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Podcast: Keith Talks Bernanke, Weimar Nikkei and More

 

Keith gets fired up this morning, talking through a number of topics this morning ranging from the Fed to gold to the Nikkei.



MONDAY MORNING RISK MONITOR: HIGH YIELD SMOKE

Takeaway: We've been focused on HY lately as a potential canary. High yield backed up 8 bps last week. There are few other cautionary signs, however.

Key Takeaways:

 

* High Yield – High Yield rates rose 8.4 bps last week, ending the week at 5.31% versus 5.22% the prior week. This is the first time in a long time that we've seen high yield move up and the fastest rate of increase year-to-date. While the move isn't especially large, it represents an inflection so we'll be keeping a close eye on HY from here.

 

2-10 Spread – Last week the 2-10 spread widened 17 bps to 173 bps. While the widening of the yield curve offers modest reprieve for lenders, the associated 8 bps back-up in conventional mortgage rates tamps down refi demand as well as GOS margins.

 

* European Financial CDS - Major widening (+205 bps) at Greek bank EFG Eurobank caused the average European bank swap to widen by 2 bps, but the median was actually tighter by 6 bps. French, Italian and Spanish banks continued to post overall, steady improvement.

 

* U.S. Financial CDS -  This was the first week in a long time that mortgage insurer swaps (PMI, RDN) didn't drop meaningfully, a barometer of stabilizing sentiment around the housing market's recovery. 

 

Financial Risk Monitor Summary

 • Short-term(WoW): Positive / 5 of 12 improved / 1 out of 12 worsened / 7 of 12 unchanged

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

 • Long-term(WoW): Positive / 4 of 12 improved / 0 out of 12 worsened / 9 of 12 unchanged

 

MONDAY MORNING RISK MONITOR: HIGH YIELD SMOKE - 15

 

1. U.S. Financial CDS -  This was the first week in a long time that mortgage insurer swaps (PMI, RDN) didn't drop meaningfully, a barometer of stabilizing sentiment around the housing market's recovery. To be fair, RDN was lower by 3 bps. Big banks were all tighter, led by Citi, BofA and MS, dropping 7, 6 and 6 bps, respectively. It's also interesting to note the 8 bps widening in spreads on Sallie Mae. We couldn't help but notice last week a greater-than-usual volume of negative press on the student loan industry.

 

Tightened the most WoW: MBI, AGO, UNM

Widened the most WoW: TRV, XL, SLM

Tightened the most WoW: MBI, BAC, AXP

Tightened the least MoM: MET, UNM, WFC

 

MONDAY MORNING RISK MONITOR: HIGH YIELD SMOKE - 1

 

2. European Financial CDS - Major widening (+205 bps) at Greek bank EFG Eurobank caused the average European bank swap to widen by 2 bps, but the median was actually tighter by 6 bps. French, Italian and Spanish banks continued to post overall, steady improvement.

 

MONDAY MORNING RISK MONITOR: HIGH YIELD SMOKE - 2 2

 

3. Asian Financial CDS - Asian financial swaps were mixed last week with Chinese banks posting very narrow increases, while most of Japan and India's banks were tighter.

 

MONDAY MORNING RISK MONITOR: HIGH YIELD SMOKE - 17

 

4. Sovereign CDS – Sovereign swaps were modestly tighter around the globe last week with the exception of Japan and Spain, where swaps widened by 6 and 1 bps, respectively. Despite the sharp increase, Japanese swaps remain 3 bps below their levels from one month ago.

 

MONDAY MORNING RISK MONITOR: HIGH YIELD SMOKE - 18

 

MONDAY MORNING RISK MONITOR: HIGH YIELD SMOKE - 3

 

MONDAY MORNING RISK MONITOR: HIGH YIELD SMOKE - 4

 

5. High Yield (YTM) Monitor – High Yield rates rose 8.4 bps last week, ending the week at 5.31% versus 5.22% the prior week.

