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DRI REMAINS A “WIN-WIN”

Darden remains one of our top ideas on the long side.

 

Expectations Unlikely To Be Met

 

We expect that 4QFY13 results and forward guidance for FY14 are likely to fall short of the investment community’s expectations. Despite this, equity holders should not panic, as we view the stock setup as a win-win for investors.

 

The “win-win” set-up, to us, looks like this:

  1. Management continues to demonstrate that it cannot effectively manage the business as it exists today, rolling out the red carpet for an activist or group of activists
  2. Sequential improvement in industry trends should help Darden in 4QFY13

 

 

Looking to FY14

 

DRI is scheduled to report this Friday on 6/21.  While we believe there will be some improvement in sequential sales trends during the quarter, it likely will not be nearly impactful enough to allow management to claim victory.  The biggest news during the quarter was the appearance of Olive Garden’s President Dave George on Jimmy Fallon’s “Late Night” show, on which Mr. George retired the weary Olive Garden slogan, “When you’re here, you’re family.”  We expect President Dave George to take on a larger role on the upcoming quarterly earnings call in order to outline his vision and the future prospects for the Olive Garden.

 

While management will likely point to the slight recovery in sequential sales trends, we don’t believe they will raise the current guidance of 0-2% EPS growth for FY14.  Highlighted by the same-store sales charts below for Olive Garden, Red Lobster, and LongHorn, street expectations are low for an improvement over the current trends.  Furthermore, the lack of a cohesive turnaround plan suggests that management cannot manage the business as it currently exists.  We continue to believe that major structural changes are necessary in order to fix DRI’s broken business model.

 

In the event that we are wrong, and sales trends deteriorated during the quarter, shareholders will likely be quick to demand more, potentially spelling the end of the current management team.  While none of the existing shareholders will likely surface as a voice of reason, an activist could emerge to apply pressure for the necessary changes.  Our analysis suggests that at current levels, the breakup value of the stock exceeds the current share price.

 

DRI REMAINS A “WIN-WIN” - olive garden SRS consensus

 

DRI REMAINS A “WIN-WIN” - red lobster SRS consensus

 

DRI REMAINS A “WIN-WIN” - longhorn SRS consensus

 

 

Howard Penney

Managing Director

 

Rory Green

Senior Analyst

 

 

 

 

 

 

 

  

 


IS THE ABENOMICS TRADE OVER?

Takeaway: Trading Abenomics from here depends primarily on your specific investment duration.

This note was originally published June 13, 2013 at 14:05 in Macro

SUMMARY BULLETS:

  • All in, the BOJ’s opting to stand pat as the currency market demands additional easing measures is the primary reason for the recent bout of yen strength (up +9% vs. the USD since its 5/17 YTD low).
  • More importantly, the USD/JPY cross has broken our intermediate-term TREND line of support at 95.95.
  • To the extent you have been short the yen or playing the Abenomics Trade in ancillary vehicles, it may prove prudent to sell/reduce your exposure upon confirmation (i.e. give it time to breathe) of a breakdown through the TREND line.
  • The long-term TAIL line of support is down at 88.67; that would be a good level to put the position back on/increase your exposure (as would a breakout back above the TREND line).
  • As one of our core research views, we remain the bears on the Japanese yen with respect to the long-term TAIL. We’re merely attempting to manage the immediate-to-potentially-intermediate-term risk of the position.

IS THE ABENOMICS TRADE OVER? - abenomics 

 

The minute-by-minute week-to-date chart of the dollar-yen tells us all we need to know about the Abenomics trade. Unlike last week’s sharp decline, the stair-step function exhibited in the week-to-date suggests that investors are slowly losing faith in the collective ability of Abe, Aso and Kuroda to deliver on the LDP’s contextually aggressive +3% nominal GDP and +2% inflation targets.

