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Client Talking Points

GERMANY

Well, the ECB threw everything (including the kitchen sink) at the tape last week and you know what the DAX did? It closed +0.1% on the week to -8.5% year-to-date. Now what? Angela Merkel was just defeated in 2 of 3 states holding regional elections as A) Germany’s economic cycle continues to slow from recent peak and B) anti-migration exit polls ramp.

RUSSELL 2000

“Everything we’ve been saying” includes not being long small caps and/or junk bonds. The Russell 2000 was only up +0.5% last week (yes, we can take a lot more pain than that) to -4.3% year-to-date and -16.1% since we went broadly bearish on U.S. stock market beta in July.

UST 10YR

With the UST 10YR up +10 basis points last week to 1.98%, now it’s go time (again) for the Long Bond and Utilities (XLU) bulls who are having a great year vs. “Long Financials During Rate Hike Cycle” view  (XLU +11.3% YTD vs XLF -5.6%). Is the Fed going to be hawkish this week? We think so – but so does everyone else; we think rates and Financials drop on the “news” like they did post rate hike.

 

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

Asset Allocation

CASH 62% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 4%
FIXED INCOME 26% INTL CURRENCIES 8%

Top Long Ideas

Company Ticker Sector Duration
XLU

Utilities (XLU) remains the alpha generating trades in equities, year-to-date XLU is up 11.3% versus -1.1% for the S&P 500. Factor exposure is very important to us, especially when volatility is in a bullish TREND set-up and small cap, illiquid stocks continue to underperform. Here's another way to look at it:

Volatility

+ Illiquidity

+ Too many hedge funds chasing performance...

= #Pain

We continue to expect utilities to outperform the broader market given this current environment.    

GIS

This stock is not likely 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. That's why GIS is up 5.5% year-to-date versus down -1.4% for the S&P 500.

 

In the past few newsletters we've noted the effect Walmart is having on GIS, how its Yogurt business is faring against competitors, and how the company is broadening the distribution of its top 450 SKUs. On the M&A front, barring any screaming deals in the market place we don’t see General Mills (GIS) buying anything over roughly $1 billion in sales, just given the added complexity it would cause. So they will most likely continue the string of pearls approach in the Natural & Organic/Snacking categories. This does not rule out the possibility of GIS being bought, 3G & Kraft Heinz could be getting back in the mix as well, although it seems too soon for another deal this big.

TLT

Growth and inflation continue to decelerate in the Eurozone and globally. In other words, there is very little central planners can do to stop the cycle and the inevitable deleveraging that must take place in credit Long-Term Treasuries (TLT) remains the alpha generating trade in fixed income this year. 

Three for the Road

TWEET OF THE DAY

No chance FTC would allow single chinese company to buy 2 large US hotels. HOT hoping MAR matches $76 $MAR $HOT

@GLLStrategist

QUOTE OF THE DAY

Rebalancing represents supremely rational behavior.

David Swensen

STAT OF THE DAY

Starwood receives nearly $14 billion buyout bid from a consortium led by China's Anbang Insurance Group (Marriott International Inc. has already bid for Starwood in a deal worth $12.2 billion).