 

MONDAY MORNING RISK MONITOR: HIGH YIELD SMOKE - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 0.8 points last week, ending at 1805.7.

 

MONDAY MORNING RISK MONITOR: HIGH YIELD SMOKE - 6

 

7. TED Spread Monitor – The TED spread rose 0.7 basis points last week, ending the week at 24.06 bps this week versus last week’s print of 23.41 bps.

 

MONDAY MORNING RISK MONITOR: HIGH YIELD SMOKE - 7

 

8. Journal of Commerce Commodity Price Index – The JOC index rose 0.2 points, ending the week at 3.46 versus 3.2 the prior week.

 

MONDAY MORNING RISK MONITOR: HIGH YIELD SMOKE - 8

 

9. Euribor-OIS Spread – The Euribor-OIS spread widened by 1 bps to 14 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: HIGH YIELD SMOKE - 9

 

10. ECB Liquidity Recourse to the Deposit Facility – 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.  

 

MONDAY MORNING RISK MONITOR: HIGH YIELD SMOKE - 10

 

11. Markit MCDX Index Monitor – Last week spreads tightened 4 bps, ending the week at 57.7 bps versus 61.3 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. 

 

MONDAY MORNING RISK MONITOR: HIGH YIELD SMOKE - 11

 

12. Chinese Steel – Steel prices in China fell 0.6% last week, or 21 yuan/ton, to 3563 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: HIGH YIELD SMOKE - 12

 

13. 2-10 Spread – Last week the 2-10 spread widened to 173 bps, 17 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR: HIGH YIELD SMOKE - 13

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.0% upside to TRADE resistance and 2.4% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: HIGH YIELD SMOKE - 14

 

Joshua Steiner, CFA


The Simplest Things

This note was originally published at 8am on May 06, 2013 for Hedgeye subscribers.

“Everything in war is simple, but the simplest thing is difficult.”

-Carl von Clausewitz

 

In hindsight, the perma Bull/Bear War in markets gets scored that way too. After the big moves, reasons for victory and defeat become simpler to understand.

 

Being a market strategist isn’t simple. You need to get to simple conclusions before the market does. And the deep simplicity of it all is born out of the complex. That’s why process matters. I’ve been highlighting the thought process of American Foreign Policy strategist George F. Kennan for the past few weeks. On #process, Chapter 11 (“A Grand Strategic Education”) of Gaddis’ Kennan biography, is a beauty.

 

“Kennan was struck by Clausewitz’s emphasis on psychologically disarming and adversary; finding the point at which the enemy realizes that victory is either too unlikely or too costly… the assailant weakens himself as he advances.” (George F. Kennan, pg 235)

 

Back to the Global Macro Grind

 

Relative to our current strategy on the US stock market, the enemy is the bear. Having been bearish plenty of times myself, I respect the physiological disarming process, big time. There is nothing worse than being squeezed.

 

With the SP500 tacking on another +2% last week to a fresh all-time daily (and weekly) closing high of 1614, the enemy is starting to give up on some core positions. You can see that by analyzing the Top 3 performing Style Factors on a 1-month duration:

  1. High Short Interest Stocks – 1-month price performance = +6.2%
  2. Consumer Discretionary Stocks (XLY) – the top performing Sector Style on a 1-month basis = +5.6%
  3. Technology Stocks (XLK) – 2nd best to Consumer on a 1-month duration = +5.0%

In other words, with employment, housing, and consumption #GrowthAccelerating in April (versus the 1-month head-fake of data slowing in March), what’s leading this market’s bullish charge are the simplest things associated with a growth. Gold doesn’t like growth.

 

Looking back at late March and early April, what was fascinating to us was how quickly consensus bulls got bearish. Since we consider ourselves Non-Consensus Bulls, this is a self-serving (and convenient) way to look at the market, in hindsight!

