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U.S. GDP GROWTH FORECAST CUT = #INFLATIONACCELERATING

Client Talking Points

USD

U.S. Dollar Down hard on the latest central plan (down another -0.5% this morning) and everything asset price inflation loves it (including a short squeeze in SPX); Oil up, Gold up – up, up, and up, in devalued Dollar terms.

10YR

Down 6 basis points in a straight line off the Fed’s “dovish” news; bonds (and anything that looks like a bond) up with Utilities leading the rally yesterday (XLU = +15.2% YTD); stay with energy inflation (XLE) + slow-growth #YieldChasing equity sector styles vs consumer discretionary (XLY) short.

VIX

10 handle again (it’s never held below 10, and never is a long time) and the immediate-term risk range for VIX is 10.14-12.15 now, so there’s no reason why this massive (-115,000) SPX Index + Emini net short position in futures and options contracts can’t capitulate (like it already is) to the upside.

Asset Allocation

CASH 10% US EQUITIES 4%
INTL EQUITIES 12% COMMODITIES 22%
FIXED INCOME 30% INTL CURRENCIES 22%

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

After being bullish on rates in 2013, we continue to be bearish on US rates in 2014

@KeithMcCullough 

QUOTE OF THE DAY

“Education is the most powerful weapon you can choose to change the world.”

-Nelson Mandela

STAT OF THE DAY

U.S. share buybacks and dividend payments climbed to a record level in the first quarter of 2014, as companies chose to boost shareholder returns in the absence of robust revenue growth. (Financial Times)