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DRI’S JAMIE QUESTION

We still like the stock but, in light of recent events at JPM, DRI shareholders should ask some questions of the leadership team in Orlando.

 

Darden’s Chief Executive Officer and Chairman of the Board, Clarence Otis, has been keeping a low profile of late. The industry-lagging operational performance of Darden’s brands has led others to join us in expressing doubt about the effectiveness of his strategy for the company. Despite JP Morgan shareholders affirming their confidence in Jamie Dimon’s ability to execute both roles, we believe the broader conversation of single persons holding the dual role of CEO and Chairman will have an impact on the leadership structure of many companies going forward. Within our space, Darden is the first that comes to mind in this respect.

 

 

 

Where is the New Plan?

 

 

Darden’s plan, outlined in its 2012 Annual Report, has been badly discredited virtually since the quarter it was released as many of the doubts we expressed in our reaction to that report came to the surface in the company’s results. We were bearish on the stock from July to February before turning bullish in early March.

 

 

Since turning positive, we have been arguing that substandard operational performance could potentially be ameliorated by structural changes to the multi-brand portfolio company. While the stock has recovered well since late-February, the operating strategy of the company remains - we assume - unchanged. Perhaps, in the event that a separate Chairman of the Board was in place, there would be added impetus for the current management team to devise a new, more effective, strategy for the company.

 

 

 

Leadership

 

 

We’ve been surprised by Clarence Otis not taking a more active role - or any role - in recent presentations by the management team. It’s almost an American tradition in corporate America, that the same person occupies the role of Chief Executive Officer and Chairman of the Board. Although it should be noted, according to some corporate governance experts, that a separation of these roles is starting to become more common. According to Spencer Stuart’s 2011 board index, only 41% of S&P 500 companies separate the job of chairman and CEO, up from 26% in 2001. We think Darden continues to be vulnerable to changes in the corporate structure.

 

 

Over the past three years DRI has underperformed the S&P 500 by 25% and the average casual dining stock by 59%. At the same time the company has spent nearly $2.0 billion in capital spending, and showed no growth in EBITDA. Despite these metrics, management has not been held accountable for mismanaging the company. One key reason for the underperformance was that management was late to recognize the secular changes in the casual dining industry, leading to misuse of shareholder capital. By separating the CEO and Chairman of the Board roles, thereby making the CEO more accountable, shareholders could benefit significantly if the change were to bring about better governance of the company, and higher returns to investors.

 

 

Combining the roles might have its advantages in certain instances but, in Darden‘s case, there appears to be little evidence that such an arrangement is benefiting shareholders. Corporate governance advocates submit that the CEO acts as his own boss because he reports to himself in his chairman role. Some corporate governance experts submit that a CEO serving as Chairman of the Board acts as his own boss, leading to a lack of accountability and a tendency for unchecked risks to be taken, which can end up harming the company’s financial health. We think this line of reasoning applies directly to DRI as the many decisions by the current CEO have led to suboptimal results for the company and its shareholders.

 

 

If Darden is going to keep the current operating structure of a complex multi-branded company then it is even more imperative to separate the two roles. Splitting the roles at DRI will allow the CEO and Chairman to focus on different, equally vital aspects of the company’s performance. DRI is in need of a CEO that is focused on the operations of the individual brands. We have heard from more than one shareholder suggesting that the current CEO is detached from the operating side of the business and does not know the numbers. Perhaps some overview from a separate Chairman of the Board could rectify that alleged detachment.

 

 

DRI is getting ready to close the books on a dismal FY13, with EPS expected to decline 11% and the outlook for FY14 also uninspiring. In 4Q13, DRI is estimated to report $1.04 in EPS, down 10% from last year. The 4Q13 results will see a sequential improvement in top line trends, but there is still no cohesive strategy to fix the longer-term issues that plague the company. Some creative thinking may be in order!

 

 

 

Howard Penney

 

Managing Director

 

 

 

 

 

Rory Green

 

Senior Analyst

 

 

 

 

 

 

 

 

 

 

 


INITIAL CLAIMS: LABOR MARKET RESUMES FULL STEAM AHEAD

Takeaway: After a brief misfire last week, the labor market appears to again be moving in the right direction. YTD trend-line acceleration continues.

