aren’t all bad.  For those of us who want to refinance our mortgage or buy a new home, it is actually quite a good thing.  From a more macro perspective though, loose monetary policy leads to a weak dollar, which sustains high commodity costs.  Low interest rates also incentive more speculative type investing, which create amplified business cycles.

 

As the market showed us last week, even if Chairman Bernanke is not suffering from the same internal conflicts as Walter White, the world is definitely addicted to the cheap American dollars that his policy has propagated.   As Bernanke said in his press conference last week:

 

“We want to be sure that the economy has adequate support until we can be comfortable that it is, in fact, growing the way we want it to be growing.”

 

Rationally, if the Chairman of the Federal Reserve comes out and questions the underlying strength of the economy, one would expect more economically sensitive asset classes to sell off, or at least be weak.  That, though, is not the reality in our current centrally planned world in which addiction to low interest rates is spreading faster than Walter White’s blue meth across New Mexico.

 

Back to the global macro grind . . .

 

Speaking of breaking economic data, the news out of China this weekend is largely breaking to the positive.  Septembers HSBC flash purchasing managers index came in at a better than expected and expansionary 51.2.  This was also a sequential improvement from August of 50.1 and the highest reading since March.  As a result, the Shanghai Composite is up more than 1.3% this morning leading most of the major Asian indices.  Imagine that a stock market that actually trades on the underlying growth prospects of its economy!

 

Our quantitative model, actually front ran this positive data point, which my colleague Darius Dale published in a note on September 6th titled, “China Goes Bullish Trend the Only Positive Data Point That Actually Matters.”  At the time, we were struggling with the myriad of data points out of China, which were still more negative than positive, but the equity market, being the sneaking leading indicator it is, ultimately signaled to us more good news was to come.  And so it has.

 

The set up for China gets increasingly interesting if the HSBC survey is correct and Chinese GDP is set to accelerate sequentially and exceed current consensus estimates.  While we are not quite ready to get aggressive on the long side of China just yet, we do like those economies with accelerating growth and benign inflation.   In fact, we’d call that breaking good and at a minimum we would not short China.

 

To be fair, none of the structural headwinds that we’ve been researching and writing about have gone away, but on the margin things do appear to be getting less bad at a time when the majority remains overly cautious on China.  According to a Bloomberg poll from last week, which surveys Bloomberg Professional users, more than 32% cited a slowing China as the #1 risk to the global economy and only 17% indicated they believe that China’s economic outlook is improving.   Didn’t know the consensus view on China? Now you know.

 

Speaking of breaking good, the economic data out of Europe this morning is also largely positive.   While the Eurozone flash manufacturing PMI edged down to 51.1 in September from 51.4 in August, both the Services and Composite PMI hit 27-month highs.  Now this is just one data series, but the potential for a sustained European recovery is a theme that you will likely see us highlight more and more often heading into year-end.

 

Our immediate-term Macro Risk Ranges are now as follows:

 

UST 10yr 2.58-2.81%

SPX 1700-1730

DAX 8563-8741

USD 80.16-81.11

Euro 1.33-1.35

Gold 1291-1340

 

Good luck out there this week.

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

Breaking Bad Rates - Chart of the Day

 

Breaking Bad Rates - Virtual Portfolio



D.C.'s Delusion

“The greatest obstacle to pleasure is not pain; it is delusion.”

-Stephen Greenblatt

 

That’s one of the best quotes from one of my favorite books this year, The Swerve. “Nature ceaselessly experiments… the swerve is the source of free will…” (pg 189). But your boys Bernanke, Boehner, and Obama will have none of that.

 

Nope. No more nature, gravity, or truth – it’s all about partisan fear-mongering for political gain. And if you don’t like it, too bad – even buying Gold won’t save you now.

 

The cover of The Economist this week says “No Way to Run A Country”, the US stock market says US Equity Futures down 17 handles this morning, and the bond market? Well, it doesn’t care about this whole “default” thing. Delusion reigns in D.C. instead.

 

Back to the Global Macro Grind

 

This remains the 1st US stock market correction of 2013 that I haven’t been buying on red. Friday was only the 3rd up day for US equities in the last 12 (when Bernanke wrongly decided to Burn The Buck by not tapering).

 

Down Dollar + Rates Down = US Stocks Down - that’s precisely what you’ll see again this morning. From a US growth expectations perspective, that’s not good.

 

Some might argue that US futures down 17 is a “capitulation” signal – but context, when considering the emotion of it all, is always critical. At 1671 (my next line of immediate-term TRADE support), this will only be a -3% correction from the SP500’s all-time closing high. That’s hardly a capitulation. That’s a start.

 

Moreover, it’s important to realize that growth “Style Factors” in our model have barely corrected at all:

  1. LOW YIELD STOCKS (i.e. growth stocks) are still +32.2% YTD (vs High Yield Stocks +11%)
  2. TOP 25% EPS GROWTH (by SP500 quartile) = +28.8% YTD
  3. TOP 25% SALES GROWTH STOCKS = +27.4% YTD

Then you have all the 2013 US Growth Pain Trades:

  1. HIGH SHORT INTEREST stocks (by SP500 quartile) = +24.9% YTD
  2. HIGH BETA STOCKS = +25.0% YTD
  3. SMALL CAPS (Russell2000) = +27.0% YTD

In other words, given Bernanke re-established his Policy To Inflate (via Down Dollar) and D.C. has gone full gong show at the same time, the US #GrowthAccelerating style factor embedded in Friday’s closing prices is almost absurdly high!

 

Then there’s Institutional Investor sentiment:

  1. TREASURIES: there’s still a net short position (futures/options data) of -57,902 contracts in 10Y Treasuries
  2. SP500: there’s a net long position of +10,393 in SPY (vs. the 6mth avg of +6,397)
  3. II Bull/Bear Survey: ramped +93%! last week (to the bullish side) from the AUG low

That’s right. By my scorecard, US institutional sentiment just got completely whipsawed again. At the late AUG lows, there were only 37% of investors in the Bull/Bear survey who admitted they were “bullish”, then the SP500 proceeded to rip them a +100 handle move to an all-time closing high in SEP. #wonderful

 

Now, after chasing growth expectations into the SEP highs, Wall Street is caught off-sides again this morning – too long = wrong. So watch the relationship between US Equity performance and US Equity volatility (VIX) from here. I’m already net short in our #RealTimeAlerts signaling product (6 LONGS, 7 SHORTS), but I’d get really net short on a VIX breakout > 18.98.

 

For front-month fear (VIX), 18.98 is our TREND line of resistance. The corollary to that line = SP500 TREND support of 1660. We haven’t seen either of those lines violated (the wrong way, respectively) since November of last year. And I have no delusions that the #1 risk to growth has always been what’s on your screen this morning – government.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.60-2.68%

SPX 1

Nikkei 139

VIX 15.64-18.21

USD 79.81-80.85

Brent 107.81-108.97

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

D.C.'s Delusion - Chart of the Day

 

D.C.'s Delusion - Virtual Portfolio


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