CLIENT TALKING POINTS
S&P SECTORS
The sector variance in the U.S. stock market has completely blown out – yesterday’s -2.1% drop in Energy (XLE) to -5.3% year-to-date vs. Healthcare (XLV) hanging out at the rafters +0.1% to +17.8% year-to-date has a lot to do with #Quad4 deflation.
COPPER
Copper is bouncing to lower-highs this morning as Chinese stocks had their 1st up day in 6; looks like a selling opportunity anywhere north of $3.09/lb – which is consistent with our SELL Old China (buy New China) theme + commodity deflation.
EUROPE
After opening “up” yesterday, then getting smoked into the close, they bounce them again as Sweden cuts rates to 0.00% - yet everyone knows that isn’t going to do a darn thing for the economy; keep selling European equities on green.
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 | 65% | US EQUITIES | 0% | |
| INTL EQUITIES | 0% | COMMODITIES | 4% | |
| FIXED INCOME | 27% | INTL CURRENCIES | 4% |
THREE FOR THE ROAD
TWEET OF THE DAY
TREASURIES: 10yr = 2.25%, remains in crash mode, -26% YTD (long $TLT)
@KeithMcCullough
QUOTE OF THE DAY
Sometimes it's just enough to smile sincerely.
-Mike Dolan
STAT OF THE DAY
66%, the percentage of teams to win the World Series after winning Game 5 and breaking a 2-2 tie. The San Francisco Giants did just that Sunday night, and they play the Kansas City Royals tonight in Game 6.
