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WEEKLY RISK MONITOR FOR FINANCIALS: STILL OVERWHELMINGLY NEGATIVE

Most troubling this past week is that high yield and leveraged loans broke to new lows (price), while the CDS for Financial companies (US) was generally wider week over week even though equities were slightly higher. The TED Spread continues to widen, even as LIBOR marks time. Overall, six of our eight risk metrics registered negative week over week changes, while two 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. Journal of Commerce Commodity Price Index
6. Greek Bond Spreads
7. Markit Subprime Spreads
8. AAII Bulls/Bears Sentiment Survey

 

1. Financials CDS Monitor - Spanish banks were the best performers in CDS last week, with three of the four improving. In the US, the environment was less sanguine, as Moneycenters and Brokers CDS rose an average of 11%, Consumer Finance companies rose an average of 7%, and Insurance companies rose an average of 15% (median 9%). Conclusion: Negative.

 

Tightened the most versus last week: Spanish banks (SAN-ES, BBVA-ES, SAB-ES, POP-ES)
Widened the most versus last week: ACE, XL, ABK, AGO
Widened the least versus last month: BAC, COF, MMC, SAN-ES
Widened the most versus last month: ACE, XL, ABK, AGO

 

WEEKLY RISK MONITOR FOR FINANCIALS: STILL OVERWHELMINGLY NEGATIVE - cds

 

2. High Yield (YTM) Monitor - High Yield rates rose 20 bps, continuing their recent march upward.  Rates closed the week at 9.29% versus 9.09% the prior week This is a new high on yield post-February (new low on price).  Conclusion: Negative.  

 

WEEKLY RISK MONITOR FOR FINANCIALS: STILL OVERWHELMINGLY NEGATIVE - high yield

 

3. Leveraged Loan Index - Leveraged loans fell last week to close at 1453, down 11 bps from the prior week.  This is also a new low on price post-February. Conclusion: Negative.

 

WEEKLY RISK MONITOR FOR FINANCIALS: STILL OVERWHELMINGLY NEGATIVE - lli

 

4. TED Spread Monitor - A great canary, the TED spread continued to close higher on almost a daily basis, finishing the week at 46 bps, 6 bps higher than the previous week.  Even though the Libor component was flat, we still regard this as a meaningful negative. Remember, a persistently high TED Spread was one of the ways markets knew for sure that the fundamental backdrop was not improving in the 2007/2008 credit crisis. Conclusion: Negative. 

 

WEEKLY RISK MONITOR FOR FINANCIALS: STILL OVERWHELMINGLY NEGATIVE - ted

 

5. Journal of Commerce Commodity Price Index - A sharp sell-off in this index served as a harbinger of the 2008 crash. This week the JOC Commodity Index closed at 16.11 on Thursday, down 4.3 from the previous week.  Conclusion: Negative. 

 

WEEKLY RISK MONITOR FOR FINANCIALS: STILL OVERWHELMINGLY NEGATIVE - joc

 

6. Greek Bond Yields Monitor - Greek Bond yields fell 11 bps  last week to 811 bps.  Conclusion: Positive. 

 

WEEKLY RISK MONITOR FOR FINANCIALS: STILL OVERWHELMINGLY NEGATIVE - gr bond

 

7. Markit ABX Index Monitor - We include this measure as a reflection of what is going on in deep subprime distressed paper.  We use the 2006-2 series and look at the AAA, AA, A and BBB- series.  The Markit ABX Index was generally flat last week, except the A series, which made a strong move to the upside.  Conclusion: Positive.

 

WEEKLY RISK MONITOR FOR FINANCIALS: STILL OVERWHELMINGLY NEGATIVE - markit

 

8. AAII Bulls/Bears Monitor - The Bulls/Bears survey grew more bearish on the margin, with bulls falling 2.6% to 34.5% and bears gaining 2.3% to climb to 43.1%.  This leaves the spread at 9% to the bearish side, up from 4% bearish last week.  We consider extreme readings in this series to be notable (particularly to the bearish side) as a contraindicator, but moderate readings are less indicative of short-term movements. Conclusion: Negative.  