 

IS THE ABENOMICS TRADE OVER? - ddale

 

This is primarily due to the trifecta of headwinds that we outlined last Friday in a research note. Perhaps the most critical of those headwinds is the fact that the BOJ appears increasingly content to “play chicken” with market participants, meaning that they continue to stand pat on their previously outlined policies and guidance.

 

Essentially, they are asking the market to patiently trust that they’ll deliver the results that the Abe administration seeks with regards to not just ending structural deflation expectations, but instituting inflation and the broad-based expectation that inflation will be sustained. As we pointed out in a 3/15 research note titled, “JAPAN’S “INVERSE VOLCKER” MOMENT IS UPON US”, Japan’s monetary policy phase change is not unlike what the US experienced with the transition from Arthur Burns to Paul Volcker in the late 70s/early 80s.

 

Just today, BOJ policy board member Sayuri Shira warned that: A) it will take considerable time to achieve +2% inflation target given that the economy has been in a deflationary slump for 15 years and B) there needs to be more focus on the downside risks. She also affirmed previous guidance by BOJ Governor Haruhiko Kuroda that the board is not planning to implement additional programs to calm JGB market volatility, stating that “sufficient tools” already exist.

 

All in, the BOJ’s opting to stand pat as the currency market demands additional easing measures is the primary reason for the recent bout of yen strength (up +9% vs. the USD since its 5/17 YTD low). More importantly, the USD/JPY cross has broken our intermediate-term TREND line of support at 95.95.

 

To the extent you have been short the yen or playing the Abenomics Trade in ancillary vehicles, it may prove prudent to sell/reduce your exposure upon confirmation (i.e. give it time to breathe) of a breakdown through the TREND line. The long-term TAIL line of support is down at 88.67; that would be a good level to put the position back on/increase your exposure (as would a breakout back above the TREND line).

 

As one of our core research views, we remain the bears on the Japanese yen with respect to the long-term TAIL. We’re merely attempting to manage the immediate-to-potentially-intermediate-term risk of the position.

 

Darius Dale

Senior Analyst

 

IS THE ABENOMICS TRADE OVER? - 2


European Banking Monitor: Still Going the Wrong Way

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .

 

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European Financial CDS - Financials swaps across Europe were mostly wider last week, consistent with the month-over-month trend.

 

European Banking Monitor: Still Going the Wrong Way - oo. banks

 

Sovereign CDS – Sovereign swaps blew out in Portugal (+27 bps), but were only nominally wider elsewhere, and tightened again in the U.S. 

 

European Banking Monitor: Still Going the Wrong Way - oo. cds1

 

European Banking Monitor: Still Going the Wrong Way - oo. cds2

 

European Banking Monitor: Still Going the Wrong Way - oo.  cds3

 

Euribor-OIS Spread – The Euribor-OIS spread widened by 1 bps to 12 bps. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. 

 

European Banking Monitor: Still Going the Wrong Way - oo. euribor

 

ECB Liquidity Recourse to the Deposit Facility – Liquidity deposits declined by 18 billion Euros last week. The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB.  Taken in conjunction with excess reserves, the ECB deposit facility measures excess liquidity in the Euro banking system.  An increase in this metric shows that banks are borrowing from the ECB.  In other words, the deposit facility measures one element of the ECB response to the crisis.  

 

European Banking Monitor: Still Going the Wrong Way - oo. facility

 


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Morning Reads on Our Radar Screen

Takeaway: A quick look at some top stories on the Hedgeye radar screen.

Josh Steiner – Financials

Former Bank of America workers allege it lied to home owners (via Reuters)

 

Morning Reads on Our Radar Screen - radar

 

Keith McCullough – CEO

Natto Makers to Public Baths Suffer in Abenomics Divide (via Bloomberg KM note … burning currency doesn't work)

Singapore Exports Fall More Than Estimated on Electronics Slump (via Bloomberg)

British man survives 15th floor fall in New Zealand (via BBC)


Howard Penney – Restaurants

Borghese v. Borghese: Battle for a Royal Name (via New York Times)


Daryl Jones – Macro

New Iran Leader Seen as Moderating Force (via WSJ)

