CLIENT TALKING POINTS
#CREDITCYCLE
High yield credit indices have recovered and spreads in resource sectors have been smashed with the flattening of the treasury curve. After widely diverging from average high yield spreads when the U.S, dollar broke out in July of 2014, high yield energy spreads have been more than cut in half since February from +1600bps to +724bps. Spreads are now well below 2015 levels when energy prices were much higher. A number of factors suggest a lot of money is behind a recovery in the energy sector. If strong dollar continues to manifest with another leg down through the end of this year in crude prices, the market will get another reminder that there IS a credit cycle.
SPAIN
With 8 months and counting of no government, Spain’s acting PM Rajoy, leader of the People’s Party, says his conservative party's leadership would meet next week (August 17th) to vote on whether to agree to 6 reforms demanded by the centrist Ciudadanos party as a condition to form a coalition government. While this news may provide for a relief rally, we reiterate our Q3 Macro theme of #EuropeImploding and will not be recommending being long Spanish equities.
The Fed's War on Active Management
The divergence between asset prices and their fundamentals is only matched by the divergence between sentiment among active managers and all-time highs in the SPY. The latest ICI data show that a net $26B was pulled out of long-term, US-focused stock mutual funds in the week-ended August 3rd. ICI has now recorded 23 straight weeks of outflows from these funds, for a total of ~$100B. It compares this to the $170.7B that left such funds for all of 2015. In the past 17 months, ICI has recorded only four weeks of net inflows for such funds. The Fed is hell-bent on making ETF distributors and robo-advisors out of all of us. Who will fight back against such tyranny?
TOP LONG IDEAS
GLD
See update on TLT/UUP.
TLT
Back to growth ... we’ll refrain from commenting on Friday’s headline non-farm payrolls number in isolation, and rather offer some perspective on the cyclical nature of the non-farm payroll data series (you’ve heard it before):
- On a Y/Y rate of change basis, Non-Farm Payrolls peaked in February of 2015;
- Once growth in this series peaks and rolls over, it doesn’t return and we move toward economic contraction on the margin. Read: Bullish for Long Bonds (TLT);
A print of +282K jobs was needed for July to avoid another Y/Y sequential deceleration in the series. NFP additions were +255K. While this beat expectations of +180K (which was cheered by just about every mainstream media outlet), the TREND in this series remains slow-moving, predictable, and most importantly past peak.
UUP
Our team’s macro process is both fundamental and top-down, and we get the top-down signals in real-time. The bottom-line is that both the CRB Commodities Index and crude oil have recently broken down from a quantitative risk management perspective. While this is a key factor contributing to our recent addition of the PowerShares DB US Dollar Index Bullish Fund (UUP), it also signals that TIP does not have as much upside as we thought. As Keith McCullough wrote to subscribers this week:
“Changing my mind on longer-term longs has happened infrequently this year, but it should happen. That’s how the game goes.”
Asset Allocation
| CASH | US EQUITIES | INTL EQUITIES | COMMODITIES | FIXED INCOME | INTL CURRENCIES | |
|---|---|---|---|---|---|---|
| 8/10/16 | 61% | 3% | 3% | 10% | 14% | 9% |
| 8/11/16 | 61% | 3% | 3% | 10% | 14% | 9% |
Asset Allocation as a % of Max Preferred Exposure
| CASH | US EQUITIES | INTL EQUITIES | COMMODITIES | FIXED INCOME | INTL CURRENCIES | |
|---|---|---|---|---|---|---|
| 8/10/16 | 61% | 9% | 9% | 30% | 42% | 27% |
| 8/11/16 | 61% | 9% | 9% | 30% | 42% | 27% |
THREE FOR THE ROAD
TWEET OF THE DAY
McMonigle: An OPEC Meeting Spoiler Alert https://app.hedgeye.com/insights/53033-mcmonigle-an-opec-meeting-spoiler-alert … via @JoeMcMonigle dty #Oil #OPEC #WTI
QUOTE OF THE DAY
"Hard days are the best because that’s when champions are made."
-Gabby Douglas
STAT OF THE DAY
If the gold medals at the 2016 Olympic Games were entirely made of gold they would be valued at nearly $22,000 each, which is why 1912 was the last time all-gold medals were awarded. The “podium value” of this years gold medal is roughly $560.
