Client Talking Points
German February Preliminary CPI fell to -0.2% year-over-year vs Expectation of 0.0% and 0.4% Prior. This is yet another data point that is going to force the ECB’s hand to act at its next policy meeting (March 10th) as inflation is tanking.
Part of our bearish thesis on housing centers on our expectation for home price growth to slow. Home prices follow the slope of housing demand on a 9-12 month lag and we are in month 8 of deceleration in Pending Home Sales in the existing market. The Case-Shiller 20-City HPI index released Monday was flat after 5-months of acceleration and yesterday’s HPI series from FHFA reflected a 2nd straight month of deceleration. We weren’t expecting the negative inflection in price growth quite this soon but the fledgling slowdown is worth noting. Recall, from a sequencing perspective: Demand leads price and the equities tend to follow the 2nd derivative trend in price.
The multi-month trending increase in implied volatility on the Chinese yuan appears to have petered out, and the nascent series of lower-highs throughout the YTD is in line with our views on the currency: there won’t be a material, one-off devaluation over the intermediate-term. Rather, policymakers will look to continue to guide the currency lower, at the margins, in line with the recent trend of minor reference rate revisions. Today’s -3bps devaluation in in line with the recent slow-bleed we’ve been seeing since the large -51bps revision in early January. PBoC Governor Xhou Xiaochuan’s early comments at the Shanghai G20 Summit reiterated his previous guidance that “there is no basis for continuous yuan devaluation”. We disagree with that statement in that there is certainly a basis for the yuan to fall much further from here, but there’s also a myriad of reasons why they don’t want to pursue such a strategy, which we’ve discussed in recent notes.
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Top Long Ideas
Long-Term Treasuries (TLT) and Utilities (XLU) remain our two best fixed income and equity vehicles to play #Lower-For-Longer on growth and interest rates as the market gets more and more skeptical about the central bank dogma.
With market turmoil, the Junk Bond ETF (JNK) is down -4.5% vs. the defensive, growth slowing equity sector Utilities (XLU) which is up 6.7%, outperforming the S&P 500 by 12.9% on a relative basis. That’s yet more confirmation of our dour economic outlook economy (spreads widen in tumultuous market environments and Utilities are a defensive sector that outperforms when growth is slowing).
General Mills (GIS) is a large player in the Yogurt category with their Yoplait brand. Their competitors, Dannon, Chobani and Fage have been aggressive on merchandising and consumer spending, making it difficult to compete while maintaining internal margin objectives. GIS is turning on innovation with the growth of Annie’s yogurt and that should help the trajectory of the business. Yogurt being a roughly $1.4 billion business, turning it around is a top priority for management.
On the broader GIS long thesis, it's unlikely that the stock is going to go up 20% in the next year, but we do believe it will fare better than most in the consumer staples sector, especially as we head into an economic slowdown.
With the market losing faith in the central planning policy backstop, investors continue to yield to top-down market signals and the direction of the data. To be clear, the data continues to deteriorate and volatility continues to break-out.
The yield spread (10-year Treasury yield minus 2-year Treasury yield) has compressed 24 basis points this year, and TLT is up 8.6% vs. the S&P 500 which is down -5.2%. The December Federal Funds Futures contract has declined in a straight line since December’s rate hike.
Three for the Road
TWEET OF THE DAY
The key takeaways on #Wayfair:
VIDEO | Under 60 Sec: Wayfair's Earnings Report | $W https://app.hedgeye.com/insights/49408-under-60-seconds-wayfair-s-earnings-report-w?type=video…
QUOTE OF THE DAY
There is no royal road to anything. One thing at a time, all things in succession. That which grows fast, withers as rapidly. That which grows slowly, endures.
Josiah Gilbert Holland
STAT OF THE DAY
According to its annual report, FIFA with just 474 employees spent $115 million on personnel expenses in 2014.