Sell on Strength

01/22/16 08:43AM EST
#CREDITCRACKS

As spreads begin to widen on a record amount of corporate credit, the rating agencies are beginning to sound the alarm, on a lag to real-time quotes and credit default swaps. When the CDS of an IG credit is trading >+1000, that’s a red flag. Both S&P and Moody’s have been vocal the last two days on the dour outlook for commodity producing companies and countries as one of our 3 big macro themes, the #creditcycle, gets rolling.

#EQUITYCASINO

Yesterday the Nikkei rallied on a central bank rumor of more easing then sold off on a contradictory rumor, the SPX futures gapped higher on Draghi pointing to rising downside risks, oil rose on higher inventories and the U.S. equities finished higher alongside a 4th month of contraction in the Philly Fed Index and a rise in rolling jobless claims to their highest level since April of last year. This morning’s catalyst is Chinese officials vowing to “look after” stock investors. Manic price action in markets and reactionary policy responses out of central banks are not outcroppings of improving fundamentals. GrowthSlowing remains the call and we remain sellers of strength.  

EUROZONE

While European equities are bouncing today, nothing has changed with our fundamental outlook of #EuropeSlowing. We got our first touch of reality on the inflation outlook from the ECB in ECB governing council member Ewald Nowotny saying there are risks inflation could turn negative due to low oil prices in H1’16. Also as no surprise, Eurozone GDP and CPI forecasts for the next three years were largely all guided down by a group of external analysts (we expect similar results from the ECB’s staff projections at the March meeting). Finally, preliminary January PMIs for the Eurozone all fell month-over-month. Manufacturing (52.3 vs 53.2 prior), Services (53.6 vs 54.2 prior), and Composite (53.5 vs 54.3 prior). Got growth slowing?

We added Utilities (XLU) on the long-side last Friday as the market continued to pummel everything we haven’t liked (high debt, high beta, and small-cap stocks leveraged to inflation expectations) – Utility stocks are low-beta, slow-growth bond proxies which is why they are by far the best relative performer year-to-date.

XLU is outperforming the S&P 500 by +7% and remains flat on the year. Friday’s large swath of data echoed what we have been saying for a while now on the deflationary risk of an industrial recession.

GIS led a $3 million funding round for kale chip maker Rhythm Superfoods. Although this is not a big deal and will most likely never make a strong impact to top or bottom line, it marks a changing in the tide for management thinking. They are making a distinct effort to delve deeper into the natural and organic category which will help them a lot in the long run.

Although the overall market has been atrocious year to date, down roughly -8%, GIS with its low beta, big cap, style factors has held in, down just -5%. We continue to like General Mills as a LONG, especially during the tumultuous times in the market.

With growth continuing to slow and volatility breaking out to the upside across asset classes, we expect the unwinding of a record amount of corporate credit leverage to continue. We’d put that deleveraging in the third or fourth inning currently. Credit spreads will continue to widen. That's why you're long TLT (and short JNK).   

SPAIN: "surges" +3.2% on Draghi Cowbell, but is still in crash mode, -26.5% from 2015 high

@KeithMcCullough

Every failure brings with it the seed of an equivalent success.

Napoleon Hill

Apple received $1 billion from Google to keep its search bar on the iPhone, according to a transcript of court proceedings from Oracle Corp.’s copyright lawsuit against Google.

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