Energy Journal: Will Iran Set a New Path on Energy? (via MoneyBeat)

 

Brian McGough - Retail

China’s Huge Cotton Stockpile – Bullish or Bearish for Cotton Prices? (via Sourcing Journal Online) 


Kevin Kaiser – Energy

Self assessment Monday: an old letter to a client… (via Bronte Capital)        

Saipem shares plunge after new profit warning (via Reuters)

 

Matt Hedrick – Macro

Greek PM dismisses talk of early election over TV closure (via YahooNews)

Turkey Police Escalate Crackdown as Erdogan Rallies Support (via Bloomberg)

 


MONSTER WEEK IN MACAU

Average daily table revenues jumped 45% from the comparable period last year and 39% week over week.  We are moving our full month GGR projection to YoY growth of 16-20%.  We remain very bullish on Macau over the near and long term.  July looks to be another excellent month, due in part to a very easy comparison, which should keep the momentum going.

 

We are hearing the strength was broad based:  while VIP hold percentage was likely high, both VIP and Mass volumes were strong.  The rising tide lifts all boats but Galaxy and MGM Macau are performing particularly well this month.  MPEL and MGM remain our top picks in the gaming sector.  

 

MONSTER WEEK IN MACAU - pp

 

MONSTER WEEK IN MACAU - n2


MONDAY MORNING RISK MONITOR: STILL GOING THE WRONG WAY

Takeaway: Credit risk continues to rise globally with Indian banks the latest group to keep tabs on. High Yield, meanwhile, continues to deteriorate.

Key Takeaways:

Overall, risk measures continue to indicate broad-based deterioration. Swaps at the global sovereign and global banking level continue to go the wrong way. Interestingly, systemic banking system gauges like TED Spread and Euribor-OIS, remain benign. High Yield continues to get hit. The weakest links always get clipped first, so keep an eye on HY.

 

* Asian Financial CDS - It's not often that we flag Asia, but it's worth noting the huge move in Indian bank swaps. ICICI bank blew out 42 bps, or +18%, while State Bank of India was wider by 23 bps (+11%) and IDB Bank of India widened by 33 bps (+14%). These are significant outliers vs. the rest of Asia.

 

* Markit MCDX Index  – Muni swaps continued to widen. Last week spreads widened a further 8.9 bps, ending the week at 84.4 bps versus 75.5 bps the prior week. 

 

* High Yield (YTM) – High Yield rates are currently our primary gauge of risk in the sector. They rose a further 11.4 bps last week, ending the week at 6.23% versus 6.11% the prior week.

 

* U.S. Financial CDS -  U.S. Financials were wider across the board last week, with the sole exception of Sallie Mae, which tightened by 21 bps (AGO gets an honorable mention as it was flat). The big movers were GS and MS, widening by 13 bps and 11 bps, respectively. 

 

* XLF Macro Quantitative Setup – Short-term upside currently 2x downside. Our Macro team’s quantitative setup in the XLF shows 2.8% upside to TRADE resistance and 1.4% downside to TRADE support.

 

Financial Risk Monitor Summary

 • Short-term(WoW): Negative / 3 of 13 improved / 5 out of 13 worsened / 5 of 13 unchanged

 • Intermediate-term(WoW): Negative / 5 of 13 improved / 6 out of 13 worsened / 2 of 13 unchanged

 • Long-term(WoW): Positive / 5 of 13 improved / 1 out of 13 worsened / 7 of 13 unchanged

 

MONDAY MORNING RISK MONITOR: STILL GOING THE WRONG WAY - 15

 

1. U.S. Financial CDS -  U.S. Financials were wider across the board last week, with the sole exception of Sallie Mae, which tightened by 21 bps (AGO gets an honorable mention as it was flat). The big movers were GS and MS, widening by 13 bps and 11 bps, respectively. BAC and C weren't far behind, widening by 8 bps each. For reference, Wells Fargo continues to be perceived as safest with a modest 1 bp widening, followed by JPM at +4 bps. Overall, swaps widened for 25 out of 27 domestic financial institutions.

