DAX, Russell 2000 and Yield Spread

Client Talking Points

DAX

Right back into crash mode goes the over-owned “this time is different” in Europe theme. The DAX is down -2% this morning and down -21.1% since the April 2015 top. ECB President Mario Draghi is going to have to defend this with Down Euro = Up Dollar = #Deflation.

RUSSELL 2000

Isn’t it ironic, but not surprising, that the “U.S. is the best house in a bad hood” thesis has crashed too? The Russell 2000 is now down -22% (crash mode) from its July 2015 #Bubble high as U.S. domestic growth expectations move toward a #Recession.

YIELD SPREAD

At 116 basis points the yield spread (10yr – 2yr) is both at a year-to-date low and cycle low. This always happens as the cycle is slowing toward recession and don’t forget you’ll get Industrial Production and PPI recession prints in the U.S. tomorrow morning. 

 

*Tune into The Macro Show with Hedgeye CEO Keith McCullough live in the studio at 9:00AM ET - CLICK HERE

Asset Allocation

CASH 65% US EQUITIES 2%
INTL EQUITIES 0% COMMODITIES 0%
FIXED INCOME 21% INTL CURRENCIES 12%

Top Long Ideas

Company Ticker Sector Duration
MCD

McDonald's boasts style factors that are best in class for turbulent times in the market, big cap and low beta and it has handily been outperforming the market and its competitors as of late. One of the biggest aspects of competing in their space is value offering.

 

McDonald’s has ceded share in the value category primarily to Burger King over the last two years. Now that they are launching a national value platform with a full slate of media support, MCD will recover the value customer.

GIS

General Mills' business seems to be starting to pick up steam, as the company is working to improve merchandising and advertising on core business.

 

In addition they have executed a few small, but meaningful M&A deals showcasing the change in managements thinking. The divestiture of Green Giant to B&G Foods, for instance, although a profitable business, was a good move for them given their lack of focus/investment in the brand (they have more opportunities like this throughout their portfolio, in addition to SKU rationalization).

 

GIS continues to look for more sizeable acquisitions in emerging markets, but the string of pearls approach may remain most effective domestically.

TLT

After the worst start to a year literally EVER for U.S. equity markets, TLT caught a bid in the first week of trading as the centrally-planned Chinese stock markets traded limit down earlier in the week. It was the largest central bank liquidity injection from Beijing since Chinese markets crashed in September.

 

TLT remains one of our strongest long idea calls heading into 2016 as junk bond markets begin to crack.   

Three for the Road

TWEET OF THE DAY

Wait for it... Fed officials have recently cautioned that headwinds from China may upend the FOMC's planned interest rate hike path.

@HedgeyeEurope

QUOTE OF THE DAY

Success is more a function of consistent common sense than it is of genius.

An Wang

STAT OF THE DAY

On Tuesday, crude oil briefly dropped below $30 per barrel for the first time in 12 years.