Inflation Matters (Big Time)

Client Talking Points

#InflationAccelerating

Accelerating inflation is still Macro Theme #1 here at Hedgeye. Check out the CRB Index which closed up another +1.1% yesterday to up +7.8% year-to-date (compare that with the S&P 500 which was -0.65% on the day, down -1.1% YTD). There is no question that this is a tax on U.S. consumption expectations. What's that? Consumer Discretionary has tumbled -3.2% YTD? Yes, exactly.

YEN

The Yellen Fed moving to “rate guidance” (i.e. price fixing) along with Treasury Secretary Jack Lew encouraging the world to reflate is totally nuts. Or at least nuts enough that even the Yen looks healthier than the US Dollar right now (policy is causal). The Nikkei fell -2.2% overnight to down -11.3% year-to-date.

Financials

Watch the Financials (XLF) very closely. As the US Dollar and Rates go, so will go the Financials (they were down -1.4% yesterday) and the market. The long-end of the yield curve needs to rise for the XLF to work – not get “rate guided” down by some un-elected bureaucrat.

Asset Allocation

CASH 53% US EQUITIES 0%
INTL EQUITIES 6% COMMODITIES 16%
FIXED INCOME 10% INTL CURRENCIES 15%

Top Long Ideas

Company Ticker Sector Duration
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.

LVS

Las Vegas Sands has transformed into that rare stock that should appeal to “Growth,” “Value”, and “Dividend/Cash Flow” investors alike.  The stock now yields higher than the S&P 500 (43% sequential quarterly dividend increase), and the company is buying back $200 million + in stock a quarter, yet still retains a pristine balance sheet.  The significant capital deployment opportunities can be funded out of annual free cash flow of nearly $4 billion. Management has indicated they are willing to raise leverage 1.5x which would still keep them well below industry average and if directed toward dividends, would result in a yield of over 6%.  And we haven’t gotten to the $10-14 billion in mall assets that could be monetized. We know of no other stocks in consumer land that provide this combination of cash flow, growth, cash return to shareholders, and value levers.

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.

Three for the Road

TWEET OF THE DAY

GOLD: up another +0.2% to +9.3% YTD with US #GrowthSlowing @KeithMcCullough

QUOTE OF THE DAY

“Eat me alive right now.” - Zinetula Bilyaletdinov, head coach of Russia's hockey team which was just eliminated

STAT OF THE DAY

In a play to dominate messaging on phones and the Web, Facebook has acquired WhatsApp for $19 billion. WhatsApp has been able to hold its weight against messaging heavyweights like Twitter, Google and Microsoft's Skype. WhatsApp has upwards of 450 million users, and is adding an additional million users every day. It's the most popular messaging app for smartphones, according to OnDevice Research. (CNN)


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