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Client Talking Points

CREDIT & CONFIDENCE

While tightening standards and declining demand currently characterize the corporate credit environment, Consumer Credit growth decelerated to its slowest pace in 23-months in January according to Fed data released yesterday. Small Business Confidence, meanwhile, retreated for a 4th straight month in February according to NFIB data released this morning. Notably, the Hiring Plans, Current Compensation and Compensation Plans Indices all declined sequentially to new 9-month lows.  Small Businesses represent over 99% of total U.S. Employer firms and > 60% of net private sector hiring on a monthly basis – sentiment around the current and forward prospects for business activity are discretely related to hiring activity and labor compensation trends for small businesses and the data has now shown a multi-month trend towards softening.

EURO

Trade the Range: buy it $1.08, sell it at $1.12. As we’ve noted in our Big Bang Theory, we think any “easing” policy announcement at Thursday’s ECB meeting from Mario Draghi could send the EUR/USD to the top end of its range.  

#REFLATIONTADE

We’re pretty confident calling a reflation trade a “squeeze” in a week where high debt, high short-interest, high beta stocks (everything that has gotten crushed) greatly diverge to the upside vs. the rest of the market. That continued yesterday with a +6% move in WTI. Most importantly with regards to the move in commodities, we highlight that a reflation TRADE doesn’t help spark another credit cycle. Corporate credit has gotten some relief in spread and fair value terms, but with lending standards tightening, a return to 2014-15 financing levels is unlikely at best. Looking at high yield energy spreads, credit is still trading at a level +400-500bps over March 2015 spreads. As we highlight in our Q1 themes deck, once the credit cycle begins to roll, any relief has historically been temporary.   

 

*Tune into The Macro Show with Retail Analyst Alec Richards 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

Hedgeye CEO @KeithMcCullough on #ECB & "Is this time different"

[UNLOCKED] Big Bang Theory https://app.hedgeye.com/insights/49593-unlocked-big-bang-theory… @Hedgeye

QUOTE OF THE DAY

The best evaluation I can make of a player is to look in their eyes and see how scared they are.      

Michael Jordan                                                  

STAT OF THE DAY

Today in 1817, the New York Stock Exchange was founded.