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Cartoon of the Day: The Sound of Deflation

Cartoon of the Day: The Sound of Deflation - Deflation cartoon 12.29.2014

That sound you're hearing around the globe? Deflation.


Keith's Macro Notebook 12/29: Europe | UST 10YR | Russell 2000

 

Hedgeye CEO Keith McCullough shares the top three things in his macro notebook this morning.


This Is a Much Bigger Risk Than Greece

Editor's note: This is a brief excerpt from Hedgeye research earlier this morning. For more information on how to become a subscriber click here.

 

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Markets seem agitated by the Greek vote this morning. Worldwide deflation is the much bigger risk.

 

The Greek stock market continues to crash (it’s down -10% this morning to -34% year-to-date). But the more interesting breakdowns @Hedgeye TREND resistance are those in Italy’s MIB and Spain’s IBEX – don’t forget who #deflation hurts the most, #debtors (hence why central planning policies will do anything to try to avoid deflation).

 

This Is a Much Bigger Risk Than Greece - a1

 

On a related note, the best Big Macro, low-volatility, liquid long position to have on if you agree with us on global #GrowthSlowing and #Deflation is the Long Bond (TLT, EDV, etc). That’s been one of our best calls in 2014. But you have to be there on the pullbacks like we saw last week.

 

This Is a Much Bigger Risk Than Greece - a2

 

The UST 10YR Yield is -4 basis points to 2.21% this morning with no support to 2.05%.



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European Banking Monitor: RED In Financials

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.  Greek banks widened the most on fears that the parliamentary vote for a new president would fail.  News broke this morning that the vote did in fact fail.  That will force the country into snap elections in early 2015.

 

European Banking Monitor: RED In Financials  - chart1 euro financials cds

 

Sovereign CDS – We look at the move in swaps as of Friday's close so the Greek election news this morning is not reflected in these figures and has most swaps higher as of this morning. There was notable tightening in Portuguese sovereign swaps (-23 bps to 173 bps) and modest tightening in Italy and Spain.

 

European Banking Monitor: RED In Financials  - chart2 sovereign CDS

 

European Banking Monitor: RED In Financials  - chart3 sovereign CDS

 

European Banking Monitor: RED In Financials  - chart4 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 widened by 1 bps to 10 bps.

 

European Banking Monitor: RED In Financials  - chart5 euribor OIS spread

 

 

Matthew Hedrick 

Associate

 

Ben Ryan

Analyst

 

 

 


MONDAY MORNING RISK MONITOR: INTERMEDIATE TERM RISK IS HIGH

Takeaway: Risk is high and rising as our intermediate term risk gauge is almost completely red. This week we're calling out oil, China and Europe.

Key Takeaways:

Our heatmap below shows almost everything red across the intermediate duration. 10 of 12 signals are deteriorating while just 1 is improving. The main callouts this week are: 1) commodity prices continue to drop. The CRB Index was down 2.2% week-over-week and is now down 12.0% month-over-month as Saudi Arabia keeps its foot on the production gas, 2) Chinese steel prices and the Chinese interbank rate are both going the wrong way. Chinese steel prices are down 2.7% on the week and are down 6.7% on the month. Meanwhile, Chinese interbank rates are up 97 bps on the month, and 3) Europe is backsliding with Greece moving, once again, to the front burner with the announcement this morning that the parliamentary vote for a new president has failed, triggering snap elections in early 2015.

 

 

Financial Risk Monitor Summary

 • Short-term(WoW): Negative / 3 of 12 improved / 3 out of 12 worsened / 6 of 12 unchanged

 • Intermediate-term(WoW): Negative / 1 of 12 improved / 10 out of 12 worsened / 1 of 12 unchanged

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

 

MONDAY MORNING RISK MONITOR: INTERMEDIATE TERM RISK IS HIGH - 15

 

1. U.S. Financial CDS -  Swaps widened for 24 out of 27 domestic financial institutions.  MBIA swaps showed the biggest increase for the second week in a row (+27 bps to 488 bps).  Meanwhile, Genworth swaps continue to widen, a trend sparked by their November 7 announcement of an impending charge of over $1 billion dollars pre-tax and continued by their December 17 announcement that they had not yet completed their annual review of long-term care insurance active life margins. Genworth swaps rose 13 bps to 459 bps.

