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 .
European Financial CDS - Europe's banking system continues its winning ways. Swaps across European financials tightened another 14 bps, on average, last week, bringing the median EU bank to 140 bps, as compared with 101 bps for the US Financials.
Sovereign CDS – Sovereign swaps tightened around the world last week on rising expectations that the US will find a solution and avert default. US swaps tightened 7 bps, falling to 34 bps. Portugal, Italy and Spain saw their swaps tighten by 48, 20 and 8 bps, respectively.
Euribor-OIS Spread – The Euribor-OIS spread tightened by 2 bps to 12 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.
Takeaway: A quick look at some stories on Hedgeye's radar screen.
Keith McCullough – CEO
No deal in sight as shutdown approaches third week (via CNN)
U.S. May Join Germany of 1933 in Pantheon of Defaults (KM note: “Ridiculous” > via Bloomberg)
Israel Finds Tunnel Dug Under Gaza-Israel Border (via AP)
Visa rules for Chinese coming to the UK to be relaxed (via BBC)
Daryl Jones – Macro
Hedge Fund Bears at Year High as Equities Focus on Budget (via Bloomberg)
U.S. May Join Germany of 1933 in Pantheon of Defaults (via Bloomberg)
Kevin Kaiser – Energy
'Dark side' of nat gas boom, according to Chanos (via CNBC)
FLASHBACK: T. Boone Pickens Is Down, But He Swears He Isn't Out (via BusinessWeek)
Josh Steiner – Financials
US investment balances skyrocketing to historic highs (via NY Post)
Fannie Mae, Freddie Mac to go after more strategic defaulters (via LA Times)
Jonathan Casteleyn – Financials
Hedge Fund Bears at Year High as Equities Focus on Budget (via Bloomberg)
Brian McGough – Retail
Accenture study forecasts 11% hike in US holiday spending (via Fibre2fasion)
Google Is Going to Include Your Face in Its New Ads (via BusinessWeek)
Jos. A. Bank keeps Men's Wearhouse door open (via The Deal)
Tumi Signs Outerwear License (via WWD)
Staples launches new price match policy (via Retailing Today)
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Takeaway: The interbank markets of the US and Europe suggest a rising confidence in the outcome of the DC dynamic.
*************** Mergers and Acquisition Black Book Conference Call Today at 2PM ***************
Please join the Hedgeye Financials Team, Jonathan Casteleyn and Josh Steiner, for a deep dive Black Book presentation on the mergers and acquisition environment (M&A) with implications for companies including Greenhill & Co (GHL), Lazard (LAZ), and Evercore (EVR). The call will be held on Monday, October 14th at 2:00pm EDT.
The M&A environment continues to have a positive setup with:
1.) High cash balances on corporate balance sheets
2.) Low corporate borrowing costs
3.) Relatively high stock currency values
4.) Rising CEO confidence
Thus the market has the potential to break out of a 3 year flat environment. Every quarter removed from the Financial Crisis without substantial volatility is a quarter closer to a more robust M&A environment which has positive implications for this group of small and mid-cap Financial stocks.
- Toll Free Number:
- Direct Dial Number:
- Conference Code: 893653#
- Materials: CLICK HERE
Risk Monitor / Key Takeaways:
Last week we indicated that the key measures we were watching for signs of risk rising are the interbank overnight rates. On that front, the news was resoundingly positive. The TED spread compressed by 3 bps to 19 bps (-16% W/W), while Euribor-OIS tightened by 2 bps to 12 bps (-13.5% W/W). This suggests that the Financials are setting up for another rally.
The other news on the week was, of course, JPMorgan's 3Q earnings. On that front, we were impressed with the resilience of the top line, particularly the positive trend in the NIM. Credit quality remains another key driver and we expect these two dynamics will be the principal themes of this quarter's earnings season.
* TED Spread Monitor – The TED spread fell 3.4 basis points last week, ending the week at 18.6 bps this week versus last week’s print of 21.99 bps.
* Euribor-OIS Spread – The Euribor-OIS spread tightened by 2 bps to 12 bps.
* Sovereign CDS – Sovereign swaps tightened around the world last week on rising expectations that the US will find a solution and avert default. US swaps tightened 7 bps, falling to 34 bps.
* European Financial CDS - Europe's banking system continues its winning ways. Swaps across European financials tightened another 14 bps, on average, last week, bringing the median EU bank to 140 bps, as compared with 101 bps for the US Financials.
