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European Banking Monitor: Financials CDS Wider on the Week

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 mostly widened in Europe last week (28 of 38). The tide of short-term momentum around EU QE-Lite appears to be receding as swaps were down on average across the EU banks complex.

 

European Banking Monitor: Financials CDS Wider on the Week - chart1 financials cds

 

Sovereign CDS – Sovereign swaps continue to drop on a month-over-month basis. Irish sovereign swaps tightened by -3.9% (-2 bps to 50 ) and Spanish sovereign swaps widened by 7.8% (4 bps to 61).

 

European Banking Monitor: Financials CDS Wider on the Week - chart2 sovereign CDS

European Banking Monitor: Financials CDS Wider on the Week - chart3 sovereign CDS

European Banking Monitor: Financials CDS Wider on the Week - chart4 sovereign

 

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 3 bps to 14 bps.

 

European Banking Monitor: Financials CDS Wider on the Week - chart5 Euriobor OIS Spread

 

Matthew Hedrick

Associate

 

Ben Ryan

Analyst 

 



Beware or Reversals

Client Talking Points

EURO

Pure currency devaluation by ECB President Mario Draghi worked; saving the economy didn’t – remember what these Policies To Inflate do (it’s all about asset prices, not real economic growth). Risk range for the EUR/USD is really wide at $1.28-1.33.

RUSSELL 2000

2 straight down weeks for the Russell 2000, right back to down for 2014 year-to-date  – one of the biggest bubbles out there remains the liquidity bubble in small/mid cap stocks. The Russell 2000 is down -4% since peaking (on no volume) July 7th, 2014.

CHINA

China continued to chug along overnight with the Shanghai Comp up another +0.3% to another year-to-date high of +14%. China and India remain our 2 favorite equity markets in the world. India’s WPI down to +3.7% AUG vs 5.2% JUL. Dr. Raj winning…

Asset Allocation

CASH 36% US EQUITIES 6%
INTL EQUITIES 19% COMMODITIES 4%
FIXED INCOME 31% INTL CURRENCIES 4%

Top Long Ideas

Company Ticker Sector Duration
EDV

The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). Now that we have our first set of late-cycle economic indicators slowing in rate of change terms (ADP numbers and the NFP number), it's time to really think through the upcoming moves of this bond market. We are doubling down on our biggest macro call of 2014 - that U.S. growth would slow and bond yields fall in kind.

TLT

Fixed income continues to be our favorite asset class, so it should come as no surprise to see us rotate into the Shares 20+ Year Treasury Bond Fund (TLT) on the long side. In conjunction with our #Q3Slowing macro theme, we think the slope of domestic economic growth is poised to roll over here in the third quarter. In the context of what may be flat-to-decelerating reported inflation, we think the performance divergence between Treasuries, stocks and commodities may actually be set to widen over the next two to three months. This view remains counter to consensus expectations, which is additive to our already-high conviction level in this position.  Fade consensus on bonds – especially as growth slows. As it’s done for multiple generations, the 10Y Treasury Yield continues to track the slope of domestic economic growth like a glove.

RH

Restoration Hardware remains our Retail Team’s highest-conviction long idea. We think that most parts of the thesis are at least acknowledged by the market (category growth, real estate expansion), but people are absolutely missing how all the pieces are coming together to drive such outsized earnings growth over an extremely long duration. The punchline of our real estate analysis is that a) RH stores could get far bigger than even the RH bulls seem to think, b) Aside from reconfiguring 66 existing markets, there’s another 19 markets we identified where the spending rate on home furnishings by people making over $100k in income suggests that RH should expand to these markets with Design Galleries, and c) the availability and economics on large properties for all these markets are far better than people think. The consensus is looking for long-term earnings growth of 28% -- we’re looking for 45%.  

Three for the Road

TWEET OF THE DAY

India's wholesale price inflation slows (again) to +3.7% y/y AUG vs +5.2% JUL - great for India's economy

@KeithMcCullough

QUOTE OF THE DAY

The first duty of a man is to think for himself.

-José Martí

STAT OF THE DAY

Gold bounces +0.5% to $1235 that is up +2.7% year-to-date (vs. Russell 2000 -0.3% year-to-date).


MONDAY MORNING RISK MONITOR: SOME GOOD, SOME BAD

Takeaway: Widening yield spreads and falling commodity prices are bullish, while falling Chinese steel pxs and dropping junk bond prices are bearish.

Current Best Ideas:

 

MONDAY MORNING RISK MONITOR: SOME GOOD, SOME BAD - 19 

 

Key Callouts:

* 2-10 Spread – Last week the 2-10 spread widened to 205 bps, 10 bps wider than a week ago. 

 

* Chinese Steel – Steel prices in China are now down almost 5% month-over-month and dropped 1.0% last week to 2974 yuan/ton. Big picture, Chinese steel prices are down almost by half in the past ~3 years. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

 

* CRB Commodity Price Index – The CRB index fell -2.9%, ending the week at 282 versus 290 the prior week. As compared with the prior month, commodity prices have decreased -2.4% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

* High Yield (YTM) Monitor – High Yield rates rose 22.0 bps last week, ending the week at 5.88% versus 5.66% the prior week.

