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Client Talking Points

EUROPE

ECB President Mario Draghi’s drugs were good for a no-volume market bounce, but his EUR devaluation did nothing for the economy and now the DAX has round-tripped, selling off right back to where it was pre-Jackson Hole (AUG lows) – 0 + 0 still = 0; all European Equity indices = bearish TREND.

VIX

The front month volatility just punched a higher-high (than the AUG closing high) and #VolatilityAsymmetry (see our JUL 2014 slide deck) remains very much in play off the all-time lows in macro market volatility as both the RUT and SPX are now bearish TREND.

SECTORS

While the “oil is down, buy consumer” thing was intellectually stimulating, it has been a depressing position to have – Discretionary (XLY) now down -1.8% year-to-date alongside Industrials (XLI) -1.7% - both the early and mid-cycle sectors are now seeing what we call #Quad4 deflation.

Asset Allocation

CASH 68% US EQUITIES 0%
INTL EQUITIES 6% COMMODITIES 2%
FIXED INCOME 24% INTL CURRENCIES 0%

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

10yr UST yield is crashing (-22% YTD), just fyi

@KeithMcCullough

QUOTE OF THE DAY

The drops of rain make a hole in the stone not by violence but by oft falling.

-Lucretius

STAT OF THE DAY

According to a PricewaterhouseCoopers Survey shoppers remain cautious on the economy and are concerned about disposable income, for the Holiday season the average household will spend $684, down from $735 in 2013.