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MONDAY MORNING RISK MONITOR: QUIET HEADING INTO THE NEW YEAR

Takeaway: The latest week of data showed a continuation of the prior week's cooling trend.

Risk measures remain benign overall, hence the title of this week's note. Rising commodity prices are one of the few negative developments. In the last month commodity prices have risen 2.1% with oil now playing a more notable role in that increase. That being said, we continue to see few red flags across the risk landscape. 

 

Financial Risk Monitor Summary

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

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

 • Long-term(WoW): Positive / 4 of 13 improved / 2 out of 13 worsened / 7 of 13 unchanged

 

MONDAY MORNING RISK MONITOR: QUIET HEADING INTO THE NEW YEAR - 15

 

1. U.S. Financial CDS -  Swaps were generally tighter for US Financials last week, but widened significantly at bond insurers MBIA and Assured Guaranty. Mortgage Insurers MTG & RDN were tighter on the week with Radian posting the largest one week improvement at -19 bps.

 

Tightened the most WoW: RDN, COF, PRU

Widened the most WoW: MBI, AGO, CB

Tightened the most WoW: RDN, WFC, TRV

Widened the most MoM: AGO, MBI, XL

 

MONDAY MORNING RISK MONITOR: QUIET HEADING INTO THE NEW YEAR - 1

 

2. European Financial CDS - European banks resumed their winning ways last week, posting another sharp improvement. Spanish and Italian bank swaps led the charge lower. On a month-over-month basis, the average EU bank is trading 17 bps tighter (9%) tighter.

 

MONDAY MORNING RISK MONITOR: QUIET HEADING INTO THE NEW YEAR - 2

 

3. Asian Financial CDS - Indian banks remain the yo-yo of international banking systems. This week swaps were down sharply across the Indian banking complex. Chinese bank swaps have been trending slowly tighter. Japanese bank swaps were notably tighter on the week.

 

MONDAY MORNING RISK MONITOR: QUIET HEADING INTO THE NEW YEAR - 17

 

4. Sovereign CDS – Sovereign swaps were tighter throughout much of Europe last week. Italy and Spain saw sovereign swaps tighten 17 and 15 bps, respectively. Elsewhere in the world, swaps were little changed.

 

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MONDAY MORNING RISK MONITOR: QUIET HEADING INTO THE NEW YEAR - 4

 

5. High Yield (YTM) Monitor – High Yield rates rose 1.4 bps last week, ending the week at 6.03% versus 6.02% the prior week.

 

MONDAY MORNING RISK MONITOR: QUIET HEADING INTO THE NEW YEAR - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 2.0 points last week, ending at 1832.

 

MONDAY MORNING RISK MONITOR: QUIET HEADING INTO THE NEW YEAR - 6

 

7. TED Spread Monitor – The TED spread fell 0.2 basis points last week, ending the week at 18.1 bps this week versus last week’s print of 18.3 bps.

 

MONDAY MORNING RISK MONITOR: QUIET HEADING INTO THE NEW YEAR - 7

 

8. CRB Commodity Price Index – The CRB index rose 0.6%, ending the week at 280 versus 278 the prior week. As compared with the prior month, commodity prices have increased 2.1% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

MONDAY MORNING RISK MONITOR: QUIET HEADING INTO THE NEW YEAR - 8

 

9. Euribor-OIS Spread – The Euribor-OIS spread widened by 1 basis point to 10 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. 

 

MONDAY MORNING RISK MONITOR: QUIET HEADING INTO THE NEW YEAR - 9

 

10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index fell 24 basis points last week, ending the week at 3.46% versus last week’s print of 3.7%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.

 

MONDAY MORNING RISK MONITOR: QUIET HEADING INTO THE NEW YEAR - 10

 

11. Markit MCDX Index Monitor – Last week spreads widened 7 bps, ending the week at 90 bps versus 83 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.

