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MONDAY MORNING RISK MONITOR: GRINDING HIGHER

Takeaway: Risk continues to fall in many key measures of the Financials complex. Fundamental measures are also improving.

Risk Monitor / Key Takeaways:

For a while now we've been flagging the particularly conducive environment for Financials on both the risk and fundamental fronts. This week remains the same. The setup remains favorable from both a short and intermediate term trend standpoint. A few of the callouts include ongoing stability/further increases in the 2-10 spread, ongoing stability and even marginal tightening in Euribor-OIS and even in the Shifon Index. Rising rates are also again becoming a general tailwind. We provide a brief summary below of some of the notable callouts across the various risk measures we track. 

 

* U.S. Financial CDS -  Another good week for the US Financials with swaps tightening 4 bps, on average. Large caps were leaders, tightening by 4-8 bps across the board.

 

* European Financial CDS - Europe's banks resume their winning ways, dropping an average of 8 bps W/W. Italian, Spanish and UK banks led the charge lower.

 

* 2-10 Spread – Last week the 2-10 spread widened to 246 bps, 5 bps wider than a week ago. 

 

 

Financial Risk Monitor Summary

 • Short-term(WoW): Positive / 6 of 13 improved / 0 out of 13 worsened / 7 of 13 unchanged

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

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

 

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1. U.S. Financial CDS -  Another good week for the US Financials with swaps tightening 4 bps, on average. Large caps were leaders, tightening by 4-8 bps across the board.

 

Tightened the most WoW: JPM, BAC, GS

Widened the most WoW: MMC, TRV, CB

Tightened the most WoW: MBI, AGO, WFC

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

 

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2. European Financial CDS - Europe's banks resume their winning ways, dropping an average of 8 bps W/W. Italian, Spanish and UK banks led the charge lower.

 

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3. Asian Financial CDS - Asia was tighter almost across the board, save for one Indian bank (+2 bps). 

 

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4. Sovereign CDS – Sovereign swaps were mixed last week with the biggest up moves in the US (+5 bps) and Ireland (+4 bps) and the biggest down moves in Spain (-9 bps) and Portugal (-7 bps).

 

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5. High Yield (YTM) Monitor – High Yield rates fell 4.6 bps last week, ending the week at 6.00% versus 6.05% the prior week.

 

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6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 1.0 point last week ending at 1829.

 

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7. TED Spread Monitor – The TED spread fell 0.4 basis points last week, ending the week at 16.3 bps this week versus last week’s print of 16.71 bps.

 

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8. CRB Commodity Price Index – The CRB index rose 0.6%, ending the week at 275 versus 273 the prior week. As compared with the prior month, commodity prices have decreased -2.3% 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 tightened by 2 bps to 9 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 fell 57 basis points last week, ending the week at 3.89% versus last week’s print of 4.45%. 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 84 bps versus 85 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 0.3% last week, or 11 yuan/ton, to 3532 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 246 bps, 5 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 0.8% upside to TRADE resistance and 1.9% downside to TRADE support.

 

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Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


Overbought & Oversold...

Client Talking Points

YEN

The Yen is signaling oversold versus the US Dollar as the Nikkei signals immediate-term TRADE overbought. The Nikkei is up 1.5% to +52.6% year-to-date. #Boom. With CFTC futures/options net short position hitting new highs of -110,309 contracts, buy/cover Yen versus the US Dollar.

DAX

Germany is straight up +0.9% to register fresh new highs this morning. It's also signaling immediate-term TRADE overbought within its bullish TREND. See our Q413 #EuroBulls Global Macro Theme. Ping sales@hedgeye.com if you need access.

GOLD

Gold is down 1% to immediate-term TRADE oversold. We will be making the buy/cover call on that this morning with Gold down -27% year-to-date and gold bulls capitulating alongside John Paulson with net long position crashing another -20% last week (futures/options).

Asset Allocation

CASH 44% US EQUITIES 10%
INTL EQUITIES 10% COMMODITIES 6%
FIXED INCOME 6% INTL CURRENCIES 24%

Top Long Ideas

Company Ticker Sector Duration
FXB

Our bullish call on the British Pound was borne out of our Q4 Macro themes call. We believe the health of a nation’s economy is reflected in its currency. We remain bullish on the regime change at the BOE, replacing Governor Mervyn King with Mark Carney. In its October meeting, the Bank of England voted unanimously (9-0) to keep rates on hold and the asset purchase program unchanged.  If we look at the GBP/USD cross, we believe the UK’s hawkish monetary and fiscal policy should appreciate the GBP, as Bernanke/Yellen continue to burn the USD via delaying the call to taper.

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.

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

Ignorant people are more likely to doubt the truth of facts that contradict their beliefs. @UberFacts

QUOTE OF THE DAY

"Anytime you play a contest that you keep score in, there should be a winner and a loser" - Mike Ditka on tie games

STAT OF THE DAY

U.S. Stocks hit all-time highs last week with the S&P 500 up +26.5% and the Russell 2000 +32.4% year-to-date. Meanwhile, US Equity Volatility (VIX) made a higher-low, closing +0.6% on the week at 12.26 (down -32% YTD).



investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

Understanding Markets

“Anyone who isn’t confused doesn’t really understand the situation.”

-Edward R. Murrow

 

That was the closing quote from David Einhorn’s most recent quarterly letter. I can’t think of one that better summarizes where we are right now in understanding markets. So I’ll leave it at that.