Labor Market: Back to the Races

After taking a breather last week, the labor market came roaring back this week. Taking a look at the YoY trend in NSA initial claims over the last five weeks, they look like this (newest to oldest): -8.9%, -1.3%, -10.5%, -9.7%, -12.1%. That is an extraordinarily strong run. The real takeaway, however, remains that the YoY rate of improvement in rolling NSA claims continues to accelerate in 2013. This is different than what we've seen in the prior three years. The chart below shows this. The black dotted line shows that the slope in the rate of claims improvement is negative for 2013, whereas 2010, 2011 and 2012 all had positive slopes (a negative slope in this instance is better as it means the rate of improvement is accelerating).

 

INITIAL CLAIMS: LABOR MARKET RESUMES FULL STEAM AHEAD - 2

 

To reiterate our comments from last week, we have subscribed to a simple philosophy since Lehman Brothers. We consider three macro factors paramount in gauging the overall direction for the sector: labor, housing and the Fed. On that score, YTD all three factors had been moving in the right direction.We continue to view labor and housing as moving in the right direction from an intermediate and longer-term standpoint. The Fed, however, now seems the odd man out, and in the short-term we continue to expect weakness. 

 

Contrary to the prior three years, however, where it was unclear whether the weakness constituted a falling knife or buying opportunity, this time around, we would view any weakness as a buying opportunity for those with a horizon beyond a few weeks. Our basis is primarily the ongoing recovery in both housing and labor. Moreover, a steepening curve is obviously a good thing for lenders, even if it retards some of the progress we've seen in housing.

 

The Data

Prior to revision, initial jobless claims fell 20k to 340k from 360k WoW, as the prior week's number was revised up by 3k to 363k.

 

The headline (unrevised) number shows claims were lower by 23k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -0.5k WoW to 339.5k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -7.6% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -8.5%

 

INITIAL CLAIMS: LABOR MARKET RESUMES FULL STEAM AHEAD - 1

 

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INITIAL CLAIMS: LABOR MARKET RESUMES FULL STEAM AHEAD - 14

 

Yield Spreads

The 2-10 spread rose 14.5 basis points WoW to 170 bps. 2Q13TD, the 2-10 spread is averaging 153 bps, which is lower by -14 bps relative to 1Q13.

 

INITIAL CLAIMS: LABOR MARKET RESUMES FULL STEAM AHEAD - 15

 

INITIAL CLAIMS: LABOR MARKET RESUMES FULL STEAM AHEAD - 16

 

Joshua Steiner, CFA

 


Dial-In and Materials for Expert Call With Jim Rickards

Dial-In and Materials for Expert Call With Jim Rickards - rickards2

 

CALL DETAILS

  • Date: Thursday, May 23rd at 11:00am EDT
  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 478237#
  • Materials: CLICK HERE

 

We will be hosting an expert call featuring Jim Rickards, renowned author of Currency Wars: The Making of the Next Global Crisis, today at 11:00am EDT titled Are We Entering Into a New Phase of the Currency War?  Hedgeye hosted a call with Rickards on August 29, 2012 where he discussed the following:

  • Philosophical views on the Chaos Theory 
  • Obama's U.S. Dollar policy
  • Acceleration of the money velocity may be the key catalyst that leads to a tipping point in inflation
  • Contrarian view of the EUR/USD
  • The four horsemen of the USD apocalypse vs the upside in gold

This time around, Jim will update us on those views and provide his thoughts on the following topics:

  • The sustainability of USD strength
  • The bear market in Gold
  • Japanese monetary policy and the JPY
  • Where the EUR goes from here
  • The sustainability of emerging market and commodity currency weakness
  • If the global monetary regime is poised to be shaken up

 

OBJECTIVE

To gain a better understanding of the global capital markets and their geopolitical drivers and what investment implications this will have looking forward.

