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Client Talking Points

ASIA

Both China and Copper rocked again overnight with the Dr. (Copper) -1.4% after failing @Hedgeye TREND resistance in April. Global Equity Bulls aren’t talking much about the Hang Seng as its -1.5% drop today takes it’s crash from the 2015 Global Equity Bubble peak to -30% (newsflash: global growth has not bottomed).

NASDAQ

Both China and Copper rocked again overnight with the Dr. (Copper) -1.4% after failing @Hedgeye TREND resistance in April. Global Equity Bulls aren’t talking much about the Hang Seng as its -1.5% drop today takes it’s crash from the 2015 Global Equity Bubble peak to -30% (newsflash: global growth has not bottomed).

YIELDSPREAD

Flattening = leading indicator of economic slowing – at 94 basis points wide this morning (10YR minus 2YR) that’s a fresh YTD low and it’s driven by the 2YR popping to 0.84% on concern the Fed will hike on a rising CPI? If the Fed raises rates in June, they will make U.S. Equity Beta Bears happy (reminder: rising inflation takes DOWN our Street low GDP forecast for Q2).

 

*Tune into The Macro Show with Hedgeye CEO Keith McCullough live in the studio at 9:00AM ET - CLICK HERE

Asset Allocation

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
5/17/16 58% 2% 0% 6% 28% 6%
5/18/16 58% 2% 0% 6% 28% 6%

Asset Allocation as a % of Max Preferred Exposure

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
5/17/16 58% 6% 0% 18% 85% 18%
5/18/16 58% 6% 0% 18% 85% 18%
The maximum preferred exposure for cash is 100%. The maximum preferred exposure for each of the other assets classes is 33%.

Top Long Ideas

Company Ticker Sector Duration
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.

Three for the Road

TWEET OF THE DAY

Huge thanks to @LincolnMotorCo for helping make our Hedgeye Cares charity golf challenge a success. @KeithMcCullough

@Hedgeye

QUOTE OF THE DAY

There is no exercise better for the heart than reaching down and lifting people up.

John Holmes

STAT OF THE DAY

A horse gallops on average 25 to 30 mph, the world record for a horse galloping over a short, sprint distance is 55 mph.