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“Take the shortest route to the puck, and arrive in ill humor.”

-Fred Shero

At my alma mater Yale, the under graduates hold a party every day in February.  If you have ever been to New Haven, CT, you get the reason they do this - New Haven is a rainy and depressing place in February.  Naturally, in the spirit of reliving their youth, a group of Yale graduates resurrected the tradition and started Yale Club Emeritus.  In effect, Yale Club for old people.

Now I’m not sure if I’m officially old or not, but after stopping by the final Yale Club Emeritus last night at the infamous Dorrian’s Red Hand Bar in the Upper East Side of Manhattan, and perhaps staying a little too late, I feel old this morning.  Or to refer to Fred Shero’s quote above, I’m at the very least in ill humor.

Yesterday I had the pleasure of joining Mario Bartiromo on CNBC’s closing bell. The topic of the discussion was what’s next for U.S. equities. The gentleman I was debating cited the fact that most Wall Street analysts had reduced their estimates for U.S. GDP growth recently and he was therefore negative on growth and the market.  As I countered, I went to these funny critters called facts.  The three most recent data points on the U.S. economy that I’d seen which were as follows:

  • New home sales up 29% y-o-y and inventory is at the lowest level since 2005;
  • Chicago PMI new orders reading coming in at 60.1, an 11-month high; and
  • Jobless claims in the most recent week showing an 8% improvement year-over-year.

As they say, facts don’t lie, people do.  Now those are only the facts that I happened to see as I was prepping for my interview yesterday and it is certainly not to say that all is well in the world, but those facts are supportive of our growth stabilizing thesis.

The caveat to my points above is the Chinese economic data that came out this morning was definitely slightly disappointing. Chinese PMI came in at 50.1 versus the estimate of 50.5 and was down from January’s reading of 50.4.  Now this reading is still expansionary, but is indicative of a sequential slow down, although admittedly the February economic data from China is distorted by the Lunar New Year.

Even as we continue to express our bullish stance on U.S. equities, we are not bullish of all markets.  In fact, a key global market we remain bearish on is the Japanese Yen.  This morning we received more confirmatory data of that stance as Japanese CPI fell for the eighth time in the last nine months.  Since the political leadership of Japan intents to manufacture inflation, they will obviously react to this by doubling down on their policy of debauching the Yen.

On that note, in the Chart of the Day (titled: Japanese Consumers Are Going to Get Bag Skated) we highlight how difficult it will actually be to create inflation in Japan via monetary easing.  This chart goes back to 2004 and highlights that annual CPI has been consistently below 0%.  The point being that if the Japanese leadership is really intent on taking CPI to a 2% level, it will take a massive amount of Japanese Yen printing, which begs the question: are we bearish enough on the Yen?

While we are doing the around the globe macro review this morning, it is probably prudent not to forget the currency experiment gone awry – the Euro-zone. This morning European manufacturing PMIs are out and the results are mediocre at best.  The headline number for the Euro-zone is 47.9, which is slightly better than the 47.8 estimate but still suggesting of an economy in decline.  As always though, Europe is bifurcated.

On the positive extreme, consistent with our research, is Germany with an expansionary PMI of 50.3.  Meanwhile on the negative end of the spectrum is France with a dreadful PMI of 43.9.   To the credit of the French politicians who implemented tax rates that have motivated capital to flee France, they actually don’t have the worst PMI in the Euro-zone. That title goes to Greece at 43.0.

Before you head off into the weekend, let’s talk stocks for a second.  As many of you know, we are instituting a best ideas list that highlights our best ideas across our research team.  On Wednesday we did the second part of that launch and our Financials Sector Head, Josh Steiner, presented the idea Nationstar Mortgage (NSM), a company that is in the business of servicing delinquent loans and originating agency mortgages for sale.  The thesis is as follows:

  • The company operates in a oligopoly with only two true competitors;
  • We think the street is too low in 2013 and that the earnings power of the company is ultimately close to $10 per share;
  • A spin-off of its Solution Star business could unlock $6 in incremental value; and
  • NSM has a servicing acquisition pipeline of some $300BN in the foreseeable future.

So, here we have a company with a big market opportunity, operates in an oligopoly and is trading at less than 4x its ultimate earnings power.  Stock ideas like NSM, are starting to put me in a much better mood this morning.

Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, UST10yr, and the SP500 are now $1, $110.04-112.85, $81.45-82.46, 1.83-1.95%, and 1, respectively.

Keep your head up and stick on the ice,

Daryl G. Jones

Director of Research

Feb Club - Chart of the Day

Feb Club - Virtual Portfolio