CLIENT TALKING POINTS
USD
Both the FX and Bond markets have been pricing in another #EmploymentSlowing report – USD is down for the 1st week in 5 and the reflation trade loves that – perversely, equity beta bulls need another headline NFP print that’s inline to slightly worse.
US 10 YR
Despite Yellen saying she’s “probably” going to raise rates in June/July, rates are falling (10yr 1.80% last vs. the recent pop to lower-highs of 1.9%) and the Yield Spread has taken another leg down to its lowest level of both #TheCycle and 2016 (91 bps wide on 10s/2s) – talk about squirrely market expectations vs. implicit economic #GrowthSlowing expectations…
SP500
What happens the “hedge” of 14,000 hedge funds doesn’t stay down on no volume? It goes up… to lower-highs… squeezes consensus into a reluctant net long position (net LONG SP500 Index + E-mini futs/options position = 2.73x on a 1yr z-score), then falls again. I can probably get you to 2124-2129 SPX today, but the jobs report might have to be sub 100k for that!
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)
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.
Asset Allocation
| CASH | US EQUITIES | INTL EQUITIES | COMMODITIES | FIXED INCOME | INTL CURRENCIES | |
|---|---|---|---|---|---|---|
| 6/2/16 | 80% | 0% | 0% | 4% | 8% | 8% |
| 6/3/16 | 80% | 0% | 0% | 4% | 8% | 8% |
Asset Allocation as a % of Max Preferred Exposure
| CASH | US EQUITIES | INTL EQUITIES | COMMODITIES | FIXED INCOME | INTL CURRENCIES | |
|---|---|---|---|---|---|---|
| 6/2/16 | 80% | 0% | 0% | 12% | 24% | 24% |
| 6/3/16 | 80% | 0% | 0% | 12% | 24% | 24% |
THREE FOR THE ROAD
TWEET OF THE DAY
Jobs report was the opposite of HUUUUGE
QUOTE OF THE DAY
"Don't go around saying the world owes you a living. The world owes you nothing. It was here first."
-Mark Twain
STAT OF THE DAY
West Virginia University ranks 14th in victories among NCAA FBS programs, as well as the most victories among those programs that never claimed nor won a National Championship.
