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DRI: CHANGE IS INEVITABLE

In another sign of the increasing influence of activist investors, the pace of activist campaigns resulting in board seats is running at a five-year high.  

 

According to FACTSET, in the first two months of 2014, activist investors were granted one or more board seats at 16 U.S. companies, the most since 2009 when 22 campaigns at 21 distinct companies resulted in board seats. 

 

These trends are supportive of our bullish bias toward Darden.  We contend that buying DRI today represents a generational opportunity in the restaurant space, as the stock is currently trading at a significant discount to its underlying asset value.  In our view, there remains the potential for tremendous upside if we see Starboard successfully stop the spin-off of Red Lobster and we see a forward-thinking, seasoned restaurant operator running the company. 

 

The FACTSET study cited several factors which may be contributing to this recent concessionary approach of U.S. companies.  Perhaps the most important one is the widespread support activists are getting from mainstream institutional investors – a factor which we believe is being lost on Darden’s current management team.  The study showed that 60% of the proxy fights for board seats that went to an actual vote in 2013 resulted in a partial or outright victory for the activist. That's the highest win rate in the 13 years we have been tracking this data. By comparison, in 2003 the activist win rate was only 39%.

 

Darden’s current CEO has done nothing but destroy shareholder value over the past five years.  The company finds itself in an eerily similar position as MCD, SBUX, and EAT, not too long ago, when these companies tried appealing to the masses and began growing units too fast.  Not surprisingly, the road to recovery for each company was essentially the same, barring some obvious nuances.

 

Change is in the air at Darden. 

 

DRI: CHANGE IS INEVITABLE - activi

 

 

Howard Penney

Managing Director

 

Fred Masotta

Analyst


Sell Some Gold?

Client Talking Points

SP500

It took a few weeks for overbought bubbles to deflate, but the S&P 500 dropping from its year-to-date high of 1881 to 1841 left its mark with immediate-term TRADE oversold. The SPX risk range is now 1828-1867.Trade it. 

OIL

Oil broke Hedgeye TREND support of $108.57 (Brent) last week and is down another -0.7% this morning. Seems that Saint Patty himself knows that with #InflationAccelerating, U.S. consumers need a Tax Cut at the pump. This could be it. Consensus is way long on crude.

GOLD

Gold’s immediate-term TRADE overbought line is $1,385 within a big league breakout ($1,328 is now TRADE support). Up a whopping +15% year-to-date (versus the Dow, which is down -3.1%), it’s easy to sell some Gold up here and buy best ideas in U.S. stocks. At this price, my top three are Lorillard (LO), Owens Corning (OC), and T. Rowe Price Group (TROW). 

Asset Allocation

CASH 42% US EQUITIES 8%
INTL EQUITIES 10% COMMODITIES 12%
FIXED INCOME 12% INTL CURRENCIES 16%

Top Long Ideas

Company Ticker Sector Duration
OC

Construction activity remains cyclically depressed, but has likely begun the long process of recovery.  A large multi-year rebound in construction should provide a tailwind to OC shares that the market appears to be underestimating.  Both residential and nonresidential construction in the U.S. would need to roughly double to reach post-war demographic norms.  As credit returns to the market and government funded construction begins to rebound, construction markets should make steady gains in coming years, quarterly weather aside, supporting OC’s revenue and capacity utilization. 

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.

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.

Three for the Road

TWEET OF THE DAY

RUSSIA: +1% for the Russian Trading System, but still crashing YTD -25.7% @KeithMcCullough

QUOTE OF THE DAY

"We learn by doing." – Aristotle

STAT OF THE DAY

More than 78,600 clean energy jobs were created in 2013, according to research group Environmental Entrepreneurs. Though impressive, clean energy job creation is actually down about 30% since 2012, the group says, due to economic headwinds and policy shifts. (Fox)


THE LEISURE LETTER (3/17/2014)

Takeaway: More money laundering issues in Macau

TICKERS: SJM, 1928.HK, LVS

 

 

EVENTS TO WATCH:  UPCOMING EARNINGS/CONFERENCES

Today

  • SNOW 5 p.m. earnings call            

Tuesday, March 18

  • Hedgeye Expert Call with Gaming REIT Attorney Ed Glazer at 11am please contact sales@hedgeye.com

Wednesday, March 19

  • Galaxy Entertainment:  FY 2013 annual results
  • iGaming North America 2014 thru Friday, Planet Hollywood Las Vegas

Thursday, March 20

  • None       

Friday, March 21

  • None       

 

COMPANY NEWS

SJM – The Tycoon Club high-limit gaming salon has opened in SJM Holdings Ltd’s Grand Lisboa.  The Tycoon Club, on the upper first floor of the casino, has 740 square metres of space, around 10 gaming tables and 30 slot machines.

Takeaway: Capacity constrained SJM eking out growth.

 

Sand China Ltd – The company announced non-executive director William Lau Wong will retire after its annual general meeting, scheduled for May 30, due to other business commitments.  Also, the Company said non-executive director Jeffrey Howard Schwartz will resign at the same time also because he has other business commitments. Previously, SCL announced non-executive director Irwin Siegel would retire following the May 30th meeting.

