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Client Talking Points

BERNANKE

Yep, he’s back – speaking for fees and making comments that are in line with his forecasting track record on growth #reckless. Allegedly (at a Morgan Stanley lunch yesterday) Bernanke said growth was going to surprise on the upside and he was surprised that the UST 10YR was still < 3%. We think he’ll be dead wrong on this forecast.

UST 10YR

We weren’t there, but looking at the intraday, we have no doubt Bernanke was somewhere saying something like that. It’s sad, but we have to risk manage this until Yellen tones it down next week – immediate-term risk range has widened (that’s dangerous – leading indicator for bond market volatility) to 2.33-2.58%.

OIL

Basically everything macro is one big correlation trade all of a sudden to Up Dollar, Up Rates (i.e. Down Oil, Down Gold, Up SPX, etc.) – with 30-day correlations vs. USD close to +/- 0.8, there’s huge TREND reversal risk now across macro markets if/when this Bernanke thing is proven wrong and/or Yellen backs the market off the higher rates expectation.

Asset Allocation

CASH 41% US EQUITIES 4%
INTL EQUITIES 19% COMMODITIES 2%
FIXED INCOME 30% INTL CURRENCIES 4%

Top Long Ideas

Company Ticker Sector Duration
EDV

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.

TLT

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.

RH

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

FX Volatility is officially on again thanks to Draghi and Bernanke

@KeithMcCullough

QUOTE OF THE DAY

You never change things by fighting the existing reality. To change something, build a new model that makes the existing model obsolete.

-Buckminster Fuller

STAT OF THE DAY

China remains bullish in our model, the Shanghai Composite is up another +0.9%  to 2014 highs of +13.6% year-to-date.