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
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)
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.
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.
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.
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.
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.
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.
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.
Joshua Steiner, CFA