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Client Talking Points

VOLUME

Volume was up huge (in rate of change terms) on yesterday’s U.S. stock market down day (that’s when we get the real volume, accelerating on down days. Total U.S. Equity Market Volume (including dark pool) +26% vs. its 3 month average – the liquidity trap in the small cap #bubble remains obvious.

RUSSELL 2000

The Russell 2000 closed the month at lower-lows than the ones it made in AUG, and is now -8.9% from its all-time #bubble peak established on July 7th. I have been calling it a #bubble A) because it is one and B) no one else will.

UST 10YR

UST 10YR Yield falling again to 2.47% this morning and we don’t think it will take much (another bad jobs report?) to smack this sucker right back to its year-to-date lows; bond yields rise/fall with the rate of change in U.S. growth – oh, and now there’s a rumor that Draghi’s “shock and awe” might include buying Treasuries? #wonderful.

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

Yesterday's Total US Equity Volume was +26.1% vs its 3mth avg - volume comes on the down moves

@KeithMcCullough

QUOTE OF THE DAY

The secret of getting ahead is getting started.

-Mark Twain

STAT OF THE DAY

In 2013, real median household income was 8.0% lower than in 2007, the year before the most recent resession.