Japan, Utilities and The ECB

Client Talking Points

#JAPAN

News of the morning = Japan goes NIRP – and the Yen goes >120, 10Y JGB’s trade down to 0.09% (as in “nine” basis points) and along with the balance of global yields, U.S. 10Y treasury yields followed suite and are trading down -6bps to 1.91% as the yield curve (10’s-2’s) compresses to another new low. Together with yesterday’s durable goods disaster, this morning’s slowing GDP report and more rumors of stimulus out of China the global #GrowthSlowing data remains conspicuous. Resurgent central bank interventionism is not a function of improving macro fundamentals. 

#UTILITIES

There’s always a bull market somewhere, even if it’s with growth-slowing bond proxies. The XLU is outperforming the S&P by 10% on a relative basis, and is the only S&P sub-sector in positive territory YTD (+2.9%). We continue to like growth-slowing, low-beta vehicles as the market continues to crush high beta, indebted names. High beta stocks are down -15% for the month (low-beta -2.4%) and high debt is down -9%. The market is not paying for 2018 earnings right now. Companies with high earnings growth estimates are down -10% on the month. 

ECB

The ECB’s Jens Weidmann (also President of the Bundesbank) warned fellow policy makers that the ECB should not go too far with the QE program, but will President Mario Draghi listen?  We doubt it!  Weidmann rightly points out that the ECB needs to lower its inflation forecast for 2016. A 2% target is after all a pipedream!

 

*Tune into The Macro Show with Gaming, Lodging & Leisure analyst Todd Jordan live in the studio at 9:00AM ET - CLICK HERE

Asset Allocation

CASH 66% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 0%
FIXED INCOME 23% INTL CURRENCIES 11%

Top Long Ideas

Company Ticker Sector Duration
XLU

Utilities (XLU) continue to be the bright spot in the equity markets for 2016. XLU is up 1% this year, having edged out all other S&P 500 subsectors by a wide margin. Last week, XLU was down marginally but was still second best among the subsectors, beating all but Healthcare (XLV). Essentially, it's paying off to own low-beta XLU in a crashing market.

GIS

General Mills (GIS) has turned on its advertising for no artificial colors and flavors in its cereal, as well as an increased effort for its gluten free campaign. Click here to view the 30 second spot TV commercial.

 

These steps taken on cereal, coupled with improved merchandise planning across their portfolio in the second half should bode well for the company’s future performance. Additionally, General Mills fits neatly into the style factors that we like from a macro point of view, large cap, low beta and liquidity.

TLT

Rating agency S&P disclosed on Thursday three concerning stats as it relates to the wellness of credit oustanding:

  • More companies were at risk of having their credit ratings cut at the end of December than at the close of any other year since 2009
  • The number of potential downgrades was at 655, compared with 824 reported by the finish of 2009
  • The year-end total for 2015 was "exceptionally" higher than a yearly average of 613

 

Then on Friday, S&P followed with additional action:

  • Disclosure that oil-exporting countries face fresh downgrades as crude prices fall further and that it could repeat last year's move when it made a big group of cuts all at once
  • S&P currently has Azerbaijan, Bahrain, Kazakhstan, Oman, Russia, and Saudi Arabia on negative outlook in its Europe, Middle East and Africa region, as well as Brazil and Venezuela in Latin America

Moody’s echoed the shaky state of credit markets by announcing it was putting the ratings of 120 oil and gas companies on watch Friday.

 

Strap on your seatbelts as we expect that credit spreads will continue to widen. If the Fed pivots on its “4 rate hikes” in 2016 as the data continues to slow, Treasury bond yields get pushed lower and high-yield spreads widen into a late cycle deleveraging. This should continue to generate alpha in a Short JNK, Long TLT trade.

Three for the Road

TWEET OF THE DAY

Kaiser: ‘I Think The Old MLP Model Is Dead’ https://app.hedgeye.com/insights/48817-kaiser-i-think-the-old-mlp-model-is-dead?type=video… via @hedgeye

@KeithMcCullough

QUOTE OF THE DAY

Mistakes are the portals of discovery.

James Joyce

STAT OF THE DAY

The 20 most profitable hedge funds pulled in $15 billion last year, while all the hedge funds combined lost $99 billion.


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