Financial Risk Monitor Summary
• Short-term(WoW): Positive / 4 of 13 improved / 3 out of 13 worsened / 6 of 13 unchanged
• Intermediate-term(WoW): Positive / 6 of 13 improved / 5 out of 13 worsened / 2 of 13 unchanged
• Long-term(WoW): Negative / 1 of 13 improved / 4 out of 13 worsened / 8 of 13 unchanged
1. U.S. Financial CDS - Big banks saw their swaps largely unchanged last week, trading in a range of +2 to -2 bps. JPMorgan posted the best results with the -2 bps. GS the worst, at +2 bps. Mortgage insurers widened by 22 bps, on average. Overall, swaps widened for 14 out of 27 domestic financial institutions.
Tightened the most WoW: SLM, AIG, COF
Widened the most WoW: AGO, MBI, RDN
Tightened the most WoW: AXP, WFC, COF
Widened the most MoM: MBI, RDN, MTG
2. European Financial CDS - Europe's banking system continues its winning ways. Swaps across European financials tightened another 14 bps, on average, last week, bringing the median EU bank to 140 bps, as compared with 101 bps for the US Financials.
3. Asian Financial CDS - Bank swaps in Asia were mostly lower last week with teh one exception of IDB Bank of India, where swaps rose 10 bps. Chinese banks were 2-3 bps tighter while Japanese financials tightened 3-6 bps.
4. Sovereign CDS – Sovereign swaps tightened around the world last week on rising expectations that the US will find a solution and avert default. US swaps tightened 7 bps, falling to 34 bps. Portugal, Italy and Spain saw their swaps tighten by 48, 20 and 8 bps, respectively.
5. High Yield (YTM) Monitor – High Yield rates fell 5.1 bps last week, ending the week at 6.24% versus 6.29% the prior week.
6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 1.0 point last week, ending at 1808.
7. TED Spread Monitor – The TED spread fell 3.4 basis points last week, ending the week at 18.6 bps this week versus last week’s print of 21.99 bps.
8. CRB Commodity Price Index – The CRB index rose 0.1%, ending the week at 287 versus 286 the prior week. As compared with the prior month, commodity prices have decreased -1.9%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.
9. Euribor-OIS Spread – The Euribor-OIS spread tightened by 2 bps to 12 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.
10. Chinese Interbank Rate (Shifon Index) – The Shifon Index rose 20 basis points last week, ending the week at 3.33% versus last week’s print of 3.13%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.
11. Markit MCDX Index Monitor – Last week spreads widened 12 bps, ending the week at 101 bps versus 89 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.
12. Chinese Steel – Steel prices in China rose 0.5% last week, or 18 yuan/ton, to 3506 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.
13. 2-10 Spread – Last week the 2-10 spread widened 2 bps to 234 bps. We track the 2-10 spread as an indicator of bank margin pressure.
14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.9% upside to TRADE resistance and 1.4% downside to TRADE support.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT
Takeaway: Kate on AMZN/EBAY. We’re not liking that one. TIF dumped by Swatch. Tumi Outerwear…Huh? SPLS price matches AMZN – good luck w/ that.
EVENTS TO WATCH OVER THE NEXT 24 HOURS
WMT - Analyst Meeting: Tuesday 10/15 8:45 am
WWW - Investor Day: Tuesday 10/15 9:00 am
Hedgeye Retail Events
RH Black Book - Wednesday 10/16 11:00 am
FNP - Kate Spade
Takeaway: Over the weekend, Kate Space got major exposure on Amazon, and also had promotions on eBay. AMZN maybe we understand…but eBay? Not exactly the place to be for an aspirational luxury brand. We're not thrilled with this development.
WWW - Blake Krueger Sounds Off on WWW's Q3 Hits
- "'The acquisition has turned out better financially — from a team standpoint and from an integration standpoint — than I could have predicted,' the president, chairman and CEO of Wolverine World Wide Inc. told Footwear News in a phone interview.
- "Overall, Sperry Top-Sider proved to be a big winner, posting double-digit increases for the 16th consecutive quarter. Krueger said that while the brand’s U.S. growth could slow, international opportunities — including a recent agreement with E-Land Group to distribute both Sperry and Keds in China — will fuel expansion. 'There’s a lot of runway in front of us yet,' the CEO said. 'It’s an opportunity that will sustain itself and grow every year.'"
- "Addressing overall industry challenges, Krueger admitted the retail climate could weigh on the company in the fourth quarter, but he affirmed that Wolverine is prepped."
Takeaway: Despite his positive stance, he's still sandbagging on accretion. Analyst meeting in NYC tomorrow.