 

One way to look at consensus is via the net long positioning in non-commercial futures and options contracts. Going into last week’s melt-up in US Stocks, here’s how consensus was positioned:

  1. Uber long Treasuries at greater than +196,000 net long contracts (one of the highest positions of 2013)
  2. Way low in SP500 net exposure at less than +2,000 net long contracts (lowest position of 2013)

Consensus positioning wasn’t new – it was trending that way as Treasuries trended (higher) and SP500 (lower) throughout the middle of April. Many got sucked into the “March data is weak” narrative. Makes sense. Consensus sprints toward the last data point, whereas macro context wins the race.

 

Now what? The April economic data is undeniably better vs March – and that’s more in line with the intermediate-term TREND of the data that we have been signaling since late November, early December:

  1. NSA Jobless Claims hit a 5yr low last week at 324,000
  2. Commodities (CRB Index) and Oil (Brent) prices are -4% and -6% year-over-year, respectively
  3. Bloomberg’s Weekly Consumer Confidence Reading hit a 5yr high at 28.9

Confidence? Who in God’s good name in this country is actually confident? Aren’t we all supposed to be calling for the next crisis that most missed calling in early 2008? If people were as confident as I am right now, they wouldn’t be buying Treasuries as they make another lower-high versus their all-time bubble peak (November 2012).

 

What drives confidence? Does employment, housing, and consumption growth matter? How about the price of your home and stock market portfolio going up double digit year-over-year for the 1st time since 2006? If you want to broaden market trends beyond 3-6 months to year-over-year (y/y):

  1. SP500 = +16.1% y/y
  2. US Home Prices (Core Logic) = +10.3% y/y
  3. Gold = -10.9% y/y

How are end of the world ads for Cyprus, BitCoin, etc. doing this morning? That’s a confidence factor too. Some market it as “social mood.” Others sell fear in more ways than one. As George Kennan wrote in the late 1940s (when people in America were right petrified of anything they couldn’t see):

 

“We are in a peculiar position of having to defend ourselves against mortal attack, but yet not wishing to inflict mortal defeat on our attacker… We must be like the porcupine who only gradually convinces the carnivorous beast of prey that he is not a fit object of attack.” (George F. Kennan, pg 235)

 

So be the porcupine. Eventually these beastly bears will stop trying to scare the hell out of you; the perma bid for Treasuries will recede; and fear (VIX) might be priced at 10, 11, or 12 by then too. Then, the simplest of things will be to sell high, smile, and go away.

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX and the SP500 are now $1406-1489, $98.81-105.24, $81.74-83.12, 97.59-100.13, 1.71-1.82%, 12.36-14.39, and 1590-1624, respectively.

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

The Simplest Things - Chart of the Day

 

The Simplest Things - Virtual Portfolio


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THE M3: SJM COTAI; MPEL/LVS TRADEMARK SUIT

The Macau Metro Monitor, May 20, 2013

 

 

SJM'S COTAI PROJECT TO MERGE WITH ANGELA LEONG'S THEME PARK Macau Daily Times

Angela Leong, the Managing Director of SJM, says SJM Cotai will not only include the government granted 74,000 square meters, but will total 250,000 square meters after combining with her privately-owned land lot nearby.  "The land grant [of my own project] next to the SJM project has already been approved [by the government]...The project [on Leong’s land] will have a 4D theme park as I mentioned earlier and a budget hotel, as well as a children’s wonderland and other facilities," she said.  She stressed the theme park doesn’t include any gaming facilities. 

 

Angela estimated her project to cost around MOP10BN to be completed after 2017.  Although the two land plots are separated by a road, she said they will be technically combined after constructing connections between them.

 

MELCO CROWN AND SANDS FIGHT OVER COTAI TRADEMARKS Macau Business

LVS and MPEL are fighting in court over trademarks that use the words “Cotai Strip”.  In a judgement handed down on April 25 but made public last week, the Court of Second Instance has sided with MPEL and rejected Sands’ attempt to register the “Cotai Strip CotaiTravel” as a trademark.  The court said the expression is “ambiguous, generic and indefinite” and that it failed to distinguish LVS from other companies “that could produce or sell the same goods”.

