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Client Talking Points

UST 10YR

Epic decline for the UST 10Yr (-71 basis points year-to-date, -23%) as long-term yields effectively crash vs. consensus expectations of rates rising. Most bond proxies in equity land (Utilities) ripped on the dovish Fed move yesterday; don’t confuse that with growth.

USD

Massive correlation risk in the market as of Friday (when Gold was pinned sub $1180 and EUR/USD was $1.25) reversed, fast – this back and forth Currency War between the Japanese, Europeans, and Americans is very much on – and consensus is way too long of U.S. Dollars given a dovish Fed.

JAPAN

Prime Minister Shinzō Abe does not like Dovish Dollar because he gets up Yen (down Nikkei) on that; Nikkei down another -0.66% overnight to -3.5% year-to-date – it will be interesting to see if the Japanese react to ECB and Fed devaluation moves in the coming months.

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

FX: Currency War #on as Fed takes its turn (Euro up)

@KeithMcCullough

QUOTE OF THE DAY

Success is not forever and failure isn’t fatal.

-Don Shula

STAT OF THE DAY

Over the last 34 years, on our way to becoming the biggest debtor nation in history, the U.S. has borrowed some $10.4T, with an average annual deficit-to-GDP ratio of ~3.2%.