Volatility (Can You Feel It?)

Client Talking Points

VIX

Volatility is in a bullish breakout TREND in our Hedgeye model and will continue to be provided that front-month VIX is greater than 14.91. The key question going into and out of the January jobs report tomorrow is whether the VIX breaks out above the October 2013 highs of 20.41? That would be bad.

EUROPE

Italy, Spain, DAX all jumped about 1% on the bounce. European Equities continue to beat US Equities year-to-date. But careful, this bounce A) is a low-volume bounce and B) It still isn’t back above important TREND lines like 3049 in the EuroStoxx50. We are watching this closely. 

UST 10YR

So the 10-year yield bounced off its year-to-date lows to 2.68%. But it looks the same as everything US equities – bounce to lower-highs, but remains below our Hedgeye TREND resistance of 2.79% into the jobs report. Bonds are still saying US #GrowthSlowing. 

Asset Allocation

CASH 50% US EQUITIES 4%
INTL EQUITIES 5% COMMODITIES 15%
FIXED INCOME 10% INTL CURRENCIES 16%

Top Long Ideas

Company Ticker Sector Duration
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.

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.

Three for the Road

TWEET OF THE DAY

JAPAN: Nikkei continues to suck wind, down another -0.2% to -13.1% YTD #bearisk TREND @KeithMcCullough

QUOTE OF THE DAY

"If you deliberately set out to be less than you are capable, you'll be unhappy for the rest of your life." - Abraham Maslow

STAT OF THE DAY

In its first report as a publicly traded company, Twitter witnessed the wrath of Wall Street, when its monthly user numbers came in lighter than predicted. Its frothy stock has plummeted 22% in pre-market trading.



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