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MONDAY MORNING RISK MONITOR: WEIGHING THE PROS & CONS

Takeaway: Commodity prices are the key risk to growth at this point, while interbank systemic risks seem to be subsiding for now.

Weighing the Pros & Cons:

The short-term setup in Financials remains mixed with five measures posting short-term improvement and three measures going the wrong way. The three areas of concern are commodity prices, high-yield rates and Chinese interbank risk. Of these, rising commodity prices is the measure we would ascribe the most significance to. We expect that today's rising commodity prices will begin weighing on economic growth in coming months and that should affect both the Fed's tapering calculus and the average consumer's spending decision process. 

 

On the other hand, two of the measures we had been concerned about for the last month, the TED Spread and Euribor-OIS, are both now flattening or improving suggesting that interbank risk in the US and Europe is now stabilizing. In light of the early-February EM scare and the ongoign situation in the Ukraine, it's noteworthy that these gauges of systemic risk are showing no further signs of upward trajectory. Also noteworthy is the fact that, in light of the Friday payroll report, the 2-10 yield spread widened out 9 bps last week and is now +4 bps on a month-over-month basis, which is positive for the Financials. That said, at 242 bps the yield spread remains well off its January 1, 2014 recent high of 265 bps. 

 

Key Points:

* 2-10 Spread – Last week the 2-10 spread widened to 242 bps, 9 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

* Euribor-OIS Spread – The Euribor-OIS spread tightened by 3 bps to 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. 

 

* CRB Commodity Price Index – The CRB index rose 1.9%, ending the week at 307 versus 302 the prior week. As compared with the prior month, commodity prices have increased 7.0% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

* High Yield (YTM) Monitor – High Yield rates rose 10.5 bps last week, ending the week at 5.71% versus 5.60% the prior week.

 

 

Financial Risk Monitor Summary

 • Short-term(WoW): Positive / 5 of 13 improved / 3 out of 13 worsened / 5 of 13 unchanged

 • Intermediate-term(WoW): Positive / 8 of 13 improved / 3 out of 13 worsened / 2 of 13 unchanged

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

 

MONDAY MORNING RISK MONITOR: WEIGHING THE PROS & CONS - 15

 

1. U.S. Financial CDS -  GS widened by 1 basis point and Sallie Mae widened by 6 bps, but aside from those two reference entities, swaps were mostly tighter week over week. Overall, swaps tightened for 20 out of 27 domestic financial institutions.

 

Tightened the most WoW: MBI, AGO, MTG

Widened the most WoW: ACE, AON, SLM

Tightened the most WoW: MBI, AGO, BAC

Tightened the least MoM: AON, ACE, XL

 

MONDAY MORNING RISK MONITOR: WEIGHING THE PROS & CONS - 1

 

2. European Financial CDS - The big mover in European swaps last week was Sberbank of Russia, which widened 72 bps to 286 bps from 214 bps. Russia's largest bank has often been a good indicator on geopolitical as well as commodity pressures. Elsewhere across Europe, the Financials were much more sanguine with broad-based improvement.

 

MONDAY MORNING RISK MONITOR: WEIGHING THE PROS & CONS - 2

 

3. Asian Financial CDS - Asian Financial swaps were tighter across the board last week as well with the exception of a few Japanese financials that were unchanged.

 

MONDAY MORNING RISK MONITOR: WEIGHING THE PROS & CONS - 17

 

4. Sovereign CDS – Sovereign swaps were tighter across the globe last week with the sole exception of the US, where swaps were unchanged at 30 bps. Europe put up broad-based improvement in spite of turmoil in peripheral Ukraine.

 

MONDAY MORNING RISK MONITOR: WEIGHING THE PROS & CONS - 18

 

MONDAY MORNING RISK MONITOR: WEIGHING THE PROS & CONS - 3

 

MONDAY MORNING RISK MONITOR: WEIGHING THE PROS & CONS - 4

 

5. High Yield (YTM) Monitor – High Yield rates rose 10.5 bps last week, ending the week at 5.71% versus 5.60% the prior week.

 

MONDAY MORNING RISK MONITOR: WEIGHING THE PROS & CONS - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 1.0 points last week, ending at 1851.

 

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7. TED Spread Monitor – The TED spread was unchanged last week at 18.8 bps this week versus last week’s print of 18.77 bps.

 

MONDAY MORNING RISK MONITOR: WEIGHING THE PROS & CONS - 7

 

8. CRB Commodity Price Index – The CRB index rose 1.9%, ending the week at 307 versus 302 the prior week. As compared with the prior month, commodity prices have increased 7.0% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

MONDAY MORNING RISK MONITOR: WEIGHING THE PROS & CONS - 8

 

9. Euribor-OIS Spread – The Euribor-OIS spread tightened by 3 bps to 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. 

