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European Banking Monitor: Russia The Big Mover

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 - 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.

 

European Banking Monitor: Russia The Big Mover - zz. banks

 

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.

 

European Banking Monitor: Russia The Big Mover - z. sov1M

 

European Banking Monitor: Russia The Big Mover - z. sov2

 

European Banking Monitor: Russia The Big Mover - z. sov3

 

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. 

 

European Banking Monitor: Russia The Big Mover - z. euribor

 

Matthew Hedrick

Associate


TWTR: Covering Short...For Now

Takeaway: Downside catalysts too far out to remain short after the 4Q13 disappointment. Better entry point to emerge in the next 1-2 quarters.

SUMMARY BULLETS

  • Rebased Expectations: TWTR's 4Q13 Earnings Release exposed holes in 2 of its 3 growth drivers (user growth and engagement); continued weakness on both these fronts may be the expectation moving forward.

  • Near-Term Upside: While we believe the runway for its largest growth driver (monetization) is shorter than the street expects, it remains a considerable near-term growth driver as the mobile migration should drive upside to estimates in 1H14.  
  • Downside Catalysts Too Far Out: Now that the holes have been exposed in 2 of its 3 growth drivers, we do not see a near-term downside catalyst till monetization begins to materially slow, which we do not expect to occur until 2H14.  
  • Better Entry Point to Emerge: We see an asymmetric setup to the upside into the 1Q14 release, and suspect that consensus estimates and the stock could move higher near-term on refueled optimism.  That said, we're getting out of the way for now, but expect a better entry point will emerge on the short side in the next 1-2 quarters.    

SUMMARY CHARTS SERIES 

User Growth: Significant Slowdown in US User growth.  We suspect TWTR's US penetration is much higher than its MAU metrics suggest given that some users have joined and are no longer inactive.  Runway is shorter than many expect.

 

TWTR: Covering Short...For Now - TWTR   US User Growth 4Q13

TWTR: Covering Short...For Now - TWTR   US penetration scenario 4Q13

 

Engagement: Decelerated considerably in 4Q13. Management suggested this is partly due to Twitter interface improvements, but we believe users migrating to TweetDeck is also to blame.  We suspect the latter could a secular theme, which would pressure ARPU.

 

TWTR: Covering Short...For Now - TWTR    Timeline Views 4Q13

TWTR: Covering Short...For Now - Google Trend   Tweetdeck 3 14

 

Monetization: the Mobile Migration may have more immediate upside than we originally thought, although we suspect some of the 4Q13 acceleration is due the holiday shopping season.  

 

TWTR: Covering Short...For Now - TWTR   ARPU 4Q13

 

Hedgeye vs. Consensus: We see upside in the near term to consensus estimates, but we expect ARPU growth to materially slow beginning 2H14 as the mobile tailwind begins to subside.  With mobile now representing over 75% of all ad revenue, the comp setup switches from mobile representing the minority to the majority of revenue moving forward.    

 

TWTR: Covering Short...For Now - TWTR   Hedgey vs. Consensus 1Q14 4Q15

 

 

We provide more detail on our short thesis in our most recent note below.  If you would like to see additional work, or discuss in more detail, let us know.

 

TWTR: Staying Short, But...

02/07/14 04:55 PM EST

http://app.hedgeye.com/feed_items/33438

 

 

 

Hesham Shaaban, CFA

@HedgeyeInternet

 


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.

 

MONDAY MORNING RISK MONITOR: WEIGHING THE PROS & CONS - 6

 

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.

 

MONDAY MORNING RISK MONITOR: WEIGHING THE PROS & CONS - 13

 

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

 


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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."

 

 




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


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