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Volume, Oil and #Recession

Client Talking Points

VOLUME

Total U.S. Equity Market Volume (including dark pool) is down -16% and -18% vs. their 1-month and 1-year averages on yesterday’s +1% SPY day. The Liquidity Trap in small caps (and Russell) remains obvious, looking nothing like the headline level of the S&P 500.

OIL

Oil experienced a textbook crash, bounce, fade move in what so many pundits have hoped for in 2015 – we think they call (ed) it “reflation” – but #Deflation is still winning with WTI down -2.3% (Russia -1.5%) after failing at the top end of the $34.83-38.29 risk range.

RECESSION

The probability of a recession continues to rise as we head into 2016. The Yield Spread (10YR minus 2YR) just flattened to a year-to-date low of 121 basis points and its rarely seen this level during the Bernanke/Yellen regime. If they (Fed) keep tightening into the slow-down, they’ll perpetuate it.

 

*Tune into The Macro Show at 9:00AM ET - CLICK HERE

Asset Allocation

CASH 63% US EQUITIES 2%
INTL EQUITIES 0% COMMODITIES 0%
FIXED INCOME 21% INTL CURRENCIES 14%

Top Long Ideas

Company Ticker Sector Duration
FII

Federated Investors (FII) profitability got a boost as the Fed boosted short term rates for the first time in 7 years. Even the slight 25 basis point hike improves profitability in the firm’s leading money fund business by +30% into the New Year.

 

In essence, the firm rolls 30-day paper throughout the short term fixed income curves and the new higher yields forthcoming into 2016 will allow the company to claw back some of the waived fees it has extended to its client base in money funds. Year-to-date the company has waived over $300 million in fees. With that firmly in the rearview, it becomes an opportunity set as FII gets higher yield from cash products next year.

 

In the financial sector, FII is the most asset sensitive name we cover, meaning it benefits most from even marginal interest rate hikes.

RH

We have to give Restoration Hardware Chairman and CEO Gary Friedman props for his approximately nine minute segment on Cramer 2 weeks. Let's face it, him going on what's arguably the most volatile and biased financial media platform, unscripted, is not what we wanted to see. The risk of fireworks was high.

 

But he capped off a successful day RH (CFO and IR) had on the investor conference circuit by focusing on the real value drivers at Restoration Hardware (RH) -- growth in product concepts, and RH's real estate transformation. The appearance was planned well before the earnings release, by the way, coinciding with a business-focused trip to NYC. All-in, it was a positive event for the stock.

  

TLT

In case you were looking for Style Factors that crushed it last week – the Top 3 gainers were the Top 3 #Deflations of 2015!

  • High Beta Stocks were +3.5% last week to -12.0% YTD
  • High Debt (to EV) Stocks were +2.9% last week to -10.9% YTD
  • Small Cap Stocks were +3.2% last week to -12.4% YTD
  • *Mean performance of Top Quartile vs. Bottom Quartile (SP500 Companies)

 

In other words, the no-volume squeeze had the smaller cap Russell 2000 outperform the large cap Dow at +3.0% week-over-week vs. 2.5%. Heading into the final week of the year, the Dow and Russell are down -1.5% and -4.1%, respectively.

 

In a slower-for-longer secular growth world, you should pay more for the organic growth that you can find. But, more importantly, you should realize that “cheap” has the illusion of “cheap” because the U.S. economic cycle is slowing alongside the secular. 

Three for the Road

TWEET OF THE DAY

Darius Dale: This Is the 'Biggest Risk Heading Into 2016’

https://app.hedgeye.com/insights/48295-dale-this-is-the-biggest-risk-heading-into-2016… via @HedgeyeDDale

@Hedgeye

QUOTE OF THE DAY

If you lose an hour in the morning, you have to hunt for it the rest of the day.

Chinese Proverb

STAT OF THE DAY

The 20 retail companies in the Fortune 500 recognize an average of $6,300 in annual profit per employee. The minimum wage decisions being discussed at WMT would take annual profit per employee down by 38% for a hike to $9 and 71% for a hike to $10.10.