 

Widened the least/ tightened the most WoW: SLM, AGO, AON

Widened the most WoW: GS, RDN, C

Widened the least WoW: WFC, AON, JPM

Widened the most MoM: AXP, TRV, ALL

 

MONDAY MORNING RISK MONITOR: STILL GOING THE WRONG WAY - 1

 

2. European Financial CDS - Financials swaps across Europe were mostly wider last week, consistent with the month-over-month trend.

 

MONDAY MORNING RISK MONITOR: STILL GOING THE WRONG WAY - 2

 

3. Asian Financial CDS - Indian banks posted significant widening. ICICI bank blew out 42 bps, or +18%, while State Bank of India was wider by 23 bps (+11%) and IDB Bank of India widened by 33 bps (+14%). In Japan and China, financials swaps were flat to modestly wider.

 

MONDAY MORNING RISK MONITOR: STILL GOING THE WRONG WAY - 17

 

4. Sovereign CDS – Sovereign swaps blew out in Portugal (+27 bps), but were only nominally wider elsewhere, and tightened again in the U.S. 

 

MONDAY MORNING RISK MONITOR: STILL GOING THE WRONG WAY - 18

 

MONDAY MORNING RISK MONITOR: STILL GOING THE WRONG WAY - 3

 

MONDAY MORNING RISK MONITOR: STILL GOING THE WRONG WAY - 4

 

5. High Yield (YTM) Monitor – High Yield rates rose a further 11.4 bps last week, ending the week at 6.23% versus 6.11% the prior week.

 

MONDAY MORNING RISK MONITOR: STILL GOING THE WRONG WAY - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index was flat last week at 1793.21.

 

MONDAY MORNING RISK MONITOR: STILL GOING THE WRONG WAY - 6

 

7. TED Spread Monitor – The TED spread fell 0.2 basis points last week, ending the week at 22.975 bps this week versus last week’s print of 23.215 bps.

 

MONDAY MORNING RISK MONITOR: STILL GOING THE WRONG WAY - 7

 

8. Journal of Commerce Commodity Price Index – The JOC index fell -2.6 points, ending the week at 0.32 versus 2.9 the prior week.

 

MONDAY MORNING RISK MONITOR: STILL GOING THE WRONG WAY - 8

 

9. Euribor-OIS Spread – The Euribor-OIS spread widened by 1 bps to 12 bps. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. 

 

MONDAY MORNING RISK MONITOR: STILL GOING THE WRONG WAY - 9

 

10. ECB Liquidity Recourse to the Deposit Facility – Liquidity deposits declined by 18 billion Euros last week. The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB.  Taken in conjunction with excess reserves, the ECB deposit facility measures excess liquidity in the Euro banking system.  An increase in this metric shows that banks are borrowing from the ECB.  In other words, the deposit facility measures one element of the ECB response to the crisis.  

 

MONDAY MORNING RISK MONITOR: STILL GOING THE WRONG WAY - 10

 

11. Markit MCDX Index Monitor – Last week spreads widened 8.9 bps, ending the week at 84.4 bps versus 75.5 bps the prior week. The Markit MCDX is a measure of municipal credit default swaps. We believe this index is a useful indicator of pressure in state and local governments. Markit publishes index values daily on six 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. We track the 16-V1. 

 

MONDAY MORNING RISK MONITOR: STILL GOING THE WRONG WAY - 11

 

12. Chinese Steel – Steel prices in China fell 1.4% last week, or 47 yuan/ton, to 3375 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

 

MONDAY MORNING RISK MONITOR: STILL GOING THE WRONG WAY - 12

 

13. 2-10 Spread – Last week the 2-10 spread widened to 186 bps, 1 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR: STILL GOING THE WRONG WAY - 13

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 2.8% upside to TRADE resistance and 1.4% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: STILL GOING THE WRONG WAY - 14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT


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