MANAGING ALL-TIME-BUBBLE-HIGHS IN U.S. EQUITIES

Client Talking Points

#INFLATIONACCLERATING

CRB Commodities Index (19 Commodities) was up another +1.5% last week to +10.6% year-to-date. WTI Crude Oil led the inflation melt-up at +4.2% on the week to +10.8% year-to-date. Natural Gas and Coffee prices were up another +1% last week to +14.8% and +50.6% year-to-date, respectively.

VOLUME

While Total U.S. Equity Market Volume was down -34% (vs. the 3 month average) on Friday’s +0.3% SPX negative breadth up-day, we finally got some real equity and commodity market volatility last week; oil volatility (Oil VIX) was +34.3% last week to 19.47 and U.S. Equity volatility (VIX) was +11.8% last week to 12.18.

U.K.

Bank of England getting two big thumbs up from us on discussing why rate hikes are good.  As the Bank of England builds currency credibility the British Pound continues to power forward. Strong currency, strong policy equates to stronger policy and stronger consumption. 

Asset Allocation

CASH 15% US EQUITIES 0%
INTL EQUITIES 10% COMMODITIES 20%
FIXED INCOME 30% INTL CURRENCIES 25%

Top Long Ideas

Company Ticker Sector Duration
HOLX

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.

OC

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.

LM

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

TREASURIES: 10yr back down to 2.58% as inflation continues to slow real U.S. Growth expectations @KeithMcCullough

QUOTE OF THE DAY

“Either you run the day or the day runs you.”

-Jim Rohn

STAT OF THE DAY

China overtakes the U.S. in company debt issued, with non-financial corporate debt in China reaching $14.2 trillion. (Financial Times)


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