Euro, Italy and Oil

Client Talking Points

EURO

The belief system needs the transmission mechanism (Burning Euros) in play to “reflate” European stocks. So, “off the highs” in yesterday’s epic big bang EUR/USD ramp, Euro -0.7% gives birth to a new hope that doing whatever it takes is going to arrest an almost 3 year European economic expansion from slowing.

ITALY

If you’re still trying to day-trade the break-down in the belief system, the Italian Stock Market is where it’s at! After crashing -33% from last year’s economic cycle high to “up” then down hard into the close yesterday, bank stocks straight up (again) to lower-highs this morning – massive TREND resistance overhead for MIB index at 19,347.

OIL

Oh, right, that’s going on too. Oil up +2.1% this morning is another big-bite reason to keep reflation bulls in the game here – immediate-term risk range (dynamic) $31.66-39.45/barrel for WTI as Oil Volatility’s risk range remains surreal at 48-60. We are much more bearish on the Financials than Energy, but would love another shot (short side) closer to $40 Oil.

 

*Tune into The Macro Show with Hedgeye CEO Keith McCullough and Demography Sector Head Neil Howe live in the studio at 9:00AM ET - CLICK HERE

Asset Allocation

CASH 66% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 4%
FIXED INCOME 24% 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. 

Three for the Road

TWEET OF THE DAY

$HIBB inventories +18% on sales growth of 2.7% and comp of (-0.6%). That's after 25%YTD gain and 13% draw-down in short interest.

#ShortMore

@HedgeyeRetail

QUOTE OF THE DAY

You know, Willie Wonka said it best: we are the makers of dreams, the dreamers of dreams.

Herb Brooks

STAT OF THE DAY

You know, Willie Wonka said it best: we are the makers of dreams, the dreamers of dreams.

Herb Brooks


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