TED Spread Continues To Signal That Cash Is King

The "TED" Spread is the difference between 3 month US Treasury Yields and 3 month LIBOR. I have attached the chart below to show the implied risks associated with recent spreads widening. Three month LIBOR closed at 2.80% on Friday. In addition to creating a widening TED spread, this is the highest it has traded over Fed funds since 1999.

Despite my being bullish on the US Market's immediate term "Trade", this remains one of the main reasons why I am negative on the intermediate "Trend". Credit risk remains a structural issue. Until this spread narrows again, investors, companies, and countries alike with the largest cash (liquidity) position will win this game of monopoly.

As the TED spread widens, the risk of defaults and bankruptcies continues to heighten. The global bankruptcy cycle is in its early stage.
Research Edge Chart by Andrew Barber, Director

US Market Performance: Week Ended 8/8/08...

Index Performance:

Week Ended 8/8/08:
Dow Jones +3.6%; SP500 +2.9%, Nasdaq +4.5%; Russell2000 +2.5%

2008 Year To Date:
Dow Jones (11.5%), SP500 (11.7%), Nasdaq (9.0%), Russell2000 (4.2%)


The correlations are visually obvious but the chart still does not do justice to the magnitude of the statistical relationship between the price of crude oil and stocks, particularly the cruise lines. The R Square for cruise stocks (CCL, RCL) versus crude prices and the S&P versus crude is 79% and 49%, respectively. Thus, changes in crude explain almost 80% and 50% of the moves in cruise stocks and the S&P, respectively. Moreover, the relationships are highly significant with T Stats off the charts. Kudlow is right. It’s all about oil.

Taking the analysis one step further, changes in crude and the S&P combined explain 90% of the moves in cruise stocks. So to be a hot cruise stock picker all you need to know is where oil and the market are heading. Seems easy enough, right?

Trading cruise stocks right now is a tricky game for your typical consumer analyst. It’s probably wise to stay away, unless you are an oil trader in which case you might as well trade the commodity. Yields don’t seem to matter right now but they will. Yields have held up nicely but I have some serious doubts about sustainability, particularly in on-board spend. More on that later. For now, I’d be patient unless you’re willing to hedge out oil and the market.

Crude driving cruise stocks and the S&P

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MCD – Currency Benefit Abating

MCD posted solid July comparable sales today. U.S. same-store sales grew 6.7% on top of a 4.3% increase last year. The question remains, however, how much of this top-line lift will be reflected in U.S. margins, which have declined for six consecutive quarters, as a result of the negative mix impact from customers trading down to the Dollar Menu and other lower priced menu offerings (average check at breakfast is lower than the rest of the day).

  • Currency Risk

    MCD’s July comparable sales were up 7.6% in Europe versus a 7.7% increase last year. MCD’s Europe division has posted consistently strong same-store sales results, which has translated to high operating income margins. Europe’s operating income growth, however, has been boosted by a growing foreign currency benefit for the last eight quarters. In 2Q, this currency impact helped by 16% in line with 1Q. As Keith McCullough highlighted earlier today, the U.S. Dollar Index is up 5% since July 14, which indicates the benefit MCD has seen from this currency cushion will begin to slow in the coming quarters. MCD’s Europe business has posted impressive operating growth in the double-digit range even excluding currency, but the incremental currency flow through has helped to offset U.S. margin weakness as it relates to the company’s consolidated operating income.


Personal consumption expenditures have been a rocket ship over the past 20 years. Gaming revenue growth has been even more impressive. Gambling spend accelerated from 0.3% of PCE in 1990 to a peak of 0.94% in December, 2006. The trend broke soon after that all the way down to 0.79% in June of 2008. As a point of reference, if gambling reverts to the mean since 1990 of 0.6%, revenues would fall by $20bn annually or 25% of the current level. This trend could be a double whammy in a consumer slowdown.

Gambling % of PCE rolling over

I Bought The US Market This Morning... No Joke

My Compliance Officer thought it was a typo, but I did in fact BUY the S&P 500 (SPY) this morning. This US Dollar strength is going to beget the long side of the US market "Trade", at least to the target level that I issued yesterday of 1299.

Keep a "Trade" a trade however. Commodities down, inflation down, will be the squeeze "Trade" that the Street cannot ignore.

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.