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Client Talking Points

YEN

What a difference a -0.6% decline in the Yen (vs. USD) makes = +2.8% bear market bounce in Nikkei (which is still -22% since #TheCycle peaked in July of 2015). All of macro correlating to what FX does right now (has nothing to do with EPS Season).

OIL

Another fun ramp to an immediate-term overbought signal (on an oversold USD signal) finds resistance, USD bounces, and Oil sells off -1.7% this morning. OVX (oil volatility) is signaling nowhere near the end of this bear market in Oil (OVX = 48 with an immediate-term risk range of 44-53).

FINANCIALS

What’s “priced in”? We’ll see. But selling all rallies (at the top-end of the risk range) in Financials has been awesome in 2016 and we expect it will continue to be as the very obvious bull run in the Long Bond (Down Yields) and Utilities (XLU +13.2% YTD vs. XLF -5.9%) continues.

 

*Tune into The Macro Show with Internet & Media analyst Hesham Shaaban live in the studio at 9:00AM ET - CLICK HERE

Asset Allocation

CASH 65% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 5%
FIXED INCOME 25% INTL CURRENCIES 5%

Top Long Ideas

Company Ticker Sector Duration
MCD

McDonald's (MCD) hit another all-time high last week. As we continue to reiterate, the company has all the style-factors that we like – high market cap, low beta and liquidity. Stick with it.

 

We are going to be looking at a much different company 1-3 years from now. Urgency has been instilled from the top down by new CEO Steve Easterbrook. He wants more speed and is encouraging people to get things done faster. The food and experience provided to the customer will greatly improve over the coming months as “Experience the Future” is implemented across the system. It won’t be instantaneous though, as MCD has a lot of work to do around changing the perception to bring back customers it may have lost.

 

Things like All Day Breakfast, responsibly sourced ingredients, and bringing back the value proposition will lead to increased sales and customer satisfaction. While this company is too big to be completely fixed overnight, management has the right plans in place. We are confident in where they are headed.

CME

We recently completed a granular, deep dive study demonstrating that all classes of volatility including equity, fixed income, and FX have been managed lower by a U.S. Central Bank engineering a historically abnormal quantitative easing policy over the past 7 years.

 

What does this mean and what are the implications? Well, with Quantitative Easing over (for now) and the Federal Reserve on a rate hiking policy path (for now), for the first time in a long time there is a reason to hedge bond and equity exposure. CME is one of the few venues that allows both institutional and retail investors to do exactly that. The company manages the entire Treasury futures curve and also most of the equity index futures in the U.S.

 

In this late cycle economic environment, CME Group (CME) has a solid earnings trajectory. The exchange continues to benefit from all 3 legs of the exchange stool including incremental volatility; incremental participants coming into its markets; and also new product introduction. Over the course of the next 12 months, we think the earnings opportunity will jump and the path to more than $5 per share in earnings will become more obvious.

TLT

We outlined our expectation and outlook moving into Q2 last Thursday in our quarterly macro themes presentation for institutional clients. The first of the three themes was labeled #TheCycle:

 

With the recessionary industrial data ongoing, employment, income and consumption growth decelerating, corporate profits facing a 3rd quarter of negative growth and Commercial and Industrial credit tightening, the domestic economic, profit and credit cycles are all past peak and continue to traverse their downslope. With this cyclical backdrop, the U.S. economy faces its toughest GDP comp of the cycle in 2Q16”….

 

The takeaway is that the economy faces a difficult GDP comp (growth rate) in Q2 within the continued late-cycle slowdown. 

Three for the Road

TWEET OF THE DAY

VIDEO: ‘We Are Vigilantly Bearish On Corporate Earnings & Junk Bonds’ https://app.hedgeye.com/insights/50248-mccullough-we-are-vigilantly-bearish-on-corporate-earnings-junk-bo… via @hedgeye

@KeithMcCullough

QUOTE OF THE DAY

Great spirits have always encountered violent opposition from mediocre minds.

Albert Einstein  

STAT OF THE DAY

The U.S. Superyacht Association estimates that the annual cost for operating a 180-foot yacht is $4.75 million, roughly an annual expense of about 10% percent of the yacht’s original cost.