U.S. and Europe

Client Talking Points

UST 10YR

UST 10YR Yield is down another -9 basis points week-over-week, now down -19.5%, for 2014 year-to-date. Total Return of the iShares 20yr Bond Fund (TLT) is up +18% (vs. Russell 2000 -5.1% year-to-date). Yield Spread is the long end of the curve (10yr yield) minus the short-end (2yr yield), it compressed another 8 basis points to +188 basis points wide (-77 basis points year-to-date).

COMMODITIES

With the U.S. Dollar up another +1.2% last week, the CRB Commodities Index is down -1.4% on the week to down that much now for the year-to-date. Oil (WTI crude) was down -4.1% on the week to -3.9% year-to-date. Gold dropped another -1.9% on the week to -1.1% year-to-date.

EUROPE

After another -2.1% down week for the EuroStoxx600, European stocks are trying to bounce today. Russian stocks continued to crash, -5.5% on the week to -24.3% year-to-date.

Asset Allocation

CASH 60% US EQUITIES 2%
INTL EQUITIES 8% COMMODITIES 4%
FIXED INCOME 24% 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

Morgan Stanley upgrades $BKW; downgrades $MCD...  not sure I understand this move

@HedgeyeHWP

QUOTE OF THE DAY

I believe that good things come to those who work.

-Wilt Chamberlain

STAT OF THE DAY

Front-month coffee is up 8.3% this morning and up +16.6% 5-Day, moisture in Brazilian Coffee Belt is 70-85% below normal.


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