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Our risk monitor this morning is topical and timely as the European situation continues to push spreads out further. While our charts below reflect week over week changes through Friday's close, as of this morning the TED Spread has widened further to 36 bps. While still significantly below crisis levels, it's the trajectory that matters and the trajectory has been moving steadily higher for the last few weeks. As long as this measure is rising, we think it is unlikely that Financials will outperform, notwithstanding a short-term snap-back rally.

Overall, 6 of the 8 measures registered negative readings on a week-over-week basis, while 2 were positive.

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 - Credit default swaps in Financial companies were worse across the board last week with the largest widening coming from AGO, AIG, and GNW.  The smallest increase week over week was at TRV, AON, and MMC. Swap prices remain considerably elevated compared to a month ago, with the most widening at AIG, GNW, and HIG. Conclusion: Negative.

  • Widened the least vs last week: TRV, AON, MMC
  • Widened the most vs last week: AGO, AIG, GNW
  • Widened the least vs last month: BAC, C, PGR
  • Widened the most vs last month: AIG, GNW, HIG
WEEKLY RISK MONITOR FOR FINANCIALS - RISK CONTINUES TO RISE - cds
2. High Yield (YTM) Monitor - High Yield rates expanded 49 bps last week, pushing back above their elevated levels preceding the Greek bailout. Rates closed the week at 9.11% upfrom 8.62% the week prior. Conclusion: Negative.
WEEKLY RISK MONITOR FOR FINANCIALS - RISK CONTINUES TO RISE - high yield
3. Leveraged Loan Index Monitor - Leveraged loans fell last week, closing at 1464, down from 1491 where they went out the week prior. Conclusion: Negative.
WEEKLY RISK MONITOR FOR FINANCIALS - RISK CONTINUES TO RISE - lli
4. TED Spread Monitor - The TED Spread is a great canary. It rose last week closing at 33.2 bps up from 27.3 bps in the week prior. Conclusion: Negative.
WEEKLY RISK MONITOR FOR FINANCIALS - RISK CONTINUES TO RISE - 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 40.10 up from 31.24 the week prior. Conclusion: Negative.
WEEKLY RISK MONITOR FOR FINANCIALS - RISK CONTINUES TO RISE - 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 slightly to 782 bps from 802bps. Conclusion: Positive.
WEEKLY RISK MONITOR FOR FINANCIALS - RISK CONTINUES TO RISE - gr bond
7. Markit ABX Index Monitor - The Markit ABX Index was generally flat/down 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: Neutral/Negative.
WEEKLY RISK MONITOR FOR FINANCIALS - RISK CONTINUES TO RISE - markit
8. AAII Bulls/Bears Monitor - The Bulls/Bears survey grew more Bullish on the margin vs last week. Bulls increased by 4.7% to 41.3% while Bears fell 2.9% to 33.9%, putting the spread at 7.6% on the bullish side, versus a even split last week. Conclusion: Positive.
WEEKLY RISK MONITOR FOR FINANCIALS - RISK CONTINUES TO RISE - bulls bears

Joshua Steiner, CFA

Allison Kaptur