Stick with What’s Working

Client Talking Points

VIX

Front-month Volatility broke Hedgeye TREND support of 14.72 yesterday. That’s bullish in the very short-term for US stocks as they make their run for a breakeven Q114.  Clearly, owning #InflationAccelerating was so much more profitable.

CONSUMER

It was a horrible quarter for Consumer Discretionary (XLY) stocks, down -3.3% year-to-date, as inflation slows real consumption growth. Stick with what’s working (Gold and Utilities are up +7.5% to +9.5%) versus consumer on the short side (same playbook as 2011).

EUROPE

Bullish news? Both the EuroStoxx600 and DAX have recovered their TREND lines of 326 and 9323 support in the last 24 hours. We’ll see if they hold, but it’s more bullish than the alternative.

Asset Allocation

CASH 18% US EQUITIES 10%
INTL EQUITIES 12% COMMODITIES 20%
FIXED INCOME 18% INTL CURRENCIES 22%

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 (etf FXB), 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 strong underlying economic fundamentals. In follow-up BOE minutes, the asset purchase program was held flat by a vote of 9-0 and the interest rate was held unchanged by a vote of 9-0. This week the UK’s Office for Budget Responsibility updated its forecasts and sees 2014 GDP at +2.7% versus forecasts of +1.8% a year ago and +2.4% in December. It also increased the 2015 growth forecast to +2.3% from +2.2% previously. The OBR sees budget deficit at -6.6% of GDP in 2013-14 from -6.8% previously forecast, and sees debt peaking at 78.7% of GDP in 2015-16, and falling to 74.2% of GDP in 2018-2019. News out this week discussed Chancellor Osborne closing in on a deal that would see the City of London become an offshore center for trading the Chinese currency. The British Pound is holding its Bullish Formation, trading above its intermediate term TREND and long term TAIL levels of support.

Three for the Road

TWEET OF THE DAY

A bubble that fails to make higher-highs on accelerating volume is a bubble that is popping @KeithMcCullough

QUOTE OF THE DAY

"Every morning we are born again. What we do today is what matters most." – Buddha

STAT OF THE DAY

Facebook is getting into the virtual reality business. The social networking giant is planning to buy virtual reality firm Oculus VR for $2 billion, its latest high-profile acquisition. Oculus makes the Oculus Rift headset, which covers your eyes and immerses you in a virtual environment that responds to your head movements. (CNN)