CLIENT TALKING POINTS
USD
A) the USD was signaling oversold 3 weeks ago and B) now it’s signaling immediate-term TRADE overbought at 95.48 USD Index, $1.12 Euro and $110.46 Yen … so C) we think most of this move is just mean reversion combined with macro tourist storytelling/fear about a rate hike.
UST 10YR
Again, it’s where mean reversions come from that lead false narratives – the 10YR Yield was oversold at 1.70% and bounced… but A) post a GDP print of 0.5%, B) an NFP print of 163k and C) a headline CPI of 1.1% year-over-year… GROWTH has trumped (pardon the pun) inflation the entire way and we think it will again – this chart is beautifully bearish TREND on growth.
SECTORS
I don’t want to say layup (because I’m a 5.9’ hockey player who is bad at hoops), but if you have our GDP, employment, and consumption slow-down view in Q2/Q3, it’s the best spot you’ve had since DEC to buy Utilities (XLU) and short the Financials (XLF and KRE) – we can finally get long #GrowthSlowing in a bigger way now.
*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 | |
|---|---|---|---|---|---|---|
| 5/18/16 | 58% | 2% | 0% | 6% | 28% | 6% |
| 5/19/16 | 51% | 5% | 0% | 8% | 30% | 6% |
Asset Allocation as a % of Max Preferred Exposure
| CASH | US EQUITIES | INTL EQUITIES | COMMODITIES | FIXED INCOME | INTL CURRENCIES | |
|---|---|---|---|---|---|---|
| 5/18/16 | 58% | 6% | 0% | 18% | 85% | 18% |
| 5/19/16 | 51% | 15% | 0% | 24% | 91% | 18% |
THREE FOR THE ROAD
TWEET OF THE DAY
Despite a solid print, $WMT's global e-commerce biz was up just 7%.
That's unacceptable from where we sit.
@HedgeyeRetail
QUOTE OF THE DAY
We do not have to become heroes overnight. Just a step at a time, meeting each thing that comes up ... discovering we have the strength to stare it down.
Eleanor Roosevelt
STAT OF THE DAY
A recent report from the AFL-CIO federation of unions found that the average CEO of a company on the S&P 500 made 335 times as much money as the average production and non-supervisory worker in 2015. That’s down from 373 times as much money as 2014.
