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MONDAY MORNING RISK MONITOR: COOLING OFF

Takeaway: The positive momentum of the risk monitor data we track cooled a bit in the most recent week but remains on the right track.

Risk Monitor / Key Takeaways:

 

* 2-10 Spread – Last week the 2-10 spread reached its widest level since the summer of 2011 at 255 bps, 9 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

* European Financial CDS - Swaps were wider across the board in European banks with the exception of Greece, where swaps tightened for all three banks we track. The median increase was +14 bps with the largest relative widening occurring in France and Austria.

 

* CRB Commodity Price Index – The CRB index rose 1.9%, ending the week at 279 versus 274 the prior week. As compared with the prior month, commodity prices have increased 2.0% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

 

Financial Risk Monitor Summary

 • Short-term(WoW): Negative / 2 of 13 improved / 5 out of 13 worsened / 6 of 13 unchanged

 • Intermediate-term(WoW): Positive / 6 of 13 improved / 2 out of 13 worsened / 5 of 13 unchanged

 • Long-term(WoW): Positive / 4 of 13 improved / 3 out of 13 worsened / 6 of 13 unchanged

 

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1. U.S. Financial CDS -  Swaps across US Financials were relatively unchanged last week, though the mortgage insurers saw sharp improvements, with MTG and RDN swaps dropping 35 and 46 bps, respectively. 

 

Tightened the most WoW: TRV, RDN, MTG

Widened the most WoW: JPM, AXP, COF

Tightened the most WoW: MBI, C, WFC

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

 

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2. European Financial CDS - Swaps were wider across the board in European banks with the exception of Greece, where swaps tightened for all three banks we track. The median increase was +14 bps with the largest relative widening occurring in France and Austria.  

 

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3. Asian Financial CDS - Asia was mixed last week, with Chinese swaps wider by an average of 4 bps while India's banks widened by 2 bps, on average. Japanese Financials were mixed, but generally modestly lower. The main trend in Asia worth keeping an eye on is Indian bank swaps, which remain sharply higher on a month-over-month basis.

 

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4. Sovereign CDS – Sovereign swaps were wider around the globe last week with the sole exception of Japan (-1 bp). Portugal and Spain led the charge higher, rising 19 and 13 bps, respectively. The US, Germany and France were little changed. 

 

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5. High Yield (YTM) Monitor – High Yield rates rose 8.8 bps last week, ending the week at 6.02% versus 5.93% the prior week.

 

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6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 1 point last week, ending at 1830.

 

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7. TED Spread Monitor – The TED spread rose 0.2 basis points last week, ending the week at 18.3 bps this week versus last week’s print of 18.11 bps.

 

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8. CRB Commodity Price Index – The CRB index rose 1.9%, ending the week at 279 versus 274 the prior week. As compared with the prior month, commodity prices have increased 2.0% 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 2 basis points last week, ending the week at 3.70% versus last week’s print of 3.72%. 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 widened 2 bps, ending the week at 83 bps versus 81 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 rose 0.4% last week, or 15 yuan/ton, to 3552 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 255 bps, 9 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 1.4% upside to TRADE resistance and 1.3% downside to TRADE support.

 

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Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


December 9, 2013

December 9, 2013 - josie


December Taper? Doubtful.

Client Talking Points

UST 10YR

10-Year Treasury yield down a beep this morning to 2.85% (and making a lower-high versus the year-to-date high in September when Bernanke went no-taper). So, if I have to handicap what the bond market thinks versus consensus “economists” (Bloomberg survey just went from 17% on December-taper to 34%), its still no-taper (there’s a -133,201 net short position in CFTC futures/options on the 10-year).

US DOLLAR

The Greenback is down for four straight weeks as Bernanke/Yellen devalue the Dollar. The Euro continues to breakout versus the US Dollar. So on the margin, the currency market thinks no December-taper too, despite there being a bigger net long position in USD than EUR currently.

GOLD

At +26,774 contracts, this is the lowest net long position (CFTC data) since June of 2007. It sounds about right now that 3.6% US GDP and #RatesRising are old news for 2013. If and when US growth slows in the next 3-6 months Gold could be a good contrarian long if the June 2013 lows of $1200 hold.

Asset Allocation

CASH 38% US EQUITIES 12%
INTL EQUITIES 14% 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

Yield Spread (10yr minus 2yr) is a healthy +255bps wide - bullish for the Financials $XLF @HedgeyeFIG

QUOTE OF THE DAY

"The reasonable man adapts himself to the world; the unreasonable one persists in trying to adapt the world to himself." - George B Shaw

STAT OF THE DAY

China's annual consumer inflation unexpectedly slowed to 3% in November from an eight-month high of 3.2%, according to the National Bureau of Statistics, easing market fears of any imminent policy tightening as authorities meet this week to outline their policy and reform priorities for 2014. (CNN)


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Prosperity's Threat

“History tells us that the threat to prosperity is not debt but socialism.”

-George Gilder

 

After a +3.6% US GDP print and back to back bullish monthly surprises on the US employment front, you’d think that America’s currency would get a bid. Nope. Why?

 

Irrespective of December-taper “odds” doubling last week (34% of “economists” in the Bloomberg survey think DEC-taper = #on versus 17% prior), Mr. Macro Market is still telling you that Ben Bernanke will devalue the Dollar for as long as he can.