 

MONDAY MORNING RISK MONITOR: QUIET HEADING INTO THE NEW YEAR - 11

 

12. Chinese Steel – Steel prices in China rose 0.5% last week, or 16 yuan/ton, to 3,568 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

 

MONDAY MORNING RISK MONITOR: QUIET HEADING INTO THE NEW YEAR - 12

 

13. 2-10 Spread – Last week the 2-10 spread tightened 1 basis point to 254 bps. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR: QUIET HEADING INTO THE NEW YEAR - 13

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.8% upside to TRADE resistance and 1.2% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: QUIET HEADING INTO THE NEW YEAR - 14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


"Mortgage Mayhem" - Larry Platt Will Discuss the Implications of Coming 2014 Rule Changes

"Mortgage Mayhem" - Larry Platt Will Discuss the Implications of Coming 2014 Rule Changes - Platt

 

Mortgage Mayhem?

Please join the Hedgeye Financials Team, Josh Steiner and Jonathan Casteleyn for a candid conversation with industry authority Larry Platt on the Implications of Forthcoming Rule Changes in 2014.

 

Tomorrow, December 17th at 1:00 pm EST we will host our next installment in the Hedgeye Financials Thought Leader Roundtable Series. Our guest will be mortgage industry authority Larry Platt from the law firm of K&L Gates.  

 

 

KEY TOPICS WILL INCLUDE:

  1. From where will the loans come? By virtually all accounts, limiting lending to QM lending will freeze out a large swath of the next generation of home buyers.  
    • Who wants to invest in an industry where the volume just isn't there?  What is the likelihood that lending will occur outside of the QM/QRM box?
  2. Is secured lending dead? Have the dramatic increases in servicing requirements and the virtual infeasibility of foreclosing on a delinquent borrower converted a secured loan to an unsecured loan and is the typical interest rate on a mortgage loan with an unenforceable mortgage too low to take the risk?  
    • Note that there now is a federal cause of action to stop a foreclosure based on an alleged violation of the ability to repay requirements, loan originator comp restriction and certain of the new servicing regs. Do servicers get paid enough to handle default servicing? What impact has this had on the servicing market?
  3. Is it too dangerous to do business with the federal government?  For anybody who thinks non-QM lending is risky, some believe that making and servicing FHA-insured loans is probably the riskiest thing out there these days.   
    • Imprecise rules with uneven application and political enforcement is a recipe for a financial bloodbath.  Many of the private investors believe that FHA lending and servicing is simply too risky.   
    • Unlike the risk of expropriation from third world countries, one can't buy political risk insurance to protect against the risks.  And to the extent that the GSEs are considered the government, the risk intensifies.
  4. Will the CFPB prevent you from making money? Some might want to applaud the relative even-handedness of the CFPB in both its rulemaking and supervisory efforts.  As we start to move more down the enforcement path, should we be so optimistic?   
    • This is particularly true with respect to the broad remedies available to the CFPB, including (i)  in certain circumstances its statutory rights to go upstream against owners and to assert aiding and abetting claims against third parties and (ii) virtually unfettered broad authority to bring UDAP claims.  Will it be balanced in its approach?
  5. When will the private securitization market return?  Where are we on GSE reform?  Hard to make or purchase loans if there is no ultimate take out investor?  
    • Even the most optimistic originators, who will build to anybody's specifications, can't or won't make loans that they ultimately can't sell.  Who wants to make a loan at par that it only can sell at a discount from par the next day?

 

ABOUT LARRY PLATT:

Larry Platt is a partner at K&L Gates LLP and concentrates his legal practice in representing purchasers and sellers of mortgage companies and mortgage-related assets, counseling clients on federal and state consumer credit laws, defending clients in government enforcement actions, and representing clients in governmental public policy matters. From 2007 to 2013, Chambers USA, an independent and research-based guide to the legal profession, ranked K&L Gates as having one of the leading financial services practices in the country. Most recently, the group earned a national, "Band 1" ranking for "Financial Services Regulation: Consumer Finance (Compliance & Litigation)." Mr. Platt is consistently ranked by Chambers USA and in 2013, he was listed under Financial Services Regulation: Consumer Finance (Compliance) (Star Individuals) and Financial Services Regulation: Consumer Finance (Litigation) (Band 1).  Mr. Platt was listed in the 2012, 2013 and 2014 Best Lawyers in America guides in the area of banking and finance law.

