The Horror

Client Talking Points

Japan

It's mere scraps for the 2013 Nikkei bulls... The Nikkei up only +0.36% overnight (it's down over -11% year-to-date). The Yen remains strong versus US Dollar ahead of Fed Chair Janet Yellen’s first official Dollar Devaluation statement. Meanwhile, Japanese Government Bond yields are down to 0.60% on the 10-year as Japanese growth slows. Things could be better.

 

USD

There's a horrifying setup ahead of the Fed's “qualitative rate guidance” (i.e., price fixing the long-end of the curve as inflation expectations rise). Sure, it may be good news for the stock market short term, but Burning Buck remains the single, biggest long term TAIL risk to the US economy. In other words?Watch out.

OIL

The only good economic news here is that options bets are way net long crude oil in the face of a TREND breakdown (+432,820 net long futures/options contracts). Oil needs to go a lot lower from here to become a consumption tax cut. But at least it's not going up. That's a start.

Asset Allocation

CASH 41% US EQUITIES 7%
INTL EQUITIES 9% COMMODITIES 14%
FIXED INCOME 13% INTL CURRENCIES 16%

Top Long Ideas

Company Ticker Sector Duration
OC

Construction activity remains cyclically depressed, but has likely begun the long process of recovery.  A large multi-year rebound in construction should provide a tailwind to OC shares that the market appears to be underestimating.  Both residential and nonresidential construction in the U.S. would need to roughly double to reach post-war demographic norms.  As credit returns to the market and government funded construction begins to rebound, construction markets should make steady gains in coming years, quarterly weather aside, supporting OC’s revenue and capacity utilization. 

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.

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.

Three for the Road

TWEET OF THE DAY

TREASURIES: 10yr 2.67% hasn't moved vs 24hrs ago - still pricing in US #GrowthSlowing  @KeithMcCullough

QUOTE OF THE DAY

"Try not to become a man of success, but rather try to become a man of value." - Albert Einstein

STAT OF THE DAY

A new £1 coin, billed by the Royal Mint as the "most secure coin in the world", is to be introduced in 2017. The move comes amid concerns about the 30-year old coin's vulnerability to counterfeiting, with an estimated 45 million forgeries in circulation. The Royal Mint, which believes 3% of existing £1 coins are fake, said the move would increase "public confidence" in the UK's currency and reduce costs for banks and other businesses. (BBC)