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European Banking Monitor: Espiritu Santo Sparks Fear of Widespread Credit Risk

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 wider across Europe's banking complex by an average of 12 bps, led by Portgugal's Espirito Santo which widened by 100 bps to 394 bps. Italian and Spanish banks also widened considerably.

 

Portugal's Espirito Santo Group continues to dominate news flow on the banking front. Both EU and US global bank swaps are widening sharply, and TED Spread is beginning to widen as well. For now, there appears to be no reason to assume that Espirito Santo's problems are widespread, but there is a rising level of uneasiness as investors ask how could this bank, which was under so much scrutiny for the last few years, suddenly be now having such problems? Perhaps more concerning is the fundamental macro slowdown that's taking place in much of the data across Europe.

 

European Banking Monitor: Espiritu Santo Sparks Fear of Widespread Credit Risk  - chart1 european financials cds

 

Sovereign CDS – Sovereign swaps widened sharply around the world, except for in the U.S. Leading the charge is Portugal, where CDS widened 65 bps w/w to 198 bps. Caught in Portugal's undertow were Italy and Spain, where swaps widened 10 and 12 bps, respectively. France and Germany were modestly wider at +3 and +2 bps as well. The U.S. tightened by 3 bps to 16 bps and is now 6 bps inside of Germany.

 

European Banking Monitor: Espiritu Santo Sparks Fear of Widespread Credit Risk  - chart 2 sovereign CDS

 

European Banking Monitor: Espiritu Santo Sparks Fear of Widespread Credit Risk  - chart 3 sovereign CDS

 

European Banking Monitor: Espiritu Santo Sparks Fear of Widespread Credit Risk  - chart 4 Sovereign CDS

 

Euribor-OIS Spread – 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. The Euribor-OIS spread tightened by 1 bps to 14 bps.

 

Matthew Hedrick

Associate

 

Ben Ryan

Analyst

 

 

 


MONDAY MORNING RISK MONITOR: PORTUGUESE RISK

Takeaway: Europe remains the center of the universe for now, and US banks are starting to get nervous.

Current Best Ideas:

MONDAY MORNING RISK MONITOR: PORTUGUESE RISK - 19

 

Key Callouts:

Portugal's Espirito Santo Group continues to dominate news flow on the banking front. Both EU and US global bank swaps are widening sharply, and TED Spread is beginning to widen as well. For now, there appears to be no reason to assume that Espirito Santo's problems are widespread, but there is a rising level of uneasiness as investors ask how could this bank, which was under so much scrutiny for the last few years, suddenly be now having such problems? Perhaps more concerning is the fundamental macro slowdown that's taking place in much of the data across Europe.   

 

The US banks are also seeing spreads widen. Citi and Morgan Stanley are wider on the week by 10 bps. We'll be keeping a close eye on Espirito Santo to see whether the situation is inflecting for better or worse.

 

 

Financial Risk Monitor Summary

 • Short-term(WoW): Negative / 2 of 12 improved / 7 out of 12 worsened / 3 of 12 unchanged

 • Intermediate-term(WoW): Negative / 2 of 12 improved / 9 out of 12 worsened / 1 of 12 unchanged

 • Long-term(WoW): Negative / 2 of 12 improved / 6 out of 12 worsened / 4 of 12 unchanged

 

MONDAY MORNING RISK MONITOR: PORTUGUESE RISK - 15

 

1. U.S. Financial CDS -  Large cap US banks widened an average of 7 bps last week, as fears around Portugal's crisis rippled across the Atlantic. Citi and Morgan Stanley were 10 bps wider each. 

 

Widened the least/ tightened the most WoW: AGO, TRV, TRV

Widened the most WoW: C, MS, MTG

Widened the least/ tightened the most WoW: ALL, TRV, AON

Widened the most MoM: MBI, AGO, WFC

 

MONDAY MORNING RISK MONITOR: PORTUGUESE RISK - 1

 

2. European Financial CDS - Swaps were wider across Europe's banking complex by an average of 12 bps, led by Portgugal's Espirito Santo which widened by 100 bps to 394 bps. Italian and Spanish banks also widened considerably.

