CLIENT TALKING POINTS
YEN
Reiterating a good spot to own what consensus macro funds do not and that’s Yen in the 109-110 range vs. USD – short Japanese Equities on the other side of that as they remain in crash mode (-20% since July) for good fundamental reason.
OIL
Oil ramps back up to the top-end of our immediate-term risk range = $42.59-46.93/barrel, but the “reflation” beta associated with that appears to be losing its appeal – don’t confuse reflation with real GDP growth (via a higher GDP Deflator it’s actually a downward pressure on our Street low Q2 GDP forecast).
CONSUMER
Not surprisingly, the U.S. Consumer gets that they get the bill when U.S. Growth Slows (Down Dollar = Tax on Real Consumption) and now the U.S. Retail Sector (XRT) which has been a Best Idea short in our Macro Themes since Q3 of 2015 is moving toward #crash mode at -18.3% since July 2015.
*Tune into The Macro Show with Hedgeye CEO Keith McCullough 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 | 3% | |
| INTL EQUITIES | 0% | COMMODITIES | 6% | |
| FIXED INCOME | 25% | INTL CURRENCIES | 6% |
THREE FOR THE ROAD
TWEET OF THE DAY
A Brief Update On Earnings Season & Sector Performance https://app.hedgeye.com/insights/50883-a-brief-update-on-earnings-season-sector-performance… via @hedgeye
@KeithMcCullough
QUOTE OF THE DAY
In the dust of defeat as well as the laurels of victory there is a glory to be found if one has done his best.
Eric Liddell
STAT OF THE DAY
Together, the 25 best-paid hedge fund managers took home $13 billion in 2015, 10% more than the previous year.