#Deflation = A Big Risk

12/29/14 08:18AM EST

CLIENT TALKING POINTS

EUROPE

The Greek stock market continues to crash (-10% this am to -34% year-to-date) but the more interesting breakdowns @Hedgeye TREND resistance are those in Italy’s MIB and Spain’s IBEX – don’t forget who #deflation hurts the most, #debtors (hence why central planning policies will do anything to try to avoid deflation).

UST 10YR

Best Big Macro, low-volatility, liquid long position to have on if you agree with us on global #GrowthSlowing and #Deflation is the Long Bond (TLT, EDV, etc.) but you have to be there on the pullbacks like you had last week. The UST 10YR Yield is -4bps to 2.21% this am with no support to 2.05%.

RUSSELL 2000

All small/mid cap bulls had to do was be long the Russell for 2 of the last 3 weeks of the year (+5.4% in the last 2 weeks on decelerating volume) and they killed it! (after the 1st week of DEC, Russell was down year-to-date); no short position in Real Time Alerts as higher-highs are bullish until they aren’t, so we are waiting/watching.

TOP LONG IDEAS

EDV

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

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

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.

Asset Allocation

CASH 56% US EQUITIES 3%
INTL EQUITIES 2% COMMODITIES 0%
FIXED INCOME 32% INTL CURRENCIES 7%

THREE FOR THE ROAD

TWEET OF THE DAY

OIL: trying to "bounce" (again) +1% but treading #deflation's water at $55.28 within a 54.01-57.43 risk range

@KeithMcCullough

QUOTE OF THE DAY

The drops of rain make a hole in the stone not by violence but by oft falling.

-Lucretius

STAT OF THE DAY

Four days after its release on December 24th, The Interview has become Sony's most-downloaded title of all time. It was downloaded more than two million times as of December 27th, making back a third of its $44m budget.

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