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European Banking Monitor: The Great Moderation

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .

 

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European Financial CDS - Swaps were almost universally tighter across European Financials last week with the sole exception of Greece, where swaps rose across the board. While the most recent week of tightening was somewhat modest, the past month of change has been remarkable. On average, European Financials have tightened up by 46 bps or roughly 21%. #EuroBulls

 

European Banking Monitor: The Great Moderation - vv.banks

 

Sovereign CDS – Sovereign swaps were mixed last week with notable improvements coming from Europe while the ROW was modestly wider. Portugal and Italy tightened by 8 and 9 bps, respectively. This trend of ongoing tightening among the PIIGS countries is reflective of our 4Q13 macro theme #EuroBulls. On a month-over-month basis, the only country in our monitor not to show improvement is the US.

 

European Banking Monitor: The Great Moderation - vv.cds1

 

European Banking Monitor: The Great Moderation - vv. cds2

 

European Banking Monitor: The Great Moderation - vv.cds3

 

Euribor-OIS Spread – The Euribor-OIS spread widened by 2 bps to 11 bps. As the chart below shows, however, the increase put the measure back in-line with its past month average and is not an indication of rising risk in Europe's banking system. 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. 

 

European Banking Monitor: The Great Moderation - vv.euribor

 

Matthew Hedrick

Associate


DAILY TRADING RANGES 12/2, REFRESHED

This note was originally published December 02, 2013 at 07:13 in Daily Trading Ranges

 

Editor's note: This is a complimentary look at Hedgeye's Daily Trading Ranges product. Every weekday morning before market open, subscribers receive our proprietary buy and sell levels on major markets, commodities and currencies. It's the ultimate edge for the smart, savvy trader. Click here to subscribe.

 

DAILY TRADING RANGES 12/2, REFRESHED - ja44

 

BULLISH TRENDS

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DAILY TRADING RANGES 12/2, REFRESHED - Slide9

 

BEARISH TRENDS

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NOVEMBER MARKET SHARE ANALYSIS

LVS rebounds but the details should look even better

 

  • Macau GGR grew over 21%, beating expectations once again
  • Hold likely held back LVS share.  Despite what we think was a low VIP hold month, LVS still maintained share trend due to a strong event calendar.  We expect that volume share increased and Mass revenue growth likely led the market in November.
  • Two Alicia Keys concerts and of course the Manny Pacquiao fight likely drove significant Mass gaming and non-gaming revenue growth.  Restaurants and retail was packed the last weekend of the month with some reports indicating 40% retail growth above a normal weekend.
  • A strong events push is proving to be a successful model for Venetian Macau and all of Sands China.  The Rolling Stones will perform in early March 2014 at the Venetian.
  • Wynn’s share uptick may be a result of an initial marketing push but it’s too early to know. We do expect some Mass market share gains at the property in the coming months.

NOVEMBER MARKET SHARE ANALYSIS - smm


investing ideas

Risk Managed Long Term Investing for Pros

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Keep An Eye on Volatility

Client Talking Points

VIX

What we're witnessing right now is front-month volatility continuing to make a series of higher-lows as the U.S. stock market year end performance chase delivers higher-highs on lower-volumes. This rarely ends well for those forced to buy and cover high. Don’t do that.

POUND

After another +0.9% week versus the US Dollar last week, the British Pound powers forward again this morning as the UK printed the best sequential PMI print for November in Europe (see 58.4 versus 56 in November). We like the Euro, but we like the Pound even more.

UST 10YR

The 10-Year Treasury Yield is up +5 basis points to 2.79% and Gold (still) does not like #RatesRising. The 10-year continues to frustrate people looking for a big breakout or breakdown as it simply trades in a 30 basis point range. This week should mark the high on US Growth consensus expectations. Incidentally, Q313 should be the top in GDP, and that’s reported on Thursday.

Asset Allocation

CASH 58% US EQUITIES 4%
INTL EQUITIES 4% COMMODITIES 4%
FIXED INCOME 4% INTL CURRENCIES 26%

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

Show me a strong currency running over Keynesian policy makers, and I'll show you a country I like @KeithMcCullough

QUOTE OF THE DAY

"The dictionary is the only place where success comes before work." - Mark Twain

STAT OF THE DAY

Heavy discounting took a toll on U.S. retail sales during the Thanksgiving weekend as shoppers spent almost 3% less than they did a year earlier. The National Retail Federation estimated the average shopper spent $407.02 over the weekend, or 3.9% less than during the same weekend last year, because of lower prices it said would persist through the rest of the season.



