A Nikkei & Bronco Beatdown

Client Talking Points

JAPAN

An absolutely horrendous start to 2014 for the Nikkei. It's down another -2% overnight to -10.3% year-to-date. Ugly like Denver. In our Global Macro Themes deck for Q1, Japan was a big outlier on sequential #GrowthSlowing from its tax-pull-forward 2013 peak. JGBs agree with 10-year yields -12 basis points month-over-month to new lows this morning of 0.61%.

OIL

Brent Oil looks like hell. It's nothing like the CRB Index right now. Brent remains bearish TREND here at Hedgeye with resistance up at $108.62. The US consumer is in dire need of a tax cut, and she won’t get it from new Fed Head Janet Yellen via a rate hike, so Oil is a big hope.

UST 10YR

The 10-year yield down at 2.65% continues to signal lower-highs (2.76% resistance) and lower-lows on our intermediate-term TREND duration which is now bullish for bonds (bearish for yields) as rate of change in US #GrowthSlowing manifests.

Asset Allocation

CASH 55% US EQUITIES 4%
INTL EQUITIES 8% COMMODITIES 9%
FIXED INCOME 6% INTL CURRENCIES 18%

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

JAPAN: Nikkei bulls getting splattered, -2% overnight to -10.6% YTD Manning to be sponsored by the Nikkei @KeithMcCullough

QUOTE OF THE DAY

"Being the richest man in the cemetery doesn't matter to me. Going to bed at night saying we've done something wonderful, that's what matters to me."

- Steve Jobs

STAT OF THE DAY

Global funds pulled $6.3 billion from emerging-market stocks in the week through Jan. 29, the biggest outflow since August 2011. More than $12 billion has fled the funds this year, already approaching 2013’s outflow of $15 billion. (Bloomberg)