Japan, Oil and The UST 10YR

Client Talking Points

JAPAN

Weimar Nikkei drops -3% on the session as the Yen stops going down (+0.3% vs. USD to $115.90 – so just a little bit of correlation risk there!) as Bloomberg breaks that “Japan unexpectedly falls into recession” – unexpected by those who thought Abenomics was working maybe -  but this is getting panicky, faster.

OIL

WTI Oil is down another -1.2% to $74.9 despite the USD down (on Yen up), which is just nasty given that it was down -3.4% last week; BOE’s Carney called it “huge disinflationary pressures” (i.e. our #deflation call) and this should continue to weigh on illiquid energy stocks/bonds with bad balance sheets (i.e. MLP like Linn Energy w/ 5x leverage).

UST 10YR

The UST 10YR Yield remains in crash mode (-24% year-to-date), falling back down to 2.29% this morning as it becomes less believable by the day that the U.S. will “decouple” from either growth or inflation expectations slowing, globally; long the Long Bond (TLT, EDV, etc) remains our highest conviction macro idea for 2014.

Asset Allocation

CASH 67% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 0%
FIXED INCOME 29% 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).

XLP

The U.S. is in Quad #4 on our GIP (Growth/Inflation/Policy) model, which suggests that both economic growth and reported inflation are slowing domestically. As far as the eye can see in a falling interest rate environment, we think you should increase your exposure to slow-growth, yield-chasing trade and remain long of defensive assets like long-term treasuries and Consumer Staples (XLP) – which work decidedly better than Utilities in Quad #4. Consumer Staples is as good as any place to hide as the world clamors for low-beta-big-cap-liquidity.

Three for the Road

TWEET OF THE DAY

Yield Spread (10yr minus 2yr - good leading indicator for growth) drops back to its YTD lows = 179bps @KeithMcCullough

QUOTE OF THE DAY

A man may die, nations may rise and fall, but an idea lives on. Ideas have endurance without death.

-John F. Kennedy

STAT OF THE DAY

Energy Stocks (XLE) led U.S. stock market sector losers, -1.8% on the week to -2.6% year-to-date.