Growth & Inflation Expectations Slowing Globally

Client Talking Points

KOSPI

Global growth bulls used to call it Dr. KOSPI (and Copper), but only because they were going up – now the KOSPI leads losers in Asia, down another -1.5% overnight, re-testing her OCT lows at -4.7% year-to-date; non-central planning catalyst Asia (ex-Japan + China) continues to act horribly.

COMMODITIES

Commodities crushed to fresh year-to-date lows (CRB Index -1.6%, -11.8% year-to-date); remember that this isn’t just about Oil (risk range there is now 60.48-65.38, lower-highs, lower-lows) – it’s about inflation expectations collapsing into #deflation.

UST 10YR

UST 10YR Yield continues to crash, -28% to 2.16% this morning ahead of a U.S. Retail Sales print that the “gas prices are low” bulls better hope isn’t as bad as the Retail Sales print (that missed) in mid-OCT; German 10YR 0.67% and Japanese 10YR at 0.40% - and we still think the Fed gets easier in Q1 as CPI surprises them on the downside.

Asset Allocation

CASH 63% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 0%
FIXED INCOME 32% 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

Watch @FoxBusiness at 9am ET as @KeithMcCullough talks markets, economy and more for the full hour with @MariaBartiromo.

@Hedgeye

QUOTE OF THE DAY

Goals live on the other side of obstacles and challenges. Be relentless in pursuit of those goals, especially in the face of obstacles. Along the way, make no excuses and place no blame.

-Ray Bourque

STAT OF THE DAY

Restoration Hardware (RH) put up a crusher 22% comp vs. our 18% estimate. This was a huge ramp from 21% on a 2-year basis in 2Q to 30% in 3Q. That includes 31% growth online – a 1,800bp sequential acceleration. RH remains our favorite name in retail.


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