VFC - Vans to Relaunch Juniors as Young Contemporary Brand
- "As VF sets an ambitious goal for Vans to reach $2.9 billion in sales within the next four years — a 70 percent spike from the $1.7 billion in sales it expects to make this year — the unit is relaunching its juniors apparel division as a young contemporary brand for next spring."
- "Under the leadership of a new vice president of apparel, Vicki Redding, and an influx of new women’s designers and merchandisers, Vans is moving past its previous 14-year-old customer to an older crowd between the ages of 16 and 24."
- "Vans still has a way to go with its women’s business, as well as apparel overall. Clothing made up 20 percent of Vans’ business last year. Of that share, women’s claimed only 20 percent. Bailey said the target is to double the apparel business by 2017."
Takeaway: VFC is sticking behind its lofty goals for Vans. Not sure we love the idea of a juniors line to fuel the growth. But in the end, it can probably run a $200-$300mm juniors line at a respectable margin.
TIF, UHR - Tiffany Looking at Swatch Alternatives
- Tiffany, in a filing with the Securities and Exchange Commission, said it had 'received numerous communications' indicating that Swatch views their watch agreement as 'terminated as of October 1, 2013.'”
- "Accordingly, the luxe jeweler said it is 'proceeding on that basis with plans to design, produce, market and distribute Tiffany & Co. brand watches through alternative arrangements.'”
- "The two companies formed a 20-year strategic alliance in 2007 that created a new Swiss-based firm to produce, design and market luxury watches under the Tiffany name."
Takeaway: If this is not a kick in the gut to Tiffany, I don't know what is. It's used to being the prom queen. But it just got dumped.
TUMI - Tumi Signs Outerwear License
- "The premium brand, best known for its travel, business and lifestyle accessories, has signed a licensing deal with David Peyser Sportswear Inc. to design, develop and distribute Tumi outerwear for men and women."
- "...the collection, which will launch for fall 2014...will range from $295 to $695."
- "Tumi will open a 6,000-square-foot showroom to showcase the outerwear at 463 Seventh Avenue. It is scheduled to open by the end of the year, when the first pieces from the collection will be launched."
Takeaway: Seriously??? Are they going to make apparel out of the same kevlar-like material that they use to make those bullet-proof briefcases?
SPLS - Staples launches new price match policy
- "Starting Nov. 3, the retailer will match prices on items sold and shipped by Amazon.com or any retailer that sells products in retail stores and online under the same brand."
Takeaway: While this is partially necessary to drive volume, we don't see how in the world it could be margin accretive.
DKS - Dick’s grand-opens three new stores
- "Dick’s Sporting Goods grand-opened three new stores on Friday, bringing the total store count to 541 in the U.S."
- "The chain opened a store in Redding, Wash., at the Redding Hilltop Center, its 30th store in the state of Washington. A new opening in Victorville, Calif., at The Mall of Victor Valley, marks the 31st Dick’s store in California. And in Kansas, at the Midstate Plaza in Salina, Dick’s opened its eighth store in the state."
Takeaway: The last thing that DKS should be doing is adding more stores. It should be figuring out why it can't comp.
JOSB , MW - Jos. A. Bank keeps Men's Wearhouse door open
- "Despite Men's Wearhouse Inc.'s rejection of a $2.3 billion unsolicited bid, Jos. A. Bank Clothiers Inc. and its private equity partner Golden Gate Capital will continue to seek a friendly, negotiated agreement, according to a source familiar with the situation."
- "The source would not rule out a scenario of Jos. A. Bank sweetening its offer to entice the target to the negotiating table, but added that Jos. A. Bank and Golden Gate are not interested in bidding against themselves."
SCC - Sears to hold first-ever Canadian Thanksgiving Black Friday sale
- "Sears Canada is getting ready to introduce the first-ever Black Friday sale in Canada to accompany Canadian Thanksgiving in October."
- "'Our customers already participate in our Black Friday sale in November so we wanted to give them one that, in a similar style to the U.S., would accompany our own Thanksgiving Holiday,' said Doug Campbell, president and CEO, Sears Canada. 'With the variety of sales being offered in stores and online they can pick up new home essentials or even get a head start on their Holiday shopping.'"
GOOG - Google Is Going to Include Your Face in Its New Ads
- "On Friday the company said it would begin including recommendations that Google+ users make in advertisements. The new policy kicks in on Nov. 11."
- "Here’s how it works: You use Google+ to rate some product or service. It turns out the company behind that product wants to advertise on Google. When the company purchases an ad, your friends will see a version that includes your photo along with what you said about the product."
Accenture study forecasts 11% hike in US holiday spending
- "U.S. consumers intend to spend an average of $646 on gifts this holiday season, which would represent an 11 percent increase over the $582 they planned to spend, on average, in 2012, according to Accenture’s annual holiday shopping survey."