 

In December 2011, the Economic Services Bureau approved the application by LVS to register “Cotai Strip CotaiTravel” as a trademark, but MPEL objected, taking its case to the Court of First Instance.  The Court of First Instance upheld the objection, and the Economic Services Bureau and LVS appealed against this ruling.



Nose Diving Expedition

“I was very pleased to read a prediction that the price of gold will nosedive.”

-Ronald Reagan

 

Can you imagine if Obama got up in front of his old media paparazzi and talked about Gold like that? Reagan did in 1980. That’s because someone advising him actually understood the marketing message - #StrongDollar, Strong America. It’s pro-growth.

 

Instead of taking a victory lap on that and talking about the most bullish development in American Purchasing Power in a decade, let’s talk about how the IRS scandal is a “partisan fishing expedition designed to distract” Americans.

 

Distract us from what? Our liberty and freedom being encroached upon by conflicted politicians again, or Gold nose diving?

 

Back to the Global Macro Grind

 

If you’ve never been on a fishing expedition, I can hook you up with my peeps (Luch and RP). They’ll take you up into the bushes of Northern Ontario where you might want to bring a gun.

 

Word has it that this year’s Canadian black bear population could be massive. There’s lots of Gold up near Red Lake, Ontario. And with Gold -19.3% now for 2013 YTD, the Gold Bears are hungry.

 

What happens when a commodity bull comes across a hungry Gold bear on a camp trail in the dark? If for only behavioral observations, last week’s CFTC futures and options data might help answer that:

  1. Total Commodities net long contracts were up +1.1% wk-over-wk to +588,482 contracts
  2. Farm Goods saw the biggest net long buyers +15% wk-over-wk to +270,486 contracts
  3. Silver’s net long position was eviscerated (-72% on the week!) to +1,413 contracts

All the while, bears dog piled the total short position in Gold short contracts to its highest position ever (74,432 contracts).

 

So how is it that a bull becomes a bear in the downward dog pile position so fast anyway?

 

I don’t want anything to do with my nose diving into something like that.

 

How about stocks?

 

Last week’s #StrongDollar bulls brought the thunder, with both the US Dollar Index and the SP500 closing at fresh YTD highs. In the year that even a hockey player could do it, here’s the updated score:

  1. US Dollar +1.3% wk-over-wk to +5.6% YTD
  2. Commodities (CRB Index) -0.4% wk-over-wk to -2.5% YTD
  3. SP500 and Russell2000 +2.1% and +2.2% wk-over-wk, to +16.8% and +17.3% YTD, respectively

Get the Dollar right, and you get a long of other things right.

 

How about bonds?

  1. Treasury Bond Yields lagged again this week, big time, with the 10yr UST Yield rising to 1.95%
  2. UST Yield Spread (proxy for economic growth) widened by another 5bps wk-over-wk to +171 basis pts wide
  3. Financials (XLF) love it when Yield Spread widens like that; they’re already +6.7% for May

Sell in May and go away? If US stock market bears just sold Gold and/or Treasuries in May, they’d have nailed it.

 

What else is ripping in May?

  1. #StrongDollar, Strong Consumer Discretionary Stocks (XLY) = +5.4% in May and +21.3% YTD
  2. High Short Interest Stocks = +12.6% in the last month and +21.0% YTD
  3. Low Yield (Higher Growth) Stocks = +11.4% in the last month and +21.9% YTD

It won’t take Americans or their compromised politicians long into their yield chasing expedition to realize that people are bidding up #GrowthAccelerating as bear scraps are issued to the #EOW (end of the world) trade. You should be very please to read that.

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, and the SP500 are now $$1, $101.32-105.29, $83.18-84.71, 101.21-104.36, 1.88-2.01%, 12.13-13.81, and 1, respectively.

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Nose Diving Expedition - Chart of the Day

 

Nose Diving Expedition - Virtual Portfolio


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