The Herd Goes Astray

Client Talking Points

JAPAN

Consensus is (was) long Nikkei and short Yen. Why? Because it was working last year. Big time. Now it’s not as the Yen moves to +3% YTD versus the US Dollar and the Nikkei drops another -2.5% overnight to -7.9% YTD. I finally shorted the Yen on Friday on an overbought signal. The Nikkei should bounce tonight off the oversold signal, but its dicey. We have no position there as we think Japanese growth slows.

COMMODITIES

With global growth expectations getting rocked last week, the CRB Index (19 commodities) closed up +1.5% on the week. #InflationAccelerating perpetuates #GrowthSlowing in our model. That’s why we do not like Consumer stocks, especially US restaurants. There are plenty of ways to play our Q1 Macro Theme. 

UST 10YR

For the last few years, the 10-year yield has tracked the rate of change of US growth as well as anything we model. Now, with US consumption #GrowthSlowing, the 10-year yield is snapping the Hedgeye TREND support of 2.79% last week makes sense to me. So does Gold going up on that (GLD loves rates down).

Asset Allocation

CASH 39% US EQUITIES 12%
INTL EQUITIES 15% COMMODITIES 10%
FIXED INCOME 0% INTL CURRENCIES 24%

Top Long Ideas

Company Ticker Sector Duration
JPM

JPMorgan shares are currently trading with the most implied upside to fair value in our fair value model for money-center, super-regional and regional bank stocks. By our estimates, JPM shares have upside of 33% based on our regression of EVA (economic value added) – which looks at the spread between return on capital and cost of capital – and the current multiple to tangible book value. Over time, we have found that sizeable discounts and premiums mean revert toward fair value giving JPMorgan an embedded tailwind in 2014.

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.

Three for the Road

TWEET OF THE DAY

TREASURIES: 2.74% 10yr yield is currently below @Hedgeye TREND support - that's new (good for Gold) @KeithMcCullough

QUOTE OF THE DAY

"The stock market is never obvious. It is designed to fool most of the people, most of the time." - Jesse Livermore

STAT OF THE DAY

The dollar has shed nearly 2% in the past three sessions as investors saw currencies like the yen and the Swiss franc as relatively safe while a sell off in emerging markets assets picked up pace late last week. (Reuters)