 

 

Financial Risk Monitor Summary

 • Short-term(WoW): Negative / 3 of 12 improved / 4 out of 12 worsened / 5 of 12 unchanged

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

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

MONDAY MORNING RISK MONITOR: SOME GOOD, SOME BAD - 15

 

1. U.S. Financial CDS -  Swaps widened for 23 out of 27 domestic financial institutions. The sharpest increases came from mortgage insurers (MTG & RDN) and guarantors (AGO & MBI).

 

Tightened the most WoW: MMC, WFC, BAC

Widened the most WoW: TRV, AGO, XL

Tightened the most WoW: WFC, ACE, CB

Widened the most/ tightened the least MoM: MS, GS, AXP

 

MONDAY MORNING RISK MONITOR: SOME GOOD, SOME BAD - 1

 

2. European Financial CDS - Swaps mostly widened in Europe last week (28 of 38). The tide of short-term momentum around EU QE-Lite appears to be receding as swaps were down on average across the EU banks complex.

 

MONDAY MORNING RISK MONITOR: SOME GOOD, SOME BAD - 2

 

3. Asian Financial CDS - Swaps were modestly wider across the Asian banking complex. Swaps rose by a median 2 bps. Only Mizuho (-4 bps w/w) and Sumitomo (-3 bps w/w) were tighter.

 

MONDAY MORNING RISK MONITOR: SOME GOOD, SOME BAD - 17

 

4. Sovereign CDS – Sovereign swaps continue to drop on a month-over-month basis. Irish sovereign swaps tightened by -3.9% (-2 bps to 50 ) and Spanish sovereign swaps widened by 7.8% (4 bps to 61).

 

MONDAY MORNING RISK MONITOR: SOME GOOD, SOME BAD - 18

 

MONDAY MORNING RISK MONITOR: SOME GOOD, SOME BAD - 3

 

MONDAY MORNING RISK MONITOR: SOME GOOD, SOME BAD - 4

 

5. High Yield (YTM) Monitor – High Yield rates rose 22.0 bps last week, ending the week at 5.88% versus 5.66% the prior week.

 

MONDAY MORNING RISK MONITOR: SOME GOOD, SOME BAD - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 5.0 points last week, ending at 1876.

 

MONDAY MORNING RISK MONITOR: SOME GOOD, SOME BAD - 6

 

7. TED Spread Monitor – The TED spread rose 1.8 basis points last week, ending the week at 22.2 bps this week versus last week’s print of 20.4 bps.

 

MONDAY MORNING RISK MONITOR: SOME GOOD, SOME BAD - 7

 

8. CRB Commodity Price Index – The CRB index fell -2.9%, ending the week at 282 versus 290 the prior week. As compared with the prior month, commodity prices have decreased -2.4% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

MONDAY MORNING RISK MONITOR: SOME GOOD, SOME BAD - 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 3 bps to 14 bps.

 

MONDAY MORNING RISK MONITOR: SOME GOOD, SOME BAD - 9

 

10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index rose 5 basis points last week, ending the week at 2.859% versus last week’s print of 2.807%. 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: SOME GOOD, SOME BAD - 10

 

11. Chinese Steel – Steel prices in China are now down almost 5% month-over-month and dropped 1.0% last week to 2974 yuan/ton. Big picture, Chinese steel prices are down almost by half in the past ~3 years. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

 

MONDAY MORNING RISK MONITOR: SOME GOOD, SOME BAD - 12

 

12. 2-10 Spread – Last week the 2-10 spread widened to 205 bps, 10 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR: SOME GOOD, SOME BAD - 13

 

13. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.7% upside to TRADE resistance and 0.8% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: SOME GOOD, SOME BAD - 14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


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.

September 15, 2014

September 15, 2014 - Slide1

 

BULLISH TRENDS

September 15, 2014 - Slide2

September 15, 2014 - Slide3

September 15, 2014 - Slide4

September 15, 2014 - Slide5

 

BEARISH TRENDS

September 15, 2014 - Slide6 

September 15, 2014 - Slide7

September 15, 2014 - Slide8

September 15, 2014 - Slide9

September 15, 2014 - Slide10


CHART OF THE DAY: #VolatilityAsymmetry Remains

CHART OF THE DAY: #VolatilityAsymmetry Remains - Chart of the Day

 

In rate of change terms, the +10.1% week-over-week move in front month US Equity volatility (VIX) was peanuts compared to the % move in volatility in foreign currency and fixed income. That’s what happens when the Fed suppresses volatility to all time lows. The bubble peaks.

 

If we’re right and we’re set up for one of the most asymmetric moves in volatility ever (see our Q3 Macro Theme deck titled #VolatilityAsymmetry), Americans may be looking back at late 2007 a lot faster than they think.



