Client Talking Points
With a truly remarkable -0.97 long-term TAIL correlation trending between the Yen and the Nikkei, I need to ask a very simple question: Does anything else matter? The Yen had its first down day of consequence versus the US Dollar yesterday. Guess what happened? Of course. The Nikkei jumped +2.5% overnight. Correlation matters.
Our call here at Hedgeye remains overweight European Equities versus mostly everything else. The DAX is up +1.2% year-to-date versus the S&P 500 which is down -0.5%. Meanwhile, the alpha march forward continues this morning with Greece up +1.7% (+10.2% year-to-date), Portugal +1% (+7.2% YTD), and Austria +0.4% (+5.9% YTD). Boom.
The 10-year Treasury yield holds Hedgeye's 2.76% TREND line support like a champ this morning and bounces to 2.87%. Gold, Silver, and Platinum don’t like that (down -0.7-1.2% respectively this morning). But the risk ranges on both the 10-year and Gold are narrowing, which might make this easier to risk manage if volatility comes down. We will see.
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Top Long Ideas
Hedgeye's detailed and constructive view on the improving fundamentals in the M&A market with a longer term perspective is a contrarian idea at odds with the rest of the Street which is overly focused on short-term results. From an intermediate term perspective, M&A is poised to break out in 2014. We are witnessing record amounts of cash on corporate balance sheets, continued low borrowing costs and the first positive fund raising round for Private Equity in four years. Moreover, a VIX in secular decline (this has historically benefited M&A), recent incrementally positive data points from leading M&A firms that dialogue has improved, and an improving deal tally from Greenhill & Company (GHL) themselves coming out of the summer all bode favorably for GHL. So is a budding European economic recovery that would assist a global M&A market that has been range bound over the past three years. GHL stands out as a leading beneficiary of these developments.
We remain bullish on the British Pound versus the US Dollar, a position supported over the intermediate term TREND by prudent management of interest rate policy from Mark Carney at the BOE (oriented towards hiking rather than cutting as conditions improve) and the Bank maintaining its existing asset purchase program (QE). UK high frequency data continues to offer evidence of emergent strength in the economy, and in many cases the data is outperforming that of its western European peers, which should provide further strength to the currency. In short, we believe a strengthening UK economy coupled with the comparative hawkishness of the BOE (vs. Yellen et al.) will further perpetuate #StrongPound over the intermediate term.
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. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.
Three for the Road
QUOTE OF THE DAY
"You don't get to choose how you're going to die or when. You can only decide how you're going to live." -Joan Baez
STAT OF THE DAY
Atlantic City's casino revenue fell below $3 billion last year for the first time in 22 years, as increasing competition in the northeastern U.S. continued to shrink the market. New figures showed the city's casinos won $2.86 billion in 2013, down from just over $3 billion in 2012. It marked the seventh straight year of plunging gambling revenue. (AP)