EUR, Japan and Inflation

Client Talking Points

EUR

Expect weakness in the EUR/USD ahead of the indecision on the Spanish Parliament (tomorrow) and German and Dutch Parliaments (Wednesday) voting on Greece’s 3rd bailout package. Germany is pressing hard to get the IMF on board to cover the liability. We maintain that both ECB head Mario Draghi and German Chancellor Angela Merkel are incentivized to maintain a weak euro.

JAPAN

The Nikkei rallied +0.5% overnight on the strength of a better-than-expected 2Q GDP report. The headline figure came in 20bps above consensus expectations of a -1.8% QoQ annualized decline, while the YoY rate of change accelerated to +0.7% from an upwardly revised -0.8% in 1Q. Japan remains our favorite international equity allocation and continues to outperform, down -0.9% WoW vs. a -3.1% drop for the EuroStoxx 600 Index, a -5.1% plunge in the DAX, a -4.2% fall in the CAC, a -2.9% drop in the FTSE 100, a -2.9% drop in the Hang Seng and a -2.1% decline in the KOSPI. Japan continues to outperform international peers from a fundamental perspective as well: underlying dividend growth in 2Q was up +16.8% in Japan vs. only +10% and +8.6% in the U.S. and Europe, respectively.

INFLATION EXPECTATIONS

Everything leveraged to inflation expectations continues to underperform. The U.S. dollar finished down over 1%, and not even inversely correlated commodities could catch a bid ex. Gold and Silver. The CRB finished down -0.2% on the week (-9.8%) to finish below its 2009 crisis lows. And by the way, 5YR forward break-evens have made a series of lower lows from the June reflation trade, head-fake high.  

Asset Allocation

CASH 58% US EQUITIES 4%
INTL EQUITIES 6% COMMODITIES 0%
FIXED INCOME 24% INTL CURRENCIES 8%

Top Long Ideas

Company Ticker Sector Duration
MCD

"We are very bullish on McDonald’s," says Restaurants Sector Head Howard Penney. "We like where this company is going. We like the new CEO and the changes they’re making."

 

Penney notes that there are a lot of things going on inside the company which we can’t see that are extremely meaningful to where this company will be in 12-18 months.

 

"I’ve said this a dozen times recently, but 2015 will be the last year McDonald’s trades at an average price below $100," he says. 

PENN

"As we predicted, regional gaming revenues surged in July which gives us confidence in our Q3 EPS estimate of $0.23, which is $0.04 above the Street," writes Hedgeye Gaming, Lodging & Leisure Sector Head Todd Jordan. "We continue to like Penn National Gaming here due to stable regional gaming trends, better than expected quarterly and annual earnings, and the Plainridge and Jamul contribution to PENN’s two-year growth story."

TLT

The set-up for the September FOMC meeting is as follows:

  1. The Fed runs the risk of tightening into a late-cycle slowdown which could ultimately flatten the yield curve (BULLISH for TLT, EDV, VNQ).
  2. Slower growth and deflationary headwinds are acknowledged and the can is kicked on a rate hike which should also be good for bonds. Until growth inflects positively, you’ll see TLT in our investment conclusions as the yield curve is the best proxy for forward looking growth expectations. 

Three for the Road

TWEET OF THE DAY

JAPAN: our fav Intl Equity market closes +0.5% on the session after holding @Hedgeye support

@KeithMcCullough

QUOTE OF THE DAY

If passion drives you, let reason hold the reins.

Benjamin Franklin

STAT OF THE DAY

Michael Jordan has made $536.6 million from sponsorships from 2000 to 2012. According to Jordan, the vast majority of it came from Nike.


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