CLIENT TALKING POINTS
VOLUME
We see way too much single factor (price momentum vs. a moving average) commentary about markets relative to what’s happening on a basic multi-factor (price, volume, volatility) basis; on the SPX “bounce” Friday (Russell was down on the day), Total U.S. Equity Market Volume was -11% vs. it’s 1 month average; that’s bearish.
VOLATILITY
From a front month VIX perspective it’s important to realize where we just came from. At 1208 Russell on July 7th, the VIX = 10.32. As of Friday’s close (21.99), the VIX is +113% from there and +60.3% year-to-date, making higher-highs vs. all of 2013-2014 earlier in the week. This is a phase transition. No resistance to 28.92.
EUROPE
FTSE, DAX, MIB, CAC, etc. -0.7-0.9% = no follow through from the no-volume late-week bounce there either; what is the catalyst for European Equities? If it’s economic gravity (slope of the line in all European growth data slowing), that’s bad – and we think the follow through to U.S. Equities with European businesses will be too.
TOP LONG IDEAS
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%.
Asset Allocation
| CASH | 68% | US EQUITIES | 0% | |
| INTL EQUITIES | 0% | COMMODITIES | 4% | |
| FIXED INCOME | 25% | INTL CURRENCIES | 3% |
THREE FOR THE ROAD
TWEET OF THE DAY
GOLD: after a rock solid week of +1.4%, up another +0.2% this morning to +3% YTD vs Russell -7%
@KeithMcCullough
QUOTE OF THE DAY
Never go to a fight you are invited to.
-Jim Chanos
STAT OF THE DAY
IBM Q3 revenue of $22.4 billion was the lowest since Q1 2009, consensus estimate was $23.37 billion.
