EARLY CYCLE SLOW-DOWN

Client Talking Points

VIX

If you ask front-month VIX, the continued relative weakness in early cycle stocks? It is real. Volatility continues to test a bearish to bullish TREND reversal with TREND support now = 11.94. There is no resistance to 14.41.

INDUSTRIALS

The XLI (Industrial Select Sector) lead decliners yesterday, closing down -1.3% (it’s down -2.2% for the month-to-date, and now only +1.1% year-to-date.) More importantly, the XLI is now bearish on both our TRADE and TREND durations for the first time in 2014.

USD

The only thing not agreeing with our macro call right now is the U.S. Dollar UP. While a big part of this is Euro DOWN, it’s definitely worth watching as the USD retests where it was in January. It’s signaling overbought – so we’re waiting and watching to see the Fed’s next move.

Asset Allocation

CASH 30% US EQUITIES 4%
INTL EQUITIES 16% COMMODITIES 16%
FIXED INCOME 24% INTL CURRENCIES 10%

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: 2.47% 10yr Yield set to test YTD lows again if US GDP misses  perma bull forecasts

@KeithMcCullough

QUOTE OF THE DAY

The strength of a family, like the strength of an army, is in its loyalty to each other.

-Mario Puzo

STAT OF THE DAY

Home Prices growth slowed for a 6th consecutive month, decelerating -148bps sequentially in May to +9.3% YoY.  This was the 2nd biggest month of deceleration since August of 2010 (last month was the largest at -155bps).


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