Never mind those “green arrows” in the futures this morning. Buying them in any of the last 3-4 days was a costly mistake. Instead, focus on the VIX TREND which is 14.91 and S&P 500 TREND which is 1779. Both remain very credible and sizable threats to the Old Wall Street consensus that’s still way too long.
Our #InflationAccelerating call here at Hedgeye (Macro Theme #1 for Q1) is performing well. The CRB Index was up another +0.8% yesterday in a very red tape to up +1.8% year-to-date. Look, very few people came into the year long commodities. Guess what? That’s why they’re working right now.
The 10-year yield failed rather hard at our Hedgeye TREND resistance of 2.80% yesterday (2.69% this morning), and this sucks for the Financials (XLF) as the yield spread gets smushed. The XLF joined the Consumer stocks as bearish TREND in our model yesterday
|FIXED INCOME||6%||INTL CURRENCIES||20%|
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.
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.
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.
The higher a monkey climbs, the more you see of its behind. -Joseph Stilwell
19%: Facebook's growth might be slowing somewhat, but it keeps finding new ways to make money off of its users. The social network reported sales and profits that beat Wall Street's expectations, sending the social network's stock soaring. FB shares are up over 19% in premarket trading Thursday.
TODAY’S S&P 500 SET-UP – January 30, 2014
As we look at today's setup for the S&P 500, the range is 27 points or 0.97% downside to 1757 and 0.55% upside to 1784.
CREDIT/ECONOMIC MARKET LOOK:
MACRO DATA POINTS (Bloomberg Estimates):
WHAT TO WATCH:
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
The Hedgeye Macro Team
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Takeaway: HBI sandbag comes out -- but watch inflation. JCP taking up prices. China’s JD frontrunning Alibaba deal. TGT SHLD and Canada. AMZN Levis
EVENTS TO WATCH OVER THE NEXT 24 HOURS
AMZN - Earnings Call: Thursday 1/30, 5:00pm
Takeaway: Strong quarter for Hanesbrands with higher guidance that was entirely driven by Maidenform -- an acquisition that we're stated for a while that management is completely sandbagging on synergies. On the core business, trends were positive in October and November, but were inconsistent in January. Management cited weather as the primary factor. One factor that caught us by surprise was CEO Rich Noll's comment about inflation. We've never heard him say anything that's other than overwhelmingly positive about inflation -- in that it drives up their prices, and helps retailers make money. But this time he said that inflation was partially offset by product costs. That's still a positive trend. But let's keep a close eye on costs here. If they catch up to the price increases to retailers -- which is possible, then it turns into a margin-draining event.
*adjusted for debt repayment expenses in Q412 and Maidenform acquisition charges in Q413
JCP - JCP hikes prices for bigger discounts later
Takeaway: The first step was getting things into the store that people actually want. Step two is raising prices to allow for discounting to protect Gross Margin. This all makes sense, actually. But the obvious risk is that sticker shock keeps some customers away. We're going to give Ullman the benefit of the doubt that he's managing this appropriately (even though we'd rather have someone else be managing it).
TGT - Target Sets Nine Canadian Openings in 2014
JD - JD.com files for IPO of up to $1.5 billion
Takeaway: JD is totally riding the coattails of big brother Alibaba. If there was ever a time to raise capital for JD, this is it. If they did it after the Alibaba deal, then they'd be competing in the marketplace against it's top business competitor -- and it would probably lose. But in anticipation of the Alibaba transaction, people will probably gobble this one up. Let's hope they don't get too greedy with valuation.
LS&C - Levi's Entering Men's Underwear Category
AMZN - Amazon to Offer Kindle Checkout System to Physical Retailers
SCC - Sears Canada Sets 624 Job Cuts
Persistently low Singapore hold is frustrating, but the dual appeal of this stock continues to grow.
The value and cash return part of the LVS thesis took a major turn positive last night. For Q4, what would’ve been considered a great quarter one month ago should now be perceived as just ok. LVS delivered a beat but on a hold adjusted basis. As you know, I’ve liked LVS for a long time and certainly on the recent pullback. However, I didn’t see Q4 as necessarily a positive or negative catalyst following the Q4 run up in stock price and positive estimate revisions. We’ll get into what we liked and didn’t like about the quarter but the LVS story certainly got a lot more interesting last night.
For me, LVS began its transformation from a growth to growth/value/cash flow/cash return stock 2 quarters ago with a sharp dividend hike and the start of a meaningful share repurchase program. See our 10/28/13 note “LVS: WHAT TYPE OF INVESTOR SHOULDN’T THIS APPEAL TOO?”
Minor “issues” with Q4 notwithstanding, that transformation took a few major steps forward last night. Another ramp in stock buybacks, a huge dividend increase, and the revelation of yet another cash/value driver crystallizes the “other” side of the LVS story. The growth side remains intact and should continue to attract the growth
As a born skeptic, I’ll hit on the negatives of Q4 first and then move to the overwhelming positive takeaways:
What we didn’t like:
What we liked:
The usual hold concerns at MBS could weigh on the stock as usual, but the takeaways from last night are overwhelmingly positive. Any price weakness should be seen as an opportunity. After all, how many other stocks can offer this kind of growth and value while lining your wallet with a rapidly growing cash stream?
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