Is Consensus Bearish Enough?

Client Talking Points

DAX

The slope of economic growth data in Europe continues to improve relative to the United States. That is why European stocks continue to outperform U.S. stocks. Over in Germany, the DAX is up +0.8% this morning after holding both TRADE and TREND supports. This is what we call #GrowthDivergences here at Hedgeye. Yes, it's real and yes it matters.

YEN

I issued an overbought signal in #RealTimeAlerts Friday, but the year-to-date corrections in the Yen versus the U.S. Dollar continue to be slim pickings. Meanwhile, the risk range for USD/YEN has tightened (that’s marginally Yen bullish) to 102.04-103.70 (lower-highs). Currencies matter.

SENTIMENT

So with U.S. #GrowthSlowing sequentially, market sentiment is reversing some. But is consensus Bearish Enough? Nope. This morning’s II Bull/Bear Survey is still +3780 basis points wide to the Bull Side (53.1% Bulls, 15.3% Bears) and the VIX is under 14.91. Bottom line is people aren't bearish enough, particularly if growth continues to slow. Careful out there, keep your head up.

Asset Allocation

CASH 43% US EQUITIES 10%
INTL EQUITIES 15% COMMODITIES 10%
FIXED INCOME 0% INTL CURRENCIES 22%

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

The bull case for $KMI rests upon financial engineering of some sort. The fundamental case is shot to hell @HedgeyeENERGY

QUOTE OF THE DAY

"Somebody may beat me, but they are going to have to bleed to do it." -Steve Prefontaine 

STAT OF THE DAY

If humans had the same mortality rate now as in 1900, more than half the people in the world today would not be alive.