 

MONDAY MORNING RISK MONITOR: PORTUGUESE RISK - 2

 

3. Asian Financial CDS - Bank swaps were slightly wider in China and India and mixed to tighter in Japan.

 

MONDAY MORNING RISK MONITOR: PORTUGUESE RISK - 17

 

4. Sovereign CDS – Sovereign swaps widened sharply around the world, except for in the U.S. Leading the charge is Portugal, where CDS widened 65 bps w/w to 198 bps. Caught in Portugal's undertow were Italy and Spain, where swaps widened 10 and 12 bps, respectively. France and Germany were modestly wider at +3 and +2 bps as well. The U.S. tightened by 3 bps to 16 bps and is now 6 bps inside of Germany.

 

MONDAY MORNING RISK MONITOR: PORTUGUESE RISK - 18

 

MONDAY MORNING RISK MONITOR: PORTUGUESE RISK - 3

 

MONDAY MORNING RISK MONITOR: PORTUGUESE RISK - 4

 

5. High Yield (YTM) Monitor – High Yield rates rose 9.6 bps last week, ending the week at 5.43% versus 5.34% the prior week.

 

MONDAY MORNING RISK MONITOR: PORTUGUESE RISK - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 1.0 point last week, ending at 1884.

 

MONDAY MORNING RISK MONITOR: PORTUGUESE RISK - 6

 

7. TED Spread Monitor – The TED spread fell 0.9 basis points last week, ending the week at 21.6 bps this week versus last week’s print of 22.51 bps.

 

MONDAY MORNING RISK MONITOR: PORTUGUESE RISK - 7

 

8. CRB Commodity Price Index – The CRB index fell -3.3%, ending the week at 297 versus 307 the prior week. As compared with the prior month, commodity prices have decreased -3.7% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

MONDAY MORNING RISK MONITOR: PORTUGUESE RISK - 8

 

9. Euribor-OIS Spread – 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. The Euribor-OIS spread tightened by 1 bps to 14 bps.

 

MONDAY MORNING RISK MONITOR: PORTUGUESE RISK - 9

 

10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index rose 36 basis points last week, ending the week at 3.3% versus last week’s print of 2.94%. 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: PORTUGUESE RISK - 10

 

11. Chinese Steel – Steel prices in China rose 0.2% last week, or 7 yuan/ton, to 3,132 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: PORTUGUESE RISK - 12

 

12. 2-10 Spread – Last week the 2-10 spread tightened to 207 bps, -6 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR: PORTUGUESE RISK - 13

 

13. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.6% upside to TRADE resistance and 0.7% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: PORTUGUESE RISK - 14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


Just Charts - Bullish Summer Charts

Investment Ideas

The table below lists our current investment ideas as well as a list of potential ideas we are in the process of evaluating (watch list).  We intend to update this table regularly and will provide detail on any material changes.

 

Just Charts - Bullish Summer Charts - cc.z

EVENTS THIS WEEK

7/17/14 PM Earnings Call 9am EST

WEEK-OVER-WEEK PERFORMANCE

Consumer Staples rose +0.4% week-over-week versus the broader market (S&P500) down -0.9 %.  XLP is up 5.3% year-to-date versus the SPX at 6.5%.

 

Positive Divergence:  ADM 4.5%; SAFM 3.8%; TSN 3.0%; LO 2.5%; MO 2.5%

Negative Divergence:  SODA -7.8%; NUS -4.6%; SMG -4.1%; THS -3.4%; HAIN -2.8%

RECENT NOTES 

XLP remains bullish on immediate term TRADE and intermediate term TREND durations from a quantitative set-up.

 Just Charts - Bullish Summer Charts - chart2

 

The Hedgeye U.S. Consumption Model shows 6 of the 12 U.S. Economic Indicators flashing green.

 Just Charts - Bullish Summer Charts - chart3

 

Despite the bullish quantitative set-up for the sector, we continue to believe that the group is facing numerous headwinds, including:

  • U.S. consumption growth is slowing as inflation rises, in-line with the Macro team’s 1Q14 theme of #InflationAccelerating, Q2 2014 theme of #ConsumerSlowing, and Q3 2014 theme of #Q3 Slowing
  • The economies and currencies of the emerging market – once the sector’s greatest growth engine – remain weak with the prospect of higher inflation in 2014 eroding real growth
  • The sector is loaded with a premium valuation (P/E of 20.0x)
  • Less sector Yield Chasing as Fed continues its tapering program
  • The high frequency Bloomberg weekly U.S. Consumer Comfort Index (rescaled for cosmetic and not component reasons) has not seen any real improvement over the past 6 months, but rose to 37.6 versus 36.4 in the prior week

Just Charts - Bullish Summer Charts - chart4

Just Charts - Bullish Summer Charts - chart5

Just Charts - Bullish Summer Charts - chart6

QUANTITATIVE SETUP

In the charts below we look at the largest companies by market cap in the Consumer Staples space from a quantitative perspective.