 

Since the Fed is both un-elected and unaccountable, would you call this socialism? Whatever you want to call it, not letting free-market prices clear is a threat to the long-term economic prosperity of this country. So make sure to sell some stuff high on that.

 

Back to the Global Macro Grind

 

After 5 consecutive down days, the 2013 US stock market bears got ripped for a +1.12% move on Friday. You either bought-the-damn-bubble #BTDB on red during the -1.2% five-day correction, or you did not. We call this managing the risk of the range.

 

If @FederalReserve continues to debauch the Dollar, the makeup of what works on US stock market up days will start to change. This is what happened in 2011 in particular. It’s also what happened last week:

  1. Utilities (XLU) = +1.1% on the week
  2. Consumer Discretionary (XLY) = -0.7% on the week

In other words, Policies to Inflate slow the expectations of future real-inflation-adjusted-economic-growth. This is not new to anyone who lives in the real world – it just annoys the Keynesians.

 

Here’s another way to look at inflation expectations rising in the face of US purchasing power falling:

  1. US Dollar Index down another -0.5% last week (down 4 straight weeks) to +0.7% YTD
  2. CRB Commodities Index (19 commodities) +1.4% last week to -5.5% YTD

In other words, if the market expects the Fed to devalue the value of money, it will start to bid up the prices of things you buy with those moneys. Venezuela burned its currency at the stake. Its stock market index is now 2,597,592.25 (+451% YTD). #Cool, eh?

 

Obviously the USA going back to where we were in 2011-2012 (weak currency and nothing sustainable to speak of from a real-economic growth perspective), would be bad. I don’t doubt, for one second, that the Fed can perpetuate that.

 

To review why we were bullish on US #GrowthAccelerating in 2013:

  1. PURCHASING POWER: US Dollar was baking in A) fiscal sequestration and B) tapering well into Q313
  2. INFLATION: #StrongCurrency + #RatesRising would Deflate The Inflation (CPI surprised consensus on the downside)
  3. GROWTH: from 0.14% in Q412 to +3.6% in Q313, and business expectations cycle took hold

And yes, as business and consumer confidence rose in Q3, fixed investment and inventories rose. It’s called a cycle. So did the Savings Rate (5.0% in Q3 vs 4.7% in the prior report). When people have more money, they have more to save too!

 

The other thing that happened in Q313 that got zero attention from the disingenuous (whining) 2013 perma bears last week was that the DEFLATOR in the US GDP report actually understated GDP growth by almost 0.3%.

 

After almost hitting a 40-yr low in Q2 (yes that was stimulative for US consumption growth, like it was in Q109), the US GDP Deflator was 1.96%. That was more than a double, sequentially, and +24 basis points higher than MIT’s Billion Prices Project inflation rate of 1.72%.

 

*higher deflator (i.e. more inflation) subtracts from reported GDP growth

 

Put another way, in our GIP (GROWTH, INFLATION, POLICY) model, provided that the Fed doesn’t taper in December, you can pretty much bake the opposite call we’ve had in the last year into the cake:

  1. US DOLLAR could start to see more downward pressure into Q114
  2. INFLATION (both CPI and PPI headline) should bottom, sequentially, in Q413 (rise in Q1)
  3. GROWTH should slow, sequentially, in Q413-Q114, in kind

So what do you do with that? That’s easy. Buy “slower-growth” assets and some inflation protection.

 

We also like the prospects for European #GrowthAccelerating (see our Q413 #EuroBulls Macro Theme) if EUR/USD continues to strengthen like it did again last week (+0.8% to +3.9% YTD).

 

You might call some Europeans socialists; but they might just call Americans that now too.

 

Our immediate-term Risk Ranges are now (we have 12 Big Macro Ranges in our Daily Trading Range product):

 

UST 10yr yield 2.79-2.91%

SPX 1

VIX 12.23-14.91

USD 80.09-80.63

EUR/USD 1.35-1.37

Gold 1

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Prosperity's Threat - Chart of the Day

 

Prosperity's Threat - Virtual Portfolio


THE M3: RWS EXEC FINED; SMOKING ZONES

THE MACAU METRO MONITOR, DECEMBER 9, 2013

 

 

SECOND RWS EXECUTIVE FINED FOR PROVIDING MISLEADING INFORMATION Strait Times

A second Resorts World Sentosa (RWS) executive was dealt with on Friday for her part in misleading the Casino Regulatory Authority (CRA) over the issuance of freebies to gamblers who renewed their annual entry levies.  Sim Bee Ling, 31, who is also known as Chernie, was fined $20,000. She had pleaded guilty last week to instructing team leader Thien Lai Foo in mid 2011 to use correction fluid and erase all mention of the giving of Universal Studios Singapore (USS) tickets for annual levy renewals in a briefing book, which is used to communicate instructions to the next shift of employees.

 

DEADLINE LOOMS FOR PROPOSING CUTS TO SMOKING ZONES Macau Business

Casinos and slot machine parlours that failed the most recent air quality tests have until tomorrow to submit plans to reduce the size of their smoking areas, the Health Bureau says.  The 16 gaming establishments that failed the second round of tests must trim their smoking areas by 10%.  The bureau is still awaiting proposals from 14 gaming establishments.


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