CLIENT TALKING POINTS
EUROZONE
Eurozone April preliminary PMIs were released this morning… drum roll… both the Manufacturing and Composite (Manufacturing + Services) fell month-over-month, in-line with our theme of #EuropeSlowing. Eurozone Manufacturing recorded 51.3 vs 51.6 prior and the Composite fell to 53.0 vs 53.1. Services rose 10bps to 53.2. Meanwhile coming late to the party, the ECB released the results of the Q2 2016 survey of professional forecasters, which sees the inflation forecast revised down by 0.4% to 0.3% for 2016 and growth at 1.5% in 2016 vs a prior estimate of 1.7%.
#COMMODITYTRENDS?
China forever the commodity sponge? Iron ore is up over +60% YTD with rebar +50% YTD on Asian exchanges. With the move in commodities comes the mainstream media stories of Chinese demand and stockpiling. We prefer to stick with the top-down signals. With the CRB up 5.5% over the last month (16/19 on CRB green) on higher trending volume in aggregate (unprecedented in some markets), we’ll soon find out if a re-pricing of QE has been met by incremental buying forcing out shorts, or if the short USD/long commodities trade is a new trend. The fresh non-consensus risk is a hike in June.
#CREDITCYCLED
Junk bonds have rallied +3% in the YTD, inclusive of a +6% squeeze over the past 3M alone. Option adjusted spreads continue to narrow dramatically, compressing -30bps in the past week alone to 586bps wide. This is down from a peak of 839bps on February 11th. Is the trough of the domestic credit cycle in the rear-view mirror, leaving us holding the bag on a stale thesis? Not at all. Our work has shown that once the horse leaves the barn on the domestic credit cycle, there is no recovery until HY spreads are north of 1,000bps and corporations have sufficiently delivered their balance sheets – neither of which has occurred.
*REPLAY The Macro Show with Darius Dale and Ben Ryan - 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
About Everything: The Golden Age of Home Improvement https://app.hedgeye.com/insights/50424-about-everything-the-golden-age-of-home-improvement… @HoweGeneration $LOW $HD #millennials
@Hedgeye
QUOTE OF THE DAY
It's about discovery.
Scott Jurek
STAT OF THE DAY
Apple reported iPhone owners unlock their device, on average, 80 times a day.
