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2 LEGAL DISCLAIMER Hedgeye Risk Management is a registered investment advisor, registered with the State of Connecticut. Hedgeye Risk Management is not a broker dealer and does not provide investment advice to individuals. This research does not constitute an offer to sell, or a solicitation of an offer to buy any security. This research is presented without regard to individual investment preferences or risk parameters; it is general information and does not constitute specific investment advice. This presentation is based on information from sources believed to be reliable. Hedgeye Risk Management is not responsible for errors, inaccuracies or omissions of information. The opinions and conclusions contained in this report are those of Hedgeye Risk Management, and are intended solely for the use of Hedgeye Risk Management s clients and subscribers. In reaching these opinions and conclusions, Hedgeye Risk Management and its employees have relied upon research conducted by Hedgeye Risk Management s employees, which is based upon sources considered credible and reliable within the industry. Hedgeye Risk Management is not responsible for the validity or authenticity of the information upon which it has relied. TERMS OF USE This report is intended solely for the use of its recipient. Re-distribution or republication of this report and its contents are prohibited. For more detail please refer to the appropriate sections of the Hedgeye Services Agreement and the Terms of Use at HEDGEYE 2

3 3MO HEDGEYE ASSET ALLOCATION April 20, 2016 THE MACRO 4/11/2014 SHOW

4 3MO HEDGEYE ASSET ALLOCATION 80% 70% 60% 50% 65% The maximum preferred exposure for cash is 100%. The maximum preferred exposure for each of the other asset classes is 33%. 76% 40% 30% 20% 10% 0% 0% 15% 15% 0% CASH U.S. EQUITIES INT'L EQUITIES COMMODITIES FOREIGN EXCHANGE FIXED INCOME April 20, 2016 THE MACRO 4/11/2014 SHOW

5 1 2 3 #EARNINGS EUR/USD #TIGHTCHINA

6 #EARNINGS With the busiest week of Q1 Earnings for S&P 500 companies, we ll have some concrete evidence of pending earnings deterioration. Thus far, 66 companies have reported from 7 sectors. 4 of 7 have comped down bottom line. S&P earnings have comped down -10.8% in aggregate, with materials and financials leading decliners. The trend of late cycle reporting strength in healthcare and consumer discretionary carries on, for now. Again we would ask the question, can the market continue to trade-up with the possibility of two more quarters of poor earnings? We ll see.

7 EUR/USD The ECB holds its monetary meeting in Frankfurt tomorrow. We expect no great waves from President Mario Draghi as he already delivered the Drugs in the form of both interest rate cuts and the expansion of QE (by 20 billion to 80 billion/month) in last month s meeting. We continue to suggest trading our immediate term TRADE risk range of $ $1.14. We have a neutral outlook on the currency cross over the intermediate term TREND.

8 #TIGHTCHINA The Shanghai Composite Index dropped -2.3% overnight despite the PBoC injecting 250B of liquidity into the banking system, which represents the largest such injection since February 26 th. Weighing on sentiment was a Xinhua report that monetary policy will likely be more prudent in 2016 than it was last year, according to sources close to the PBoC, as well as PBoC Chief Economist Ma Jun commentary about future monetary policy needing to guard against financial risks. With Chinese corporate leverage high and getting higher (166% of GDP) and property prices running up 30% YoY in first tier cities, we expect the PBoC to rein in the liquidity provision meaningfully from here now that economic stabilization is in the rear view mirror.

9 MACRO DARIUS DALE

10 UNITED STATES DATA SOURCE: BLOOMBERG HEDGEYE 10

11 UNITED STATES CONT D. G: Our model has domestic economic growth decelerating sharply here in Q2 with a probable trough by the third quarter. This forecast is corroborated by the trending tightening across all segments of domestic rates markets, as well as the sharp breakdown of the USD on a trade-weighted basis in recent months which itself has perpetuated a massive short squeeze across nearly every facet of the global reflation trade. DATA SOURCE: BLOOMBERG I: In line with our #Quad4 expectation for Q2, reported inflation has at least temporarily inflected from generally hawkish trends. We are projecting a resumption of trending acceleration in 2H16, but to lower-highs on a long-term basis. P: Domestic and global spillover effects stemming from structural USD strength have forced the Fed s hand to the dovish side, which is being ardently reflected throughout the short end of U.S. rates markets in the YTD. There is, however, limited room for further spread compression absent outright easing. HEDGEYE 11

