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Client Talking Points

OIL

There’s still a > +276,000 net LONG position in crude futures/options, so don’t forget that the bounce China gave oil last week was A) short lived and B) faded by deflation expectations, big time as WTI tests making lower lows – very bearish for Energy stocks and bonds, imposing interconnected risk to the high-yield market.

UST 10YR

There’s still a -128,000 net SHORT position in the 10YR Treasury, so bond bears are getting creamed with the 10YR crashing (-26% year-to-date) to 2.25% this morning. 2.22% is an immediate-term level of short-term support, but we still think yields go lower as the Fed freaks about #deflation in Q1 of 2015.

SENTIMENT

As front month VIX tests the low-end of my 12.16-15.62 risk range, the II Bull/Bear Spread just tested an all-time high of +4270 basis points wide to the bull side (+108% since OCT 13th) as the Bear side of the survey hit an all-time low of 13.8%. Stay with the Long Bond over RUT and SPX from here – less volatility, and way less crowded.

Asset Allocation

CASH 64% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 0%
FIXED INCOME 31% INTL CURRENCIES 5%

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

GREECE (which we're still short) down another -1.4% to -18% YTD

@KeithMcCullough

QUOTE OF THE DAY

Children have never been very good at listening to their elders, but they have never failed to imitate them.

-James A. Baldwin

STAT OF THE DAY

Copper deflates another -0.5% to -10% for 2014 year-to-date as global growth (demand) slows.