 

MONDAY MORNING RISK MONITOR: WEIGHING THE PROS & CONS - 9

 

10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index rose 21 basis points last week, ending the week at 2.055% versus last week’s print of 1.846%. 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: WEIGHING THE PROS & CONS - 10

 

11. Markit MCDX Index Monitor – Last week spreads were unchanged at 73 bps. 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: WEIGHING THE PROS & CONS - 11

 

12. Chinese Steel – Steel prices in China were unchanged last week at 3,303 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: WEIGHING THE PROS & CONS - 12

 

13. 2-10 Spread – Last week the 2-10 spread widened to 242 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 1.1% upside to TRADE resistance and 2.3% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: WEIGHING THE PROS & CONS - 14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


LVS: REMOVING FROM INVESTING IDEAS

Takeaway: We are removing Las Vegas Sands (LVS) from Investing Ideas.

We are removing shares of Las Vegas Sands (LVS) from Investing Ideas. LVS was added on 1/31/13. Shares have risen over 9.5% during this time, more than doubling the 4.1% return for the S&P 500.


LVS: REMOVING FROM INVESTING IDEAS - las44


Hedgeye Gaming, Lodging & Leisure Sector Head Todd Jordan writes, "While Las Vegas Sands remains the best positioned company in all of gaming over the long-term in our opinion, we don’t see many near-term catalysts for continued stock price momentum.  Macau growth is decelerating, and while still strong, may not be enough to push LVS into further record territory."

 

Jordan adds that, "we would be buyers on any meaningful pullback as LVS occupies a unique position in the consumer sector:  significant cash flow generation, numerous high growth capital deployment opportunities, and a shareholder friendly management team now bent on returning cash to shareholders."

 

 




Early Look

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Bubbly: SP500 Levels, Refreshed

Takeaway: I might consider chasing the mo-mo on the upside, if the fundamental research view supported it – but it doesn’t.

POSITION: 11 LONGS, 10 SHORTS @Hedgeye

 

If the buck wasn’t burning and #InflationAccelerating wasn’t slowing US growth, I wouldn’t be selling on immediate-term TRADE overbought signals. Consensus hasn’t acknowledged the inflation impact on 2014 growth (yet), and I like that.

 

To call it a bubble isn’t a big deal. I called it a bubble when I was buying it all of last year (remember: #BTDB – buy-the-damn-bubble). What else would you call the all-time highs in prices?

 

Across our core risk management durations, here are the lines that matter to me most:

 

  1. Immediate-term TRADE overbought = 1888
  2. Immediate-term TRADE support = 1864
  3. Intermediate-term TREND support = 1805

 

In other words, why would you buy an overbought price if you have 4% mean reversion downside to the TREND line of 1805? I might consider chasing the mo-mo on the upside, if the fundamental research view supported it – but it doesn’t.

 

Let’s see if 1864 holds. Then we reset.

 

KM

 

Keith McCullough

Chief Executive Officer

 

Bubbly: SP500 Levels, Refreshed - SPX


ICI Fund Flow Survey, Refreshed

Takeaway: Equity mutual funds had $4.9 billion in inflow this week, in-line with the YTD average but bond inflow trends were higher than the '14 mean.

Editor's Note: This research note was originally published March 06, 2014 at 08:28 in Financials. For more information on you can subscribe to Hedgeye, please click here

Investment Company Institute Mutual Fund Data and ETF Money Flow:

 

In the most recent week, equity mutual funds had another solid inflow albeit just inline with the year-to-date averages with bonds funds showing improving subscriptions, well above the year-to-date mean.

 

ICI Fund Flow Survey, Refreshed - Wall Street

 

Total equity mutual funds produced another strong week of inflow with $4.9 billion of net subscriptions, a slight deceleration from the $5.8 billion inflow the week prior. The $4.9 billion inflow had a domestic bend during the most recent 5 day period, with $3.1 billion flowing into domestic equity funds and $1.8 billion flowing into international stock funds. The 2014 running weekly average inflow for equity mutual funds is now $4.9 billion, an improvement from the $3.0 billion weekly average inflow for 2013. 

