Japan, UST 10YR and Market Divergences

Client Talking Points

JAPAN

The Nikkei is down -0.6% (down for the 2nd day in 3) as the Yen stopped going down (+0.5% vs. USD to 114.01). Risk ranges for both the Nikkei (14,773-17539) and the Yen (111.16-117.24) are wacky wide now – should lead to plenty of macro volatility.

UST 10YR

The UST 10YR Yield is down hard on the jobs report and down again to 2.29% this morning after trading 10-12bps higher into jobs day on hopes that the U.S. isn’t slowing like the rest of the world is (it is). Staying with long the Long Bond (TLT) and bond proxies as that’s where the fundamental performance is.

DIVERGENCES

Big divergences  were everywhere in global equities last week – Dow +1.1% vs. Russell flat; Consumer Discretionary (XLY) -0.1% vs. Consumer Staples (XLP) +2.2%; Hang Seng -1.9% vs. Nikkei +2.8%; and Emerging Markets down another -2.4% on the MSCI index and -4.5% on the LATAM side.

Asset Allocation

CASH 70% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 0%
FIXED INCOME 27% INTL CURRENCIES 3%

Top Long Ideas

Company Ticker Sector Duration
EDV

d

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

GREECE: leads losers -2% to -23% YTD #crashing

@KeithMcCullough

QUOTE OF THE DAY

I found out that if you are going to win games, you had better be ready to adapt.

-Scotty Bowman

STAT OF THE DAY

Euro (vs USD) is down another -0.6% on the week to -9.4% year-to-date.