Client Talking Points
Oil continues to get smoked (WTIC $91.27 this morning is down -6% and -11% on a 1 and 3 month basis) and this is easily the top thing U.S. growth bulls are pinging us on. While its better than oil $100, we would remind you that the all-time high in U.S. cost of living (rent, food, education) remains firmly intact – companies aren’t cutting prices; inflation is sticky.
Bubbles bounce and we gave you the levels on SPX/RUT oversold vs. VIX overbought yesterday, but those were just immediate-term signals within what we think has developed into the most epic stock market bubble we have seen in our careers (AAPL, FB, and BABA will = $1 TRILLION in market cap!).
Hopes that our 2013 #RatesRising call will eventually be right in 2014 fails at yet another lower high (in July the UST 10YR topped at 2.59%), back down to 2.51% this morning and no immediate-term TRADE support to 2.31%.
|FIXED INCOME||30%||INTL CURRENCIES||4%|
Top Long Ideas
The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). Now that we have our first set of late-cycle economic indicators slowing in rate of change terms (ADP numbers and the NFP number), it's time to really think through the upcoming moves of this bond market. We are doubling down on our biggest macro call of 2014 - that U.S. growth would slow and bond yields fall in kind.
Fixed income continues to be our favorite asset class, so it should come as no surprise to see us rotate into the Shares 20+ Year Treasury Bond Fund (TLT) on the long side. In conjunction with our #Q3Slowing macro theme, we think the slope of domestic economic growth is poised to roll over here in the third quarter. In the context of what may be flat-to-decelerating reported inflation, we think the performance divergence between Treasuries, stocks and commodities may actually be set to widen over the next two to three months. This view remains counter to consensus expectations, which is additive to our already-high conviction level in this position. Fade consensus on bonds – especially as growth slows. As it’s done for multiple generations, the 10Y Treasury Yield continues to track the slope of domestic economic growth like a glove.
Restoration Hardware remains our Retail Team’s highest-conviction long idea. We think that most parts of the thesis are at least acknowledged by the market (category growth, real estate expansion), but people are absolutely missing how all the pieces are coming together to drive such outsized earnings growth over an extremely long duration. The punchline of our real estate analysis is that a) RH stores could get far bigger than even the RH bulls seem to think, b) Aside from reconfiguring 66 existing markets, there’s another 19 markets we identified where the spending rate on home furnishings by people making over $100k in income suggests that RH should expand to these markets with Design Galleries, and c) the availability and economics on large properties for all these markets are far better than people think. The consensus is looking for long-term earnings growth of 28% -- we’re looking for 45%.
Three for the Road
TWEET OF THE DAY
Only bad thing about $LULU print is that it buys current mgmt team time. We added LULU as a top long after the Street capitulated in June
QUOTE OF THE DAY
The value of identity of course is that so often with it comes purpose.
STAT OF THE DAY
The European Union has decided to slap new economic sanctions on Russia over its actions in Ukraine, diplomats said Thursday and the Russian ruble fell to an all-time low of 37.51 rubles against the U.S. dollar.