- "The Accenture Holiday Shopping Survey found that one in five consumers (20 percent) plans to spend more on gifts this year, compared to 14 percent who planned to increase their holiday spending in 2012. They also are more likely to overspend their holiday budget this year (46 percent, compared to 34 percent in 2012)."
Takeaway: One in five consumers intend to spend more this year, but they forecast an 11% rise in total spending (which would be one of the biggest holiday's on record)??? There's some flawed logic here. We'd love to know who funded the survey.
Bangladeshi Garment Executive Held Captive by Workers
- The managing director of a Bangladeshi apparel company where 112 employees died in a November factory fire was held captive by workers for 12 hours over the weekend in a pay dispute.
- "Police said workers demanding salaries and severance payments locked Delwar Hossain of Tuba Group in his office for much of the day Saturday. Mr. Hossain was later released, police said. But workers on Sunday were still holding his brother-in-law as well as a Tuba factory manager, according to police."
- "Workers said Tuba, a garment manufacturer that owns 12 Bangladeshi clothing factories, had closed one of its factories Friday without notifying them or providing back pay and severance. With the Muslim Eid al-Adha festival just two days away, they said they couldn't afford to go home empty-handed."
Takeaway: And who says labor costs are not going up.
Automated Ad Buying Surges Online
- "Automated ad buying, in which marketers use computerized systems to target users based on consumer data and Web-browsing histories, is expected to increase 56% this year in the U.S. to $7.4 billion, according to a study scheduled for release Monday by Magna Global, the research and ad-buying arm of Interpublic Group of Cos."
- "Such 'programmatic buying' would represent about 53% of the $14 billion U.S. market for display-related ad businesses, the company said."
- "About $3.9 billion of the expected automated ad spending this year, Magna said, will be through real-time bidding, in which advertisers, through machines, automatically bid for inventory that meets their ad specifications within milliseconds of it becoming available."
Client Talking Points
The UK relaxing some Chinese visa rules and the world marches forward despite USA Sunday talk show fear-mongering. Chinese stocks could not care less about the US media’s noise. It was up another +0.43% overnight. It's back in black for the year-to-date at +1.6%.
Do European stock and bond markets care about the “default risk” yip-yap overseas? Nope. Italy’s stock market is punching another year-to-date high this morning. Meanwhile, Germany’s DAX is correcting a whopping -0.18% after gaining another +1.2% last week. Take a look at Hedgeye's Q413 Macro Themesdeck on why we like Germany (DAX) more than the U.S. (S&P 500) right now. Incidentally, the SPX risk range is 1683-1708. We sold into Friday’s rip and moved back to 5 LONGS, 5 SHORTS (versus 9 LONGS, 3 SHORTS on Friday’s open). There will be plenty to do today on red if they try to freak out again.
You’d think that if #EOW (End of the World) Republicans and Democrats were credible that Gold would be ripping higher right? Nope. It's still crashing. Gold was down -3.2% last week, and barely has a 30 basis point bid this morning. Don’t make the mistake of confusing the real risk of US #GrowthSlowing with “default risk.” They are two very different things.
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Top Long Ideas
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. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.
Health Care sector head Tom Tobin has identified a number of tailwinds in the near and longer term that act as tailwinds to the hospital industry, and HCA in particular. This includes: Utilization, Maternity Trends as well as Pent-Up Demand and Acuity. The demographic shift towards more health care – driven by a gradually improving economy, improving employment trends, and accelerating new household formation and births – is a meaningful Macro factor and likely to lead to improving revenue and volume trends moving forward. Near-term market mayhem should not hamper this trend, even if it means slightly higher borrowing costs for hospitals down the road.
Financials sector senior analyst Jonathan Casteleyn continues to carry T. Rowe Price as his highest-conviction long call, based on the long-range reallocation out of bonds with investors continuing to move into stocks. T Rowe is one of the fastest growing equity asset managers and has consistently had the best performing stock funds over the past ten years.
Three for the Road
TWEET OF THE DAY
If the USA was going to "default", I doubt Gold would still be crashing (-25% YTD)
QUOTE OF THE DAY
“If you just set out to be liked, you would be prepared to compromise on anything at any time, and you would achieve nothing.” -Margaret Thatcher
STAT OF THE DAY
At the end of July 2013, foreign holders of U.S. Treasury securities totaled close to $5.6 trillion. China is the largest holder of U.S. debt with $1.28T, followed by Japan with $1.14T.
Risk Managed Long Term Investing for Pros
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