CLIENT TALKING POINTS
PMI's
One narrative (for almost a year now) has been that “PMIs have bottomed” – and, clearly, post yesterday’s Chicago PMI of 49.3, last night’s China PMI of 50.2, and this morning’s 3 month low Eurozone PMI of 51.5, they have not – neither has copper and/or “Chinese demand”.
Yields
Around the world (Swiss 10yr yield hitting new lows this am at -0.40%), long-term yields have had #TheCycle right from a GDP #GrowthSlowing perspective – question now is, with the Fed “probably” raising rates in June/July, what do we do with our league leading positions in Long-Term Bonds, Munis, Utes, etc? We say it’s time to book some gains and enjoy the summer – we can always buy them back.
SP500
It’s a good thing they ramped SPX +1.4% on May 24th on a down -16% volume day (vs. the 1 month avg) – that all but ensured that many aren’t “beating the market” YTD unless they were super long #GrowthSlowing (Utes, XLU +13.6% YTD) and/or Reflation (Energy +10.9% YTD) for the period (MAR/APR) when Janet was diving dovish… now back to hawkish, because all is well, eh?
TOP LONG IDEAS
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);
ZROZ
In our view, the probability that the Federal Reserve continues on a tightening course is next to nil if #LateCycle employment data continues to deteriorate, and there are signs that is happening. For example, one of the slides in our Q2 macro themes deck provides a long history of one of Janet’s favorite indicators, the “Change in Labor Market Conditions Index.”
This index has trended positive for the balance of the cycle until 2016. The index has now dipped into negative territory for four consecutive months to the lowest readings since June of 2009.
Does Janet want to be the catalyst in expediting that? When the bars in the chart above start to dip deep into red territory, she has to be dovish – it’s part of her playbook, and the dovish pivot will continue to be supportive of #GrowthSlowing allocations on the margin (like Long Bonds (TLT, ZROZ), and especially Gold (GLD).
Asset Allocation
| CASH | US EQUITIES | INTL EQUITIES | COMMODITIES | FIXED INCOME | INTL CURRENCIES | |
|---|---|---|---|---|---|---|
| 5/31/16 | 77% | 0% | 0% | 6% | 11% | 6% |
| 6/1/16 | 77% | 0% | 0% | 6% | 11% | 6% |
Asset Allocation as a % of Max Preferred Exposure
| CASH | US EQUITIES | INTL EQUITIES | COMMODITIES | FIXED INCOME | INTL CURRENCIES | |
|---|---|---|---|---|---|---|
| 5/31/16 | 77% | 0% | 0% | 18% | 33% | 18% |
| 6/1/16 | 77% | 0% | 0% | 18% | 33% | 18% |
THREE FOR THE ROAD
TWEET OF THE DAY
[NEW] About Everything: Department Stores = Endangered Species? https://app.hedgeye.com/insights/51291-about-everything-everything-must-go … via @HoweGeneration $JWN $TGT $WMT $M $JCP $DDS
QUOTE OF THE DAY
"If you're going to have to bed them to play, it's not going to work."
-Chuck Daly
STAT OF THE DAY
Without the 3 point line, Jerry West scored 2,309 points and recorded 1,240 rebounds during his career at West Virginia University.
