Client Talking Points
A 2.51% yield starts the week off down after a lot of people said bond yields couldn’t go lower yet. Newsflash: JGB 10-year yields are at 0.58%. If we go 0% forever, there is a precedent. 2.61% TAIL risk resistance = on. Consensus for the 10-year yield is 3.32% for year end - not a hope in hell that happens if inflation continues to slow growth expectations.
Inflation in the oil price of +2.3% last week sees WTIC up another +0.6% this morning, just in time for Memorial Day weekend when Americans are being taxed six-ways to Sunday from rent to food. #InflationAccelerating.
The MIB Index smoked for a -2.9% drop this morning in a rather abrupt move as Italian stocks have given back ½ their year-to-date gains on the “Sell in May and go away” trade – that’s very much on in US growth (Russell 2000) exposures as well.
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Top Long Ideas
Hologic is emerging from an extremely tough period which has left investors wary of further missteps. In our view, Hologic and its new management are set to show solid growth over the next several years. We have built two survey tools to track and forecast the two critical elements that will drive this acceleration. The first survey tool measures 3-D Mammography placements every month. Recently we have detected acceleration in month over month placements. When Hologic finally receives a reimbursement code from Medicare, placements will accelerate further, perhaps even sooner. With our survey, we'll see it real time. In addition to our mammography survey. We've been running a monthly survey of OB/GYNs asking them questions to help us forecast the rest of Hologic's businesses, some of which have been faced with significant headwinds. Based on our survey, we think those headwinds are fading. If the Affordable Care Act actually manages to reduce the number of uninsured, Hologic is one of the best positioned companies.
Construction activity remains cyclically depressed, but has likely begun the long process of recovery. A large multi-year rebound in construction should provide a tailwind to OC shares that the market appears to be underestimating. Both residential and nonresidential construction in the U.S. would need to roughly double to reach post-war demographic norms. As credit returns to the market and government funded construction begins to rebound, construction markets should make steady gains in coming years, quarterly weather aside, supporting OC’s revenue and capacity utilization.
Legg Mason reported its month ending asset-under-management for April at the beginning of the week with a very positive result in its fixed income segment. The firm cited “significant” bond inflows for the month which we calculated to be over $2.3 billion. To contextualize this inflow amount we note that the entire U.S. mutual fund industry had total bond fund inflows of just $8.4 billion in April according to the Investment Company Institute, which provides an indication of the strong win rate for Legg alone last month. We also point out on a forward looking basis that the emerging trends in the mutual fund marketplace are starting to favor fixed income which should translate into accelerating positive trends at leading bond fund managers. Fixed income inflow is outpacing equities thus far in the second quarter of 2014 for the first time in 9 months which reflects the emerging defensive nature of global markets which is a good environment for leading fixed income houses including Legg Mason.
Three for the Road
TWEET OF THE DAY
76% of people reject socialist policy (to hike min wage to $25/hr) in Switzerland #WellDone @KeithMcCullough
QUOTE OF THE DAY
"If you'll not settle for anything less than your best, you will be amazed at what you can accomplish in your lives." - Vince Lombardi
STAT OF THE DAY
AT&T has agreed to acquire America's biggest satellite television provider, DirecTV, in a deal worth almost $50 billion. (CNN)