Client Talking Points
While U.S. stocks had their low-volume bounce to lower-highs on Friday, the real read-through on the jobs report was the US Dollar getting smoked. The greenback has moved back to bearish TREND in our model and was down -0.8% on the week. No bid again this morning. Meanwhile, the Euro and Pound continue to look stronger, as does European growth data, on the margin. We have been bullish on both, in particular the Pound.
A big rip in Oil inflation on the payroll miss. Brent was up +3% on the week and, more importantly, back to bullish TREND in our Hedgeye model. This is occurring alongside a commodity complex (CRB Index) that continues to crush any US stock index year-to-date (CRB up another +2.3% last week – CRB Food Index = +4.5% YTD). Inflation? It's a tax.
It was fun to watch the SPX bounce +0.5% to -2.8% year-to-date last week, but the Russell had zero fun. It was down another -1.3% to -4% year-to-date as #InflationAcclerating slows US growth expectations. The 10-year yield of 2.66% this morning continues to signal the same on growth.
|FIXED INCOME||10%||INTL CURRENCIES||16%|
Top Long Ideas
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.
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
GOLD: up another +0.5% to +5.5% YTD - Down Rates, Down Dollar = Inflation Slowing growth @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
For the first time in over 20 years, rates on jumbo mortgages -- loans of more than $417,000, or $625,500 in pricier areas -- are at or below rates on conventional mortgages. Jumbo rates usually run one-quarter to one-half of a percentage point higher, but lenders eager for wealthier customers are making deals. (CNN)