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Client Talking Points

Oil

A lot people trying to pick bottoms. You shouldn’t do that when something’s crashing like oil. Deflation. Deflation. Deflation.

Oil is down 44% since June with lower highs and lower lows. Not good.

10-Year Yield

The 10-Year bond yield trading with what? Deflation expectations because deflation expectations are price in what? Oil. It’s a clean cut correlation. The crash in bond yields continue with the yield on the 10-Year down 30% YTD. 

Vix

Volatility went up 80% in three days. #NoWorries. We’ve been bullish on volatility since July. We’ve remained bullish on volatility since July. We’ve been bearish on things like growth and junk bonds since July. These things are interconnected and correlated.

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

Yield Spread pounded to YTD lows; Spread risk in low-quality bonds at YTD highs #NoWorries

--@KeithMcCullough

QUOTE OF THE DAY

“If winning isn’t everything, why do they keep score?”

--Vince Lombardi

STAT OF THE DAY

$1.1 trillion, the amount of the spending bill passed by Congress last night.