Japan, Russia and Volatility

Client Talking Points

JAPAN

Abenomics is a centrally planned Policy To Inflate = higher cost of living, not real economic growth; Japanese Household spending -4.7% year-over-year in AUG as real wages fell -2.6% year-over-year. These are the facts.

RUSSIA

Maybe Japan and Europe just aren’t being aggressive enough! Russian Rubles are -14% in the last 3 months, its stock market is crashing, and now they need to “defend” the currency? #History has seen this devaluation movie many times.

VIX

Most of this ultimately plays out in both volatility and liquidity space, so stay with our playbook = long Global Macro volatility and liquidity – short illiquidity (small caps) with impunity… and manage the risk of trading ranges.

Asset Allocation

CASH 58% US EQUITIES 2%
INTL EQUITIES 8% COMMODITIES 4%
FIXED INCOME 26% INTL CURRENCIES 2%

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

Shares of Bloomin’ Brands have enormous potential upside says Hedgeye’s Howard Penney| $BLMN

http://app.hedgeye.com/media/1285-shares-of-bloomin-brands-have-enormous-potential-upside-says-hedgeye-s-howard-penney-blmn ...via @HedgeyeHWP

@Hedgeye

QUOTE OF THE DAY

Laughter is wine for the soul - laughter soft, or loud and deep, tinged through with seriousness - the hilarious declaration made by man that life is worth living.

-Seán O'Casey

STAT OF THE DAY

303, the number of yards that the New England Patriots gave up in the first half in last night’s 41-14 loss to the Kansas City Chiefs.