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MONDAY MORNING RISK MONITOR: THE SETUP REMAINS FAVORABLE

Takeaway: We continue to see few, if any, indications of trouble brewing on the risk front.

Risk Monitor / Key Takeaways:

Financials continue their winning ways, rising another 1.3% last week. Based on our interpretation of the risk monitor the setup remains very favorable from an intermediate term trend standpoint. The short-term trade setup is less favorable, though not negative. A few of the callouts include ongoing stability/further tightening in the TED Spread and Euribor-OIS, but further widening in the Shifon Index. Rising rates are also generally a tailwind with the month-over-month change in the 2-10 yield spread now at 14 bps. We provide a brief summary below of some of the notable callouts across the various risk measures we track.

 

* Sovereign CDS – Portuguese sovereign swaps widened 14 bps last week, but it was the exception. Elsewhere, swaps either tightened or went unchanged. The largest improvements came from the US and Japan, tightening 6 and 4 bps, respectively. 

 

* Asian Financial CDS - Indian banks widened significantly last week with ICICI wider by 40 bps and the other two major Indian banks wider by 24-25 bps. Chinese banks were mostly unchanged except for Bank of China, where swaps widened by 4 bps. Japan's banks were mixed last week with the largest move coming from Matsui, where swaps widened by 14 bps to 231 bps.

 

* U.S. Financial CDS -  Large cap US banks were tighter across the board last week with an average improvement of 5 bps. Insurers also posted strong improvement, tightening by an average 8 bps. Overall, swaps tightened for 20 out of 27 domestic financial institutions.

 

Financial Risk Monitor Summary

 • Short-term(WoW): Positive / 2 of 13 improved / 1 out of 13 worsened / 10 of 13 unchanged

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

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

 

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1. U.S. Financial CDS -  Large cap US banks were tighter across the board last week with an average improvement of 5 bps. Insurers also posted strong improvement, tightening by an average 8 bps. Overall, swaps tightened for 20 out of 27 domestic financial institutions.

 

Tightened the most WoW: MBI, AGO, CB

Widened the most WoW: RDN, MTG, XL

Tightened the most WoW: MBI, AGO, MS

Widened the most/ tightened the least MoM: XL, GNW 

 

MONDAY MORNING RISK MONITOR: THE SETUP REMAINS FAVORABLE - 1

 

2. European Financial CDS - European banks posted a rare week of widening, but only nominally so. The average change was +2 bps. Spanish and Italian banks showed the largest increases, though those increases were still relatively modest at 10-11 bps. Improvements came from Greek and Belgian banks, where swaps continued to tighten.

 

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3. Asian Financial CDS - Indian banks widened significantly last week with ICICI wider by 40 bps and the other two major Indian banks wider by 24-25 bps. Chinese banks were mostly unchanged except for Bank of China, where swaps widened by 4 bps. Japan's banks were mixed last week with the largest move coming from Matsui, where swaps widened by 14 bps to 231 bps.

 

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4. Sovereign CDS – Portuguese sovereign swaps widened 14 bps last week, but it was the exception. Elsewhere, swaps either tightened or went unchanged. The largest improvements came from the US and Japan, tightening 6 and 4 bps, respectively. 

 

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5. High Yield (YTM) Monitor – High Yield rates rose 1.2 bps last week, ending the week at 6.05% versus 6.04% the prior week.

 

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6. Leveraged Loan Index Monitor – The Leveraged Loan Index was unchanged last week, ending at 1828.

 

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7. TED Spread Monitor – The TED spread fell 1.9 basis points last week, ending the week at 16.7 bps this week versus last week’s print of 18.64 bps.

 

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8. CRB Commodity Price Index – The CRB index rose 0.1%, ending the week at 274 versus 274 the prior week. As compared with the prior month, commodity prices have decreased -4.2% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

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9. Euribor-OIS Spread – The Euribor-OIS spread was unchanged at 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. 

 

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10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index rose 43 basis points last week, ending the week at 4.19% versus last week’s print of 3.76%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.

 

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11. Markit MCDX Index Monitor – Last week spreads tightened -1 bps, ending the week at 85 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.

 

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12. Chinese Steel – Steel prices in China fell 0.4% last week, or 16 yuan/ton, to 3,543 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

 

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13. 2-10 Spread – Last week the 2-10 spread widened to 242 bps, 13 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

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14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.6% upside to TRADE resistance and 1.7% downside to TRADE support.

 

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Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


THE M3: JAPAN BILL; MACAU MASS OUTPERFORMANCE

THE MACAU METRO MONITOR, NOVEMBER 18, 2013

 

 

ABE ALLIES DIVIDED ON SENDING CASINO BILL TO DIET THIS YEAR Bloomberg

“I don’t necessarily think we will reach consensus on submitting the bill to the current session and moving forward with it in the limited time we have,” Natsuo Yamaguchi, leader of the New Komeito party, said.  A cross-party group of lawmakers has said it is preparing to submit the casino legalization bill to parliament in the current session, ending on Dec. 6.

 

Yamaguchi said the public lacked “full understanding” of the casino issue and said there were potential drawbacks, such as the effect on young people.  If the bill is not submitted now, it would have to wait for the next parliamentary session starting in January.

 

MASS GAMING REVENUE GROWTH EXPECTS TO OUTPERFORM VIP BUSINESS Macau Daily News

Some operators of VIP business projected that gaming revenue for next year will continue to grow, especially for the mass market.  It is expected that mass market’s revenue growth will outperform that of VIP rooms.  Alvin Chau, CEO and director of Suncity Group, projected the revenue growth in the mass market will maintain an uptrend next year with the increasing purchasing power of Mainlanders and more Mainland cities will be included in the Individual Visit Scheme. He added that revenue growth in VIP business will narrow next year as it has already stood at a high level.