 

MGM – The newly remodeled New York-New York Brooklyn Bridge Plaza Experience has opened to the public  

 

GLPI – William J. Clifford unloaded 100,000 shares of the company’s stock on the open market in a transaction dated Tuesday, March 11th. The shares were sold at an average price of $37.42, for a total value of $3,742,000.00. Following the sale, the chief financial officer now directly owns 187,204 shares in the company, valued at approximately $7,005,174.

Takeaway:  It is interesting to see such a large insider stock sale this early in the life of this new company.  Apparently, no acquisitions are imminent.  Maybe the stock is fairly valued...

  

INDUSTRY NEWS

GAMING               

Macau – The junket business was rocked by further negative headlines when it was announced a Neptune Group shareholder was detained by Hong Kong authorities for suspicion of money laundering when he was found to have HKD 200 million in cash in his Hong Kong apartment. - (Macau Daily Times)

Takeaway:  The 3rd related story in a week along with last week’s Dept of State request as well as the Union Pay Card story. 

 

Macau – Joseph Lau, the billionaire chairman of real estate developer Chinese Estates Holdings of Hong Kong, was found guilty by a Macau court on Friday of corruption and money laundering in connection with the payment of a HK$20 million, or $2.6 million, to former Macau public works chief Ao Man-long in a money-for-land deal.

Takeaway:  Guilty verdict was expected

 

Revel – 75-80 Casino employees delivered a petition to the property’s management office, announcing their desire to form a union. 

Takeaway: Not sure the property can handle a higher cost structure

 

MACRO

Hedgeye remains negative on consumer spending and believes in more inflation.  Following  a great call on rising housing prices, the Hedgeye Macro/Financials team is turning decidedly less positive. 

Takeaway:  We’ve found housing prices to be the single most significant factor in driving gaming revenues over the past 20 years in virtually all gaming markets across the US.


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Detached From Reality

This note was originally published at 8am on March 03, 2014 for Hedgeye subscribers.

“They have a detached-from-reality, academic, floating abstraction form of intelligence.”

-John Allison

 

While I was flying to LA last night (during the Oscars, because that’s how I roll), that is not a quote about Hollywood. That’s what the former CEO of one of the best banks in American #history said about the Fed’s finest.

 

That free markets would make better price decisions than elitist central planners (members of the Federal Reserve) should not be a surprise. Ludwig von Mises proved the futility of central planning in his numerous books, including The Theory of Money and Credit (1913), Socialism (1922), and Human Action (1940).” (The Financial Crisis And The Free Market Cure, pg 34)

 

If you haven’t objectively studied any of those four books, no worries. Bush, Obama, Bernanke, and Yellen haven’t either.

 

But you can watch the real-world economics of currencies burning the purchasing power of their peoples this morning in Crimea. I’m hearing that with the Ukrainian currency crashing (-21% YTD), the Ukraine’s stock market being up +43.9% YTD (in burning FX terms) is bullish.

 

Detached From Reality - yellow

 

Back to the Global Macro Grind

 

In Burning Bucks, the US Stock market was “up for 2014” too – for like 1.5 days. But, after US GDP almost getting cut in half sequentially, and some geopolitical risk pin-action in equity futures today, that will change. Life that is detached from reality generally does, in a hurry.

 

My inbox is jammed. I can’t count how many emails I received on Friday saying that the “market is up on a GDP slowdown – your research call feels right, but the market doesn’t care”, or something like that…

 

To be clear, I don’t go with the how markets and GDP “feel” thing. You can overpay to get that from someone else. While the SP500 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 that:

  1. Healthcare (XLV) = +7.2%
  2. Utilities (XLU) = +6.5%
  3. Basic Materials = +1.9%

The most meaningful parts of the economic cycle (the consumption economy) are actually down YTD:

  1. Consumer Staples (XLP) = -1.5%
  2. Financials (XLF) = -0.7%
  3. Industrials (XLI) = -0.4%

But no worries, as long as you aren’t long anything like Kinder Morgan (KMI, KMP, KMR) in Bernanke’s overvalued Yield Chasing space – or short anything that loves US #Stagflation (like Gold +11.4% YTD), you’re killing it with the whole “market is up” thing.

 

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 wk, and down 3 of the last 4 weeks), Down Rates (UST 10yr Yield -38bps YTD) thing.

 

And, looking at the components of the US GDP report:

  1. The Deflator (made-up inflation rate) bounce, big time, off its almost 50 yr low
  2. Government Spending dropped -1.05% sequentially from a GDP contribution perspective

So, the key vectors in the P (Policy) piece of the Hedgeye GIP (Growth, inflation, Policy) model are going to require the US government to:

  1. MONETARY vector – have the Fed start telling you we need a Policy To Inflate in order to amplify “inequality”
  2. FISCAL vector – have Obama ramp up deficit spending again in order to pretend to slow the “inequality”

I know, 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?

 

I’m actually hearing from my contacts in Miami that the Mexicans are going to blame the Russians too. Instead of ripping on US GDP #GrowthSlowing on Friday, Mexico’s stock market dropped to -2.4% on the wk to -9.2% YTD.