 

BUD – bullish TRADE and TREND w/ TREND support = 109.76

Just Charts - Bullish Summer Charts - chart7

 

DEO – bullish TRADE and TREND w/ TREND support = $124

Just Charts - Bullish Summer Charts - chart8

 

KO – bullish TRADE and TREND w/ TREND support = 40.72

Just Charts - Bullish Summer Charts - chart9

 

PEP – bullish TRADE and TREND w/ TREND support = 86.39

Just Charts - Bullish Summer Charts - chart10

 

GIS – bullish TRADE and TREND w/ TREND support = 52.13

Just Charts - Bullish Summer Charts - chart1111

 

MDLZ – bullish TRADE and TREND w/ TREND support = 36.32

Just Charts - Bullish Summer Charts - chart12

 

KMB – bullish TRADE and TREND w/ TREND support = 110.02

Just Charts - Bullish Summer Charts - chart13

 

PG – bullish TRADE and TREND w/ TREND support = 80.29

Just Charts - Bullish Summer Charts - chart144

 

MO – bullish TRADE and TREND w/ TREND support = 40.28

Just Charts - Bullish Summer Charts - chart15

 

PM – bearish TRADE (86.77 resistance); bullish TREND (84.82 support)

Just Charts - Bullish Summer Charts - chart16

 

Howard Penney

Managing Director

 

Matt Hedrick

Associate

 

Fred Masotta

Analyst


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.

Monday Mashup: YUM On Deck

Investment Ideas

The table below lists our Investment Ideas as well as our Watch List -- a list of potential ideas that we are in the process of evaluating.  We intend to update this table regularly and will provide detail on any material changes.

Monday Mashup: YUM On Deck - chart1

Recent Notes

07/07/14 Monday Mashup: Big Week for BOBE

07/09/14 BOBE: Ugly is Beautiful

07/10/14 PBPB: Staying Short

07/11/14 June: The Ugly Duck of 2Q

Events This Week

07/16/14 YUM earnings release AMC

07/17/14 YUM earnings call 9:15am EST

Chart of the Day

We continue to believe 2Q14 consensus SSS estimates are too aggressive.  Knapp and Black Box 2Q14 SSS estimates came in at -0.9% and +0.3%, respectively.

Monday Mashup: YUM On Deck - chart2

Recent News Flow

Monday, July 7th

  • YUM price target was raised to $94 from $87 at UBS.
  • BOBE issued a response to Sandell's latest release.  In the response, the company highlighted the activist's recent "omissions" and reiterated their commitment to finding a settlement solution.

Tuesday, July 8th

  • BJRI introduced a new Peanut Butter S'mores Pizookie.

Wednesday, July 9th

  • PLKI named Todd Burke as VP of Corporate Communications.  Mr. Burke has held prior roles at JetBlue Airways, Trans World Airlines, American Airlines and, most recently, Pacific Gas & Electric Company.  At Popeyes, Mr. Burke "will lead internal and external communications, and the public and government affairs function."
  • PBPB preannounced disappointing 2Q14 earnings and guided down full year estimates.  You can read more about this in our recent note "PBPB: Staying Short."

Thursday, July 10th

  • COSI appointed new CFO Scott Carlock, who will replace current CFO William Koziel.  Carlock comes over from Yum! Brands where he previously served as an executive, holding various finance and accounting roles over the past 13 years.

Friday, July 11th

  • EAT was downgraded to hold at Wunderlich Securities with a $52 PT.

Sector Performance

The XLY (-1.0%) underperformed the SPX (-0.9%) last week.  Both casual dining and quick service stocks, in aggregate, underperformed the narrower XLY Index, with casual dining being the biggest laggard of the two.

