Client Talking Points
Welcome to chaotic macro. With cross-asset volatility rising and sideways FX trading, inverse commodity correlations to the USD have broken down over the last 1-3 months. Things like crude oil and copper, which typically sniff out the direction USD, are registering r-squared correlations of +.54 and -.14 to the USD on a 1-month basis and -.22 and +0.64 on a 3-month basis. History suggests this won’t last for an extended period of time, but strap your seatbelts for more non-linear volatility in the interim.
All eyes are on Greece’s Sunday referendum vote (as it relates to credit proposals boiled down to YES you want to stay in the Eurozone, or NO you don’t). Both Tsipras and Varoufakis have upped the ante by saying they will resign if there is a YES vote. We expect ~70% probability of YES, but if a NO comes through expect it to wreck havoc on the markets on Monday.
The Nikkei closed up nearly +1% today, reversing week-to-date weakness on one of the three prongs in our bullish “win-win-win” thesis: subdued survey-based measures of inflation expectations. Specifically, the BoJ’s Tankan Survey showed little change to firms’ FY16 price expectations and its Consumer Survey showed no change to consumers’ price expectations one and five years out. The BoJ has too much demographic hay to bale to meet its inflation target, which effectively means QQE in perpetuity. We reiterate our intermediate-to-long term bullish bias on Japanese equities.
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Top Long Ideas
We came out of the earnings report being very positive about management doing all the little things right. They continue to prove that they are some of the best operators in the industry. Importantly, many small cap restaurant companies with an undisciplined unit growth strategy experience significant labor inefficiencies as they expand. ZOES is in a different class of companies. In a quarter where ZOES opened 12 new company-owned restaurants they managed to decrease both COGS and labor. We view ZOES as one of the best small cap growth names. The company is set-up for long-term success for the following reasons:
PENN’s new property, Plainridge Park in Massachusetts, had a strong opening. We expect slot win per day of $400, above Street expectations. In addition, June state gaming revenues will begin to roll out in 1-2 weeks. We expect June to be as strong as May, setting up Q2 to be estimate-beating quarter for PENN.
After a Fed-fueled week of strength in slow-growth, yield-chasing asset classes and long duration fixed income, both the Dollar and interest rates re-couped their losses from Fed Week. The dollar declined, rates increased, and as a result, those long of gold took some pain. Will this continue? Will a long, sustained rate liftoff ensue? We don’t think so. We continue to repeat that the chance of further downward revisions to forward looking growth estimates from the Federal Reserve and consensus macro is much more likely than not. The attempted suspension of economic gravity from policy makers weakens the currency and puts pressure on bond yields. We remain long of this set-up with gold and long-duration fixed income.
Three for the Road
QUOTE OF THE DAY
“People who say it cannot be done, should not interrupt those who are doing it.”
– George Bernard Shaw
STAT OF THE DAY
Joey Chestnut (USA) successfully ate 61 hot dogs last year at Nathan's Hot Dog Eating Contest.