#Deflation’s Dominoes

Client Talking Points

EURO

Both Euros and Oil (they’re trading together vs. USD) are signaling immediate-term TRADE oversold this morning, but both remain very #deflationary and (ex-DAX), European Equity markets do not like it – Greece and Russia -2.5%, and ex-Germany, most major European stock markets continue to signal bearish TREND (FTSE, CAC, MIB, IBEX).

OIL

WTIC Oil is making fresh 6 month lows as it tests this exhaustion zone $51.76-52.61 that we’ve been monitoring; to get a real bounce, you need a real USD selloff, and you have some big U.S. economic data points this week on that front with ISM Services tomorrow, Fed Minutes Wednesday, and Jobs repot Friday.

UST 10YR

The best way to play global #GrowthSlowing + #Deflation remains the Long Bond; 2.11% was a nice -14 basis points drop last week and the Yield Spread (10yr minus 2yr) compressed another -6 basis points to 145, in line with the rate of change in the December U.S. economic data (ISM and PMI, which both slowed).

Asset Allocation

CASH 54% US EQUITIES 6%
INTL EQUITIES 2% COMMODITIES 0%
FIXED INCOME 30% INTL CURRENCIES 8%

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

Same Global Macro story we ended 2014 on, with both Greek and Russian stocks -2.5% leading losers

@KeithMcCullough

QUOTE OF THE DAY

Talent is cheap; dedication is expensive. It will cost you your life.

-Irving Stone

STAT OF THE DAY

The White House (1600 Pennsylvania Ave.) is appraised at 1 Billion Dollars.


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