Moving America's Future Forward

“Sometimes you got to go back to actually move forward.”

-Matthew McConaughey in the new Lincoln MKC commercial

 

 

I thought Lincoln nailed it with this one-minute McConaughey spot (click here Lincoln’s newest commercial). Both our personal and collective histories have always provided great sources of leadership and inspiration in this country. “You just have to know where to look.”

 

Moving America's Future Forward - 4g7

 

As our firm moves forward, we’ll continue to be the change we’d like to see in America. We’ve created an outreach program called HedgeyeCares and tomorrow we’ll be hosting our inaugural golf tournament to support the area’s youth through the Bridgeport Caribe Youth Leaders, a 501(c)(3) organization. (Here’s a short video we put together with testimonials from current recipients: https://www.youtube.com/watch?v=t5NgER166I0).

 

We’re also extremely thankful to The Lincoln Motor Company for its title sponsorship.  Lincoln is a great American luxury brand that recognizes the importance of giving back to communities across the country.  With its test drive program  “Driven to Give”, it has raised more than $3.27 million dollars for schools and charities across the United States since it was created in 2011. That’s a great win!

 

Thanks again to all of our event sponsors and participants. Change doesn’t happen unless we make it happen, together.

 

Back to the Global Macro Grind

 

Change happened in macro markets last week. They went backwards! And it wasn’t just stocks that pulled back. They smoked pretty much everything from commodities to bonds to any stock that looked like a bond. That leaves us with a lot to think about ahead of the Fed this week.

 

Will the US Federal Reserve get more hawkish or dovish at its Wednesday meeting? With the US Dollar having had its biggest point to point ramp since 1997, and the 10yr bond yield ramping +15bps week-over-week to 2.61%, expectations for hawkishness are high.

 

Since I think this USD ramp has been largely driven by horrendous economic data in both Europe and Japan (weaker Euros and Yens), I think you fade the recent strength in US interest rates and buy what was down the most last week:

 

  1. Long end of the bond market (TLT and EDV) with no support for the 10 and 30 yr yields to 2.34% and 3.11%, respectively
  2. Gold (GLD) was down -2.8% last week (to +2.1% YTD), and has immediate-term upside to $1275
  3. Utilities (XLU) were down -3.1% last week (to +11.3% YTD), and has immediate-term upside to $44
  4. REITS (VNQ) were down -5.4% last week (to +13.2% YTD), and has immediate-term upside to $77
  5. Emerging Markets (VWO) got sacked last week (MSCI LATAM -6.7% on the wk) and have immediate-term upside to $46

 

That’s why you see me investing what was our largest Cash position of the year in the Hedgeye Asset Allocation Model, taking up our US Equity exposure from 0% to 6% (split the net long position between Utilities and REITS, and stay short the Russell, Housing, and Regional Banks).

 

The alternative to buying slow-growth #YieldChasing is, of course, chasing the #MoBros. You know, something like Argentina (ARGT) which was up another +6.1% last week to +105% YTD – even though you really can’t get your money in/out of the country.

 

With the Russell 2000 down for the 2nd straight week to -0.3% for 2014 YTD, that’s why I still like staying net short (for long onlys its called underweight) one of the most obvious bubbles in America right now – small cap stocks that trade at 50x trailing earnings, with no liquidity.

 

In other #bubble news, at 30x revenues and $220B in market cap, you’ll have plenty of liquidity in AliBubble (BABA) this week!

 

While I am sure BABA is a fantastic story… as I see it, the problem with Jack Ma’s company is that... I can’t see it. While the Old Wall is fist pumping this sucker to oblivion this week, that’s the bear case – #opacity. And that’s all I have to say about that.

 

The other big #bubble callout from last week was #deflation.

 

Unfortunately, your cost of living didn’t deflate much (CRB Food Index was up another +1.3% on the week to 18.3% YTD, Cattle prices were up another +0.7% to +33.4% YTD, etc.), but that was one of the most broad based selloffs across asset classes of the year.

 

Most of this #deflation was driven by the biggest currency move (in weekly rate of change terms) we’ve seen in 17 years. When stuff moves that fast, what you get is this thing called volatility.

 

In rate of change terms, the +10.1% week-over-week move in front month US Equity volatility (VIX) was peanuts compared to the % move in volatility in foreign currency and fixed income. That’s what happens when the Fed suppresses volatility to all time lows. The bubble peaks.

 

If we’re right and we’re set up for one of the most asymmetric moves in volatility ever (see our Q3 Macro Theme deck titled #VolatilityAsymmetry), Americans may be looking back at late 2007 a lot faster than they think.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.34-2.62%

SPX 1

RUT 1151-1169

VIX 11.84-14.04

EUR/USD 1.28-1.30

Gold 1

 

Best of luck out there today,

KM

 

Keith McCullough
CEO

 

Moving America's Future Forward - Chart of the Day


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