CLIENT TALKING POINTS

Germany

Got #GrowthSlowing? We again reiterate our call for slowing growth in
the Eurozone beginning in Q2 and today got classic "late to the party"
confirmation from the German economy ministry who said the
country’s economy had a decent start to the Q2 but its growth pace is
likely to slow during the course of the April-June period.

#Materials

Next to the growth slowing Utilities (XLU +17.4% YTD) crusher in 2016, Energy and Materials are leading sector outperformance MTD and YTD. XLB and XLE are +10.8% and +14.2% YTD respectively. From a large consensus short bias to inflation leveraged sectors in Q1, much of the
energy and materials sector were immune to strong USD deflation in May, arguably for a number of reasons, as USD correlations are broken (especially in energy). With most of these commodities trending higher on healthy signaling, consensus has chased the momentum and/or capitulated on shorts and is positioned for a continuation in said momentum. A marginally hawkish policy turn this summer is a huge risk to market sentiment right now.

Global Demand

No matter what side of the reflation/deflation trade you’re on, the growth in global demand continues to decelerate on a trending basis. Only 35% of country and regional PMI figures across manufacturing, services and composite readings are both expanding (i.e. > 50) and accelerating sequentially as of last month. The rest are either expanding
but decelerating or in outright contraction (i.e. < 50). With continued evidence of economic contraction, we’re confident stick with growth-slowing allocations (TLT, XLU) while waiting and watching on deflation/reflation exposure.

TOP LONG IDEAS

MCD

MCD

McDonald's (MCD) is testing fresh beef in 14 Dallas-area restaurants in an attempt to become a modern progressive burger company and better compete with smaller, premium chains. Part of the reason they haven’t done this in the past is because there hasn’t been enough supply of fresh beef for their demand.

The initiative will expand further to more markets over the course of the year to test both consumer perception and their supply chains ability. This could be a big move for MCD that will undoubtedly improve food quality and consumer perception of the company.

Also in the news over the last couple of weeks is MCD’s plan to move its HQ from Oak Brook to downtown Chicago. Although not important from an operational perspective immediately, it will help the company attract and retain top talent which will be beneficial overtime. MCD remains one of our top ideas in the Restaurant space.

TLT

TLT

Friday’s jobs report represented a complete shift to any renewed expectations of a June/July hike. The yield spread ended the week pinned near the bottom of the cycle low at 92 basis points (10yr-2yr yield %). And, looking at real-time rate hike expectations, the bid-yield of December 2016 Federal Funds Futures Contracts dipped 8 basis points day-over-day, implying the market’s expectations for the first rate hike is now in 2017!

GLD

GLD

That was the commentary that closed out a deflationary month of May – USD +3.1% with Gold -6.3% and the long end of the Treasury curve and the S&P roughly flat. Fast forward a week. Gold, the Treasury market, and Federal Fund futures don’t buy the hawkish rhetoric for a second.

We’ve shown our chart of the Y/Y% change in Non-Farm Payrolls numerous times, so Friday’s Jobs report was no surprise to us. Consumption and labor market strength are classic late-cycle indicators, but eventually these indicators peak and roll-over in rate-of change terms. Here's the Jobs Report breakdown:

Non-Farm payroll additions totaled +38K in May vs. +160K est. and +160K prior. While the number was a bomb for those who follow the month-to-month sequential change (which is useless), we expected the weakness. To be clear, history paints a very clear picture. NFP additions peaked in Q1 of 2015 and have since rolled over. It’s part of #TheCycle.  

Asset Allocation

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
6/9/16 69% 0% 0% 5% 16% 10%
6/10/16 69% 0% 0% 5% 16% 10%

Asset Allocation as a % of Max Preferred Exposure

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
6/9/16 69% 0% 0% 15% 48% 30%
6/10/16 69% 0% 0% 15% 48% 30%
The maximum preferred exposure for cash is 100%. The maximum preferred exposure for each of the other assets classes is 33%.

THREE FOR THE ROAD

TWEET OF THE DAY

*REPLAY Q&A w/ Neil Howe: Bullish Case For Life Insurance Stocks app.hedgeye.com/insights/51536… @HoweGeneration $MET $PRU

@Hedgeye

QUOTE OF THE DAY

"That's right...Iceman...I am dangerous!"

-Pete "Maverick" Mitchell, Top Gun

STAT OF THE DAY

Don Mattingly played 14 years in the MLB, he had a career batting average of .307