 

 

JAMES RICHARDS OVERVIEW

James G. Rickards is Senior Managing Director at Tangent Capital Partners LLC, a merchant bank based in New York City, and is Senior Managing Director for Market Intelligence at Omnis, Inc. Mr. Rickards is a seasoned counselor, investment banker and risk manager with over thirty years experience in capital markets. 

 

Mr. Rickards' previously held senior executive positions at sell side firms (Citibank and RBS Greenwich Capital Markets) and buy side firms (Long-Term Capital Management and Caxton Associates) as well as technology firms (OptiMark). Mr. Rickards has applied his financial expertise to a variety of tasks for the benefit of the U.S. national security community and the Department of Defense. He is the author of Currency Wars: The Making of the Next Global Crisis.


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

Risks Abound

Client Talking Points

JGBs

We called this the biggest (new) risk two weeks ago.  Consensus still isn’t positioned for this. TAIL risk line on the 10yr = 0.81%; breakout confirmed; then the follow through overnight to 1%;  Nikkei plunges -7.3% in a straight line and Yen stops going down. It makes sense. Respect the market’s message here – this was A) already in motion but B) is still very new. Again, Consensus still isn’t positioned for this. I don’t think it’s a 1-day thing.

USTs

Yesterday was one of Bernanke’s worst days (and that’s saying something). Markets didn’t believe his reasoning and basically did the opposite of what he was trying to jaw bone it to do. “Innovative communication tools” gotit. Our TAIL risk (breakout line) for the 10yr remains intact at 1.82%; no intermediate-term resistance to 2.41%

OIL

The best economic news of the morning? What we get on the other side of all this – another tax cut at the pump (pending). Same playbook in terms of the flow of our call, but you need to be picky on price (buying Consumption stocks) now because all of my major mo mo lines (immediate-term duration) are broken (for SPY that’s 1657 and for RUT that’s 988).

Asset Allocation

CASH 50% US EQUITIES 12%
INTL EQUITIES 12% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 26%

Top Long Ideas

Company Ticker Sector Duration
IGT

Decent earnings visibility, stabilized market share, and aggressive share repurchases should keep a floor on the stock.  Near-term earnings, potentially big orders from Oregon and South Dakota, and news of proliferating gaming domestically could provide near term catalysts for a stock that trades at only 11x EPS.  We believe that multiple is unsustainably low – and management likely agrees given the buyback – for a company with the balance sheet and strong cash flow as IGT.  Given private equity’s interest in WMS (they lost out to SGMS) – a company similar to IGT that unlike IGT generates little free cash – we wouldn’t rule out a privatizing transaction to realize the inherent value in this company.  

WWW

WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. 

FDX

With FedEx Express margins at a 30+ year low and 4-7 percentage points behind competitors, the opportunity for effective cost reductions appears significant. FedEx Ground is using its structural advantages to take market share from UPS. FDX competes in a highly consolidated industry with rational pricing. Both the Ground and Express divisions could be separately worth more than FDX’s current market value, in our view.

Three for the Road

TWEET OF THE DAY

@KeithMcCullough Sincere congratulations - you performed both the roles of market obstetrician and mkt mortician with precision in 2013. @DougKass

QUOTE OF THE DAY

“Hi there. Sorry if I took a snap at you at one time. Fish gotta swim, birds gotta eat.” -Finding Nemo

STAT OF THE DAY

Japanese government gross debt ... 240% of GDP.



I Snapped

“Hi there. Sorry if I took a snap at you at one time. Fish gotta swim, birds gotta eat.”

-Finding Nemo

 

I’ve watched that movie at least 30 times (I have a 3 and a 5 year old). And while I haven’t seen this market movie before, I have seen how the waters tend to flow toward a burst of entropy, over the dam.

 

I’ll get to the flows of how this macro trade snapped in a minute, but first wanted to give credit to where it’s due. Ben Bernanke was fantastic yesterday – in terms of storytelling, that is. He was so convincing that the market finally realized it’s fiction.

 

Markets (particularly the bond market) losing faith that Bernanke can find Nemo, is not a good thing. Even the Gold market realized that his entire policy depends on fictional forecasts at this point. That’s saying something.