What Do You Care?

“If a science has an adjective, it probably isn’t a science.”

-Richard Feynman

 

As far as American physics goes, California’s Richard Feynman was as cool as cool gets. Above and beyond his brilliant contributions to the field, Feynman was a great communicator. His ability to teach reminded us how well he understood the subject matter.

 

Just before he passed away in 1988, Feynman left us with some behavioral thoughts and life lessons. One of the two books he published during the year of his death was titled What Do You Care What Other People Think?

 

“The book’s title is taken from a question his first wife, Arline, often put to him when he seemed preoccupied with his colleague’s opinions about his work.” (Wikipedia) Is there a better question for how your portfolio is positioned, every day?

 

Back to the Global Macro Grind

 

I certainly hope you don’t care what most “economists”  think about your portfolio. But I highly suggest you respect what Mr. Macro Market thinks. He can save you from missing the big obvious stuff.

 

One of the glaringly obvious things you should have cared about in 2013 was Mr. Macro Market’s phase transition to bucking up for GROWTH as an investment Style Factor. With the SP500 closing up another +2.8% in November, here are the YTD growth scores:

  1. LOW YIELD (Higher Growth) Stocks +41.3% YTD (vs High Yield, Slower Growth, Stocks +15.8%)
  2. TOP 25% EPS GROWTH Stocks (by SP500 quartile) +39.2% YTD
  3. HIGH BETA Stocks +37.9% YTD (vs Low Beta +23.3%)
  4. NASDAQ and Russell2000 +34.5% and +34.6%, respectively, YTD
  5. GOLD -25.9% YTD

In other words, being long the Gold Bond thing didn’t work like it did during the pervasively SLOW GROWTH 2010-2012 period of A) Interest Rate Repression B) Dollar Debauchery and C) Bernanke’s Policy To Inflate.

 

All it took to get growth expectations up (i.e. priced by Mr. Macro Market) were: 

  1. US Dollar that didn’t go down (US Dollar Index peaked at +6% YTD in July)
  2. Tapering Expectations = #RatesRising
  3. US GDP #GrowthAccelerating 

Oh, and you needed all 3 of those things to happen, all at the same time. In the absence of central planners trying to get in gravity’s way, even Keynesian “economists” call these pro-growth cycle moves “coincident” indicators.

 

No matter what the #EOW (end of the world) consensus view on US growth was 1 year ago today (when consensus “economists” expected +1.6% US GDP Growth and SP500 of 1528 for 2013), here we are – tracking closer to +3% US GDP growth and SP500 = 1800.

 

What did you care if #OldWall was off on GDP by almost 50% and the SP500 by 272 points? And what do you care about where consensus is today? Do you all of a sudden “buy growth”? Or is now precisely the time you should start to get out?

 

Using the same Hedgeye playbook (our GIP Model: Growth, Inflation, Policy):

  1. US GROWTH: odds that the slope of US Growth’s acceleration peaking in Q313 are rising
  2. US DOLLAR: whatever was left of USD strength continues to erode (down for 3 consecutive weeks)
  3. US RATES: 10yr Yield is signaling a lower-high vs the YTD high in US growth expectations (SEP 10yr of 2.97%)

All the while, from a purely quantitative modeling perspective, the SP500:

  1. PRICE is making higher-highs now on decelerating VOLUME (not good)
  2. VOLUME is trending down -9-14% versus our TREND based average into the “all-time highs” (not good)
  3. VOLATILITY (VIX) front month VIX continues to make a series of higher-lows (not good)

Up PRICE on down VOLUME and rising implied VOLATILITY as lagging GDP and employment data jams people into chasing the highs? Isn’t that just peachy.

 

But what do the central planners perpetuating Down Dollar and Rate Repression from here care? What do you care? Sadly, US currency and rate markets were only allowed to trade “freely” until the said “scientists” at the Fed said no-taper (SEP 18th), after all.

 

Our immediate-term Risk Ranges are now:

 

UST 10yr Yield 2.70-2.81%

SPX 1

VIX 13.01-14.19

USD 80.46-80.91

Pound 1.62-1.64

Gold 1

 

Best of luck out there today,

KM

 

What Do You Care? - Chart of the Day

 

What Do You Care? - Virtual Portfolio


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