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Client Talking Points

JAPAN

This is what the economic reports said before they hit the panic button (household spending -6% year-over-year, housing starts -14% year-over-year, and Construction spending -40% year-over-year)… so they must do moarrr of what didn’t work? Yep. Massive devaluation of Yen to 111.62 last, and Nikkei ramps to highest since U.S. market collapse began (NOV 2007).

USD

Unintended consequences? Nah – how about Yen Down, Dollar Up = #deflation accelerating? Oil, Gold, Russia, Texas, etc. all going to feel serious pain on this epic central planning day of 2014.

OIL

Oil is down on the “news” with WTI re-testing of the lows in play now = down -25% since June and don’t forget that (depending whose index you use),  20-27% of the high yield/junk debt market is “Energy” related. Month end ramp in equities, but we highly doubt that’s on inflation oriented ones.

Asset Allocation

CASH 68% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 0%
FIXED INCOME 28% 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

YEN has one of the biggest 1-day drops in money printing history = $111.62 vs USD

@KeithMcCullough

QUOTE OF THE DAY

Nothing in all the world is more dangerous than sincere ignorance and conscientious stupidity.

-Martin Luther King

STAT OF THE DAY

According to a study published in Environmental Science and Technology, 29% of San Francisco's air pollution comes from China.