BUSINESS AS USUAL IN MACAU

It was business as usual this past week in Macau, with table revenues coming in just a touch softer than our projections.

 

 

Table revenues for the first half of November continued to come in line with our estimates.  ADTR was down 5% WoW to $886, but still up a healthy 14% YoY.  We took our full month GGR projection down a touch to 16-20% YoY growth.  

 

This week, Galaxy was the big share gainer while SJM gave back the most share.  Month-to-date, MPEL and MGM are tracking well above their trailing 3 month share while SJM and LVS are trending below.

 

BUSINESS AS USUAL IN MACAU - tab1

 

BUSINESS AS USUAL IN MACAU - tab2


Early Look

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November 18, 2013

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BULLISH TRENDS

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BEARISH TRENDS

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Weird Bubbles

“If we’re in a bubble, it’s the weirdest bubble I have ever seen, where everybody hates everything.”

-Mark Andreesen

 

From both a US economic growth and stock market perspective (not one and the same thing), there was a lot of truth in Andreesen’s general statement – if he said it precisely a year ago (he said it on May 1, 2012 with the SP500 at 1406).

 

A full year ago today, the US economy was tracking 0.14% in the 4th quarter of 2012, US Treasury Yields were a full 100 basis points lower (10yr = 1.70%, all-time lows), and the SP500 was at 1360. So if you bought what everyone hated (growth), and shorted what everyone was clinging too (Gold and Bonds), you crushed it.

 

Does that make today a bubble? Or was there a bubble back then in fear? Up +32.2% from November 16th, 2012 is the SP500 a bubble? Barrons says “Yes” (in a few names), but “No” (in most names)” and our new central planning diva, Janet Yellen, says “No” (anywhere)… So I’ll agree with Andreesen - there are plenty of weird bubbles; some of the weirdest markets have ever seen.

 

Back to the Global Macro Grind

 

Most pundits and politicians who have never forewarned you of a bubble live in their own conflicted and compromised bubble. Most “market-equilibrium” people think bubbles are measured by “valuation.” And most market-practitioners call bubbles things that start to make lower-highs versus their all-time highs in price.

 

Well, maybe not most market-practitioners. But that’s how this one thinks. And yes, I’m perfectly happy to be in my own little bubble as a write about bubbles from my hotel room on the Santa Monica, California coastline this morning!

 

At the end of the day, calling something that’s up a “bubble” is about as useful as having another leg in a one-legged butt kicking contest. If you are going to run around trying to make news calling things bubbles, you better be short them, publicly, with timestamps.

 

To review what we have been calling the Bernanke Bubbles for the last year:

  1. Gold
  2. Bonds
  3. MLPs

MLPs are master limited partnerships. If you don’t know what those are, don’t worry about it. We’ll boil it down for you – they are the sub-asset class of equities that look most like a bond that slow-growth Yield Chasing investors have found tax refuge in.

 

All 3 of these bubbles have 3 things in common:

  1. They had almost bullet proof storytelling narratives that lasted on the order of 1-3 decades
  2. Their asset prices confirmed the storytelling (making higher-highs) until they all topped in 2011-2012
  3. They’re now all making a series of lower-highs as interest rates make a series of higher-lows

Now, as you all know, all-time is a long time. So this concept of US 10yr Treasury Bond Yields making an all-time low when US Growth expectations were bottoming in November 2012 can make for some exciting causal relationships.

 

The relationship between interest rates and 0%-rates-forever-bubbles isn’t weird at all. It makes perfect sense. That’s why the upside down of repressed growth expectations (US Growth Stocks) have bubbled up to bring the US stock market to all-time highs:

 

From a US stock market “Style Factor” perspective, check out the score:

  1. LOW YIELD (i.e. GROWTH) stocks = +40.4% YTD
  2. Top 25% EPS GROWERS (by SP500 quartile) = +37.2% YTD
  3. HIGH BETA stocks = +35.8% YTD

As my boy Jesse Pinkman would say, that growth stuff is “awesome!”

 

At the same time, the slow-growth-end-of-the-world-fear trade score for 2013 YTD is:

  1. US Equity Volatility Fear Index (VIX) = crashing -32.4% YTD
  2. Gold = crashing -23.6% YTD
  3. UST 10yr Bonds Yields = +54% YTD

In other words, there was this Weird Bubble in fear-mongering that consensus got sucked into last year that popped as everyone trying to call the top in a said “US stock market bubble” ended up being a bubble themselves.

 

US stock market bears hate that. Another way to measure their “hate” is how well short-interest has performed in 2013. As a “Style Factor”, High Short Interest stocks in the SP500 are currently +31.8% YTD, outperforming the SP500 by +570 basis points.

 

And that’s why I’ve been so quick to cover “growth” shorts throughout October. Holding the bag on a bubble of fear isn’t exactly how I roll. Neither is holding onto the long side of bubbles (like Gold and Bonds) that are still very much in crash mode.

 

My holding period on Gold was 72 hours. And I’m not going to apologize for that. I had my catalyst (Yellen being who she is) and I booked that small gain on the event day. I cut my “crazy eights” exposure to both US stocks and bonds in half on that too.

 

Bubble or no bubble. Weird or not weird. Mr. Macro Market couldn’t care less what we think about markets. He is designed to punish the largest amount of people (consensus) at the most inopportune time. So #GetActive out there, and keep moving.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.66-2.81%

SPX 1

VIX 11.91-14.35

USD 80.54-81.39

Brent 106.04-108.69

Gold 1

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Weird Bubbles - Chart of the Day

 

Weird Bubbles - Virtual Portfolio


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