CLIENT TALKING POINTS
#JUNKBONDS
Whether it’s commodities, high yield credit, or EM currencies, there has been a lot of buying behind the global reflation trade, especially in beaten down resource-based issues. This has made us wrong on our call for continued deterioration in credit markets in isolation. JNK is +10.5% off the Feb lows and +3.1% YTD. However, our pair trade against the long bond (TLT +8.1% YTD) has been a winner and it remains our view that yet another unwinding of the global reflation trade will give us even more alpha on this position as treasuries will continue to be bid unless there is a sustained turn in the economic cycle.
#EUROZONE
European stocks are popping higher on the back of improving confidence figures from the ZEW survey. The Eurozone Expectations (6-month forward looking) rose to 21.5 in April vs 10.6 in March. German Expectations rose to 11.2 vs 4.3 in the prior month. However our #EuropeSlowing thesis remains intact, with the region entering the ugly Quad 3 (equating to growth slowing as inflation accelerates) in 2H 2016.
#REFLATIONREFLATIONREFLATION
Everywhere you look, reflation is winning the day – and perhaps the year. Arguably nowhere is that more prevalent in the YTD than it is in Argentina, whose recent $15B international bond issuance was well oversubscribed. While yields of 7.5% and 8% on 10Y and 30Y paper, respectively, are well above peer rates, the return to international capital markets after 15 years of exile represents a huge win for the Mauricio Macri administration. How much of the Merval Index’s +34.8% appreciation over the past 3M or the ARS’s +4.6% MoM ascent vs. the USD is a function of Macri’s reform agenda – which is far from a slam dunk considering his weak footing in Argentine parliament – or a dovish Janet Yellen remains to be seen. We think it’s a lot of both.
*Catch the replay of The Macro Show with Hedgeye Gaming, Lodging & Leisure Sector Head Todd Jordan - CLICK HERE.
TOP LONG IDEAS
MCD
McDonald's (MCD) is reporting 1Q16 results on Friday, and we will have a more thorough update following the release. Current consensus estimates are projecting system-wide same-store sales (SSS) growth to be +4.6%, and +4.6% in the United States. Given another full quarter of All Day Breakfast, and ever evolving value proposition that MCD is providing, we feel confident in their ability to perform at or above expectations.
MCD continues to be a great LONG stock to hold during turbulent times in the market given their attributes of being large-cap, low beta, and aligns with our macro teams view of going LONG lower to middle income food providers.
CME
With the largest Capital Markets operation reporting results last week, JP Morgan's numbers continue to relay the business-to-business (B2B) shift in both bond and equity markets. With capital hamstrung by Financial Crisis era regulation, and fixed income desks running tight as a drum, brokerage activity continues to shift over into the exchange traded derivative markets. JPM's FICC, or fixed income trading, results hit $3.5 billion in revenue in 1Q16, down 13% year-over-year.
Conversely, the daily reporting of CME Group's (CME) bond volumes finished at 8.2 million contracts per day in 1Q, up +9% from last year. On a revenue basis, CME's results are actually a little stronger, with fixed income rate per contract up +2% year-over-year. The shift in equities is more balanced, with JPM's equity trading revenues up +6% y-o-y according to their latest report.
CME's stock volumes, however, still outflank the big brokerage desk with futures and options volume up +9% y-o-y for the forthcoming quarterly report on April 28th. This activity shift is secular in our view and CME Group has a strong upward bias in earnings power which makes its stock one of the few to own in Financial Services.
TLT
We remain the bears on the U.S. economy and the corporate profit and credit cycles - we’re long growth slowing via Long Bonds (TLT) and Pimco 25+ Year Zero Coupon U.S. Treasury ETF (ZROZ) and short risky corporate credit via Junk Bonds (JNK) as the profit cycle rolls over.
High yield bonds have experienced meaningful relief in price terms with the move in reflationary assets. Again, we reiterate that once credit spreads move off their cycle lows, they don’t typically revert in the same cycle, which is why we are sticking with our sell recommendation on junk bonds (JNK).
Any time corporate profits decline for two consecutive quarters, the S&P drawdown has had a peak to trough decline of at least 20%. Dissecting the likely direction of earnings in Q1 and Q2 of this year, we could be facing 4 consecutive quarters of declining corporate profits, and we question the market's ability to slap higher earnings multiples on the S&P 500.
Asset Allocation
| CASH | 65% | US EQUITIES | 0% | |
| INTL EQUITIES | 0% | COMMODITIES | 5% | |
| FIXED INCOME | 25% | INTL CURRENCIES | 5% |
THREE FOR THE ROAD
TWEET OF THE DAY
McDonald's is building an epic restaurant with all-you-can-eat fries http://www.businessinsider.com/mcdonalds-new-restaurant-offers-all-you-can-eat-fries-2016-4
via @BI_RetailNews $MCD
@HedgeyeHWP
QUOTE OF THE DAY
I look real good and feel even better, I make a burlap sack look like a cashmere sweater.
Ravishing Rick Rude
STAT OF THE DAY
The U.S. accounts for 5% of the world's population but 25% of the world's prisoners.
