CLIENT TALKING POINTS
FINANCIALS (XLF)
Financials snapped our Hedgeye TREND line this week and closed just above it yesterday (TREND = 21.21). This is the single most important sector signal for me today. Right now the Yield Spread is compressing -- fast -- as the 10-year yield remains below our TREND of 2.80%. Meanwhile, whatever yesterday’s low-volume U.S. stock pop was (month-end?), it’s not popping this morning.
JAPAN
Most of Asia was closed last night (Happy New Year!) but I found it very interesting (revealing) to see them sell the Nikkei in the face of a U.S. bounce. The Nikkei is now confirming bearish TREND at -8.4% year-to-date.
COPPER
Copper is diverging negatively versus the CRB Index (commodities) as it slices back through our Hedgeye TREND support of 3.31/lb. Not all commodities are the same obviously – copper’s long-term supply (mining) bubble remains very relevant.
TOP LONG IDEAS
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.
Asset Allocation
| CASH | 48% | US EQUITIES | 6% | |
| INTL EQUITIES | 10% | COMMODITIES | 10% | |
| FIXED INCOME | 6% | INTL CURRENCIES | 20% |
THREE FOR THE ROAD
TWEET OF THE DAY
Amazon now bigger than Target on revenues, 5x larger mkt cap, 1/5th as much income @JeffMacke
QUOTE OF THE DAY
"The world ain't all sunshine and rainbows. It is a very mean and nasty place and it will beat you to your knees and keep you there permanently if you let it. You, me, or nobody is gonna hit as hard as life. But it ain't how hard you're hit; it's about how hard you can get hit, and keep moving forward. How much you can take, and keep moving forward." - Rocky Balboa
STAT OF THE DAY
It’s been 835 days without a 10% correction. That’s the 5th longest streak of its kind, and the third in the past 25 years. Of course, it still has a long way to go to compete with the mystifying seven-year stretch starting in 1990, when we had 2,553 correction-free days. (Bespoke)
