CLIENT TALKING POINTS
USD
Welcome to #Quad4 (Rates Down, Dollar Up). The USD has been up for 2 straight weeks and up for 3 of the last 4, holding our long-term TAIL risk level of 92-93 support. The 90-day inverse correlation between the SPX and USD is -0.77.
OIL
On its own path (for now) +3.7% week for WTI despite Dollar Up and up another +1.8% this morning getting closer to the top-end of our refreshed immediate-term risk range = $43.69-47.80. Oil Up = GDP Deflator needs to go up (GDP down).
UST 10YR
The Yield Spread got smashed to fresh year-to-date lows last week (10YR minus 2YR = 95 basis points) keeping the Financials (XLF -4.0% year-to-date) our favorite sector on the short side vs. Utes (XLU +14.1% YTD) our favorite on the long side.
*Tune into The Macro Show with Hedgeye CEO Keith McCullough live in the studio at 9:00AM ET - CLICK HERE.
TOP LONG IDEAS
XLU
Utilities (XLU) remains our favorite sector on the long side as Financials (XLF) remains our favorite sector on the short side. Current global macro positioning is squarely behind a continuation in the reflation trade as evidenced by commodity leveraged credit spreads, global macro futures and options positioning, and forward-looking volatility expectations. Global macro futures and options positioning show a market that is leaning long of commodities and short of U.S. dollars. Corporate credit as a % of GDP remains at cycle highs, capital markets activity has dried up significantly, and credit extension is tightening nationwide according the most recent Fed Senior Loan Officer survey.
MCD
For some perspective on the Macro environment and why we favor companies like McDonald's (MCD), here's an excerpt from the Early Look written by Hedgeye CEO Keith McCullough:
“Taking a step back, don’t forget where US Consumers (70% of GDP) were at this time last year:
- US Employment Growth (NFP) was putting in a cycle peak
- US Consumer Confidence was putting in a cycle peak
- US Consumption Growth was putting in a cycle peak
Peak. Peak. #Peak!
And what happens when you start to lap the cycle peak? Well, instead of crappy Baby Boom capacity putting up mediocre (barely positive) same store sales at the peak, they look even crappier on the back side of the cycle."
That's why we like large-cap, low-beta, liquid companies like McDonald's in this tumultuous market environment. Case in point, earlier in the week, MCD hit an all-time high. Since we added the company to Investing Ideas, it is up almost 30%.
Stick with it. Restaurants analyst Howard Penney reiterates his "road to $150" call, implyling more than 15% upside from here.
TLT
Credit markets are one of the major beneficiaries (maybe the largest) of the reflation trade since February. While yield spread compression has been a positive for Long Bonds (TLT, ZROZ), a perceived monetary policy shift and a collapse in bond market volatility expectations have been a positive for Junk Bonds (JNK), but we don’t expect it to continue.
With growth continuing to slow alongside consensus positioning broadly, downside deflation risk is on the table. As we’ve highlighted on a daily basis, consumption growth and labor market growth peaked in Q1 2015 and both are slowing alongside a continued corporate profits slowdown. This mix:
- Smells like incremental deflation on the margin;
- Is a huge risk for high yield credit (JNK);
Did we mention TLT and ZROZ were up 4.4% and 2.1% respectively last week? Not bad with U.S. #GrowthSlowing.
Asset Allocation
| CASH | US EQUITIES | INTL EQUITIES | COMMODITIES | FIXED INCOME | INTL CURRENCIES | |
|---|---|---|---|---|---|---|
| 5/15/16 | 60% | 3% | 0% | 6% | 25% | 6% |
| 5/16/16 | 58% | 2% | 0% | 7% | 27% | 6% |
Asset Allocation as a % of Max Preferred Exposure
| CASH | US EQUITIES | INTL EQUITIES | COMMODITIES | FIXED INCOME | INTL CURRENCIES | |
|---|---|---|---|---|---|---|
| 5/15/16 | 60% | 9% | 0% | 18% | 76% | 18% |
| 5/16/16 | 58% | 6% | 0% | 21% | 82% | 18% |
THREE FOR THE ROAD
TWEET OF THE DAY
An Animated History Of U.S. #GrowthSlowing https://www.youtube.com/watch?v=KegxiDarBlM&feature=youtu.be via @YouTube
@KeithMcCullough
QUOTE OF THE DAY
Only he who can see the invisible can do the impossible.
Frank L. Gaines
STAT OF THE DAY
Today in 1866, Congress eliminated the half dime coin and replaced it with the nickel.
