Frothy

Client Talking Points

ITALY

As the U.S. "Burns the Buck" (see Obama’s spending ramp plan), #StrongEuro continues to perpetuate European purchasing power. Italy’s Service PMI has crossed the important 50 line to 52.9 in February (versus 49.4 January). Being long Italy’s stock market (up +8.3% year-to-date) sure beats banging your head against the wall on whether the Dow should be “up” or not yet YTD.

RUSSIA

Mr. Putin may have ramped hedgie S&P 500 short positions for a day (there was a SPX net short position in Index + Emini of -41,486 futures/options contracts into the event), but both the Ruble and the Russian Stock market are still implying that being long anything Russian sucks. Russian Trading System down -0.4% after its 1-day bounce. It's still down over -18% YTD 

SENTIMENT

Both front month VIX and the bear side of the II Bull/Bear survey just dropped right back to where they were on Jan1. No, that’s not a good thing. The Bull/Bear Spread has ripped right back towards its all-time highs at +3950 basis points wide to the bull side with only 15.1% admitting they’re bearish. That is a generational low.

Asset Allocation

CASH 37% US EQUITIES 3%
INTL EQUITIES 10% COMMODITIES 16%
FIXED INCOME 14% INTL CURRENCIES 20%

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

Back to the all-time highs for US stocks is putting sentiment right back to where it was on DEC 31 #frothy @KeithMcCullough

QUOTE OF THE DAY

“If you’re limiting yourself to what you experienced, you are going to be in trouble. . . . I studied the Great Depression. I studied the Weimar Republic. I studied important events that didn’t happen to me.” -Ray Dalio 

STAT OF THE DAY

The EU is ready to provide $15 billion of financial support to Ukraine over the next couple of years via a series of loans and grants, European Commission President Jose Manuel Barroso said on Wednesday.