CLIENT TALKING POINTS
RUSSELL 2000
Russell 2000 has been absolutely crushed in the two days since BABA’s birth = down another -1.7% yesterday (-3% in two days, biggest 2-day drop of the year) as small cap liquidity remains one of our biggest concerns (42% of stocks in the Russell are crashing, -20% of more from their 12 month peaks).
UST 10YR
Bounce to lower-highs is met, once again, with bond buying on the long end of the curve (TLT +13.1% YTD vs. RUT -3%); UST 10YR Yield falls to 2.54% with immediate-term supports at 2.42%, then 2.32%. Federal Reserve Bank of New York President William C. Dudley was decidedly dovish at Bloomberg’s central planning event yesterday, talking down both rates and the U.S. Dollar.
GOLD
Gold stopped going down when bond yields stopped bouncing to lower-highs. Gold also held where it started the year, at +0.8% this morning to +1.9% year-to-date as bombs fly in the Middle East. Immediate-term risk range = $1211-1256 after the net long position (CFTC futures/options) has been cut in half in the last month.
TOP LONG IDEAS
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%.
Asset Allocation
| CASH | 42% | US EQUITIES | 4% | |
| INTL EQUITIES | 16% | COMMODITIES | 4% | |
| FIXED INCOME | 32% | INTL CURRENCIES | 2% |
THREE FOR THE ROAD
TWEET OF THE DAY
FSTE 100 down -1%, breaking @Hedgeye TREND support again
@KeithMcCullough
QUOTE OF THE DAY
You must not fight too often with one enemy, or you will teach him all your art of war.
-Napoleon Bonaparte
STAT OF THE DAY
iOS 8 had already been installed on some 46% of active iPhones and iPads by Sunday. The 10-month-old Android KitKat is still working its way toward the 25% mark.