CLIENT TALKING POINTS
EUROPE
European equities showing 0% follow through to the latest “communication tool” (read: hope); Portugal -1.1% leads losers this morning (-19.9% year-to-date) as liquidity traps remain obvious; Russian collapse remains a credible threat as the stock market continues to crash -23.7% year-to-date.
VIX
The front-month volatility went from 10.32 (July 7th when the Russell #Bubble topped) to 26.25 on Oct 15th, then back to 16.08 – yeah, that’s normal! But what is born out of that is an immediate-term risk range of 15.09-28.26 – enjoy.
S&P 500
Since implied volatility’s range is wicked wide now, so is the risk range for SPX at 1 (i.e. -4.6% downside vs +0.3% up); my dynamic (non-linear) model hasn’t seen risk ranges widen like this since NOV 2007 (when the SPX closed -6.6% on the month).
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 | 67% | US EQUITIES | 0% | |
| INTL EQUITIES | 0% | COMMODITIES | 4% | |
| FIXED INCOME | 25% | INTL CURRENCIES | 4% |
THREE FOR THE ROAD
TWEET OF THE DAY
OIL: wti up small; trending weakness remains pervasive as #Quad4 deflation dominates
@KeithMcCullough
QUOTE OF THE DAY
“Each of us has a fire in our hearts for something. It’s our goal in life to find it and keep it lit.”
-Mary Lou Retton, winner of gold medal at 1984 Los Angeles Summer Olympic Games
STAT OF THE DAY
The share of first time homebuyers remains anemic, coming in at 29% in September. First time homebuyers have been sub-30% now for 17 of the last 18 months. The share of first time homebuyers was generally above 40% from 2001-2008 and briefly hit 50% in 2010 in response to the government's homebuyer tax credit programs.