 

Representative Work: 

  • Bank of America: Sale of over $400 billion in mortgage servicing rights.
  • MetLife Bank: Sale of approximately $70 billion in mortgage servicing rights.
  • LaSalle Bank: Sale of capital stock of ABN AMRO Mortgage Group, Inc., including $240 billon in mortgage servicing rights.
  • Washington Mutual Bank: Sale of $140 billion in mortgage servicing rights to Wells Fargo Bank, N.A.
  • Barclays Bank PLC: Purchase of mortgage servicing business of HomEq Servicing Corporation, including $40 billion in servicing rights.
  • TD Banknorth, N.A.: Negotiation of "private label," origination outsource arrangement with PHH Mortgage Corporation.
  • KB Home: Sale of substantially all of the assets of mortgage company subsidiary to Countrywide Home Loans, Inc., along with execution of long term joint venture for future origination of mortgage loans.
  • GMAC Mortgage Corporation: Purchase of substantially all of the assets of a wholesale mortgage lender, Pacific Republic Mortgage Corporation.
  • The Principal Financial Group, Inc.: Sale of capital stock of Principal Residential Mortgage, Inc.
  • Merrill Lynch Mortgage Capital: Purchase of capital stock of loan servicer, Wilshire Credit Corporation.
  • Wells Fargo Home Mortgage Corporation: Purchase of servicing platform of GE Capital Mortgage Services, Inc., with a separate subserving platform, and purchase of approximately $35 billion in servicing rights from First Union Mortgage Corporation.

 

ABOUT K&L GATES:
K&L Gates LLP comprises more than 2,000 lawyers who practice in 48 offices located on five continents.  For the third year, K&L Gates was named among top two firms for first-tier rankings in the annual U.S. News-Best Lawyers "Best Law Firms" survey, In 2012, Corporate Board Member magazine, in association with FTI Consulting, Inc., ranked K&L Gates as one of the top 25 law firms in its annual list of "America's Best Corporate Law Firms." The 2013 BTI Consulting Group survey of corporate counsel included the firm in its "BTI Client Service 30," an elite ranking that recognizes the leading law firms in driving superior client relationships according to general counsel.

 

 

CONTACT

Please email  to learn more about this call. Attendance on the call is limited. Please note if you are not a current subscriber to our Financials research there will be a fee associated with this call.         


What's That Smell?

Client Talking Points

JAPAN

The problem with Bernanke's Buck Burning (for Japan) is that equals Yen up. And Yen up means Nikkei down. Witness Japanese stocks down 1.6% overnight after snapping its immediate-term TRADE line of @Hedgeye 15,242 support. The Net short (futures/options) position in Yen is -129,614 contracts. Currencies have consequences.

GERMANY

After another rock solid economic data point (German PMI for December rose to 54.2 versus 52.7 in November), they are back buying the DAX after it held @Hedgeye TREND support of 8876 last week. Euro up, DAX up was losing its correlation, so let’s watch this today.

EUR/USD

After a modest correction, the Euro continues to power forward again this morning. That makes sense – on the margin Q4 German data is better than the US data (still accelerating versus US #GrowthSlowing). Oh yeah, one other thing... they don’t have Bernanke or Janet Yellen.

Asset Allocation

CASH 44% US EQUITIES 8%
INTL EQUITIES 8% COMMODITIES 8%
FIXED INCOME 8% 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

WSJ says market "not in a bubble" - got it

@KeithMcCullough

QUOTE OF THE DAY

"Logic will get you from A to B. Imagination will take you everywhere." - Albert Einstein

STAT OF THE DAY

Investors are dumping gold-backed exchange-traded products at the fastest pace since the securities were created a decade ago, mirroring the steepest price drop in 32 years. Holdings in the 14 biggest ETPs plunged 31% to 1,813.3 metric tons since the start of January, the first annual decrease since the funds started trading in 2003. (Bloomberg)


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

December 16, 2013

December 16, 2013 - Slide1

 

BULLISH TRENDS

December 16, 2013 - Slide2

December 16, 2013 - Slide3

December 16, 2013 - Slide4

December 16, 2013 - Slide5

December 16, 2013 - Slide6

 December 16, 2013 - Slide7

December 16, 2013 - Slide8

December 16, 2013 - Slide9

 

