Time to Redeploy Some Capital

Client Talking Points

VIX

The VIX is +32% in the 4 straight down days in the SPX from the 2090 no-volume-year-end-markup, and now that front month VIX is signaling immediate-term TRADE overbought (within its bullish TREND), we think you buy/cover U.S. equities this morning. The risk range for the VIX risk is 16.36-20.59.

UST 10YR

Registering the 1-handle this am at 1.99% and that’s not a Long Bond (TLT) buy signal – that’s a book some gains in your Long Bond core long positions and redeploy that capital into some oversold U.S. domestic consumption exposure (XLY, XLP, etc.); still our Best Macro Long idea, but we don’t buy at every price.

RUSSELL 2000

After another fast -3.1% correction, the Russell is signaling immediate-term TRADE oversold, so we’ll take it off our Best Ideas list on the short side (and review why on our Macro Themes call on Thursday); as opposed to 1 year ago when we loved it short side, now it’s a hedge fund consensus short (-25,000 net short position in futures/options contracts).

Asset Allocation

CASH 52% US EQUITIES 10%
INTL EQUITIES 2% COMMODITIES 0%
FIXED INCOME 28% 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

Dr. KOSPI continues to signal global #GrowthSlowing -1.7% overnight; India tagged for a -2.9% drop

@KeithMcCullough

QUOTE OF THE DAY

In all likelihood world inflation is over

-Per Jacobbson, IMF, 1959

STAT OF THE DAY

Beijing removes tax rebate for steel-boron products which accounted for 31% of steel exports for 2014 through November.


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