 

Fixed income mutual funds also had net inflows during the 5 day period ending February 26th with $2.3 billion flowing into all fixed income funds. The breakout of improving bond fund inflow amounted to $1.6 billion into taxable products and a $667 million inflow into tax-free or municipal products, the 7th consecutive week of inflow into munis after 33 consecutive weeks of outflow. The 2014 weekly average for fixed income mutual funds now stands at a $751 million weekly inflow, an improvement from 2013's weekly average outflow of $1.5 billion but a far cry from the $5.8 billion weekly average inflow from 2012 (our view of the blow off top in bond fund inflow).

 

ETFs had mixed trends during the week, with a strong week of subscriptions in stock ETFs with $5.8 billion in net inflow with bond ETFs experiencing flat-ish trends with just $458 million of inflow. The 2014 weekly averages are now a $2.2 billion weekly outflow for equity ETFs and a $2.1 billion weekly inflow for fixed income ETFs. 

 

The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a positive $8.0 billion spread for the week ($10.8 billion of total equity inflow versus the $2.7 billion inflow within fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52 week moving average has been $7.0 billion (more positive money flow to equities), with a 52 week high of $30.9 billion (more positive money flow to equities) and a 52 week low of -$36.9 billion (negative numbers imply more positive money flow to bonds for the week). 

 

Continued strong equity mutual fund inflow trends currently support our favorite long idea in the sector, T Rowe Price (TROW) which should benefit with a leading retail equity mutual fund franchise. In addition, we recently added Legg Mason (LM) to our Best Ideas list on the long side to capture the emerging trends on the institutional side of the industry which is experiencing inflow into fixed income and outflow in equities (see our Legg report here).

 

Mutual fund flow data is collected weekly from the Investment Company Institute (ICI) and represents a survey of 95% of the investment management industry's mutual fund assets. Mutual fund data largely reflects the actions of retail investors. Exchange traded fund (ETF) information is extracted from Bloomberg and is matched to the same weekly reporting schedule as the ICI mutual fund data. According to industry leader Blackrock (BLK), U.S. ETF participation is 60% institutional investors and 40% retail investors.   

 

 

ICI Fund Flow Survey, Refreshed - ICI

 

 

Most Recent 12 Week Flow in Millions by Mutual Fund Product:

 

 

ICI Fund Flow Survey, Refreshed - ICI chart 2 png

 

ICI Fund Flow Survey, Refreshed - ICI chart 3 png

 

ICI Fund Flow Survey, Refreshed - ICI chart 4 png

 

ICI Fund Flow Survey, Refreshed - ICI chart 5 png

 

ICI Fund Flow Survey, Refreshed - ICI chart 6 png

 

 

Most Recent 12 Week Flow Within Equity and Fixed Income Exchange Traded Funds:

  

 

ICI Fund Flow Survey, Refreshed - ICI chart 7 png

 

ICI Fund Flow Survey, Refreshed - ICI chart 8 png

 

 

Net Results:

 

 

The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a positive $8.0 billion spread for the week ($10.8 billion of total equity inflow versus the $2.7 billion inflow within fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52 week moving average has been $7.0 billion (more positive money flow to equities), with a 52 week high of $30.9 billion (more positive money flow to equities) and a 52 week low of -$36.9 billion (negative numbers imply more positive money flow to bonds for the week). 

 

 

ICI Fund Flow Survey, Refreshed - ICI chart 9 png 

 

 

Continued strong equity mutual fund inflow trends currently support our favorite long idea in the sector, T Rowe Price (TROW) which should benefit with a leading retail equity mutual fund franchise. In addition, we recently added Legg Mason (LM) to our Best Ideas list on the long side to capture the emerging trends on the institutional side of the industry which is experiencing inflow into fixed income and outflow in equities (see our Legg report here).

 

 

 

 

Jonathan Casteleyn, CFA, CMT 

203-562-6500 

jcasteleyn@hedgeye.com 

 

Joshua Steiner, CFA

203-562-6500

jsteiner@hedgeye.com

 


MACAU: GOOD 1ST WEEK

A strong start to March with average daily table revenues (ADTR) of HK$1,206 million per day, up 16% from the comparable period last year.  Weekly ADTR should slow throughout the month.  Last year, ADTR declined 7% sequentially in each of the following weeks of March.  For the full month of March, we are projecting YoY of GGR (includes slots) growth of 13-17%, a deceleration from the combined YoY growth rate of 24% for January/February.  Underlying fundamentals remain just as strong, however, as the 1 and 2-yr comps for March are more difficult, +25% and 24%, respectively.

 

Market shares carry little weight this early in the month but WYNN and Galaxy are off to a great start.  

 

MACAU: GOOD 1ST WEEK - macau1

 

MACAU: GOOD 1ST WEEK - macau2


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