Last week, 3 of the 8 risk measures registered positive readings on a week-over-week basis, while the remaining five were neutral.
Our risk monitor looks at the following metrics weekly:
1. CDS for all available US Financials (29 companies).
2. High Yield
3. Leveraged Loans
4. TED Spread
5. Journal of Commerce Commodity Price Index
6. Greek Bond Spreads
7. Markit MCDX
8. AAII Bulls/Bears Sentiment Survey
1. Financials CDS Monitor – Swaps were mixed this week. Twelve of the 30 CDS readings contracted, while 17 widened. Conclusion: Neutral.
Contracted the most vs last week: MBI, MS, AGO
Widened the most vs last week: AON, ALL, TRV
Contracted the most vs last month: MBI, XL, AXP
Widened the most vs last month: AON, ALL, TRV
2. High Yield (YTM) Monitor – High Yield rates fell 21 bps last week. Rates closed the week at 8.74% down from 8.95% the week prior. Conclusion: Positive.
3. Leveraged Loan Index Monitor - Leveraged loans rose by 10 points last week, closing at 1466 versus 1456 the week prior. Conclusion: Positive.
4. TED Spread Monitor - The TED Spread is a great canary. Last week it remained flat, closing at 38 bps. Conclusion: Neutral.
5. Journal of Commerce Commodity Price Index – The JOC smoothed commodity price index is a useful leading indicator. A sharp sell-off in this index starting in July ’08 heralded further declines in the stock market. This week, the index fell slightly, closing on Thursday at 7.19, down just over 1 point versus last week’s close at 8.59. Pricing data was not available for Friday. Conclusion: Neutral.
6. Greek Bond Yields Monitor – Greek bonds yields and CDS show that concerns over debt have not waned. Last week yields declined very slightly, ending the week at 1025 bps versus 1033 bps the prior week. Conclusion: Neutral.
7. Markit MCDX Index Monitor – The Markit MCDX is a measure of municipal credit default swaps. We believe this index will be a useful indicator of pressure in state and local governments. Each index is a basket of 50 bonds, both revenue and GO, and the chart displayed is the average of four indices. A volatile week ended up largely flat, as spreads closed at 221 versus 228 a week ago. Conclusion: Netural.
8. AAII Bulls/Bears Monitor - The Bulls/Bears survey ripped back to the bullish side last week. Bulls rose by 18.5% to 39.4% while Bears fell 19.3% to 37.8%, pushing the spread to 2% bullish, versus 36% bearish the prior week. Conclusion: Positive.
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.
Joshua Steiner, CFA