CLIENT TALKING POINTS
USD
Get the Dollar right and you’re still getting most things macro right – USD hammered #Reflation yesterday (Metals & Mining ETF -7.8% on the day!) and should signal immediate-term TRADE overbought on this bounce up at 94.65 USD Index.
JAPAN
Japan loves Up Dollar, Down Yen, the Nikkei was up +2.2% overnight and got U.S. Equity Futures excited, but we would fade that. The Nikkei will signal overbought on the bounce around 16,667 inasmuch as Yen will signal oversold vs. USD around 110.
SINGAPORE
Just in case someone is telling you global “demand” is why Japanese stocks bounced, after getting smoked China didn’t bounce overnight and Singapore was -0.9% (-22% from the April 2015 Global Equity #bubble high).
*Tune into The Macro Show with Hedgeye CEO Keith McCullough live in the studio with Demographer Neil Howe at 9:00AM ET - CLICK HERE.
TOP LONG IDEAS
XLU
As our Growth, Inflation, Policy model is oscillating between tracking in quad 3 and 4 for the second quarter, we’re sticking to core positions that perform well when growth is slowing and the yield curve is flattening:
- QUAD3: Growth Slowing, Inflation Accelerating
- QUAD4: Growth Slowing, Inflation Decelerating
The model signals that growth is slowing either way, and we expect a continuation of bond market discounting late cycle, growth-slowing. An allocation to Long Bonds (TLT, ZROZ) and Utilities (XLU) keeps investors out of the way of guessing which way assets levered to inflation will move next. The yield spread 10s-2s moved this week like it is headed toward taking out YTD lows. To be clear, this is NOT an indication that growth is back.
MCD
McDonald's (MCD) reported 1Q16 earnings on April 22nd that beat consensus estimates. The quarter serves as continued proof that the comeback story is in full swing.
The big question is where MCD is headed in terms of their national value platform. They had the McPick 2 for $2, then 2 for $5, now they have shifted to the monopoly promotion. McDonalds regaining a consistent value message is key to their success, and they know this. Additionally, we have another two quarters of tailwind from All Day Breakfast before we begin to lap it.
McDonalds’ recovery has been nothing short of extraordinary and has been a great source of alpha for all of its holders. We continue to like the name on the LONG side given the strong fundamental turnaround and the style factors that we love, big cap, low beta and liquidity.
TLT
#GrowthSlowing remains our call here in Q2. How do we know growth is slowing (ex. being validated by Treasury bond market and XLU outperformance)?
We look at every relevant data series on a rate-of-change basis to analyze a sine curve. Taking a look at our analysis of Y/Y Non-Farm Payroll growth, a clear cyclical picture develops. Mainstream media and other sell-side sources who talk about guessing the sequential NFP number are pursuing a fool’s errand (a confidence interval that is very wide) in terms of positioning into a number. We call this “open the envelope risk."
Rather, constructing a sine curve of the rate of change in NFP growth gives us a clear visual that employment growth peaked (in Feb. 2015), and it’s not recapturing that growth rate in this cycle. So whatever the sequential number is M/M, we know where this series is headed. And, when considered with every other relevant data series, we have a clear empirical view on where the U.S. economy is positioned in the economic cycle.
Asset Allocation
| CASH | 60% | US EQUITIES | 4% | |
| INTL EQUITIES | 0% | COMMODITIES | 8% | |
| FIXED INCOME | 26% | INTL CURRENCIES | 2% |
THREE FOR THE ROAD
TWEET OF THE DAY
VIDEO (2mins) Expensive? ‘I Love Expensive’ https://app.hedgeye.com/insights/50822-mccullough-expensive-i-love-expensive… via @hedgeye
@KeithMcCullough
QUOTE OF THE DAY
With courage you will dare to take risks, have the strength to be compassionate, and the wisdom to be humble. Courage is the foundation of integrity.
Keshavan Nair
STAT OF THE DAY
90% of Alaska’s general fund revenue comes from oil.
