The Smell of Incremental Easing

Client Talking Points

USD

Plenty of foreign currency volatility out there now that the USD has had its biggest move since 1997, but we’re right where it stopped going up in July of 2013. So, for a trade we would sell that. Pound vs. USD at 2 week highs into the Scottish vote.

UST 10YR

We heard more talking about the “dots” yesterday than we saw analysis of what Janet Yellen was actually saying – she’s saying she’ll go with the data, so watch-out below on yields if we’re right and Q3 GDP misses (and/or a jobs report does).

GOLD

Gold is annoying people (as it tends to on massive USD ramps), but unless the USD Index can shoot towards 86-87 and hold up there, Gold has plenty of support here (its +2% from where it started the year); the risk range is now 1216-1266.

Asset Allocation

CASH 34% US EQUITIES 6%
INTL EQUITIES 20% COMMODITIES 4%
FIXED INCOME 32% 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

INDIA: +1.7% move for BSE Sensex to +29.7% YTD (where the real perf is at)

@KeithMcCullough

QUOTE OF THE DAY

You don't get to choose how you're going to die, or when. You can decide how you're going to live now.

-Joan Baez

STAT OF THE DAY

The Russell 2000 (small cap Style Factor) is still down -0.9% for 2014 year-to-date versus a proxy for the #GrowthSlowing Long Bond (TLT) which is +11.1% year-to-date.


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