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Client Talking Points

THE FED

The trillion dollar question: When does the Fed taper? Probably not one week before Christmas (the FOMC meets DEC 17-18). In fact, we are increasingly of the view that the Fed is aware of the systemic risk present in the bond market and is potentially setting up to never commence tapering. They will likely accomplish this by setting far-too-aggressive targets for GDP growth and shifting their focus to combating a perceived risk of deflation, at the margins.

S&P 500

We continue to think the great rotation out of debt and back into stocks is: A) still on; and B) will provide a structural bid to the equity market. That said, we now think that bid could be from lower prices as proxy hedging activity from distressed fixed income investors (not to be confused with investors that invest in distressed debt) weighs on broader asset prices in the interim. Our immediate-term Risk Range for SPX is 1785 - 1805.

Asset Allocation

CASH 44% US EQUITIES 10%
INTL EQUITIES 10% COMMODITIES 6%
FIXED INCOME 6% INTL CURRENCIES 24%

Top Long Ideas

Company Ticker Sector Duration
FXB

Our bullish call on the British Pound was borne out of our Q4 Macro themes call. We believe the health of a nation’s economy is reflected in its currency. We remain bullish on the regime change at the BOE, replacing Governor Mervyn King with Mark Carney. In its October meeting, the Bank of England voted unanimously (9-0) to keep rates on hold and the asset purchase program unchanged.  If we look at the GBP/USD cross, we believe the UK’s hawkish monetary and fiscal policy should appreciate the GBP, as Bernanke/Yellen continue to burn the USD via delaying the call to taper.

WWW

WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.

TROW

Financials sector senior analyst Jonathan Casteleyn continues to carry T. Rowe Price as his highest-conviction long call, based on the long-range reallocation out of bonds with investors continuing to move into stocks.  T Rowe is one of the fastest growing equity asset managers and has consistently had the best performing stock funds over the past ten years.

Three for the Road

TWEET OF THE DAY

We're 1 Hilsenrath whisper of no-taper away from 1802 $SPY #TaperTalk @KeithMcCullough

QUOTE OF THE DAY

"Last night would have been a hell of a night to assassinate a President." -John F. Kennedy, two hours before his assassination

STAT OF THE DAY

Massive inflows into Equities this week... (+$7.2 billion versus -$7.5 billion outflows in Bond funds) This is the widest weekly spread between debt/equity of the year.