 

Back to the Global Macro Grind

 

Follow the flow of the last 6 months:

  1. Bernanke teaches the Japanese how to eviscerate their currency for short-term political gain
  2. The Japanese take it up 20,000 feet and roll with 132 TRILLION Yens of easing
  3. Yen gets blasted to 103 and the Weimar Nikkei rips a +75%, 6 month, move
  4. The 57% (average Japanese Household net worth has that much in JGBs and Cash) says, buy Weimar Nikkei!
  5. To buy Weimar Nikkei, Japanese dudes have to sell JGBs
  6. JGBs breakout above the Hedgeye TAIL risk line of 0.81% (on the 10yr)
  7. Implied volatility in JGBs starts to rip (Japanese breakevens are already ripping too)
  8. Japanese Government guys say we got this move in the bond market under control, right?
  9. USA’s Central Planning overlord (Bernanke) says I got it on this end too, right?
  10. US stocks, bonds, and Gold all snap intraday; Yen stops going down; Nikkei closes down -7.3%

I sold all but 7 LONG positions and took our Cash position to 50% in the Hedgeye Asset Allocation Model at 10:38AM EST right after Bernanke spewed something about “savers wear multiple hats.”

 

It was only the 2nd day since November 29th that I was net short intraday in Real-Time Alerts. Sorry if I was snapping on him on Twitter in real-time. I gotta speak my mind, kids gotta eat.

 

Not only was Bernanke’s thing about savers a slap in the face to any upstanding American who has taught their children Benjamin Franklin style frugality, but it showed a genuine lack of respect for the sacrifice savers (deposits) have made to backstop the most asymmetric, levered, and tax payer funded, trade in US history.

 

Sorry Ben. You lost my trust and respect a long time ago. Now you are losing the market’s. So now what? After consensus hedge funds bought SPY call options at their most aggressive pace since 2007 (on Tuesday, ostensibly having some inside info on what Bernanke was going to say about tapering), is it officially time to freak out?

 

Well, since Rule #1 is don’t lose money and rule #2 is probably turning into don’t freak out when other people are – we should probably respect the all encompassing rules of market mortality as well (I learned this one from Nemo too):

 

Marlin: Now it's my turn. I'm thinking of something dark and mysterious. It's a fish we don't know. If we ask it directions, it could ingest us and spit out our bones. 


Dory: What is it with men and asking for directions? 

 

Marlin: I don't want to play the gender card right now. You want to play a card, let's play the "let's not die" card. 

 

Ok. So that about sums up my call this morning – we’ve had a great run; let’s not die.

 

We’ve already snapped some lines where price momentum chasing machines will end up dead via stop loss this morning. What was immediate-term TRADE support is now resistance for the DAX, Nikkei, and SP500 at:

  1. DAX = 8,389
  2. Nikkei = 15,097
  3. SP500 = 1657

The good news is that bullish TREND supports for all 3 remain firmly intact (for the SP500 that’s 1558). The bad news is that those TREND lines of support are a lot lower than last price.

 

In my last few weeks of rants (notes titled “Sovereign Yield Risk” and “The Waterfall”) I’ve outlined how all of this could potentially play out. My general advice for 6 months has been don’t buy bubbles that are popping (Gold, Commodities, etc.).

 

Bernanke is big on asset bubbles (Housing, Commodities, and now Treasuries). And the Japanese are big on Bernanke. So the last thing you want to be buying this morning are more of the Japanese (JGBs) or Bernanke (Treasuries).

 

If you are hungry for Yield – I guess that’s too bad. We’ve had plenty to eat – and eating the artificial stuff won’t fill your family’s belly forever; your hard earned Savings will.

 

And, as for you Mr. Bernanke… Marlin, Mr. Market, and I are going to start teaching you how to eat that Yield Chasing thing like Dory was taught, “Cause you are about to eat my bubbles.”

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, Russell2000, Weimar Nikkei, and the SP500 are now $1, $100.97, $83.84-84.69, 100.11-103.39, 1.86-2.03%, 12.94-15.73, 964-988, 147, and 1, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

I Snapped - Chart of the Day

 

I Snapped - Virtual Portfolio


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