Japan, Europe and U.S. Small Caps

Client Talking Points

JAPAN

The Nikkei is +1.5% to -3.1% year-to-date and signals immediate-term TRADE overbought – we’ve been waiting to add this and more European equity shorts to Real Time Alerts and we’re going to see those selling opportunities now.

EUROPE

The DAX is +0.6%, but Italy, Spain, and Russia have all turned red, which is weird, because we thought ECB President Mario Draghi said he has banned deflation. As Europe’s economy slows, we think gravity wins this time – sell European Equities.

RUSSELL 2000

Big bounce in the Russell 2000 to immediate-term TRADE overbought within its bearish TREND. The Russell 2000 would have to close > 1181 to recapture intermediate-term TREND support; still -5% from her all-time #bubble high and no support to 1067.

Asset Allocation

CASH 65% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 4%
FIXED INCOME 27% INTL CURRENCIES 4%

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

COPPER: bangs the top-end of her 2.95-3.10 immediate-term risk range #sell

@KeithMcCullough

QUOTE OF THE DAY

Are you gonna bark all day, little doggy, or are you gonna bite?

-Reservoir Dogs

STAT OF THE DAY

864 million,  the number of daily active Facebook users as reported by the company Tuesday night. That represents a 19% increase compared to the prior year.


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