12 EUROZONE DATA SOURCE: BLOOMBERG HEDGEYE 12

13 EUROZONE CONT D. G: Our model has Eurozone growth decelerating on a trending basis throughout the balance of the year. This forecast is corroborated by the fact that Eurozone economic growth continues to slow on a trending basis across every key category of highfrequency data. I: Our model has Eurozone inflation decelerating through the balance of 1H16 before v-bottoming and trending higher through year-end. This forecast is corroborated by the trending breakdown in 5Y5Y EUR inflation swaps as well as the trend higher in the EUR on both a nominal and real basis. P: We expect the ECB to incrementally ease monetary policy by their June meeting in order to combat the aforementioned cyclical headwinds, as well as the trend lower in both Eurozone equities and Eurozone inflation expectations, as well as the trend higher in the EUR/USD. DATA SOURCE: BLOOMBERG HEDGEYE 13

14 CHINA DATA SOURCE: BLOOMBERG HEDGEYE 14

15 CHINA CONT D. G: Our secular bear case on China remains firmly intact as evidenced by the lackluster Q1 GDP report and the fact that growth rates C + I + NX formula continue to decelerate on a trending basis across key highfrequency metrics. I: Our model has Chinese inflation inflecting here in Q2 and trending lower through the balance of Q3. Corroborating this forecast is the trending deceleration in core CPI, which implies the recent trend of global commodity reflation something we anticipate will end soon has been artificially propping up headline inflation readings in China. P: Consistent with our bullish bias on the USD from here, we anticipate the PBoC will begin to revalue the CNY lower on a trending basis over the intermediate term. This will likely force them to keep policy rates tight(er) in order to offset capital outflow pressures and it appears that is already being reflected on the short end of Chinese rates markets. DATA SOURCE: BLOOMBERG HEDGEYE 15

16 JAPAN DATA SOURCE: BLOOMBERG HEDGEYE 16

17 JAPAN CONT D. G: Our model is all over the map with respect to Japanese GDP growth, forecasting a #Quad4 setup in Q1, a #Quad1 setup in Q2, a #Quad3 setup in Q3 and a #Quad2 setup in Q4. While there are indeed nascent signs of inflection, Japanese economic growth continues to trend lower across every key category of highfrequency data as do rates on the long end of the JGB yield curve. DATA SOURCE: BLOOMBERG I: Our model has Japanese inflation trending lower throughout the balance of 1H16. This forecast is being corroborated by trending deceleration across headline CPI, core CPI and headline PPI, as well as the trend lower in 5Y5Y JPY inflation swaps and the trend higher in the JPY on both a nominal and real basis. P: Japanese policymakers in both the Cabinet and BoJ have ratcheted up verbal intervention in the JPY, which is up ~10% YTD vs. the USD. We believe verbal intervention to be unsustainable and anticipate the BoJ will expand upon QQE and/or NIRP at its April meeting. HEDGEYE 17

18 UNITED KINGDOM DATA SOURCE: BLOOMBERG HEDGEYE 18

19 UNITED KINGDOM CONT D. G: Aside of brief respite in Q3, our model has U.K. GDP growth decelerating on a trending basis throughout the balance of Corroborating this forecast is the trending deceleration seen across every key category of high-frequency growth data, as well as the trending narrowing of the Gilt 10Y-2Y spread. I: Our model has U.K. inflation accelerating throughout the balance of This forecast is corroborated by trending acceleration across headline CPI, core CPI and headline PPI, as well as the trending breakdown in the GBP on both a nominal and real basis. P: Naturally, we d expect the BoE to be in a box given the aforementioned cyclical outlook for persistent #Quad3 stagflation. Complicating policy matters is the Brexit vote which is scheduled for late-june and is effectively a coin toss. The BoE is appropriately storing its ammo in the event that process weighs heavily upon consumer and business confidence in the U.K. DATA SOURCE: BLOOMBERG HEDGEYE 19

20 HEDGEYE MACRO 3MO PROCESS: RATE OF CHANGE April 20, 2016 THE MACRO 4/11/2014 SHOW

21 3MO S&P REVENUE & EARNINGS COMP April 20, 2016 THE MACRO 4/11/2014 SHOW

22 WHAT CAN 3MO MORE JAWBONING ACCOMPLISH? April 20, 2016 THE MACRO 4/11/2014 SHOW