Monday Mashup: YUM On Deck - chart3

Monday Mashup: YUM On Deck - chart4

XLY Quantitative Setup

From a quantitative perspective, the sector remains bullish on an intermediate-term TREND duration.

Monday Mashup: YUM On Deck - chart5

Casual Dining Restaurants

Monday Mashup: YUM On Deck - chart6

Monday Mashup: YUM On Deck - chart7

Quick Service Restaurants

Monday Mashup: YUM On Deck - chart8

Monday Mashup: YUM On Deck - chart9

 

Howard Penney

Managing Director

 

Fred Masotta

Analyst


Time's Inner Logic

This note was originally published at 8am on June 30, 2014 for Hedgeye subscribers.

“Without cycles, time would literally defy any kind of description.”

-The Fourth Turning

 

From a performance reporting perspective, it’s both month and quarter end today. As William Straus and Neil Howe recently reminded me in The Fourth Turning, “The words year and hour come from the same root as the Greek horos (solar period)… and the word month is a derivative of moon.”

 

Time and price put more pressure on us than most things in this profession. We just need to take a few deep breaths every once in a while to contextualize both. “We need to recall that time, in its physical essence, is nothing but the measurement of cyclicality itself.” (The Fourth Turning, pg 13)

 

After one of the lowest volume months in US equity market history, where are market prices within the context of the future? What is the US economic cycle (and bond market) telling you vs. the US stock market’s last price? Does history matter?

 

Back to the Global Macro Grind

 

Straus/Howe do a good job arguing that most academics who are trying to become famous in the social sciences with “it’s different this time” are disrespecting time and space. “This scholarly rejection of time’s inner logic has led to the devaluation of history throughout our society” (pg 12).

 

While it might work in disruptive technologies, devaluing history, time, and cycles rarely works in Macro… “so”, let’s embrace the uncertainty born out of these measurable risk factors and get on with Q3.

 

One of the Top 3 Global Macro Themes we’ll roll with for Q314 (we’ll be hosting our Institutional Investor conference call next week) is simply going to be #Q3Slowing. US growth slowing, that is.

 

Nope, God didn’t call us this weekend. Here’s where we’re finding conviction in this out-of-consensus view:

 

  1. The Currency Market
  2. The US Bond Market
  3. The US Equity Market

 

Why?

 

  1. FX – US Dollar Index (down for 2 straight weeks) remains below both our TREND ($80.84) and TAIL ($81.19) risk lines of resistance
  2. TREASURIES – 10yr Yield -7bps last week (-49bps YTD) remains below both our TREND (2.81%) and TAIL (2.65%) risk lines of resistance
  3. US EQUITIES – slow-growth Utilities (XLU) were up another +1% last week to +15.6% YTD (Consumer Discretionary is still down YTD)

 

And those are just the quantitative signals (time/price) augmenting our baseline research views that:

 

  1. The Fed is perpetuating inflation via its #DownDollar Policy To Inflate
  2. As the Dollar declines, #InflationAccelerates and real-consumption growth slows
  3. As real-growth slows, inflation + slow-growth #YieldChasing strategies (long Bonds, Utilities, etc.) #win

 

Who cares if an ideological and un-elected central planning committee doesn’t get paid to acknowledge time and space? All you have to do is listen to Mr. Macro Market’s inner logic and you’ll beat your peers in generating risk adjusted returns.

 

Food prices (CRB Foodstuffs Index) were up another +0.5% to +23.5% YTD last week. Cattle led the charge on that front, closing up another +3.6% on the week to +25.9% YTD. Being long of that and short Del Frisco’s (DFRG) cost of goods sold (and traffic slowing) works for us.

 

Or how about being long the lover of all things slow-growth-#YieldsFalling, Gold?  Gold was up another +0.3% last week to +9.6% YTD (vs. the Dow +1.7% YTD). But, after 4 consecutive up weeks, you want to be buying ze #GrowthSlowing Gold on red, not green!