 

WEEKLY RISK MONITOR FOR FINANCIALS: STILL OVERWHELMINGLY NEGATIVE - bulls bears

 

Joshua Steiner, CFA

 

Allison Kaptur

Today's Truth

“Whoever is careless with the truth in small matters cannot be trusted with the important matters.”

~ Albert Einstein

 

The truth is that the US stock market finally closed up for 2 days in a row. The truth is that the SP500 is up +0.2% now for the month of June. The truth is that 2 days and 0.2% does not an immediate or intermediate term TRADE or TREND make.

 

The truth is that I was just parked on I-95 for almost 2 hours this morning, so I’m going to keep this short and to the point. Into and out of last week’s YTD closing lows for US, European, and Asian equity markets, we covered a lot of short positions (covered SPY on 6/4; covered QQQQ on 6/7). Our cash position in the Hedgeye Asset Allocation Model peaked at 79% early last week. This morning we’ll open the week with a 70% cash position and a 3% position allocated to US Equities.

 

The truth is that global markets, from countries to their currencies and commodities remain broken from an intermediate term TREND perspective. In the Hedgeye Risk Management model, the intermediate term TREND duration is 3 months or less. If this morning’s rally in the US futures holds and we see the first 3-day rally in US Equities since April, the truth will also be that the immediate term TRADE lines across markets, globally, will come back into play.

 

In the Hedgeye Risk Management model, the immediate term TRADE is 3 weeks or less in duration. Here are those TRADE lines of resistance (we continue to use them as critical lines of resistance, or stops, as we look to bear market rallies as selling opportunities):

  1. S&P 500 = 1104
  2. Dow Jones Industrial Average = 10,312
  3. Nasdaq Composite = 2276
  4. Russell 2000 = 661
  5. S&P Consumer Discretionary Sector (XLY) = 32.64
  6. S&P Financials Sector (XLF) = $14.97
  7. Goldman Sachs (GS) = $141.91

We bought Goldman Sachs (GS) last Thursday at $133.04. This is a good example of buying a great franchise at a great price but, at the same time, understanding what duration we were buying the stock for. Every stock, commodity, currency, etc. can get immediate term oversold. In this environment, that’s where we want to be covering shorts and buying longs. Every market has a time and price where you need to be active.

 

At the same time, we don’t want to try and pretend to be Warren Buffett here, so you need the discipline to sell/short whatever you bought/covered if it can’t breakout above its immediate term TRADE line of resistance. That’s how we think about risk management in a bear market. As a practical matter, whether it’s the SPY, XLF, or GS, we consider selling decisions at both the security level and in the aggregate.

 

The truth is that not every investor you are competing with on the bid or offer is duration agnostic. The truth is that some investors are landlocked in a style that doesn’t allow them to capture the immediate term alpha that you can pull out of a market that is breaking down but inevitably bounces. The truth is that this is going to provide a huge advantage to those who are equipped to manage both their absolute exposure to cash and net exposure to short positions in 2010.

 

From a Hedgeye Macro Theme perspective, we remain very bearish on the only bubble that remains – that of the Fiat Fools in Big Keynesian Governments. After we covered our short position in the Nasdaq last Monday, we also shorted the US Dollar (UUP) as a way to express our being negative on the US deficit and debt disasters that America has yet to address. The good news for Europeans on deficit spending is that they are at least starting to tell the truth.

 

While a down Dollar may very well be reflationary for commodities priced in US Dollars in the immediate term (we have a 6% allocation to Commodities), in the intermediate term the truth has already been told by the Europeans as to where the Road to Keynesian Perdition ends – with austerity measures. The truth is that we aren’t telling Americans the truth about that because they won’t like austerity measures either.

 

My immediate term support and resistance levels for the SP500 are now 1082 and 1104, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Today's Truth - Day


US STRATEGY – CONFIDENTLY MIXED

The S&P 500 finished higher on Friday and rose 2.5% for the week, despite some mixed MACRO economic data.  On Friday, the preliminary June Michigan Consumer confidence Index hit its highest level in more than two years in June, though retail sales unexpectedly fell in May for the first time since September.

