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One of Hedgeye's Q2 Themes, Sovereign Debt Dichotomy is a call for an accelerating divergence between the countries with strong, liquid balance sheets and those with the largest debt issues. Furthermore, we called for and have seen a widening performance spread between the equities, bond yields, currencies and CDS of these countries.

On this month's Hedgeye Strategy call, we focused on one of the weaker countries, and the 9th largest global economy, Spain. We have gone into detail on why we see the market as not bearish enough on Spain, and more importantly, why you should be.

In addition, we updated you on our other two Q2 Themes:

  • April Flowers/May Showers - We expected and have seen U.S. equities lock in intermediate term highs as bonds break down to lower-highs. We have a very healthy degree of skepticism of Government, Politicians and the market's current levels and we are managing risk accordingly. As we think about the setup for the S&P 500 over the next three months, we observe 15 major headwinds for the market, the economy, interest rates, commodities, and the American consumer. Bearish on U.S. equities.
  • Inflation's V-Bottom - We are currently at generational lows of global inflation. As such, we continue to expect the global median inflation rate to accelerate meaningfully. Domestically, we believe CPI will accelerate sequentially throughout Q2, peaking at +3% Y/Y. We expect that and an impending rate hike to continue to be priced in the bond, currency, and commodities markets. We expect it to be priced into the equities markets last. Bearish on 1-3 year U.S. Treasuries.

To hear the podcast for yesterday’s call, click here. The link to the accompanying presentation is here as well: http://docs.hedgeye.com/Hedgeye Q2 Themes and SPAIN May 18 2010.pdf.


The Hedgeye Macro Team