WEEKLY RISK MONITOR FOR FINANCIALS

This morning we're rolling out our inaugural weekly risk monitor for Financials. The point is to provide readers with a snapshot of the changes that took place in various risk-based indicators during the last week to help them position as they look ahead to the coming week. We've selected specific indicators that we think represent good "canaries in the coal mine" in that they tend to reflect changes coming before those changes are more broadly priced into equity markets. Overall, 5 of the 8 measures registered positive readings on a week-over-week basis, while 1 was negative and 2 were neutral.

 

Our risk monitor looks at the following metrics weekly:

 

1. CDS for all available US Financials (30 companies).

2. High Yield

3. Leveraged Loans

4. TED Spread

5. VIX

6. Greek Bond Spreads

7. Markit Subprime Spreads

8. AAII Bulls/Bears Sentiment Survey

 

 

1. Financials CDS Monitor - Overall, credit default swaps in Financial companies were tighter nearly across the board last week with the largest improvement coming from GS, WFC and COF. Compared with a month ago, however, swap prices remain considerably elevated with the most widening at HIG, MET, JPM. Conclusion: Positive.

  • Tightened the most vs last week: GS, WFC, COF
  • Widened the most vs last week: ABK, MBI, AGO
  • Tightened the most vs last month: MTG, PMI, RDN
  • Widened the most vs last month: HIG, MET, JPM
  • Greatest CDS vs Equity divergence - last week:
    • GS (CDS 17.9% tighter / Equity 0.2% Higher)
    • ALL (CDS 15.6% tighter / Equity 0.2% Higher)
  • Greatest CDS vs Equity divergence - last month:
    • PMI (CDS 31.0% tighter / Equity 36.3% Lower)
    • MTG (CDS 33.6% tighter / Equity 28.7% Lower)
    • RDN (CDS 24.4% tighter / Equity 45.1% Lower)

WEEKLY RISK MONITOR FOR FINANCIALS - CDS table

 

2. High Yield (YTM) Monitor - High Yield rates tightened 24 bps last week, reversing some of their recent deterioration over EU contagion fears. Rates closed the week at 8.62% down from 8.86% the week prior. Conclusion: Positive.

 

WEEKLY RISK MONITOR FOR FINANCIALS - high yield

 

3. Leveraged Loan Index Monitor - Leveraged loans were essentially unchanged last week, closing at 1491, up a hair from 1488 where they went out the week prior. It's interesting to note the divergence between HY and Leveraged loans over the last week. Leveraged Loans are slightly senior to High Yield in the capital structure (secured vs unsecured), so it is interesting to see HY outperforming LL at a time of still broadly perceived uncertainty. Conclusion: Neutral.

 

WEEKLY RISK MONITOR FOR FINANCIALS - leveraged loan index

 

4. TED Spread Monitor - The TED Spread is a great canary. It was essentially unchanged last week closing at 30.0 bps down a hair from 30.8 bps in the week prior. Conclusion: Neutral.

 

WEEKLY RISK MONITOR FOR FINANCIALS - ted spread

 

5. VIX Monitor - The VIX is admittedly a far more coincident indicator, but we include it as a general reflection on the equities market. Last week the VIX closed at 31.24 down from 41.95 the week prior. Conclusion: Positive.

 

WEEKLY RISK MONITOR FOR FINANCIALS - vix

 

6. Greek Bond Yields Monitor - The Greece situation remains in flux and so we include Greek Bond 10-Year Yields as a reflection of that dynamic. Last week yields fell to 802 bps from 1229 bps. Conclusion: Positive.

 

WEEKLY RISK MONITOR FOR FINANCIALS - greek bond yields

 

7. Markit ABX Index Monitor - The Markit ABX Index was generally positive vs the prior week. We use the 2006-2 series and look at the AAA, AA, A and BBB- series. We include this measure as a reflection of what is going on in deep subprime distressed paper. Conclusion: Positive.

 

WEEKLY RISK MONITOR FOR FINANCIALS - markit data

Source: Markit

 

8. AAII Bulls/Bears Monitor - The Bulls/Bears survey grew more Bearish on the margin vs last week. Bears increased by 8% to 36.6% while Bulls fell 2.5% to 36.6%. This now means that Bulls and Bears are equally balanced at 36% suggesting no edge is available presently from this survey. Conclusion: Negative.

 

WEEKLY RISK MONITOR FOR FINANCIALS - bulls bears

 

Joshua Steiner, CFA

 

Allison Kaptur


Another French Revolution?

"Don't be complacent," writes Hedgeye Managing Director Neil Howe. "Tectonic shifts are underway in France. Is there the prospect of the new Sixth Republic? C'est vraiment possible."

read more

Cartoon of the Day: The Trend is Your Friend

"All of the key trending macro data suggests the U.S. economy is accelerating," Hedgeye CEO Keith McCullough says.

read more

A Sneak Peek At Hedgeye's 2017 GDP Estimates

Here's an inside look at our GDP estimates versus Wall Street consensus.

read more

Cartoon of the Day: Green Thumb

So far, 64 of 498 companies in the S&P 500 have reported aggregate sales and earnings growth of 6.1% and 16.8% respectively.

read more

Europe's Battles Against Apple, Google, Innovation & Jobs

"“I am very concerned the E.U. maintains a battle against the American giants while doing everything possible to sustain so-called national champions," writes economist Daniel Lacalle. "Attacking innovation doesn’t create jobs.”

read more

An Open Letter to Pandora Management...

"Please stop leaking information to the press," writes Hedgeye Internet & Media analyst Hesham Shaaban. "You are getting in your own way, and blowing up your shareholders in the process."

read more

A 'Toxic Cocktail' Brewing for A Best Idea Short

The first quarter earnings pre-announcement today is not the end of the story for Mednax (MD). Rising labor costs and slowing volume is a toxic cocktail...

read more

Energy Stocks: Time to Buy? Here's What You Need to Know

If you're heavily-invested in Energy stocks it's been a heck of a year. Energy is the worst-performing sector in the S&P 500 year-to-date and value investors are now hunting for bargains in the oil patch. Before you buy, here's what you need to know.

read more

McCullough: ‘My 1-Minute Summary of My Institutional Meetings in NYC Yesterday’

What are even some of the smartest investors in the world missing right now?

read more

Cartoon of the Day: Political Portfolio Positioning

Leave your politics out of your portfolio.

read more

Jim Rickards Answers the Hedgeye 21

Bestselling author Jim Rickards says if he could be any animal he’d be a T-Rex. He also loves bonds and hates equities. Check out all of his answers to the Hedgeye 21.

read more

Amazon's New 'Big Idea': Ignore It At Your Own Peril

"We all see another ‘big idea’ out of Amazon (or the press making one up) just about every day," writes Retail Sector Head Brian McGough. "But whatever you do, DON’T ignore this one!"

read more