Eurozone, Earnings and Japan

Client Talking Points

EUROZONE

Got inflation?  #Nope!  Eurozone CPI picked up 1.2% in March M/M but remains grounded at 0.0% Y/Y. We continue to pound the table via our Q2 2016 Macro Theme #BeliefSystem that ECB President Mario Draghi can’t bend economic gravity and a 2.0% inflation target over the intermediate term is pipe dream.  #FadingHope.

EARNINGS

It’s early in earnings season, but we got an early look at tough comps in commodity land (Monsanto and Agrium have both comped down double digits top and bottom line). Alcoa fired 1,000 people globally in the process. One of the key call-outs in our macro deck was that S&P 500 companies face tough comps for Q1 and Q2 (8 of 10 sectors comped higher in Q1 2015), with the flow through sparking the big question: with forward-looking earnings being taken down, what multiple will the market slap on declining forward looking expectations?  

JAPAN

The Japanese yen’s -1% decline to the mid-109’s on the USD cross in the WTD has been good for a major squeeze higher in the Nikkei this week. Today’s massive +3.2% rally puts the index up +6.9% WTD with one more day of trading to go. In a speech at Colombia University yesterday, BoJ Governor Haruhiko Kuroda doubled down on NIRP by highlighting how it “boosts the effects of existing policy measures by directly pushing down the short-end of the yield curve”. Despite this week’s spectacular gains, the Nikkei more-or-less remains in crash mode down -19.3% from its peak last June and we think it’ll take more than jawboning to perpetuate a series of lower-highs in the yen and higher-lows in the Nikkei from here. We expect the pressure of decelerating trends across headline, core and producer price inflation – as well as long-term breakeven rates – to cause the BoJ to add to its easing measures at its April 27-28 meeting. Will additional easing in Japan be met with additional repudiation of the central planning #BeliefSystem, or will Japan simply export this growing lack of faith to U.S. markets via a stronger dollar?

Asset Allocation

CASH 64% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 6%
FIXED INCOME 26% INTL CURRENCIES 4%

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: A great discussion about the decline of material culture in my new @Hedgeye segment "About Everything" https://app.hedgeye.com/insights/50184-about-everything-a-perfect-storm-of-trends-points-to-less-interest-i

@HoweGeneration

QUOTE OF THE DAY

To pay attention, this is our endless and proper work.

Mary Oliver   

STAT OF THE DAY

The White House will redirect $589 million (predominantly from funds allocated to fight Ebola) toward fighting the Zika virus, with additional funding requested from Congress.