 

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

Widened the most WoW: MBI, AIG, C

Tightened the most WoW: AIG, MTG, RDN

Widened the most MoM: GNW, C, MBI

 

MONDAY MORNING RISK MONITOR: INTERMEDIATE TERM RISK IS HIGH - 1 2

 

2. European Financial CDS - Swaps mostly widened in Europe last week.  Greek banks widened the most on fears that the parliamentary vote for a new president would fail.  News broke this morning that the vote did in fact fail.  That will force the country into snap elections in early 2015.

 

MONDAY MORNING RISK MONITOR: INTERMEDIATE TERM RISK IS HIGH - 2

 

3. Asian Financial CDS - 9 out of 10 Asian bank CDS widened last week. Japanese and Indian bank swaps widened the most.

 

MONDAY MORNING RISK MONITOR: INTERMEDIATE TERM RISK IS HIGH - 17

 

4. Sovereign CDS – We look at the move in swaps as of Friday's close so the Greek election news this morning is not reflected in these figures and has most swaps higher as of this morning. There was notable tightening in Portuguese sovereign swaps (-23 bps to 173 bps) and modest tightening in Italy and Spain.

 

MONDAY MORNING RISK MONITOR: INTERMEDIATE TERM RISK IS HIGH - 18

 

MONDAY MORNING RISK MONITOR: INTERMEDIATE TERM RISK IS HIGH - 3

 

MONDAY MORNING RISK MONITOR: INTERMEDIATE TERM RISK IS HIGH - 4

 

5. High Yield (YTM) Monitor – High Yield rates fell 74.8 bps last week, ending the week at 6.42% versus 7.17% the prior week.

 

MONDAY MORNING RISK MONITOR: INTERMEDIATE TERM RISK IS HIGH - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 5.0 points last week, ending at 1853.

 

MONDAY MORNING RISK MONITOR: INTERMEDIATE TERM RISK IS HIGH - 6

 

7. TED Spread Monitor – The TED spread rose 3.2 basis points last week, ending the week at 25.4 bps this week versus last week’s print of 22.21 bps.

 

MONDAY MORNING RISK MONITOR: INTERMEDIATE TERM RISK IS HIGH - 7

 

8. CRB Commodity Price Index – The CRB index fell -2.2%, ending the week at 235 versus 240 the prior week. As compared with the prior month, commodity prices have decreased -12.0% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

MONDAY MORNING RISK MONITOR: INTERMEDIATE TERM RISK IS HIGH - 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 widened by 1 bps to 10 bps.

 

MONDAY MORNING RISK MONITOR: INTERMEDIATE TERM RISK IS HIGH - 9

 

10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index fell 6 basis points last week, ending the week at 3.549% versus last week’s print of 3.606%. 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: INTERMEDIATE TERM RISK IS HIGH - 10

 

11. Chinese Steel – Steel prices in China fell 2.7% last week, or 76 yuan/ton, to 2756 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: INTERMEDIATE TERM RISK IS HIGH - 12

 

12. 2-10 Spread – Last week the 2-10 spread tightened to 151 bps, -1 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR: INTERMEDIATE TERM RISK IS HIGH - 13

 

13. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.9% upside to TRADE resistance and 2.2% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: INTERMEDIATE TERM RISK IS HIGH - 14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


MACAU: DECEMBER TRENDING -30%

Takeaway: No surprise here – GGR tracking down 30% YoY. No turn on the horizon.

CALL TO ACTION

While somewhat of a throw away month because of the Chinese President’s visit, the 2nd half of December actually performed very similar to the 1st half.  Daily table revenues were almost identical in both halves of the month and a down 30% month looks likely.

 

What can we say? The relief rally is on but the fundamentals are no better.  Street estimates are lower, and that’s the good news, but estimates are still not low enough. We would fade this rally and look to get more constructive when 2015 Street EBITDA estimates are 10-15% lower, from here, or a positive catalyst emerges.

 

Please see our detailed note: http://docs.hedgeye.com/HE_Macau_12.29.14.pdf


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