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Client Talking Points

JAPAN

So, what gives in Japan? Inflation! CPI in Japan accelerated +3.4% year-over-year.  This was the highest pace in 32-years for Japanese inflation. The fact of the matter is that the Japanese will tell you that once you factor out the sales tax impact, there was actually a slight drop in CPI.  That said, even the Japanese labor market is showing inflationary signs as the jobs-to-applicants hit a 22-year high at 1.09.  

VIX

Robert E. Whaley, a professor at Vanderbilt University’s business school, who is credited with developing the VIX for the Chicago Board Options Exchange in 1993, had this to say about the VIX being literally at an all-time low, “I wouldn’t be worried about it.” While Professor Whaley, aka the “Father of the VIX,” isn’t worried, that’s not necessarily a reason for us not to be worried.  The risk range for the VIX this morning is 10.61-12.94.

The U.S. FED

The Fed’s balance sheet continues inflating at an almost staggering rate. In total, the Fed’s balance sheet is at an astounding $4.4 trillion.  Certainly, tapering is slowing the growth of these assets on the Fed’s balance sheet, but what, exactly, happens when the Fed starts to sell these assets?  At over 25% of GDP, it is worth sniffing around this question.

Asset Allocation

CASH 14% US EQUITIES 6%
INTL EQUITIES 15% COMMODITIES 24%
FIXED INCOME 26% INTL CURRENCIES 15%

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

More than a fourth of QSR users engage with at least one QSR on social media sites. pic.twitter.com/SPwRhr6VMA

@HedgeyeHWP   

QUOTE OF THE DAY

“Most of the important things in the world have been accomplished by people who have kept on trying when there seemed to be no hope at all.”

-Dale Carnegie

STAT OF THE DAY

Nike’s Gross Margins were up 169bps to 45.6%, its highest rate in 4-years.