December 30, 2015

  • Bullish Trend
  • Bearish Trend
  • Neutral

INDEX BUY TRADE SELL TRADE PREV. CLOSE
UST10Y
10-Year U.S. Treasury Yield
2.32 2.16 2.32
SPX
S&P 500
2,001 2,093 2,078
RUT
Russell 2000
1,108 1,169 1,160
COMPQ
NASDAQ Composite
4,913 5,129 5,107
NIKK
Nikkei 225 Index
18,525 19,342 18,982
DAX
German DAX Composite
10,339 10,885 10,860
VIX
Volatility Index
14.30 21.71 16.08
DXY
U.S. Dollar Index
97.41 99.40 98.17
EURUSD
Euro
1.07 1.10 1.09
USDJPY
Japanese Yen
119.84 121.52 120.46
WTIC
Light Crude Oil Spot Price
34.83 38.29 37.33
NATGAS
Natural Gas Spot Price
1.69 2.36 2.32
GOLD
Gold Spot Price
1,049 1,081 1,068
COPPER
Copper Spot Price
2.03 2.15 2.14
AAPL
Apple Inc.
104 110 108
AMZN
Amazon.com Inc.
660 696 693
GOOGL
Alphabet Inc.
763 797 793
DIS
Walt Disney Company, Inc.
102 110 107
KMI
Kinder Morgan Inc.
13.81 16.45 15.10
VRX
Valeant Pharmaceuticals Inc.
98.06 111.31 101.39

 

Hedgeye's Daily Trading Ranges are twenty immediate-term (TRADE) buy and sell levels, with our intermediate-term (TREND) view and the previous day's closing price for each name.  Click HERE for a video from Hedgeye CEO Keith McCullough on how to use these risk ranges.

 


Cartoon of the Day: Roadkill

Cartoon of the Day: Roadkill - Deerflation cartoon 12.29.2015

 

Fed head Janet Yellen has called deflation "transitory." There's nothing transitory about it. In fact, deflation is pervasive; just look at the crash in commodity prices. 


the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

INSTANT INSIGHT | How To Risk Manage The Coming Recession

INSTANT INSIGHT | How To Risk Manage The Coming Recession - tlt lowdown

 

Wait... didn't the Fed just hike interest rates? Why are interest rates falling? 

 

Good question.

 

Here's the lowdown from Hedgeye CEO Keith McCullough in a note to subscribers earlier this morning:

 

"The yield spread (10Y's - 2Y's) compressed another -2 basis points yesterday back down to a 52-week low of 122 basis points with the retreat in the long-end driving most of the compression. Into year-end, the bond market continues to price in what it has all year long... Slower-and-lower-for-longer (i.e. slower growth and lower rates)."

 

Unconvinced that growth is slowing?

 

Check out this compendium of contractionary macro data put together by Hedgeye Senior Macro analyst Darius Dale. (Please note the abundance of red.) 

 

CLICK THE IMAGE BELOW TO ENLARGE.

INSTANT INSIGHT | How To Risk Manage The Coming Recession - darius macro data

 

... Or, for good measure, watch Dale on Fox Business this morning where he discusses our economic outlook for 2016. (Spoiler alert: It's not looking good.) 

 

 

Let's not mince words. Our Macro team has been sounding the alarm on the increasing probability that the U.S. will enter a recession in 2016.

 

So... how should investors play the compression of the yield curve and coming economic slowdown? Three letters:

 

T-L-T

 

Yesterday afternoon, McCullough advised subscribers book some gains in their Long bond (TLT) position in Real-Time Alerts. 

 

INSTANT INSIGHT | How To Risk Manage The Coming Recession - tlt rta

 

Make no mistake though, McCullough is very bullish on long-term Treasury bonds. It's a linchpin for investors who subscribers to our #GrowthSlowing theme, hence the bullish green indicators above over all three of our durations, "trade," "trend" and "tail." (TLT has been a core holding in our longer-term oriented product Investing Ideas. As McCullough is fond of saying, he's "the most bullish guy on Wall Street" ... on Long bonds.)

 

In Real-Time Alerts, McCullough is simply risk managing entry and exit points in an effort to maximize returns in that core, longer-term TLT position.

 

INSTANT INSIGHT | How To Risk Manage The Coming Recession - tlt say cheese 


McCullough: The Best Way to Play the Coming Recession

In this recent excerpt from The Macro Show, Hedgeye CEO Keith McCullough explains why he’s becoming “the most bullish guy on Wall Street again.” Watch the video to see exactly what he’s so bullish on.

 

Subscribe to The Macro Show today for access to this and all other episodes. 

 

Subscribe to Hedgeye on YouTube for all of our free video content.


Dale: This Is the 'Biggest Risk Heading Into 2016’

During this animated discussion on Fox Business' Mornings with Maria, Hedgeye Senior Macro analyst Darius Dale discusses our dour U.S. economic outlook for 2016, the coming de-FANG-ing of Facebook, Amazon.com, Netflix, and Google, and why we like large-cap stocks and the Long bond.

 

 


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