 

Yep, life in Latin America is starting to suck. With the whole deficit-spending-debt-ramp thing, Venezuela and Argentina are reminding people that Latin American stock markets can go down on stagflation too (MSCI LATAM Index -0.1% last wk to -8.1% YTD).

 

So cheer up – the “market is up.” Away from food and energy prices ripping humanity another new one last week:

  1. CRB Foodstuffs Index +3.2% to +10.5% YTD
  2. Oats (I’m probably just a rich guy eating the stuff) +7.1% to +42.2% YTD
  3. Coffee up another +6.4% w/w to + 59.6% YTD

There’s not a lot to worry about re: the whole #InflationAccelerating thing either… Unless you aren’t detached from reality, of course.

 

Our immediate-term Risk Ranges are now as follows (our Top 12 macro ranges are in our Daily Trading Range product):

 

SPX 1825-1861

VIX 13.28-16.99

USD 79.59-80.31

EUR/USD 1.36-1.38

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Detached From Reality - G7 VIX

 

Detached From Reality - virt55



Overbought, Oversold

“A good laugh and a long sleep are the two best cures.”

-Irish Proverb

 

Indeed. Happy Saint Patty’s Day to you! For we Irish-Scottish-Canadian-American mutts, it’s a good day to wake up with a smile. My two month old daughter had a great big one on her face before I left home this morning. Life is good.

 

After signaling immediate-term TRADE oversold on Friday (Gold and VIX signaled overbought), US Equity Futures are smiling this morning too. And they should be – there’s nothing like reviving the animal spirits of a bubble that deflated last week.

 

So sell some of that Gold and buy yourself whatever you like. Amongst others, we’d go with Lorillard (LO), Owens Corning (OC), and T. Rowe Price (TROW). The two best cures for a down US stock market YTD are oversold signals and up futures!

 

Back to the Global Macro Grind

 

Immediate-term TRADE overbought and oversold signals are what they are – risk management tools that should help augment your investment process, no matter what your investment duration is…

 

Another way to think about this is what I call Fading Beta (or more commonly referred to as selling high and buying low). I get that “it is often that a person’s mouth broke his nose” (Irish Proverb!), so I’m not trying to be cute when I write it like that. It’s just what I try to do.

 

Here are some clean cut immediate-term TRADE overbought signals from Friday:

  1. Gold immediate-term TRADE overbought = $1385
  2. VIX (front month) immediate-term TRADE overbought = 17.99
  3. Bonds overbought (yields oversold) at 10yr UST yield = 2.62%

In other words, the #InflationAccelerating-slows-growth asset allocation of Long Gold, Bonds, and Fear was overbought at the following 2014 YTD gains:

  1. Gold +15.1% YTD
  2. Bonds (10yr Yield) -37 basis points YTD to 2.65%
  3. Fear (VIX) = +29.9% YTD

Sure, you could have very well broken your own nose banging it against a wall trying to get back to break-even in something like:

  1. Dow Jones Industrial Index -3.1% YTD
  2. US Consumer Discretionary Stocks (XLY) -1.5% YTD
  3. SP500 -0.4% YTD

But why the stress? Why not relax a little and buy your favorite US stocks when they are on sale? Reality is that this business isn’t that easy. We’re all stressed – and that’s the point about having a pint every now and then. Takes the ole’ edge off!

 

You could have bought stocks (twice) at the all-time bubble highs (intraday moves toward 1881 on the SP500) on both Friday March 6th and Tuesday March 11th. Or you could have bought them 40 S&P points lower on March 14th at 1841. There’s a difference.

 

#Timing matters. So do counter-consensus Global Macro Themes like #InflationAccelerating. Here’s the update on that asset allocation shift as of last week:

  1. CRB Food Index flat (in a down US equity market) last week at +15.3% YTD
  2. Lean Hogs up another +6.1% last wk to +27.7% YTD
  3. Coffee prices up another +0.8% last wk to +75.7% YTD

I know. I know. I’m focused too much on what humans eat and drink for breakfast. How about slow-growth-yield-chasing?

  1. Silver +2.4% last week to +10.5% YTD
  2. Utilities (XLU) +2.3% to +7.7% YTD
  3. REITS flat (in a down US Equity market wk) at +8.3% YTD

Yep, that’s the deal – and while you can’t eat a REIT, you can definitely pay your inflating rent, and like it. Or not. Oh yes, Mucker “where the tongue slips, it speaks the truth.”

 

So don’t confuse oversold signals in US Equities (or overbought signals in Gold, Bonds, Utilities, etc.) with a new narrative, because #InflationAccelerating and #GrowthSlowing in Q114 are still here to stay.

 

For those of us who can buy inflation protection, it’s fine. We just don’t want you to buy the all-time bubble highs on overbought signals. After all, as another Irish Proverb goes, “if you buy what you don’t need, you might have to sell what you do.”

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.61-2.75%

SPX 1

Nikkei 148

VIX 15.01-18.34

USD 79.21-79.86

Gold 1

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Overbought, Oversold - Chart of the Day

 

Overbought, Oversold - Virtual Portfolio


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