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Client Talking Points

CHINA

The big breakout off our signal continued overnight with the Shanghai Comp up another +2.4% (it’s up +6% since @Hedgeye TREND breakout on 7/21). We published an institutional research note last week outlining our #bullish view on China. Both our quantitative signals and fundamental research now support buying China. This stance is in stark contrast to our previous view.

DAX

Potential for a sustained bullish to bearish TREND reversal here is real. The DAX is down -0.3% this morning, but below @Hedgeye TREND resistance of 9789 is the more important risk management point. Most European Equity markets look no different.

VOLATILITY

Front month VIX snuck back above @Hedgeye TREND support of 11.94 on Friday. We’re watching that closely as the asymmetry in volatility, across asset classes, is epic by any historical measure. This is in line with our third Q3 Theme:  #VolatilityAsymmetry. Meanwhile, the Russell 2000 is down -5.3% since July 7.

Asset Allocation

CASH 28% US EQUITIES 4%
INTL EQUITIES 16% COMMODITIES 18%
FIXED INCOME 22% INTL CURRENCIES 12%

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

RUSSIA: trading system down another -1.9% this morn to -12.2% YTD $RSX

@KeithMcCullough  

QUOTE OF THE DAY

In looking for people to hire, you look for three qualities: integrity, intelligence, and energy. And if they don't have the first, the other two will kill you.

-Warren Buffett

STAT OF THE DAY

The CRB Food Index is up +19.7% year-to-date with Coffee up +52.9% year-to-date.