CLIENT TALKING POINTS
USD
To be clear, that means we’re down to 49% Cash! And that’s mainly because the USD is signaling immediate-term TRADE overbought, so many of the #Reflation trades signaled immediate-term TRADE oversold this week (i.e. buy/cover signals).
GOLD
Dollar Down, Rates Down is the other big reason for the setup (i.e. we can be long the Long Bond, Utilities, Gold, etc. in that scenario); Gold’s immediate-term risk range = $1, so not a ton of upside from here but we’ll take what we can get.
FINANCIALS
Not to be confused with a growth accelerating setup, both the employment data (jobless claims UP +2.2% year-over-year yesterday – first time positive year-over-year has happened since 2012) and Janet Yellen are your friend on Down Rates from here – keeping the Financials as our favorite Sector Style on the short side vs. long Utilities (XLU) which acted great yesterday +1% to +11.3% year-to-date.
*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 | |
|---|---|---|---|---|---|---|
| 5/19/16 | 51% | 5% | 0% | 8% | 30% | 6% |
| 5/20/16 | 49% | 6% | 0% | 10% | 30% | 5% |
Asset Allocation as a % of Max Preferred Exposure
| CASH | US EQUITIES | INTL EQUITIES | COMMODITIES | FIXED INCOME | INTL CURRENCIES | |
|---|---|---|---|---|---|---|
| 5/19/16 | 51% | 15% | 0% | 24% | 91% | 18% |
| 5/20/16 | 49% | 18% | 0% | 30% | 91% | 15% |
THREE FOR THE ROAD
TWEET OF THE DAY
(VIDEO 2 MIN) McCullough: History Is An Important Guide To Mr. Market https://app.hedgeye.com/insights/51063-mccullough-history-is-an-important-guide-to-mr-market… via @KeithMcCullough
@Hedgeye
QUOTE OF THE DAY
Be who you are and say what you feel, because those who mind don’t matter and those who matter don’t mind.
Dr. Seuss
STAT OF THE DAY
For the 24th consecutive year, the most popular breed of dog in the United States is the Labrador retriever, according to rankings released by the American Kennel Club.
