Fading Reflation

Client Talking Points

USD

Dollar Up, Reflation Down – it’s not that complicated to understand unless you are the Fed, trying to maintain “credibility” going for another policy mistake, raising rates into a slow-down. We’ll see if they’re S&P 500 (instead of data) dependent, the 15-day correlation (machines chase it) between USD and SPX is -0.84.

COMMODITIES

Dollar Up, Commodities Down – short-term inverse correlation there is even higher than with the S&P 500 at -0.96 for the CRB Index (19 commodities), so the CRB dropped -2.2% yesterday, back to -1.7% year-to-date (the new up).

RUSSELL 2000

We are The Bears on U.S. stocks and we can’t understand how the Russell dropping a full -1.9% yesterday back to -5.3% year-to-date (and -17% since July) is bullish; apparently if no one talks about it and quotes SPX, everything is fine.

 

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Asset Allocation

CASH 69% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 5%
FIXED INCOME 21% INTL CURRENCIES 5%

Top Long Ideas

Company Ticker Sector Duration
XLU

Utilities (XLU) hasn’t bounced as much as leveraged , high-beta resource names, but the outperformance is greatly divergent vs. both the market, and our preferred sector short in financials (XLU +12.3% YTD, S&P -0.3% YTD, XLF -4.6% YTD).

GIS

General Mills (GIS) remains one of analyst Howard Penney's top Long ideas in the Consumer Staples space. As we have continued to say, it boasts style factors ideal during turbulent times; high market cap, low beta and liquidity. Case in point, GIS is up 7% year-to-date, versus essentially flat for the S&P 500 in 2016. We'll have an update next week after GIS reports earnings.

TLT

Long-Term Treasuries (TLT) finished +1.9% on the week. Aside from Mr. Market, the Fed downwardly revised expectations (the common lag) on Wednesday:

  • The median 2016 GDP forecast revised to +2.2% vs. +2.4% in December
  • The median 2016 PCE Inflation forecast revised to +1.2% vs. +1.6% in December
  • Median Federal Funds end-2016 rate forecast revised to 0.9% vs. +1.4% in December

From a GROWTH, INFLATION, POLICY perspective, it’s lower for longer on growth and inflation and a more dovish Fed.

Three for the Road

TWEET OF THE DAY

QUICK TAKE: How To Risk Manage Gold | $GLD https://app.hedgeye.com/insights/49900-quick-take-how-to-risk-manage-gold-gld… via @hedgeye

@KeithMcCullough

QUOTE OF THE DAY

QUICK TAKE: How To Risk Manage Gold | $GLD https://app.hedgeye.com/insights/49900-quick-take-how-to-risk-manage-gold-gld… via @hedgeye

@KeithMcCullough

STAT OF THE DAY

Data obtained from Reuters shows that more than 2 million Brazilians are set to lose unemployment benefits by June.