*************** Mergers and Acquisition Black Book Conference Call Today at 2PM ***************
Please join the Hedgeye Financials Team, Jonathan Casteleyn and Josh Steiner, for a deep dive Black Book presentation on the mergers and acquisition environment (M&A) with implications for companies including Greenhill & Co (GHL), Lazard (LAZ), and Evercore (EVR). The call will be held on Monday, October 14th at 2:00pm EDT.
The M&A environment continues to have a positive setup with:
1.) High cash balances on corporate balance sheets
2.) Low corporate borrowing costs
3.) Relatively high stock currency values
4.) Rising CEO confidence
Thus the market has the potential to break out of a 3 year flat environment. Every quarter removed from the Financial Crisis without substantial volatility is a quarter closer to a more robust M&A environment which has positive implications for this group of small and mid-cap Financial stocks.
- Toll Free Number:
- Direct Dial Number:
- Conference Code: 893653#
- Materials: CLICK HERE
Risk Monitor / Key Takeaways:
Last week we indicated that the key measures we were watching for signs of risk rising are the interbank overnight rates. On that front, the news was resoundingly positive. The TED spread compressed by 3 bps to 19 bps (-16% W/W), while Euribor-OIS tightened by 2 bps to 12 bps (-13.5% W/W). This suggests that the Financials are setting up for another rally.
The other news on the week was, of course, JPMorgan's 3Q earnings. On that front, we were impressed with the resilience of the top line, particularly the positive trend in the NIM. Credit quality remains another key driver and we expect these two dynamics will be the principal themes of this quarter's earnings season.
* TED Spread Monitor – The TED spread fell 3.4 basis points last week, ending the week at 18.6 bps this week versus last week’s print of 21.99 bps.
* Euribor-OIS Spread – The Euribor-OIS spread tightened by 2 bps to 12 bps.
* Sovereign CDS – Sovereign swaps tightened around the world last week on rising expectations that the US will find a solution and avert default. US swaps tightened 7 bps, falling to 34 bps.
* European Financial CDS - Europe's banking system continues its winning ways. Swaps across European financials tightened another 14 bps, on average, last week, bringing the median EU bank to 140 bps, as compared with 101 bps for the US Financials.
Financial Risk Monitor Summary
• Short-term(WoW): Positive / 4 of 13 improved / 3 out of 13 worsened / 6 of 13 unchanged
• Intermediate-term(WoW): Positive / 6 of 13 improved / 5 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
1. U.S. Financial CDS - Big banks saw their swaps largely unchanged last week, trading in a range of +2 to -2 bps. JPMorgan posted the best results with the -2 bps. GS the worst, at +2 bps. Mortgage insurers widened by 22 bps, on average. Overall, swaps widened for 14 out of 27 domestic financial institutions.
Tightened the most WoW: SLM, AIG, COF
Widened the most WoW: AGO, MBI, RDN
Tightened the most WoW: AXP, WFC, COF
Widened the most MoM: MBI, RDN, MTG
2. European Financial CDS - Europe's banking system continues its winning ways. Swaps across European financials tightened another 14 bps, on average, last week, bringing the median EU bank to 140 bps, as compared with 101 bps for the US Financials.
3. Asian Financial CDS - Bank swaps in Asia were mostly lower last week with teh one exception of IDB Bank of India, where swaps rose 10 bps. Chinese banks were 2-3 bps tighter while Japanese financials tightened 3-6 bps.
4. Sovereign CDS – Sovereign swaps tightened around the world last week on rising expectations that the US will find a solution and avert default. US swaps tightened 7 bps, falling to 34 bps. Portugal, Italy and Spain saw their swaps tighten by 48, 20 and 8 bps, respectively.
5. High Yield (YTM) Monitor – High Yield rates fell 5.1 bps last week, ending the week at 6.24% versus 6.29% the prior week.
6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 1.0 point last week, ending at 1808.
7. TED Spread Monitor – The TED spread fell 3.4 basis points last week, ending the week at 18.6 bps this week versus last week’s print of 21.99 bps.
8. CRB Commodity Price Index – The CRB index rose 0.1%, ending the week at 287 versus 286 the prior week. As compared with the prior month, commodity prices have decreased -1.9%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.
9. Euribor-OIS Spread – The Euribor-OIS spread tightened by 2 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. Chinese Interbank Rate (Shifon Index) – The Shifon Index rose 20 basis points last week, ending the week at 3.33% versus last week’s print of 3.13%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.
11. Markit MCDX Index Monitor – Last week spreads widened 12 bps, ending the week at 101 bps versus 89 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 0.5% last week, or 18 yuan/ton, to 3506 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 2 bps to 234 bps. 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 0.9% upside to TRADE resistance and 1.4% downside to TRADE support.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT