CLIENT TALKING POINTS
VOLUME
Algos/quants lifting little offers on up days; liquidation on the big down days – we still think this is a Liquidity Trap. Total U.S. Equity Volume ramped +22% vs. its 1-month average yesterday (SPX -0.92%, Nasdaq -1.2% on the day).
GOLD
Gold absolutely loves the U.S. GDP #GrowthSlowing call – ramping to +20.2% year-to-date this morning and since not a lot of managers are long it, it’s probably best to focus on whether the SPX is up or down 2%!
JAPAN
Unfortunately, they do have to re-open the Japanese stock market on Monday (closed overnight) with Yen +1% and Nikkei futures -3%; we think this is the epicenter of the #BeliefSystem (in centrally planning equity markets) breaking down.
*Tune into The Macro Show with Hedgeye CEO Keith McCullough at 9:00AM ET - CLICK HERE.
TOP LONG IDEAS
MCD
McDonald's (MCD) released earnings Friday reporting strong numbers across every important metric. Consider, for example, Q1 EPS $1.23 versus FactSet's consensus estimate of $1.16. Same-store sales in the U.S. were +5.4% vs consensus +4.4%. Revenue in the U.S. was $2.02B vs consensus $1.98B. Company-operating margin was 15.4% vs consensus 14.9% and year-ago 14.3%. We are sticking with our $150 target and believe that $7.00 in EPS for 2017 is not out of the question.
CME
Please note we are removed CME Group from Investing Ideas (long side) on Thursday. "I thought there was going to be more upside to the numbers than there was," Hedgeye CEO Keith McCullough wrote yesterday. "The market reaction looks right on that (companies that beat big go up big – see FB). So I’ll remove it today, as I think the U.S. stock market broadly has a ton of risk pending May-July."
Earnings analysis via Financials analyst Jonathan Casteleyn:
"CME Group had solid earnings results this week with revenue up +11% and earnings up +18% year-over-year. Investors will be hard pressed to find similar growth in the Financials sector with interest rates that continue to compress and very low banking and trading activity. In contrast, the average result for Financial companies in the S&P 500 thus far in earnings season has been top line revenue declines of -3.3% with earnings decay of -14.5%. With 2Q16 trading volumes up +4% year-over-year to start the new quarter, CME will likely put up another solid quarter and out comp the rest of the sector again."
TLT
The market is currently pricing in a rate hike but not until … late 2017. So if you’re looking for reasons to buy the market at all-time highs, don't expect a boost from incremental Fed policy. To be clear, the dovish Fed commentary of late is a direct result of U.S. growth slowing. Friday’s manufacturing PMI continued its downward trend (it peaked in rate of change terms in August 2014). Clearly, the market gets decelerating growth, which is why Utilities (XLU) are leading equity sector divergences YTD (+9.3%) and the U.S. Treasury 10-year yield down 0.35% over that same period. (That translates into TLT +6.5% and ZROZ +10.2% year-to-date.)
With that being said, the alpha on our long utilities and Long Bonds (TLT & ZROZ) vs. short Junk Bonds (JNK) position has gone against us in the last two months. Notably, we have no direct exposure to commodities or commodity-related sectors, but being short of JNK amidst a huge rally in commodities has not been a good position. Much of the beaten down resource-leveraged credit has rallied.
Asset Allocation
| CASH | 62% | US EQUITIES | 0% | |
| INTL EQUITIES | 0% | COMMODITIES | 4% | |
| FIXED INCOME | 28% | INTL CURRENCIES | 6% |
THREE FOR THE ROAD
TWEET OF THE DAY
Again, My Thoughts On This Lousy GDP Report https://app.hedgeye.com/insights/50593-my-thoughts-on-this-lousy-gdp-report… via @hedgeye
@KeithMcCullough
QUOTE OF THE DAY
Always borrow money from a pessimist. He won’t expect it back.
Oscar Wilde
STAT OF THE DAY
According to a YouGov survey conducted in 10 countries across four continents U.S. Democrats and Republicans are about as likely as each other to prefer blue as their favorite color (33% for Democrats and 29% for Republicans). However, 17% of Republicans like red – twice the number of Democrats who do (8%).