 

Back to the Global Macro Grind

 

While he’s been quite adept at not violating Rule #1 of investing (don’t lose money), that doesn’t mean Einhorn shies away from writing about where he could make more money. One of those areas is high short interest stocks.

 

From a Hedgeye Style Factoring perspective, last week was the 1st week of 2013 where SHORT INTEREST (as a style factor) diverged versus its TREND. We look at these style factors by quartile in the SP500:

  1. HIGH SHORT INTEREST (as a style factor) was -0.5% last week
  2. LOW SHORTS INTEREST (as a style factor) was +0.8% last week

In other words, if you’re short company that hedge fund consensus (high short interest) doesn’t like, the stock actually had a good chance of going down last week. Look at Tesla (TSLA). That’s new.

 

What wasn’t new vs. intermediate-term macro TRENDs last week?

  1. US stocks closing at another all-time high (SP500 = 1804, +26.5% YTD)
  2. #RatesRising on the 10 yr US Treasury Yield (+4 bps w/w to 2.74% = +99 bps YTD)
  3. Rate Sensitive “asset classes” (like Gold and REITS) going down on that

In fact, “rate sensitive” was really sensitive last week:

  1. MSCI REITS (real estate) Index lost another -2.2% going to FLAT 0.0% return for 2013 YTD
  2. Gold was down another -3.4% on the wk to -26.3% for 2013 YTD

And, to be clear, all those pundits who told you that #RatesRising (tapering) was going to spell the #EOW (end of the world) were dead wrong this year. Wrong is as wrong does.

 

Would you be wrong to buy anything “rate sensitive” on sale today? Buying any of Bernanke’s Yield Chasing Bubbles is not for the faint of heart. While he won’t acknowledge the mother of all global commodity inflations (2011-2012), history’s score will.

 

For the YTD here are your Top 5 Deflating of Bernanke’s Inflations moves:

  1. Silver -34.6%
  2. Coffee -33.0%
  3. Corn -29.6%
  4. Gold -26.3%
  5. Coal -20.3%

I know. I know. At the all-time high in world food prices (2012), there was NO INFLATION. More Jelly Donuts, please.

 

At the all-time high in commodity inflation expectations (2011), check out our Chart of The Day: the net length of the CFTC (Commodities Futures Trading Commission) non-commercial net long positioning in Gold spanning Bernanke’s tenure as Fed overlord:

  1. John Paulson launches his Gold fund 2010
  2. EXPECTATIONS PEAK = August 2nd, 2011 = +289,000 net long Gold contracts
  3. SPOT GOLD PRICE PEAK ($1900.20) = September 5th, 2011

Last week’s net long position in Gold fell below < 75,000 net long contracts for only the 2nd time since 2008. Down -15% week-over-week to +71,840 net long contracts, that’s down -75% from the expectations peak (not to be confused with the price inflation peak).

 

Expectations, as Shakespeare wrote, are the root of all heartache. And my guess is that those shorting Gold -1% this morning will have some heartache of their own when we get back from Thanksgiving. So get all wild and crazy today, and buy yourself some. It’s “cheap-(er)”!

 

What is not confusing about Gold is that it trades on expectations. When the market expected interest rates to rise into their YTD peak (January-July 2013), it went down; when the market expected rates to fall (July-September 2013 into no-taper), Gold went up.

 

Oh, and if you are confused as to whether or not our central planning overlords will allow #RatesRising (and Gold falling) from today’s time/price, join the club. Because, eventually, the Fed may very well lose control of that expectation too.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.69-2.83%

SPX 1

VIX 11.85-13.62

USD 80.54-81.29

Brent 106.25-111.24

Gold 1

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Understanding Markets - Chart of the Day

 

Understanding Markets - Virtual Portfolio


THE M3: SJM COTAI; CASINO JAI ALAI

THE MACAU METRO MONITOR, NOVEMBER 25, 2013

 

 

SJM AWAITS VERDICT ON A SECOND COTAI BLOCK Macau Business

SJM expects the government to update the company soon on its request for a second block of land in Cotai.  “We are still waiting for that lot and we hope to hear from the Macau government soon. We have submitted our plans there, but we are waiting for a reply,” CEO Ambrose So said.  The extra land the company wants is thought to be near the Studio City casino.  In May, the government granted SJM the right to develop more than 70,000 square metres of land near the Macau Dome.

 

SJM COTAI PROJECT MODEL TO BE PRESENTED EARLY NEXT YEAR Macau Daily Times

SJM CEO Ambrose So said that they are going to publicize the ideas behind the conceptualization of their Cotai project.  He disclosed that they are currently improving the condition of the soil, and will have to fully analyze it.  He also revealed that the project is almost finished and is awaiting the government’s approval to begin construction.  So hopes that the project can start in 1Q 2014.

 

SJM CONFIRMS LEASEBACK DEAL FOR CASINO JAI ALAI Macau Business

Casino Jai Alai, until last year thought to be wholly owned by SJM Holdings Ltd, will be leased back to the company for the next three years.  SJM Holdings told the Hong Kong Stock Exchange that the deal means a company controlled by businesswoman Angela Leong On Kei would receive up to HK$180 million (US$23.2 million) a year for three years from January 1.


November 25, 2013

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BULLISH TRENDS

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BEARISH TRENDS

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