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Client Talking Points

#LOWERHIGHS

While industrial activity has stabilized against 13 months of negative comps, domestic service sector activity continues to slow off its mid-2015 highs. Headline ISM Services along with the Employment and New Orders components improved sequentially in March but the 9-month trend remains one of lower highs and lower lows.  On the Labor Front, the trend has been similar as yesterday’s JOLTS data for February showed Job Openings decline by -159K, continuing the 8-month retreat off the mid-2015 peak.  

#EARNINGS

Q1 earnings season kicks-off next week with the bulge bracket banks leading the way (JPM next Wednesday). If you think we’ll follow-up an awful Q4 2015 reporting season (S&P revs -4.0% Earnings -6.9%) with a rebound, think again. We won’t be lapping bad comps until at least Q3 of this year (reported in Q4). In Q1 of 2015, 8/10 sectors saw Y/Y earnings growth, and the one sector with awful earnings was energy, where WTI averaged $48.57 vs. $33.63 in Q1 0f this year. Don’t get excited about Q1 earnings season. It will be more of the same. #thecycle.  

EUROPE

Eurozone conflicted?  If the Brexit debate wasn’t enough, German Finance Minister Wolfgang Schaeuble is out saying  “It's a problem of our common currency union that we have ... an independent central bank, which conducts unified monetary policy for 19 member states that is less favorable for Germany than for other countries.”  While we’ve identified the ECB’s conflicted policy framework for years, it underlines just how quickly risk can form across Eurozone assets.  For the EUR/USD cross we continue to suggest trading the immediate term range, $1.11-$1.14.

Asset Allocation

CASH 67% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 6%
FIXED INCOME 23% INTL CURRENCIES 4%

Top Long Ideas

Company Ticker Sector Duration
MCD

McDonald's (MCD) hit an all-time highs last week. "They can't chase Energy Charts today, so they're just dog-piling into our long calls on GIS and MCD," wrote Hedgeye CEO Keith McCullough on Friday.

 

We've said it before, McDonald's has all the style factors that we like during these turbulent macro market times; high market cap, low beta and liquidity. The stock is up 7.5% this year beating the S&P 500 by more than 600 bps. In August 2015, Restaurants analyst Howard Penney wrote that "2015 will be the last time this stock is below $100."

CME

CME Group (CME) stock is among the small cohort of financial companies that benefit from volatile markets. With the exchange's open interest continuing to expand, which will drag trading volume higher, CME Group is one of the few lower beta longs that will hold up relatively better in the current environment.

 

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.

TLT

Non-Farm payroll additions came in over +200 again (+215K to be exact) and private sector wage growth was also “good,” increasing +4.2% year-over-year on Friday. We’re most concerned with "better" or "worse" from a rate of change perspective. The non-farm payroll number is "less good" (i.e. "worse") from a year-over-year rate-of-change perspective. Growth in non-farm payrolls peaked in February 2015 at +2.3% year-over-year and the trend since then has been one of decline (+2.0% Y/Y for March 2016). And private sector salary and wage growth peaked on a year-over-year percent change basis in December of 2014.

 

We remain bullish on Long Bonds (TLT and ZROZ), Utilities (XLU) and short Junk Bonds (JNK). We expect more alpha after what was a great Q1, as the back-end of the Treasury curve continues to get flatter regardless of Fed rate hikes. We were alone in that camp, in December, when we first told you that a rate hike was in fact good for long-duration Treasury bonds. Stick with what's worked.

 

Here's the Q1 2016 Scorecard (data through 3/31):

  • TLT +8.3%
  • XLU +14.7%
  • JNK +1.0%
  • versus S&P 500 +0.7%

Three for the Road

TWEET OF THE DAY

**New Video | Game Over. Central Bankers Can’t Do Anymore  https://app.hedgeye.com/insights/50122-game-over-central-bankers-can-t-do-anymore?type=video… cc @KeithMcCullough

@Hedgeye

QUOTE OF THE DAY

I'm not saying I'm gonna change the world, but I guarantee that I will spark the brain that will change the world.

Tupac Shakur

STAT OF THE DAY

Alaska Airlines will acquire Virgin America for $2.6 billion after a short bidding war with JetBlue.