Client Talking Points
Pure currency devaluation by ECB President Mario Draghi worked; saving the economy didn’t – remember what these Policies To Inflate do (it’s all about asset prices, not real economic growth). Risk range for the EUR/USD is really wide at $1.28-1.33.
2 straight down weeks for the Russell 2000, right back to down for 2014 year-to-date – one of the biggest bubbles out there remains the liquidity bubble in small/mid cap stocks. The Russell 2000 is down -4% since peaking (on no volume) July 7th, 2014.
China continued to chug along overnight with the Shanghai Comp up another +0.3% to another year-to-date high of +14%. China and India remain our 2 favorite equity markets in the world. India’s WPI down to +3.7% AUG vs 5.2% JUL. Dr. Raj winning…
|FIXED INCOME||31%||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
India's wholesale price inflation slows (again) to +3.7% y/y AUG vs +5.2% JUL - great for India's economy
QUOTE OF THE DAY
The first duty of a man is to think for himself.
STAT OF THE DAY
Gold bounces +0.5% to $1235 that is up +2.7% year-to-date (vs. Russell 2000 -0.3% year-to-date).