 

In a Fed Easing, Down Dollar, and #InflationAccelerating environment, there are so many places to put your money that I’ll run out of time and space in this morning’s rant. To recap, here are some of the bigger asset allocations we continue to like:

 

  1. Fixed Income (still loving TIPs and Treasuries)
  2. Foreign Currencies (still loving the Canadian, Mark Carney, at the Bank of England #StrongPound)
  3. Commodities (Gold, Oil, Food, etc.)
  4. International Equities (India, Brazil – i.e. most of the markets we didn’t like last year)
  5. US Equities (Utilities, Energy Stocks, Healthcare Stocks, Semis, etc.)

 

In other words, without embracing the uncertainty of where we are going in the macro cycle, my writing to you every market morning would literally be useless. #History teaches us that knowing where you are going in markets requires contextualizing where you’ve been.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.51-2.60%

SPX 1944-1969

BSE Sensex 24976-25652

USD 80.01-80.37

Pound 1.69-1.71

WTI Oil 105.16-106.99

Gold 1305-1345

Copper 3.12-3.20

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Time's Inner Logic - Chart of the Day


BOUNCE?

Client Talking Points

UST 10YR

If you ask bond yields about bouncing, they won’t – a 2.53% 10yr yield is only up a beep after dropping 12 basis points last week; down -51 basis points year-to-date. We still think the bond market and S&P Sector Variance has it right, #Q3Slowing for U.S. GDP versus the Q2 bounce.  

ITALY

European stocks opened higher on the German win, but have faded since. Italy’s MIB Index was one of the 1st majors to go red on the day and remains bearish TREND on the @Hedgeye signal (21,383 TREND resistance).

OIL

After a -3% down week, what oil does from here matters to global consumption. Russian headlines have Brent bouncing small within its immediate-term $106.39-110.81 risk range and Gold’s refreshed range is now $1314-1345 – we still like both, long side.

Asset Allocation

CASH 14% US EQUITIES 8%
INTL EQUITIES 12% COMMODITIES 20%
FIXED INCOME 24% INTL CURRENCIES 22%

Top Long Ideas

Company Ticker Sector Duration
HOLX

Hologic is emerging from an extremely tough period which has left investors wary of further missteps. In our view, Hologic and its new management are set to show solid growth over the next several years. We have built two survey tools to track and forecast the two critical elements that will drive this acceleration.  The first survey tool measures 3-D Mammography placements every month.  Recently we have detected acceleration in month over month placements.  When Hologic finally receives a reimbursement code from Medicare, placements will accelerate further, perhaps even sooner.  With our survey, we'll see it real time. In addition to our mammography survey. We've been running a monthly survey of OB/GYNs asking them questions to help us forecast the rest of Hologic's businesses, some of which have been faced with significant headwinds. Based on our survey, we think those headwinds are fading. If the Affordable Care Act actually manages to reduce the number of uninsured, Hologic is one of the best positioned companies.

OC

Construction activity remains cyclically depressed, but has likely begun the long process of recovery.  A large multi-year rebound in construction should provide a tailwind to OC shares that the market appears to be underestimating.  Both residential and nonresidential construction in the U.S. would need to roughly double to reach post-war demographic norms.  As credit returns to the market and government funded construction begins to rebound, construction markets should make steady gains in coming years, quarterly weather aside, supporting OC’s revenue and capacity utilization.

LM

Legg Mason reported its month ending asset-under-management for April at the beginning of the week with a very positive result in its fixed income segment. The firm cited “significant” bond inflows for the month which we calculated to be over $2.3 billion. To contextualize this inflow amount we note that the entire U.S. mutual fund industry had total bond fund inflows of just $8.4 billion in April according to the Investment Company Institute, which provides an indication of the strong win rate for Legg alone last month. We also point out on a forward looking basis that the emerging trends in the mutual fund marketplace are starting to favor fixed income which should translate into accelerating positive trends at leading bond fund managers. Fixed income inflow is outpacing equities thus far in the second quarter of 2014 for the first time in 9 months which reflects the emerging defensive nature of global markets which is a good environment for leading fixed income houses including Legg Mason.

Three for the Road

TWEET OF THE DAY

India continues to fight inflation w/ a stronger currency - JUN inflation down to 5.4% vs 6% MAY

@Keith McCullough

QUOTE OF THE DAY

A nation or civilization that continues to produce soft-minded men purchases its own spiritual death on an installment plan.

-Martin Luther King Jr.

STAT OF THE DAY

Germany’s 2013 current account surplus of $260 billion was the largest in the world, breaking its own record high.


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