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Client Talking Points

JAPAN

We have been signaling the probability of the Japanese stock market to go up. Yen down = Japanese equities up. Japanese equities signaled immediate term trade over bought up, Weimar Nikkei (which we have people long of) up another +1.2% last night to +11.2% year-to-date. Yen is testing the low end of the immediate term risk range.

OIL

You saw the bounce in oil yesterday and then it fails to show follow through (again). WTI oil is down -1.5% to $56.25, the risk range immediate term risk range is 52.87 to 59.23. Look at oil as the epicenter of the risk of deflation.

SENTIMENT

The immediate term risk range on the VIX (volatility index) is wacky wide at 13.17 to 24.35. At the low end of the range you sell and at the high end of the range you buy. The II Bull/Bear Spread is +3770 basis points to the Bull side - not an all-time high, but close. People just believe they can’t make fundamentally make money on the short side, that’s not true because we have.

Asset Allocation

CASH 57% US EQUITIES 4%
INTL EQUITIES 2% 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

Serious Lack of Momentum in the Momentum Stocks | $GPRO $LOCO https://app.hedgeye.com/insights/41390-mccullough-serious-lack-of-momentum-in-the-momentum-stocks-gpro-l … via @hedgeye

@KeithMcCullough

QUOTE OF THE DAY

The Revolution transformed science from a popular hobby into a full-fledged profession.

-Sharon Bertsch McGrayne

STAT OF THE DAY

Keurig Green Mountain has announced a recall affecting roughly 7 million of its K10 Mini Plus Brewing Systems manufactured between 2009 and 2014.