Hedgeye - WEEKLY RISK MONITOR FOR FINANCIALS - TRAJECTORY FLATTENS, WHICH IS A POSITIVE ON THE MARGIN

Last week, 2 of the 8 risk measures registered positive readings on a week-over-week basis, while 4 were neutral and two were negative - a pretty balanced reading suggesting the jury is still out on whether concerns around Europe are subsiding or simply pausing before their next move. That said, last week 6 of 8 measures recorded worse readings sequentially, suggesting that this week's leveling out may be a positive on the margin from a second derivative standpoint.

One caveat is that our interpretation of the AAII Bulls/Bears survey is that a more bearish reading is bearish. Most market observers would use this survey as a contrarian indicator, which we wouldn't disagree with from a practitioner standpoint. However, for the purposes of this risk monitor, we treat an increase in bearish sentiment as a negative.

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 mixed last week, a week of respite following major hikes over the last few weeks. The largest decreases week over week were AGO, C, GS, and COF. Swap prices remain considerably elevated compared to a month ago, with the most widening at XL, ABK, GNW, and HIG. Conclusion: Neutral.

Widened the least vs last week: GS, C, COF, AGO
Widened the most vs last week: XL, ABK, BBVA-ES, POP-ES

Widened the least vs last month: C, GS, SAB-ES, POP-ES
Widened the most vs last month: XL, ABK, GNW, HIG

WEEKLY RISK MONITOR FOR FINANCIALS - TRAJECTORY FLATTENS, WHICH IS A POSITIVE ON THE MARGIN - cds

2. High Yield (YTM) Monitor - High Yield rates fell 14 bps last week, remaining above their elevated levels preceding the Greek bailout. Rates closed the week at 8.97% down from 9.11% the week prior. Conclusion: Positive.

WEEKLY RISK MONITOR FOR FINANCIALS - TRAJECTORY FLATTENS, WHICH IS A POSITIVE ON THE MARGIN - high yield

3. Leveraged Loan Index Monitor - Leveraged loans were flat last week, closing at 1464, the same point they went out the week prior. Conclusion: Neutral.

WEEKLY RISK MONITOR FOR FINANCIALS - TRAJECTORY FLATTENS, WHICH IS A POSITIVE ON THE MARGIN - lli

4. TED Spread Monitor - The TED Spread is a great canary. It rose last week closing at 37.1 bps up from 33.2 bps in the week prior. Conclusion: Negative.

WEEKLY RISK MONITOR FOR FINANCIALS - TRAJECTORY FLATTENS, WHICH IS A POSITIVE ON THE MARGIN - 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 32.07 down from 40.10 the week prior. Conclusion: Positive.

WEEKLY RISK MONITOR FOR FINANCIALS - TRAJECTORY FLATTENS, WHICH IS A POSITIVE ON THE MARGIN - 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 20 bps to 762 bps from 782 bps. Conclusion: Neutral.

WEEKLY RISK MONITOR FOR FINANCIALS - TRAJECTORY FLATTENS, WHICH IS A POSITIVE ON THE MARGIN - 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.

8. AAII Bulls/Bears Monitor - The Bulls/Bears survey grew more Bearish on the margin vs last week. Bulls decreased by 11.5% to 29.8% while Bears rose 17.2% to 50.9%, putting the spread at 21% on the bearish side, versus 7.6% to the bullish side last week. Conclusion: Negative.

Joshua Steiner, CFA

Allison Kaptur