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Client Talking Points

EUROPE

Our intermediate-term TREND signals broke over a month ago, and now you’re seeing the draw-down percentages add up.  Italy is -13% since its June top and Germany (DAX) has had a -10% drop since topping July 3rd (a week before the Russell did).

VIX

The front month VIX is +63.5% since the Q2 bounce failed to make higher-highs (Russell 2000). Our TREND breakout line is 11.94, so what’s born out of this scenario is wider risk ranges (our 3-day range for the SPX is now over 100 points – last month it was 30-35 wide).

UST 10YR

UST 10YR should test fresh year-to-date lows here as Yield Spread (10yr minus 2yr) compresses to +199bps wide (its year-to-date lows). These are clean cut #Q3Slowing signals in our model, so we’re sticking with the Long Bond as our best asset allocation idea.

Asset Allocation

CASH 42% US EQUITIES 0%
INTL EQUITIES 14% COMMODITIES 6%
FIXED INCOME 28% 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

HOUSING: MBA purchase app index down another -1.3% this wk - horrendous trend, on the margin $ITB -- @KeithMcCullough

QUOTE OF THE DAY

We work to become, not to acquire.

-Elbert Hubbard

STAT OF THE DAY

The VIX has ripped +63.5% from the time we made our #VolatilityAsymmetry slide deck presentation.