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Client Talking Points

JAPAN

Day-3 of the Burning FX experiment looked like it was in trouble (in Nikkei terms) into the bell, then there was “chatter” of the “BOJ buying ETFs into the close”, and they managed to close the Nikkei up +0.4%. We couldn’t make this up if we tried. At 114.71 the Yen is crashing vs. USD and superimposing #Deflation onto everything and anything tied to Oil inflation expectations.

SENTIMENT

Today’s II Bull/Bear Spread is only +93% wider to the bullish side than it was on OCT 13th – no worries! If there was one sentiment reading that typifies the hope out there that we don’t revisit that mid-Oct fetal position, this one is it (Bulls at 54.7%, Bears re-testing all-time lows of 15.1% - spread = +3960bps wide, which is close to the end of SEP consensus bullishness).

UST 10YR

In the Long Bond we trust. Don’t forget that the UST 10YR Yield is still in crash mode (-22% year-to-date) as U.S. growth and inflation expectations continue to fall – once we get through the mid-terms bounce today, next up is this jobs report (which was suspiciously strong ahead of the elections). A bad report should get your 2.21% on the UST 10YR, fast.

Asset Allocation

CASH 72% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 0%
FIXED INCOME 25% INTL CURRENCIES 3%

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

#Quad4 Deflation is a very investable theme, on the short side of almost anything Energy/Oil

@KeithMcCullough

QUOTE OF THE DAY

To be prepared for war is one of the most effective means of preserving peace.

-George Washington

STAT OF THE DAY

According to an aggregation of polls from Real Clear Politics, Obama’s approval rating is 41.9% and his disapproval rating is 53.4%. For perspective, Obama’s current approval rating is very similar to that of President Bush prior to the 2006 mid-terms.