BEARISH TRENDS

December 16, 2013 - Slide10

December 16, 2013 - Slide11
December 16, 2013 - Slide12

 


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – December 16, 2013

 

As we look at today's setup for the S&P 500, the range is 24 points or 0.47% downside to 1767 and 0.88% upside to 1791.                                         

                                                                                      

SECTOR PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

EQUITY SENTIMENT:

 

THE HEDGEYE DAILY OUTLOOK - 10                                                                                                                                                                  

 

CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 2.53 from 2.54
  • VIX  closed at 15.76 1 day percent change of 1.42

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Empire Manufacturing, Dec., est. 5 (prior -2.21)
  • 8:30am: Nonfarm Productivity, 3Q final, est. 2.80% (pr 1.9%)
  • 8:58am: Markit U.S. PMI Prelim., Dec., est. 54.8, pr 54.3
  • 9am: ECB’s Draghi speaks in Brussels
  • 9am: Total Net TIC Flows, Oct. (prior -$106.8b)
  • 9:15am: Industrial Production, Nov., est. 0.6% (pr -0.1%)
  • 2pm: Bernanke makes commemorative remarks at Fed Centennial

 GOVERNMENT:

    • Senate in session, House not in session
    • U.S., EU negotiators hold 3rd round of negotiations on Transatlantic Trade and Investment Partnership

WHAT TO WATCH:

  • AIG said to near sale of plane unit to AerCap for cash, stk
  • J&J said to get 3 diagnostics bids of at least $4b each
  • Mitsubishi Heavy, GE settle wind patent infringement cases
  • China manufacturing index unexpectedly falls as output slows
  • Euro-area manufacturing expands more than forecast on Germany
  • Budget deal lauded by lawmakers belies fiscal rigors ahead
  • Credit-card Nov. charge-offs, delinquencies reports today
  • Yahoo CEO apologizes to users for e-mail service problems
  • Japan Tankan shows limits on spending as cos. get cautious
  • China to probe pricing in antitrust drive, regulator says
  • Merkel keeps Schaeuble at Finance; von der Leyen to Defense
  • Draghi ally Asmussen to leave ECB board for German govt
  • Ukraine demonstrations surge; fractures hurt opposition
  • Google buys robotics co. Boston Dynamics, NY Times reports
  • Berry Petroleum, Linn Energy holders vote on acquisition
  • Charter said to ready offer letter for Time Warner Cable
  • Facebook, Wal-Mart using face recognition help write U.S. code
  • Amazon German workers to take protest to Seattle HQ
  • Baidu made to add warnings as regulators focus on China stks
  • London 2014 house price growth to slow as property tax looms

EARNINGS:

    • ChinaEdu (CEDU) 4:30pm, $0.86
    • FuelCell Energy (FCEL) After-mkt, $(0.03)

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Gold Funds See Unprecedented 31% Slump With World Losing Faith
  • Brent Crude Rises as Rebels Refuse to Open Libya’s Eastern Ports
  • Speculators Most Bullish Since October Before Drop: Commodities
  • Copper Reaches Six-Week High as Premium Signals Limited Supply
  • Gold Declines as Fed May Start Taper, ETP Holdings Seen Dropping
  • Wheat Extends Slump to 18-Month Low as Frost-Damage Risks Wane
  • Robusta Coffee Declines as Vietnam May Boost Sales Before Tet
  • Indonesia Ore Export Ban Seen Spurring Thousands of Job Cuts
  • Copper Market to Stay Broadly in Balance Next Year for Trafigura
  • Olam Survives Muddy Waters in Bond Comeback: Corporate Finance
  • Libya’s Oil Sales Constrained as Eastern Ports Remain Shut
  • Hedge Funds’ Natural Gas Bets Jump as Thermometer Drops: Energy
  • Utilities May Want Coal for Christmas as Gas Prices Surge 27%
  • Indonesia Ministers to Meet on Ore Export Ban Tomorrow: Hidayat

THE HEDGEYE DAILY OUTLOOK - 5

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - 6

 

GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 4

 

EUROPEAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 7

 

ASIAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 8

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - 9

 

 

The Hedgeye Macro Team

 

 

 

 

 

 

 

 

 

 

 

 

 



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