#Deflation is Dominating Headlines

Client Talking Points

CHINA

If your economy slows, you have to centrally plan a stock market ramp! China’s Q4 economic slowdown = +20.6% gain in December for the Shanghai Comp! To close out the year up a whopping +52.9% (up next, The Year Of The Sheep).

OIL

Down another -1.9% this am to $53.12 WTI Oil has been crashing for 6 straight weeks (down -50% since June). Oil will actually signal immediate-term TRADE oversold in our model for the 1st time in a long time anywhere inside of $52.96 (i.e. the low-end of our current 52.96-55.91 risk range).

VIX

Remains in what we call a Bullish TREND Phase Transition (we made this call in July with the VIX at 10), making a series of higher-lows and holding immediate-term TRADE support of 12.85. All this tells us is that Q1 should be plenty volatile, and we like that.

Asset Allocation

CASH 57% US EQUITIES 3%
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). As our declining rates thesis proved out and picked up steam over the course of the year, we see this trend continuing into Q1.  Short of a Fed rate hike, there’s no force out there with the oomph to reverse this trend, particularly with global growth decelerating and disinflationary trends pushing capital flows into the one remaining unbreakable piggy bank, which is the U.S. Treasury debt market.

TLT

As growth and inflation expectations continue to slow, stay with low-volatility Long Bonds (TLT). We believe the TLT has plenty of room to run. We strongly believe the dynamics in the currency market are likely contribute to a “reflexive deflationary spiral” whereby continued global macro asset price deflation and reported disinflation both contribute to rising investor demand for long-term Treasuries, at the margins.

XLP

Our models are forecasting a continued slowing in the pace of domestic economic growth, as well as a further deflation. The confluence of these two events is likely to perpetuate a rise in volatility across asset classes as broad-based expectations for a robust economic recovery and tighter monetary policy are met with bearish data that is counter to the consensus narrative. 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

TREASURIES: 10yr Yield drops 9bps this wk to 2.16%, -29% for 2014

@KeithMcCullough

QUOTE OF THE DAY

The pain of discipline is far less than the pain of regret.

-Sarah Bombell

STAT OF THE DAY

87% of parents are spending New Year’s Eve with their children and 34% of parents plan to fool their children into thinking it’s 2015 before the clock actually strikes midnight, according to a survey conducted by Netflix.


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