Client Talking Points
The biggest hedge fund net short position in currency markets is being unwound and the Nikkei is getting royally crushed on that. It's down another -4.2% overnight on a 30 basis point FX move to -14% year-to-date! Ugly. At the same time, Japanese Government Bonds continue higher (0.59% 10year), signaling a probable sequential peak in Japanese growth in Q413.
Some people apparently bought the #Sochi catalyst. No, that was not a smart decision. Russia’s Trading System leads European losers this morning, down another -0.6% to -11% year-to-date, The Ruble looks like bloody hell and Brent Oil is one of the few major commodities that remains decisively broken in our TREND/TAIL model.
So... U.S. stocks get totally slammed yesterday (biggest 9-day decline since November 2011 for the Russell 2000 which was drubbed -7.4%). But wouldn't you know! The CRB Commodities Index went UP on that! The CRB Index is now +1.4% year-to-date versus Consumer Discretionary (XLY) which has been pummeled -8.7%. We stand by our #InflationAccelerating macro call. On the margin it mattered.
|FIXED INCOME||6%||INTL CURRENCIES||18%|
Top Long Ideas
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.
Three for the Road
QUOTE OF THE DAY
"We are still masters of our fate. We are still captains of our souls."
STAT OF THE DAY
Amazon is considering raising the price of Prime membership by as much as $40, hoping it can strike the right balance between managing rising costs and scaring away customers. Prime members get 2-day shipping on a large number of Amazon items at no extra cost, plus the ability to borrow Kindle books and stream movies. Prime currently costs $79 a year, but that might jump to $99 or even $119.