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PODCAST: All Eyes On Europe

 

On today's Morning Investment Call held for Hedgeye subscribers, CEO Keith McCullough discussed ECB rate cuts, oil prices and gold, as well as S&P 500 levels. In regards to Europe, investors are clearly expecting a rate cut from European Central Bank Chief Mario Draghi and the probability of a rate cut has gone up considerably. Commodity prices continue to come down, with Brent crude oil trading at the higher end of risk range while remaining in bearish formation. Gold caught a bounce this morning but remains in bearish formation. When the time is right, we'll re-short gold via GLD or the Gold Miners (GDX). 

 

You can listen to the full call in the audio posted above.

 


MONDAY MORNING RISK MONITOR: GREEN MEANS GO

Takeaway: European fears further recede while the great U.S. yield hunt continues. Big bank swaps place low probability on Brown-Vitter passsage.

Key Takeaways:

 

* High Yield (YTM)  – Investors continue to discount risk, pushing High Yield rates lower by another 13.6 bps last week, ending the week at 5.53% versus 5.67%.

 

* European Financials - There are a lot of roses coming up in Europe lately. European banks were tighter across the board last week as Cyprus-related fears shifted from the back burner to ancient memory. Italian banks tightened an average of 30 bps, boosted by finally having a government.

 

* U.S. Financials -  Bank of America was the big mover on the week, tightening 11 bps to 122 bps. Pretty remarkable, when you consider that BofA was at 483 bps on 11/25/11 and that its lows since 2009 have been around 100 bps. Goldman and Morgan followed BofA's lead, tightening 8 bps and 6 bps, respectively. The mortgage insurers continued to see their bankruptcy profiles plunge, as swaps tightened 67 bps and 64 bps at MTG and RDN.

 

 

Financial Risk Monitor Summary

 • Short-term(WoW): Positive / 5 of 12 improved / 2 out of 12 worsened / 6 of 12 unchanged

 • Intermediate-term(WoW): Positive / 6 of 12 improved / 2 out of 12 worsened / 5 of 12 unchanged

 • Long-term(WoW): Positive / 7 of 12 improved / 0 out of 12 worsened / 6 of 12 unchanged

 

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1. American Financial CDS -  Bank of America was the big mover on the week, tightening 11 bps to 122 bps. Goldman and Morgan followed BofA's lead, tightening 8 bps and 6 bps, respectively. The mortgage insurers continued to see their bankruptcy profiles plunge, as swaps tightened 67 bps and 64 bps at MTG and RDN.

 

Tightened the most WoW: RDN, MTG, AXP

Widened the most/ tightened the least WoW: AON, MBI, WFC

Tightened the most WoW: RDN, MTG, AXP

Widened the most MoM: MBI, SLM, MMC

 

MONDAY MORNING RISK MONITOR: GREEN MEANS GO - 1

 

2. European Financial CDS - European banks were tighter across the board last week as Cyprus-related fears shifted from the back burner to ancient memory. Italian banks tightened an average of 30 bps, boosted by finally having a government.

 

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3. Asian Financial CDS - Asian bank swaps were mixed, though modest last week. Chinese banks narrowly tightened, while Japanese banks were mostly wider. State Bank of India was the biggest mover with a 10 bps tightening.  

 

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4. Sovereign CDS – So much for Cyprus. European sovereign swaps continue to tighten. Italy, Spain, Portugal and Ireland all came in by 9-19 bps week-over-week, and are down 19-50 bps over the past month. Meanwhile, the U.S., Germany, France and Japan all remain a yawn with 1 bp moves.

 

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5. High Yield (YTM) Monitor – High Yield rates fell another 13.6 bps last week, ending the week at 5.53% versus 5.67% the prior week.

 

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6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 2.5 points last week, ending at 1796.

 

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7. TED Spread Monitor – The TED spread fell 0.6 basis points last week, ending the week at 22.3 bps this week versus last week’s print of 22.1 bps.

 

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8. Journal of Commerce Commodity Price Index – The JOC index was essentially flat last week at 7.48 versus 7.5 in the prior week.

 

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9. Euribor-OIS Spread – The Euribor-OIS spread remained flat last week at 13 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. 

 

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10. ECB Liquidity Recourse to the Deposit Facility – ECB deposits were up 5.8 billion Euros last week. The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB.  Taken in conjunction with excess reserves, the ECB deposit facility measures excess liquidity in the Euro banking system.  An increase in this metric shows that banks are borrowing from the ECB.  In other words, the deposit facility measures one element of the ECB response to the crisis.  

 

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11. Markit MCDX Index Monitor – Last week spreads tightened 7 bps, ending the week at 59.2 bps versus 65.7 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. 

 

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12. Chinese Steel – Steel prices in China fell 0.6% last week, or 21 yuan/ton, to 3574 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: GREEN MEANS GO - 12

 

13. 2-10 Spread – Last week the 2-10 spread tightened to 148 bps, -2 bps tighter 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 2.0% upside to TRADE resistance and 1.5% downside to TRADE support.

 

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Joshua Steiner, CFA

 


GOLD: Ignore The Bounce?

