The Russian Bear

Client Talking Points

RUSSIA

Just when it was looking like it was safe to get back in the water. The Ukraine suddenly matters (a lot) to investors, with Europe off 2-3% and S&P 500 futures down ~20 handles. World markets are doing to Vladimir Putin what Barack Obama can't. The Russian stock market is getting absolutely hammered down -13.8%. It's swan dived to -24.2% year-to-date. Got correlation risk?

U.S.

In other non-Crimean news, US GDP #GrowthSlowing sequentially (from 4.12% in Q313 to 2.37% in Q413) is only the beginning of the Down Dollar (USD down another -0.7% last week, and down 3 of the last 4 weeks), Down Rates (UST 10yr Yield -38bps YTD) thing. Both US monetary and fiscal policy going dovish on the margin is just fantastic! Because, without going to sub 2% US GDP growth and plus 2% made-up-reported-inflation growth, how the heck else could the Keynesians blame Russia?

S&P 500

To be clear, we don’t go with the whole how markets and GDP “feel” thing. You can overpay to get that from someone else. While the S&P 500 was up a whopping +0.6% for 2014 YTD (it’s March fyi), it's mainly the inflation and #GrowthSlowing parts of the market leading: Healthcare (XLV) +7.2% Utilities (XLU) +6.5% Basic Materials +1.9%. The most meaningful parts of the economic cycle (the consumption economy) are actually down YTD: Consumer Staples (XLP) -1.5%. Financials (XLF) -0.7% Industrials (XLI) 0.4%.

Asset Allocation

CASH 44% US EQUITIES 0%
INTL EQUITIES 8% COMMODITIES 16%
FIXED INCOME 14% INTL CURRENCIES 18%

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

EUROPE: train wreck morning w/ war markets like Poland -4.9%, Hungary -4.5%, Austria -3.9% @KeithMcCullough

QUOTE OF THE DAY

You must obey the law, always, not only when they grab you by your special place. -Vladimir Putin

STAT OF THE DAY

Rising tension over Ukraine slammed Russian financial markets Monday, prompting the central bank to hike interest rates as the ruble plunged. The ruble, already one of the weakest currencies so far this year, fell as much as 3% versus the U.S. dollar before posting a small recovery. The ruble has declined by more than 10% this year as Russia experiences a significant slowdown and weak future growth prospects. (CNN)


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