To Chase Or Not to Chase?

Client Talking Points

UST 10YR

After failing our Hedgeye TREND resistance of 2.81%, yields dropped and bonds rallied to their highs for the month yesterday. We think a test of 2.54% for the 10-year is still in the cards if we’re right on U.S. economic growth slowing and GDP falling back towards the 2% handle.

FINANCIALS (XLF)

Unsurprisingly (with Dollar Down, Rates Down) the Financials (XLF) were down yesterday, leading decliners alongside the Transports. Inflation slows earnings-per-share growth for the Transports, but the Fed having 0% credibility fighting inflation keeps Yield Spread compression in play (10s minus 2s = -5 basis points for the week.)

OIL

Oil is holding its $108.02 support (Brent) and looks primed for a breakout. It's just one of many commodity #InflationAccelerating signals in my model right now that you can make money on from the long side. Energy (XLE) looks great

Asset Allocation

CASH 43% US EQUITIES 0%
INTL EQUITIES 6% COMMODITIES 18%
FIXED INCOME 16% INTL CURRENCIES 17%

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

COMMODITIES: inflation continues to slow global growth - CRB Index +7.9% YTD vs $SPY -0.2% @KeithMcCullough

QUOTE OF THE DAY

"Most of the shadows of this life are caused by our standing in our own sunshine." - Ralph Waldo Emerson

STAT OF THE DAY

Some numbers from YouTube’s own blog that put some perspective on its penetration into our culture and time.

  • 1 billion unique monthly visitors
  • 6 billion hours of videos are watched every month
  • YouTube reaches more U.S. adults ages 18-34 than any cable network

 


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