Downside Risk Remains

Client Talking Points

ASIA

Sure, Asia bounced across the board... but there are two important caveats. A) the Nikkei's +2.2% bounce (it's still down -11.2% year-to-date) is not seeing any bearish Yen follow through; B) not one single Asian equity market bounced back above our Hedgeye TREND resistance. Careful.

EUROPE

European stocks continue to look better than their U.S. or Japanese counterparts. (Italy up +2.9% and Spain +1.4% year-to-date). But the pre-US-jobs-lottery report bounce isn’t doing anything for the DAX or FTSE; both broke my TREND lines this week.

UST 10YR

The bounce in the 10-year yield looks identical to the bounce in the S&P 500 – lower-highs, and still well below what’s developing as TREND resistance up at 2.80%. That’s probably why Gold still looks good this morning. If the jobs report isn’t good enough, you buy Treasuries, Utilities, and Gold and short the Consumer (XLY).

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

Expectations are the root of all heart ache . . .Jan US Nonfarm Payrolls +113K vs. StreetAccount consensus +175K @HedgeyeDJ

QUOTE OF THE DAY

"If you think you are too small to be effective, you have never been in the dark with a mosquito." - Betty Reese

STAT OF THE DAY

Apple bought $14 billion of its own shares in the two weeks since reporting financial results that disappointed Wall Street. With the latest purchases, Apple has bought back more than $40 billion of its shares over the past 12 months; a record for any company over a similar span. (WSJ)


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