Get the Macro Right!

Client Talking Points

#GrowthDivergences

Looking to the U.S., Europe, China and Japan, we see the heavyweights of the world economy diverging from an economic growth perspective as some countries and/or regions are much further along in the economic cycle than others. This has implications for investors around the globe. Country/sector/asset picking matters in a lower variance, divergent performance environment.  Some big YTD divergence and the YTD is only a few weeks old.

#FlowShows

We expect a continuation of fund flows out of fixed income and into equities during Q1. The “Queen Mary” has indeed turned, aided by the Fed’s decision to begin tapering. According to the latest ICI Fund Flow Survey, Equity flows perked up strongly after a negative week to start '14 with the biggest inflow in 10 weeks. This strong weekly inflow coupled with the slight outflow from last week has now moved the 2014 weekly average to a $3.9 billion average inflow for equities to start 2014, a follow through on 2013's positive trends where $3.0 billion per week on average flowed into stock funds.

#InflationAccelerating

Across the globe, reported inflation readings are poised to accelerate from post-crisis lows as easy comps, a commodity base effect and accelerating wage pressures all come to a head in the first quarter of 2014. The reemergence of inflation as a core macro risk threatens to materially alter the investment landscape going forward.

Asset Allocation

CASH 33% US EQUITIES 15%
INTL EQUITIES 18% COMMODITIES 9%
FIXED INCOME 0% INTL CURRENCIES 25%

Top Long Ideas

Company Ticker Sector Duration
FXB

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.

DRI

Darden is the world’s largest full service restaurant company. The company operates +2000 restaurants in the U.S. and Canada, including Olive Garden, Red Lobster, LongHorn and Capital Grille. Management has been under a firestorm of criticism for poor performance. Hedgeye's Howard Penney has been at the forefront of this activist movement since early 2013, when he first identified the potential for unleashing significant value creation for Darden shareholders. Less than a year later, it looks like Penney’s plan is coming to fruition. Penney (who thinks DRI is grossly mismanaged and in need of a major overhaul) believes activists will drive material change at Darden. This would obviously be extremely bullish for shareholders and could happen fairly soon driving shares materially higher.

GHL

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.

Three for the Road

TWEET OF THE DAY

Markets aren't about calling tops and bottoms - they are all about risk managing ranges @KeithMcCullough

QUOTE OF THE DAY

"It's not that I'm so smart, it's just that I stay with problems longer."

-Albert Einstein

STAT OF THE DAY

Treasury prices surged Friday in their second day of strong gains. The 10-year note was down 5 basis points at 2.722%, on track for its lowest close since the end of November.


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