Proactively Prepare

Client Talking Points

JAPAN

Unlike the slow-volume squeeze U.S. equity beta had off those crashy FEB lows, Japan really sucked wind throughout Q1. The Nikkei closed down for 3 straight days to end the quarter right back in crash mode (-20% since the bubble highs in Global Equities of July 2015) – we remain bearish (short) Japan and one of its ETF manufacturers (DXJ and WETF).

EUROPE

Forget Q2’s prospects for one more day, Europe was flat out ugly for Equity Bulls too – Spain leads losers this morning -1.5% and is in a race with Italian stocks for biggest draw-down from 2015 highs (both -25%!); they’re totally not into the Yellen Dollar Devaluation (Euro Up) thing; #GrowthSlowing in Europe remains our fundamental call there.

QQQ

We finally added QQQ to the short side (yesterday in Real-Time Alerts) – having missed shorting the Nasdaq at the beginning of Q1, we’ll have to enter the game with it already -2.7% YTD. Plenty of markups in consensus long ideas from the 2013-2015 ramp in growth stocks; heading into Q2 (we have Street low U.S. growth forecasts), we’re shorting growth (QQQ) vs. our core Long slow-growth macro ideas (TLT + XLU + GLD).

 

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

Asset Allocation

CASH 66% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 6%
FIXED INCOME 24% INTL CURRENCIES 4%

Top Long Ideas

Company Ticker Sector Duration
CME

CME Group (CME) put up a decent fourth quarter earnings print with a slight revenue and earnings beat. Not that we put much weight on what happened last quarter but trends into the new operating period are looking even better. The exchange guided to just a +1% operating expense increase for 2016, guided to slightly lower annual taxes for '16 (with more activity coming from abroad), and again announced that open interest was setting a new record, at over 111 million contracts.

 

Even assuming some mean reversion to just over 16.5 million contracts (depending on product group), 1Q is running at ~$1.20 per share in earnings, which means the Street will need to perk up its current $1.06 estimate. Simply put, this is one of the few growth stories in the current macro environment within Financials.

GIS

We continue to like General Mills (GIS) as one of the best large cap names in the packaged food space. With that being said, the third quarter was not without its noise surrounding the numbers; Green Giant divestiture, Walmart clean store policies, foreign currency exchange, and grain merchandising just to name a few, muddied the waters. But digging through the noise, this is a business that is truly turning a corner. When they set sail on fiscal year 2016 back in June of 2015, we knew this was not going to be an easy ship to turn towards success. Now, with many key product platforms turning (through strong product innovation and renovation) in the right direction and operational improvements implemented through cost savings initiatives, GIS is on the cusp of success. We will be measuring this success by realization of sustained top line growth in the low single digit range.

TLT

In our model the second quarter is the toughest compare on both GDP and U.S. corporate profits so we want to be very careful going into that and be positioned defensively. Stay long Long-Term Treasuries (TLT).

 

While small/mid cap U.S. Equities reverted to their bear market mean last week (Russell 2000 down -2.0% on the week and -16.7% since US Corporate Profits peaked in Q2 of 2015), so did a few other US Equity Market Style Factors that had had a big 1-month bounce:

  1. High Beta stocks were -2.0% on the week
  2. High Leverage (Debt/EBITDA) stocks were -1.9% on the week
  3. High Short Interest stocks were -1.7% on the week

Three for the Road

TWEET OF THE DAY

NEW VIDEO: #Millennials Gone Mild: The Investing Implications https://app.hedgeye.com/insights/50012-millennials-gone-mild-the-investing-implications… @KeithMcCullough

@Hedgeye

QUOTE OF THE DAY

The smallest deed is better than the greatest intention.

John Burroughs  

STAT OF THE DAY

Spotify raised $1 billion in convertible debt from TPG,  Dragoneer, and clients of Goldman Sachs. TPG and Dragoneer get to convert the debt to equity at a 20% discount of whatever share price Spotify sets for an eventual IPO. And if it doesn’t IPO within the next year, that discount goes up 2.5% for every additional six months.