 

MACRO data points for the week pertaining to the consumer pointed to mostly weaker trends. Consumer credit trends, mortgage applications, initial jobless trends and retails sales all showed softness.  Coming into Friday’s release of retail sales, consumer spending had been one bright spot since last October.  May Retail Sales declined 1.2% vs. consensus of 0.2%; ex-Autos (1.1%) vs. consensus 0.1%.  April Retail Sales was revised downward to 0.6% from 0.4%; ex-Autos revised upward to 0.6% from 0.4%. 

 

In contrast to the weakening macro data points, confidence showed stronger trends.  On Wednesday last week, the ABC confidence numbers showed a slight tick positive and on Friday the preliminary June Michigan Consumer Confidence also improved.  June University of Michigan Confidence (prelim) 75.5 vs. consensus 74.5; the final May reading was 73.6.

 

Technology shares climbed for a second consecutive day, and the NASDAQ ended up roughly where it started on Monday.  Strong results and optimism from chipmakers attempted to stifle concerns around a slowdown in the space. Pharma rallied around numerous upgrades and investors taking on new risk.

 

On Friday, the three best performing sectors were Materials (XLB) up 1.1%, Technology up 0.9% and, Healthcare up 0.81%.  With the S&P 500 up 2.5% on the week, the Hedgeye Risk Management models now have Energy (XLE) and Utilities (XLU) positive on TRADE; there are no companies positive on TREND.  The three worst performing sectors on Friday were Consumer Staples (XLP), Consumer Discretionary (XLY) and Utilities (XLU).  The XLP and the XLY were the only two sectors down on the day.   

 

The DXY rallied 0.4% on Friday and the Hedgeye Risk Management models have the following levels for the USD – Buy Trade (86.32) and Sell Trade (88.21).  The VIX declined 5.8% on Friday and 18.6% last week.  The Hedgeye Risk Management models have the following levels for the VIX – Buy Trade (27.11) and Sell Trade (36.41). On Friday, Treasuries gained modestly with the long-end outperforming.

 

In early trading, the EURO is trading higher by 1.1%.  The Hedgeye Risk Management models have the following levels for the EURO – Buy Trade (1.18) and Sell Trade (1.23).

 

A notable standout on Friday was Healthcare (XLV). The (XLV) was up 0.8%, led by strength in Biotech with the BTK +1.8% and Pharmaceuticals (IHE) up 1.4%.  The second best performing sector on Friday was Technology (XLK).  The S&P software index was up 2.2% on the day and the SOX improved by 1.4%. National Semiconductor’s earnings and upbeat guidance lifted its shares by +5.0%; May quarter revenues, earnings and gross margins all beat consensus estimates.  Coupled with TXN’s (0.3%) bullish outlook earlier this week, investors are beginning to get a clearer picture of how the second half could take shape in Semis.

 

In early trading, crude oil is trading above $75 on speculation of continued growth in the U.S. economy. The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (73.73) and Sell Trade (76.40).

 

In early trading, Copper is trading higher for the fifth straight day.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (2.89) and Sell Trade (3.05). 

 

The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,214) and Sell Trade (1,245).   

 

As we look at today’s set up for the S&P 500, the range is 22 points or 0.9% (1,082) downside and 1.1% (1,104) upside.  Equity futures are trading above fair value and close to session highs in a continuation of Friday's late rally and ahead of a busier week for economic releases which include May's CPI reading on Thursday.

 

Howard Penney

 

US STRATEGY – CONFIDENTLY MIXED - S P

 

US STRATEGY – CONFIDENTLY MIXED - DOLLAR

 

US STRATEGY – CONFIDENTLY MIXED - VIX

 

US STRATEGY – CONFIDENTLY MIXED - OIL

 

US STRATEGY – CONFIDENTLY MIXED - GOLD

 

US STRATEGY – CONFIDENTLY MIXED - COPPER


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MGM: ESTIMATES ARE STARTING TO LOOK AGGRESSIVE

MGM may have trouble making consensus Q2 EBITDA estimates. A Q2 miss may mean more to investors than the Q1 miss.

