Client Talking Points
With the Russell 2000 down -1.2% year-to-date, it’s been a lot easier for small/mid cap growth investors to stay with long China, India, and Indonesia – all up again overnight to +12.5%, +27.6%, and +23.5% year-to-date, respectively – that’s where the real perfect is and also why you’ll see a higher “International Equities” allocation in our asset allocation model than USA.
One of the biggest overbought exhaustion signals in 15 years remains, but you saw what a downtick in USD can do yesterday; huge 1-day move in both Oil and Energy (XLE) stocks – we still think the Fed gets easier throughout Q3/Q4 as the rate of change in U.S. economic growth data slows – consensus is hawkish.
The Down Dollar, Down Rates move yesterday paid the slow-growth #YieldChasers – that was the 1st SPX Sector we signaled buy on alongside the SPX oversold signal at 1977; XLU +1.2% on the day yesterday to +13.1% year-to-date – we’ve stayed with that all year and we’re not changing our minds on it into the Fed statement either.
|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
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
It's fine to celebrate success but it is more important to heed the lessons of failure.
STAT OF THE DAY
TREASURIES: UST 10YR down -4 basis points for the week and -46 basis points year-to-date ahead of the Fed today.