The Bull Case Is Now “Decoupling”

Client Talking Points

OIL

Oil bounces (again) and this one seems to be inspiring the many (Janet trades oil futures now - says the crash was just “transitory”). The immediate-term risk range for WTI, however, continues to signal lower-lows and lower-highs = 52.89-59.91, so if you weren’t short Russia, Energy, etc., here’s another chance.

RUSSIA

Putin is 1 of 5 central planners in the Top 5 Bloomberg Economic Stories this morning (the others include Yellen, Draghi, Abe, and a Swiss Guy who cut to negative rates). You know this is going to end well because Putin said Russia’s economy will “recover in 2017”… Russian stocks +5.3% on that to -47.7% year-to-date – UAE +13%, Saudi +8% (totally normal market moves).

EUROPE

The Swiss central bank telling savers they get to pay them (negative rates) is the latest catalyst to drive European Equities to lower-highs, but this doesn’t seem to be stimulating Greece (-2.2% to -26.6% year-to-date). #TwilightZone

Asset Allocation

CASH 59% US EQUITIES 4%
INTL EQUITIES 0% COMMODITIES 0%
FIXED INCOME 30% INTL CURRENCIES 7%

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

JAPAN: Weimar Nikkei correlation trade firmly intact, +2.3% overnight post Yen resuming being burnt to a crisp

@KeithMcCullough

QUOTE OF THE DAY

Beware of the person who can't be bothered by details.

- William Feather

STAT OF THE DAY

68% of 56 economists surveyed by Bloomberg late last week said the Federal Open Market Committee will drop its pledge to keep interest rates near zero for a “considerable time” and instead adopt a word such as “patient” to describe its approach to policy. Only 23% said the committee will keep “considerable time.”



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