Japan and Russia

Client Talking Points

YEN

As the Yen burns, Japanese Consumer Prices (CPI) are +2.7% year-over-year. But Japanese Household Spending (in Burning Yen Terms) is down -2.5% year-over-year, and the Savings Rate of the Japanese people just went negative alongside real wage growth. The immediate term risk range for the Yen is 118.23-121.11 (bearish).

NIKKEI

But as long as the Nikkei (which, by the way, we’ve been suggesting you be long, while short Yens vs USD) is up, the financial media that panders to central-planning-access is going to tell you that this Abenomics thing could actually work. The immediate term risk range for the Nikkei is 17261-17995 (bullish).

RUSSIA

Despite “bouncing” off its lows, the Russian Trading System Index is down -38.4% year-to-date, and would only have to be +63% (from here) to get whoever “allocated assets” to it a year ago back to breakeven. The immediate term risk range is 642-875. In other words, with the RTSI (Russian Stock Market) currently trading at 847, it has immediate-term upside of +3% and immediate-term downside of -24%.

Asset Allocation

CASH 56% US EQUITIES 4%
INTL EQUITIES 2% COMMODITIES 0%
FIXED INCOME 31% 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

$LINE down another -5% - not a merry christmas for people who got sucked into owning that

@KeithMcCullough

QUOTE OF THE DAY

A mind that is stretched by a new experience can never go back to its old dimensions.

-Oliver Wendell Holmes

STAT OF THE DAY

The U.S. 10YR Yield ticks back down to 2.25%, -26% year-to-date as growth and inflation expectations fall. 


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