 

 

Paulson & Company took a big stake in three gaming companies:  MGM, BYD, and HET.  In each case, the successful hedge fund manager took on significant exposure to the three worst performing casino markets:  Las Vegas Strip, Las Vegas Locals, and Atlantic City.  What is he thinking?

 

We don’t have a line in to John Paulson but he is clearly making a recovery bet.  Those three markets were hit the hardest, so a trough to peak recovery would be the greatest.  Moreover, these markets have not begun to recover.  We won’t take issue with the BYD bet on the LV locals market other than the timing. 

 

The problem with the MGM bet is two-fold.  First, the likelihood of MGM missing the Q2 consensus estimate is high which means forward estimates will have to come down.  So much for a V-shaped recovery.  Second, MGM’s valuation seems to already reflect expectations of a V-shaped recovery.  Granted, our estimates are below the Street, but MGM’s enterprise value multiple of 2011 EBITDA is right at 12.6x.  I’ve covered this sector since 1996 (I’m old) and double digit multiples for Las Vegas assets have been generally confined to periods of cheap money and sub 4x leverage.  MGM currently has a leverage ratio of around 9x.  Bulls better hope for a V-shaped recovery, although hope is not an investment process.

 

The following chart shows our estimates relative to the Street's for MGM’s Las Vegas Strip EBITDA.  We present this comparison because this is where we really differ from the Street.  On a consolidated, as reported, basis, our 2011 EBITDA estimate is $1.15 billion versus the Street at $1.40 billion.  We think the Street will come down in 2010 and 2011, closer to our estimates following the Q2 release.

 

MGM: ESTIMATES ARE STARTING TO LOOK AGGRESSIVE   - mgm

 

Macau is the one strong market for MGM.  However, they continue to underperform in that market following a surge in share late last year.  Investors expecting a Macau IPO catalyst for MGM may be disappointed.  We think MGM will generate significantly below the $500 million that some expect.


The Week Ahead

The Economic Data calendar for the week of the 14th of June through the 18th is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.

 

The Week Ahead - c1

The Week Ahead - c2


Forecasts Revisited: Germany vs USA

Position: Short France (EWQ)

 

Germany’s Bundesbank raised growth forecasts for the country in its bi-annual economic outlook report today, calling for +1.9% this year (versus a previous estimate of +1.6%) and +1.4% in 2011 (versus +1.2%). For comparison, Bloomberg’s average GDP forecast for Germany is +1.8% in 2010 Y/Y and 1.7% in 2011.

 

We agree with the report that inflation levels will likely be moderate over the medium term, despite the Euro’s depreciation, and that exports may get a boost from a weak Euro and improving global demand.

 

However, we’re cautious on the contagion threats from sovereign debt default across Europe. As we’ve pointed out in our Q2 quarterly theme work, investment risk related to sovereign debt default or restructuring is not limited to Greece, but will spread to Spain, France, and Italy, much larger economies than Greece with significantly higher levels of debt exposure to European banks, especially in Germany.  

 

Flipping to the other side of the pond, we think that growth estimates for the US, like Germany, may be lofty.

 

At the Federal Budget Committee hearing on Wednesday, Fed Chairman Ben Bernanke forecast 3.5-4% GDP growth in 2011. For comparison, Bloomberg’s average GDP forecast for the US is +3.2% in 2010 Y/Y and 3.0% in 2011.

 

Keith wrote the following comments in response:

 

“So Ben Bernanke is not only forecasting a higher level of US growth than the Bloomberg consensus for 2011 but now more than a DOUBLE of the Bundesbank’s forecast for Germany in 2011!

 

With both pending US deficits and debt maturities demonstrably higher than Germany’s, we have a very hard time comprehending the world Bernanke sees coming in 2011. Much like our differences in forecasts versus Bernanke’s in 2008 this, unfortunately, remains a consistent divergence of analytical opinion.”

 

Tack on a jobless recovery that could run out of stem in 2H10 and headwinds facing the consumer coming down the pike – including housing – and it’s easy to see why Bernanke’s Bet might be a bit too aggressive.

 

Matthew Hedrick
Analyst


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