CLIENT TALKING POINTS
VIX
Same #process, buy equities at the low-end of their risk range and high-end of volatility’s. The VIX risk range is now 13.13-14.99; this is not for the faint of heart, as total macro volatility comes off its most asymmetric low, ever.
U.S. CONSUMER
As in Discretionary (XLY) stocks got pounded back to flat for 2014 year-to-date yesterday; this was a sector a lot of people chased on the “down oil” thing, but its down -2.7% for the month – down oil isn’t going to change the all-time high in U.S. cost of living. Commodity deflation is setting in, but pricing is sticky.
CHINA
The only real good equity news in the last 48 hours was Chinese stocks ripping fresh year-to-date highs, up another +1.5% overnight to +14.4% year-to-date for the Shanghai Comp, running neck and neck with our preferred way to be long of U.S. #GrowthSlowing, the Long Bond (TLT) +14% year-to-date.
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
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 | 46% | US EQUITIES | 4% | |
| INTL EQUITIES | 12% | COMMODITIES | 4% | |
| FIXED INCOME | 30% | INTL CURRENCIES | 4% |
THREE FOR THE ROAD
TWEET OF THE DAY
HOUSING: mortgage demand continues to test fresh YTD lows - MBA weekly purchase apps down another -4.1% $ITB
@KeithMcCullough
QUOTE OF THE DAY
In economics, hope and faith coexist with great scientific pretension and also a deep desire for respectability.
-John Kenneth Galbraith
STAT OF THE DAY
China consumes over 40% of the world’s industrial metals (up from 5% in 1980).