Short Low, Cover High? No Thanks

Client Talking Points

EURO

Despite terrible economic data this week (or is that what European Equities really need, and a commensurate Down Euro?), the EUR/USD is having a hard time breaking down through the low-end of our current $1.08-1.12 risk range. We believe that’s why European Equities stop going up (again) here – if Mario Draghi doesn’t walk on water next week, watch out below.

RUSSELL 2000

Post the short squeeze “off the lows” the Russell’s draw-down is still -18.6% since July – if you haven’t been short small/mid cap, junk, illiquidity, high beta, high short interest, etc., here’s another bite at a big apple of alpha. There is immediate-term downside in the Russell to 991 (short/sell lower-highs, cover lower).

UST 10YR

To end on a bullish note, Donald Trump would characterize today’s excellent buying opportunity in the Long Bond as very very super huge with the UST 10YR at 1.84% (on a whiff of a rate of change slow-down jobs report on Friday, our risk range implies 20 basis points of immediate-term downside to 1.64%); buy TLT, ZROZ, EDV, XLU, etc.

 

*Tune into The Macro Show with Hedgeye Macro and Housing Analyst Christian Drake live in the studio at 9:00AM ET - CLICK HERE

Asset Allocation

CASH 66% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 2%
FIXED INCOME 26% INTL CURRENCIES 6%

Top Long Ideas

Company Ticker Sector Duration
XLU

Our preferred growth slowing vehicle remains Utilities (XLU) in equites. Hitting on Friday’s revised GDP report (Q/Q SAAR Q4 GDP revised to +1.0% from +0.7%), a deep-dive into the number doesn’t support an incrementally stronger economy:

  • Consumption was revised down marginally but net exports were up with the negative revision to imports outweighing the negative revision to exports. That’s good for the number but lower global trade activity is not a good sign for global growth;
  • Much of the actual change in the revision was due to inventories, which contributed +0.31pts to the headline number
GIS

General Mills (GIS) hit an all-time high last week when it reached $60.18 on Thursday. Although this would not be a great entry point, it is also not a reason to get out if you have a long-term view. Nothing has changed in our fundamental story and we have no reason to lose faith in our thinking to date.

 

Over the course of the past few years, GIS has made strategic acquisitions within the natural & organic / wellness space (we call it the string of pearls approach). Although they are not largely meaningful to top or bottom-line right now, they are changing the way the company thinks about its broader portfolio.

 

We continue to believe GIS is one of the best positioned consumer packaged foods companies due to its strong brands and best-in-class people and organization.

TLT

Our preferred growth slowing vehicle remains (Long-Term Treasuries) TLT in fixed income. A flattening in the yield spread (10YR Treasury Yield – 2YR Treasury Yield) continued last week into double digit basis point territory (currently at 96 basis points). Year-to-date the yield spread has declined 44 basis points while the 10YR Treasury Yield has dropped 47 basis points. As a reminder the yield curve flattens as the economy slows with policy and/or liquidity management driving the short-end higher and defensive positioning and/or discounting of lower future growth/inflation driving the long end lower. 

Three for the Road

TWEET OF THE DAY

$CMG has competitive issues too! The meat you eat is more likely to be antibiotic-free this year http://www.huffingtonpost.com/entry/antibiotic-free-meat-subway-perdue-tyson_us_56d49d09e4b0871f60ec465c

@HedgeyeHWP

QUOTE OF THE DAY

The prettier the garden, the dirtier the hands of the gardener.    

B.E. Barnes                                               

STAT OF THE DAY

Today in 1797, The Bank of England issued the 1st one and two Pound banknotes.