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Client Talking Points

JGBs

We called this the biggest (new) risk two weeks ago.  Consensus still isn’t positioned for this. TAIL risk line on the 10yr = 0.81%; breakout confirmed; then the follow through overnight to 1%;  Nikkei plunges -7.3% in a straight line and Yen stops going down. It makes sense. Respect the market’s message here – this was A) already in motion but B) is still very new. Again, Consensus still isn’t positioned for this. I don’t think it’s a 1-day thing.

USTs

Yesterday was one of Bernanke’s worst days (and that’s saying something). Markets didn’t believe his reasoning and basically did the opposite of what he was trying to jaw bone it to do. “Innovative communication tools” gotit. Our TAIL risk (breakout line) for the 10yr remains intact at 1.82%; no intermediate-term resistance to 2.41%

OIL

The best economic news of the morning? What we get on the other side of all this – another tax cut at the pump (pending). Same playbook in terms of the flow of our call, but you need to be picky on price (buying Consumption stocks) now because all of my major mo mo lines (immediate-term duration) are broken (for SPY that’s 1657 and for RUT that’s 988).

Asset Allocation

CASH 50% US EQUITIES 12%
INTL EQUITIES 12% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 26%

Top Long Ideas

Company Ticker Sector Duration
IGT

Decent earnings visibility, stabilized market share, and aggressive share repurchases should keep a floor on the stock.  Near-term earnings, potentially big orders from Oregon and South Dakota, and news of proliferating gaming domestically could provide near term catalysts for a stock that trades at only 11x EPS.  We believe that multiple is unsustainably low – and management likely agrees given the buyback – for a company with the balance sheet and strong cash flow as IGT.  Given private equity’s interest in WMS (they lost out to SGMS) – a company similar to IGT that unlike IGT generates little free cash – we wouldn’t rule out a privatizing transaction to realize the inherent value in this company.  

WWW

WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. 

FDX

With FedEx Express margins at a 30+ year low and 4-7 percentage points behind competitors, the opportunity for effective cost reductions appears significant. FedEx Ground is using its structural advantages to take market share from UPS. FDX competes in a highly consolidated industry with rational pricing. Both the Ground and Express divisions could be separately worth more than FDX’s current market value, in our view.

Three for the Road

TWEET OF THE DAY

@KeithMcCullough Sincere congratulations - you performed both the roles of market obstetrician and mkt mortician with precision in 2013. @DougKass

QUOTE OF THE DAY

“Hi there. Sorry if I took a snap at you at one time. Fish gotta swim, birds gotta eat.” -Finding Nemo

STAT OF THE DAY

Japanese government gross debt ... 240% of GDP.