Client Talking Points
Japan is evidently not enjoying the other side of the USD/YEN correlation risk (Yen up, Nikkei down another -2.4% overnight to -7% year-to-date) – when you have neither economic growth nor a devaluation policy to inflate markets that are working, it gets tougher to convince people what is “cheap”.
Horrendous German ZEW for OCT would lead you to believe the Germans don’t trust the French/Italian monetization dressing; Draghi’s Policy To Inflate only resulted in #deflation across the entire Eurozone in reported CPI terms this morning too (France CPI -0.4% y/y SEP vs -0.3% AUG).
UST 10YR Yield smashed to 2.21% this morning, so you can book some gains on the Long Bond (TLT) as capitulation is #on for Treasury Bond bears; Russell 2000 and UST 10Yr Yield continue to signal U.S. #GrowthSlowing in 2H14 vs the Q2 “bounce”.
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Top Long Ideas
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.
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.
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
Oil price slump yet to hit US shale oil production: IEA chief http://www.reuters.com/article/2014/10/13/us-shaleoil-energy-breakeven-idUSKCN0I21GG20141013
QUOTE OF THE DAY
In the middle of every difficulty lies opportunity.
STAT OF THE DAY
In China, Thailand, Germany and Egypt income inequality was about the same in 2000 as it had been in 1820.