Client Talking Points
The economic data coming from Europe is flat out awful, in rate of change terms it’s simply ugly. If you get rate of change right you get bond yields right. This is why the German bund yields are falling this year, because growth is falling in rate of change terms. The FTSE and the DAX remain decidedly bearish trends on our quantitative model.
In the U.S. we are definitely in #QUAD4, which happens when growth and inflation slows at the same time. Today is not the day you want to short oil. Immediate term trade oversold for WTI Oil is $80.07, oil remains in a bearish trend formation on our quantitative model.
The finishing move in UST 10YR as we move towards 2% is that the Fed comes in line with our call and gets more dovish on the margin. Jon Eric Hilsenrath (the chief economics correspondent for The Wall Street Journal) said that the Federal Reserve is looking at the CRB Index, the Fed only looks at the CRB Index when it is going down. When the CRB Index was up 12% they didn’t need to raise rates? When the market and the economy and/or both go down the Fed gets easier, so the UST 10YR goes lower. Today is not the day to buy the TLT you buy it on pullbacks or you buy it on days that bond yields bounce.
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Top Long Ideas
The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). U.S. real GDP growth is unlikely to come in anywhere in the area code of consensus projections of 3-plus percent. And it is becoming clear to us that market participants are interpreting the Fed’s dovish shift as signaling cause for concern with respect to the growth outlook. We remain on other side of Consensus Macro positions (bearish on Oil, bullish on Treasuries, bearish on SPX) and still have high conviction in our biggest macro call of 2014 - that U.S. growth would slow and bond yields fall in kind.
We continue to think long-term interest rates are headed in the direction of both reported growth and growth expectations – i.e. lower. In light of that, we encourage you to remain long of the long bond. The performance divergence between Treasuries, stocks and commodities should continue to widen over the next two to three months. As it’s done for multiple generations, the 10Y Treasury Yield continues to track the slope of domestic economic growth like a glove. We certainly hope you had the Long Bond (TLT) on versus the Russell 2000 (short side) as the performance divergence in being long #GrowthSlowing hit its widest for 2014 YTD (ex-reinvesting interest).
The U.S. is in Quad #4 on our GIP (Growth/Inflation/Policy) model, which suggests that both economic growth and reported inflation are slowing domestically. As far as the eye can see in a falling interest rate environment, we think you should increase your exposure to slow-growth, yield-chasing trade and remain long of defensive assets like long-term treasuries and Consumer Staples (XLP) – which work decidedly better than Utilities in Quad #4. Consumer Staples is as good as any place to hide as the world clamors for low-beta-big-cap-liquidity.
Three for the Road
TWEET OF THE DAY
At least 2/3 of the country has had negative wage growth and seen cost of living hit all time highs @KeithMcCullough
QUOTE OF THE DAY
Don’t be afraid to give up the good to go for the great.
-John D. Rockefeller
STAT OF THE DAY
The German Government lowered its GDP forecast (leaked on Friday) to 1.2% in 2014 (vs 1.8% prior); and 1.3% in 2015 (vs 2.0% prior).