Correlations and Rates

Client Talking Points

USD

Finally a big move down in Yen vs. the USD yesterday and that’s seeing follow through this morning to $119.71 (4 week low). This is A) good for Japanese stocks, B) bad for oil and C) bad for levered Energy stocks.

OIL

The beta on this Correlation Risk between USD and Oil is massive – on a +0.2% move in the USD Index yesterday, Oil and Gas stocks were down 10x that, and some of our least liked MLP stocks were down 7-9%; this is a very different macro trade than the newsier Greek thing – lots to think about on different storytelling vectors.

UST 10YR

Then you had an expedited 3-day March higher in rates post the jobs report that finally stopped yesterday (vs. 5AM yesterday, the UST 10YR Yield is actually down a beep to 1.98% now), and Utilities (XLU) front-ran that efficiently – best S&P sector on the day at +2.1% as Utilities are now trading with Tech beta!

Asset Allocation

CASH 47% US EQUITIES 8%
INTL EQUITIES 6% COMMODITIES 0%
FIXED INCOME 32% 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.

HOLX

Hologic (HOLX) is a name our Healthcare Sector Head Tom Tobin has been closing monitoring for awhile. In what Tom calls his 3D TOMO Tracker Update (Institutional Research product) of U.S. facilities currently offering 3D Tomosynthesis, month-to-date December placements signaled a break-out quarter after a sharp acceleration in October and slight correction to a still very high rate in November. We believe we are seeing a sustained acceleration in placements that will likely drive upside to Breast Health throughout FY2015. Tom’s estimates are materially ahead of the Street, but importantly this upward trend in Breast Health should lead not only to earnings upside, but also multiple expansion and a significant move in the stock price.

Three for the Road

TWEET OF THE DAY

VIDEO (2mins) 3 Reasons the Russell Looks Better Than S&P 500 https://app.hedgeye.com/insights/42254-mccullough-3-reasons-the-russell-looks-better-than-s-p-500… $IWM $SPX

@KeithMcCullough

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