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Client Talking Points

USD

All it took was 2 down days for USD to ramp reflation, but this time to lower-highs for both the CRB Index (TAIL risk resistance = 192) and Oil – anything in the area code of consensus on jobs “probably” (her word) gives the Fed the greenlight they want on a rate hike (i.e. rate of change in labor market will still be slowing into that hike, which would be USD bullish from here).

 

Japan

No likey Down Dollar, Up Yen move, eh? For your friends who think stocks can’t go down anymore, the Nikkei just lost another -2.3% overnight and -3.9% in 2-days, taking it right back into #crash mode at -21% since July. Into the jobs report, we say you book some gains on the short side of Japanese Equities, especially if USD Index holds this 94-95 level.

OIL

Is the new intermediate-term risk range $46-56 or $36-50? The Saudis have a major drill program underway and Iran isn’t budging (our Energy Policy analyst Joe McMonigle is at the OPEC meeting); the Fed tightening into a slow-down matters in trying to answer the question on what the risk ranges are across durations – currently the immediate-term range = $46.87-49.99 WTI.

Asset Allocation

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
6/1/16 77% 0% 0% 6% 11% 6%
6/2/16 80% 0% 0% 4% 8% 8%

Asset Allocation as a % of Max Preferred Exposure

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
6/1/16 77% 0% 0% 18% 33% 18%
6/2/16 80% 0% 0% 12% 24% 24%
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
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)

 

GLD

Our Macro team’s proprietary Growth, Inflation, Policy Model (GIP Model) is a proven model that accurately front-runs the second derivative direction of inflation-adjusted growth. The most important call-out is that our growth estimates for 2016 (year-over-year) remain WELL BELOW Wall Street and Central Bank consensus forecasts:

 

  • Hedgeye: +1.4%
  • Bloomberg Consensus: +1.8%
  • Central Bank: +2.2%

 

In conclusion, the Fed remains out to lunch with their expectation for growth, and once they come around the Hedgeye view, the policy playbook calls for incremental easing on the margin.

Three for the Road

TWEET OF THE DAY

McMonigle: Why $50 Oil Is Likely Temporary app.hedgeye.com/insights/51329… … via @JoeMcMonigle on #oil at #OPEC meeting pic.twitter.com/cRHFPAQMOa

@Hedgeye

QUOTE OF THE DAY

"I didn't get over 1300 walks without knowing the strike zone."

-Wade Boggs

STAT OF THE DAY

Jeff Bagwell hit 449 HR's during his 15 year career.