Oil Down, Rates Down

Client Talking Points

JAPAN

If you’ve been bearish on the #BeliefSystem (central-market-planning) breaking down in Japan alongside us, congrats – Japanese stocks failed @Hedgeye TREND resistance overnight as the Yen popped (again) on a BOJ statement day. The Nikkei is down -0.7% to -10% for the year-to-date. It is not clear how the bulls could be trumpeting losing money year-to-date.

FINANCIALS

Financials lagged the U.S. Equity market all day long yesterday (they’re down -5.9% year-to-date and remain our favorite sector on the short side) and since rates failed at the top-end of our 1.76-2.00% risk range (UST 10YR) yesterday, it won’t surprise us if they lead the market lower alongside Energy today.

OIL

Oil is down hard after failing at the top-end of what is now a $34.05-39.76 immediate-term risk range for WTI – and, again, if you’re thinking the Fed is going to be “hawkish”, don’t forget that means Dollar Up, Commodities Down. We would stay with the better TREND setup than chasing Energy charts (i.e. Long Gold vs. Short Oil for 2016).

 

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

Asset Allocation

CASH 60% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 6%
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

Today at 11am ET@JamesGRickards and @KeithMcCullough

Watch (for free) here: https://app.hedgeye.com/feed_items/49716-watch-live-jim-rickards-and-keith-mccullough-conversation… #Gold $GLD $SPY

@Hedgeye

QUOTE OF THE DAY

What is harder than rock, or softer than water? Yet, water hollows out rock. Persevere.

Ovid           

STAT OF THE DAY

In the U.S. 106,000 aluminum cans are used every 30 seconds.