Bubbles, Bonds and China

Client Talking Points

RUSSELL 2000

The Russell 2000 is down -4.2% since the BABA #bubble was issued, taking its draw-down from its all-time #bubble high (July 7th) of 1208 to -8.1%; yesterday’s close of 1110 was a lower-closing-low than August; keep selling bounces.

UST 10YR

The UST 10YR is straight back down to 2.49% this morning after failing at both our TRADE and TREND lines of resistance; with it -18% year-to-date, and the Fed primed to get dovish on the margin if jobs and/or GDP miss, keep buying Long Bond dips.

CHINA

China is up for the last 3 days making a fresh year-to-date closing high of +14.6% on the Shanghai Comp, evidently Chinese locals couldn’t care less about the liquidity bubble in small cap U.S. stocks imploding. Interesting divergence. We like it.

Asset Allocation

CASH 50% US EQUITIES 4%
INTL EQUITIES 10% COMMODITIES 4%
FIXED INCOME 28% 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

The whole Chinese iron ore/steel thing seems even uglier now.

http://blogs.platts.com/2014/09/25/china-steel-attack/

@HedgeyeIndstrls

QUOTE OF THE DAY

Never let the opinion of another affect your opinion of yourself.

-Teresa Mummert

STAT OF THE DAY

Nike reported a blow out quarter coming in at $1.04 (the Street at $0.88) futures looked outstanding at 11%, with a 400bp sequential turn higher in North America to +15%.


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