The World Changed

Client Talking Points

YEN

The Yen breaking out now on my immediate-term risk duration (vs. USD); breakout line = 107.79 and it’s important to realize how much Correlation Risk was embedded in macro markets during the biggest USD ramp since 1997; Nikkei does not like this USD reversal, down another -2.2% overnight to -8.2% year-to-date.

EUROPE

They tried bouncing the DAX and FTSE early this morning, but the rest of the European equity market faded to red in a hurry. Italy and Spain are down again; Greece and Portugal are both #crashing (again) at -23.5% and -21.6% year-to-date, respectively. Draghi’s drugs didn’t stop gravity #EuropeSlowing.

OIL

If what’s going on from a #Quad4 deflation perspective in Oil and related energy stocks (XLE -11.1% for OCT) isn’t telling you the world changed, it should. These draw-downs are both nasty and pervasive. Chasing a Russell #bubble bounce when it is in freefall is as risky as it gets during a macro phase transition like this – stay hedged!

Asset Allocation

CASH 70% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 3%
FIXED INCOME 24% INTL CURRENCIES 3%

Top Long Ideas

Company Ticker Sector Duration
EDV

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.

TLT

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).

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

VIDEO | I Talk Market Mess With @MariaBartiromo @FoxBusiness http://app.hedgeye.com/media/1313-video-keith-talks-market-turbulence-with-maria

@KeithMcCullough

QUOTE OF THE DAY

The way I see it, if you want the rainbow, you gotta put up with the rain.

-Dolly Parton

STAT OF THE DAY

The UST 10YR Yield at 2.06% has crashed, down -32% year-to-date.


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