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Client Talking Points

EURO

This Thursday the ECB meets and we expect it to announce additional simulative policy. According to our Big Bang Theory, after 600 rate cuts globally, there’s a new regime of investors that has given up on the belief that central bankers can artificially produce stimulus and weaken their currency for economic benefit.  This policy hasn’t worked in Japan, and it isn’t going to work in the Eurozone. We expect the EUR/USD to bounce on a simulative announcement:  to our TREND ($1.12) and TAIL ($1.13) resistance levels. We also expect associated selling of European equities.

STYLE FACTORS

Alongside another rate-of-change slowing in employment and income last week, High Beta (+8.4% on the week), Small Cap (+6.2%)  and High Debt (+7.2%) stocks led the counter-Trend move higher.  In other words, the leverage and illiquidity that got you crushed over the last 8-months reflated.  With growth slowing and the economic, profit and credit cycles past peak we don’t think the 3-week squeeze off of the mid-February 2016 Global Equity crash lows is sustainable.  

INCOME

In a Keynesian economy consumption is king and income growth drives the capacity for consumption growth.  With hourly earnings growth decelerating and average hours worked per week declining in Friday’s NFP data, aggregate income growth will decelerate both sequentially and year-over-year when the official data are released for February later this month.  Unless credit growth accelerates meaningful and/or the savings rates declines materially, consumption growth for February should show further deceleration and the labor, income, consumption peaks (4Q14/1Q15) will remain rearview.  

 

*Tune into The Macro Show with Hedgeye Healthcare Sector Head Tom Tobin live in the studio at 9:00AM ET - CLICK HERE

Asset Allocation

CASH 62% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 3%
FIXED INCOME 29% INTL CURRENCIES 6%

Top Long Ideas

Company Ticker Sector Duration
XLU

If you were long energy over utilities last week, nice trade! We'd remind you that Utilities (XLU) are outperforming the S&P 500 by +10% year-to-date. And that’s with the bounce. By contrast, Energy (XLE) was up 6.5% on the week but is up only 1% year-to-date.

GIS

General Mills (GIS) faces some headwinds across their portfolio, and although the 1H of FY16 was a challenge, the company has robust merchandising and consumer plans in the 2H that should improve results.

 

GIS has embarked on a mission to drive their top 450 SKUs, which represent 75-85% of their volume. Calling it their ‘Power 450’, surprisingly these 450 SKUs aren’t even in all retail locations and formats, broadening the distribution footprint of these top SKUs is priority number one for GIS’s sales team. The organization is also looking at the bottom 450, representing 1-2% of volume and making critical decisions on what products can be discontinued.

 

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

We can’t emphasize enough the bigger picture from both a data and top-down market signaling perspective. To contextualize the relief rallies and short squeezes in asset classes and instruments that are counter to our more longer-term view. Here’s what how we think the macro environment plays out from here:

  1. The market is positioned for more rate hikes into 2016
  2. The data continues to deteriorate, and market volatility ensues
  3. The expectation that “all is good” comes off the table and the market increasingly pivots to the view that, throughout 2016, the Fed is going to hike rates in methodical fashion straight into an economic slowdown
  4. The market takes in the growth slowing pivot in real-time (Treasury rates and the dollar both move lower, and inflation-leveraged assets like gold catch a bid)

 

Once the policy catalysts are out of the way in the next few weeks, our expectation is a return to outperformance in growth slowing asset classes (TLT and XLU). If you’re in for the TAIL and the TREND call, focus on the data, not the desperate attempts of central planners to arrest economic gravity. A brief reminder: ECB chief Mario Draghi will attempt to walk on water Thursday.

Three for the Road

TWEET OF THE DAY

VIDEO (15 mins) The Last Commodity Bubble Still Standing https://app.hedgeye.com/insights/49558-the-last-commodity-bubble-still-standing

@KeithMcCullough

QUOTE OF THE DAY

There is only one way to avoid criticism: do nothing, say nothing, and be nothing.

Aristotle

STAT OF THE DAY

Alibaba affiliate Ant Financial is valued at nearly $50 billion, the internet-finance company plans to raise up to $3.1 billion in its current funding round.