Poking the Bear

Client Talking Points

CHINA

Even the Chinese can’t make up numbers that are less than awful at this point. The Shanghai Composite went down -2.9% overnight to -5.5% for 2014 year-to-date. But look on the bright side: that beats Japan’s Nikkei which is down -7.1% YTD.

RUSSIA

Simply said, Vladimir Putin’s currency and stock markets are crashing. Just look at the Russian Trading System which is down another -0.5% this morning. All told, it’s been down -24% since October and down -19.7% YTD. The writing is on the wall.

UST 10YR

The 10-year yield of 2.79% this morning has failed to confirm a bond yield breakout above Hedgeye’s TREND (3 months or more) resistance of 2.81%. The payroll print was fun, but the 3 month TREND in payrolls is bearish and, more importantly, the forward looking NSA Jobless Claims series (rolling year-over-year) has now been on a negative slope for 8 consecutive weeks.

Asset Allocation

CASH 20% US EQUITIES 6%
INTL EQUITIES 12% COMMODITIES 18%
FIXED INCOME 24% 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

CRB Commodities Index +9.6% YTD vs Dow -0.7% as inflation slows US consumption growth @KeithMcCullough

QUOTE OF THE DAY

"The most beautiful thing we can experience is the mysterious.” -Albert Einstein

STAT OF THE DAY

The amount of global debt has soared over 40% to $100 trillion since the first signs of the financial crisis as governments borrowed to pull their economies out of recession and companies took advantage of record low interest rates. The $30 trillion increase from $70 trillion between mid-2007 and mid-2013 compares with a $3.86 trillion decline in the value of equities to $53.8 trillion, according to the Bank for International Settlements and data compiled by Bloomberg. (Bloomberg)


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In the past six months, U.S. stock indices are up between +12% and +18%.

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