Consumer Tax Cut #Deflation Persists

Client Talking Points

USD

Higher-highs for the U.S. Dollar Index yesterday drove the CRB Index down another -0.9% (-3.4% year-to-date) and Energy stocks continued to lag as U.S. equity sector styles focused on consumption continue to crush (XLY +6.6% year-to-date vs. SPX +2.8%).

OIL

Oil is whipping around as Oil Volatility remains wicked high (OVX = 54 after topping at 64), but Dollar Down days (today after signaling overbought yesterday) give Oil these bounce bids, up +1.3% this morning to $50.23 with a risk range of $48.04-52.23.

UST 10YR

The UST 10YR experienced another rate ramp yesterday (Bunds and JGBs up 10% too, in yield % terms!) to 2.08% this morning – the risk range has widened to 1.84-2.16% ahead of Friday’s jobs report, so this can get more volatile, faster, now. 

Asset Allocation

CASH 43% US EQUITIES 10%
INTL EQUITIES 10% COMMODITIES 0%
FIXED INCOME 29% INTL CURRENCIES 8%

Top Long Ideas

Company Ticker Sector Duration
YUM

Our bullish thesis on Yum! Brands is slowly becoming more mainstream, as activist talk has recently heated up. Management implemented a shareholder friendly amendment to the company’s by-laws that will permit a shareholder, or group of shareholders, with 3% or more ownership of common stock (for three years or more), to nominate directors representing up to 20% of the board. This is good news for several reasons: 1) an activist may be involved in the name 2) shareholders are speaking up 3) management is feeling the pressure and 4) management is open to adopting more shareholder friendly policies. We continue to believe there is significant upside here despite the stock’s strong recent outperformance.  This stock is one major announcement away from hitting $95.

PENN

Penn National Gaming is the best way to play improving domestic regional gaming trends due to its superior operational management and unit growth opportunities. Catalysts include positive estimate revisions, the opening of the first Massachusetts casino in June, and industry leading earnings growth in 2015 and 2016.

TLT

Low-volatility Long Bonds (TLT) have plenty of room to run. Late-Cycle Economic Indicators are still deteriorating on a TRENDING Basis (Manufacturing, CapEX, inflation) while consumption driven numbers have improved. Inflation readings for January are #SLOWING. We saw deceleration in CPI year-over-year at +0.8% vs. +1.3% prior and month-over-month at -0.4% vs. -0.3% prior. Growth is still #SLOWING with Real GDP growth decelerating at -20 basis points to +2.5% year-over-year for Q4 2014.The GDP deflator decelerated -40 basis points to +1.2% year-over-year.

 

Three for the Road

TWEET OF THE DAY

2015: Germany +14.8%, Italy +17.7%, EuroStoxx50 +14.8% YTD

@KeithMcCullough

QUOTE OF THE DAY

There is a fine line between fishing and just standing on the shore like an idiot.

-Steven Wright

STAT OF THE DAY

Copper is down -1.6% this morning, down -6.4% year-to-date. Copper remains one of the most obvious ways to play our top theme, Global #Deflation.


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