Correlation Risk

Client Talking Points

EURO

The most important move in macro this morning is the EUR/USD retesting of $1.09 on the upside. It’s not only a Pain Trade in FX but it gives both a bid to bombed out Oil/Commodities and an offer to Japanese/European stocks – correlation risk very high.

CHINA

Both the spot and reference rate for the Yuan are testing 4 year lows making this FX/Correlation Risk all the more relevant. The -$87B draw-down in Chinese FX Reserves was the 3rd largest in 10 years; no bounce for stocks in Shanghai or Hong Kong overnight.

TRANSPORTS

“Ex-Energy”, the S&P 500 was down more than it looked yesterday – Oil & Gas (XOP) was up +0.6% on the day vs. the Transports (IYT) down a big -2.8% - fully loaded with COST inventories +16.5% last night (vs. Sales +1.3%). The U.S. economy is very obviously slowing here in Q4 – the Fed is cutting its GDP forecast as they raise rates.

 

*Tune into The Macro Show with Macro & Housing Analyst Christian Drake at 9:00AM ET - CLICK HERE

Asset Allocation

CASH 70% US EQUITIES 3%
INTL EQUITIES 6% COMMODITIES 0%
FIXED INCOME 15% INTL CURRENCIES 6%

Top Long Ideas

Company Ticker Sector Duration
MCD

Restaurants Sector Head Howard Penney had no material update on McDonald's (MCD) this week. However, here is what Penney wrote around when we added MCD to Investing Ideas. It's worth reiterating our high conviction in the stock:

 

"We continue to get more bullish every time we talk to the company, franchisees and/or customers which we have polled via conducting surveys. We are going to be looking at a much different company 1-3 years from now." 

 

"Urgency has been instilled from the top down by new CEO Steve Easterbrook," according to Penney. "This ship is in gear and headed north. 2015 will be the last time this stock is below $100."

RH

A lot has happened in 13 weeks... not the least of which is that Restoration Hardware (RH) is underperforming not only the market by 16%, but Retail as well (by 7%) – despite RH being more insulated from some of the issues that are clipping earnings today for retailers more broadly.

 

Over this time period, however, RH meaningfully accelerated square footage growth, launched two new concepts. Some say it’s bad timing. We disagree. RH is our favorite name in the retail space, and we like it across all three durations. Trade, Trend, and Tail.

TLT

On went the game of slowing last week with a little central planning un-secretive sauce. Despite the ECB’s move to cut the deposit rate to -0.30%, Draghi didn’t ring the cowbell loud enough. Meanwhile, Friday’s jobs report might have been just enough for Janet to hike rates into a late cycle slowdown. The consensus long USD crowd was crushed on the ECB news. The dollar lost over 2% on Thursday and rates were pushed higher.

 

If growth is going to continue to slow, with a rate hike on the horizon, a relative fixed income spread play (long TLT, short JNK) is exactly what you want on.

Three for the Road

TWEET OF THE DAY

$KMI cuts dividend by 74%.  Ahhh this is so bittersweet it hurts

@HedgeyeEnergy

QUOTE OF THE DAY

No man was ever wise by chance.

Seneca

STAT OF THE DAY

China’s FX reserve balance plunged -$87.2B in NOV (the third-largest decline in at least 10 years) to the lowest absolute level since FEB ‘13.


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