Gold caught a 20 point bounce this morning to around $1470/oz. While that's fine and dandy for those who bought gold near the top and are reeling from that pain trade, the reality is that gold remains in bearish formation. We have yet to re-short gold via the SPDR Gold Trust ETF (GLD) but we did re-short the Market Vectors Gold Miners ETF (GDX) last week. The precious metal remains down -13% year-to-date and we gather it'll drop back below $1400/oz sooner than later.

 

GOLD: Ignore The Bounce? - GLDGDX ytdchart


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MACAU REBOUNDS

Takeaway: MPEL the stalwart in the high growth Macau market

Macau posted a solid performance last week with average daily table revenues of HK$886 million, up 15% YoY and 15% from last week’s HK$775 million.  Our full month projection is now HK$26.5-27.0 billion, up 9-11% YoY.  We expect May YoY growth to accelerate to mid-teens which could keep up the momentum in the Macau stocks.  

 

With 23 deaths thus far, the H7N9 virus may be impacting the tour group business but doesn't appear to be affecting gaming revenues.  In fact, less congestion during the May holidays could actually boost VIP activity.  May holidays start today and end on May 3rd.

 

In terms of market share, MPEL continues to shine with 16.3% share well above recent trend.  MPEL remains our favorite stock in the group.  LVS is also performing well in April and we expect that trend to continue for the rest of the year.  Wynn and Galaxy are the laggards here in April.

 

MACAU REBOUNDS - aa

 

MACAU REBOUNDS - bb


Morning Reads From Our Sector Heads

Keith McCullough (CEO):

 

Philippines Mulls Adjusting Deposit Facility as Peso Climbs (via Bloomberg)

 

Ebbing Inflation Means More Easy Money (via Bloomberg)

 

Howard Penney (Restaurants):

 

Mind your franchisees, Mayor McCheese (via Crain's Chicago Business)

 

Jay Van Sciver (Industrials):

 

Eaton First Quarter Operating Earnings Per Share of $0.84 Exceed Midpoint of Guidance by 12 Percent (via Eaton)

 

Rob Campagnino (Consumer Staples):

 

Analysts await details of financing for ADM's GrainCorp bid (via The Australian)

 

Brian McGough (Retail):

 

Under Armour Drops Low Cost Fleece Sources In Favor of Costlier But Prompt, Reliable Delivery (via Sourcing Journal Online)

 

Kevin Kaiser (Energy):

 

What If We Never Run Out of Oil? (via The Atlantic)

 

Josh Steiner (Financials):

 

Influential economist says Wall Street is full of 'crooks' (via NY Post)

 

The CFPB issues Civil Penalty Fund rule (via CFPB)

 

JPMorgan promotes Zames in shake-up (via FT)

 

Todd Jordan (GLL):


Sands Casino Says Auditor Quits Account (via WSJ)

 

Tom Tobin (Healthcare):

 

CMS ISSUES PROPOSED INPATIENT PAYMENT REGULATION (via CMS)



Heightened Expectations

Client Talking Points

You Down With ECB?

Rate cuts have become the norm in the "new economy" we live in. The next big one should come out of Europe, specifically from Mario Draghi at the European Central Bank (ECB). The EuroStoxx 600 index was up +3.7% last week, which shows that stocks do expect and care about rate changes. Spain and Italy rallied the most out of the great big melting pot so if Draghi doesn't cut rates soon, it's going to be a mess over there.

Crude Mood

Brent crude oil is in bearish formation across all three of our durations: TRADE, TREND and TAIL. Last week's bounce is unlikely to hold and that's a positive for consumption (Americans are quite fond of lower gas prices). Our immediate-term risk range for Brent crude oil is $97.18-104.09 and there are plenty of speculators who need to unwind their long positions.

Asset Allocation

CASH 22% US EQUITIES 26%
INTL EQUITIES 18% COMMODITIES 0%
FIXED INCOME 6% INTL CURRENCIES 28%

Top Long Ideas

Company Ticker Sector Duration
IGT

Decent earnings visibility, stabilized market share, and aggressive share repurchases should keep a floor on the stock.  Near-term earnings, potentially big orders from Oregon and South Dakota, and news of proliferating gaming domestically could provide near term catalysts for a stock that trades at only 11x EPS.  We believe that multiple is unsustainably low – and management likely agrees given the buyback – for a company with the balance sheet and strong cash flow as IGT.  Given private equity’s interest in WMS (they lost out to SGMS) – a company similar to IGT that unlike IGT generates little free cash – we wouldn’t rule out a privatizing transaction to realize the inherent value in this company. 

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. 

FDX

With FedEx Express margins at a 30+ year low and 4-7 percentage points behind competitors, the opportunity for effective cost reductions appears significant. FedEx Ground is using its structural advantages to take market share from UPS. FDX competes in a highly consolidated industry with rational pricing. Both the Ground and Express divisions could be separately worth more than FDX’s current market value, in our view. 

Three for the Road

TWEET OF THE DAY

"Consumer spending report at 8:30 kicks off a week chock full of data" -@BenEisen

QUOTE OF THE DAY

"Facts are stubborn things, but statistics are more pliable." -Mark Twain

STAT OF THE DAY

U.S. consumer spending rises 0.2% in March.


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.65%
  • SHORT SIGNALS 78.63%
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