TODAY’S S&P 500 SET-UP – April 2, 2014
As we look at today's setup for the S&P 500, the range is 32 points or 1.57% downside to 1856 and 0.13% upside to 1888.
CREDIT/ECONOMIC MARKET LOOK:
MACRO DATA POINTS (Bloomberg Estimates):
WHAT TO WATCH:
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
The Hedgeye Macro Team
This note was originally published at 8am on March 19, 2014 for Hedgeye subscribers.
"I am sometimes a fox and sometimes a lion. The whole secret in government lies in knowing when to be one or the other."
The old farm yard analogy of a fox licking its chops and entering the proverbial hen house can likely be applied to many current situations. On the global macro front the situation in the Ukraine and stand-off, of sorts, between the West and Vladmir Putin is likely the most relevant.
Certainly, the foxes in the Kremlin are licking their chops since annexing the former Soviet territory of Crimea. Is this the beginning of another Cold War? It is likely not. But the ineffectiveness in combating the Russian move certainly increases the likelihood of additional and more aggressive moves by the Russians. (By ineffectiveness, I read yesterday that the current, proposed sanctions by the U.S. would freeze the assets of a mere seven Russian citizens.)
Late yesterday, the first fatality occurred as a Ukrainian military base in Crimea was overtaken by Russian / Crimean troops. Albeit only one serviceman was shot, and reports are still conflicted as to how and by whom, the response by the leadership in the Ukraine is to now allow their military to use force as needed in Crimea.
Perhaps most telling yesterday was Vladmir Putin’s hour long speech, specifically this excerpt:
“Our Western partners headed by the United States prefer not to be guided by international law in their practical policies, but by the rule of the gun. They have come to believe in their exceptionalism and their sense of being the chosen ones. That they can decide the destinies of the world, that it is only them that can be right.”
Clearly, the old Russian fox Putin is licking his lips.
Back to the Global Macro Grind . . .
Assuming hostilities don’t accelerate in Crimea, the most significant impact from the annexation of Crimea by Russia is likely to be on the upcoming midterm elections. The media has been very clearly painting President Obama and his administration to have been ineffective in dealing with the Russians and Obama’s approval rating is starting to reflect as much.
According to the RealClearPolitics approval aggregate, Obama’s disapproval rating is now 52 and his approval rating is 43, for a spread of 9. Gallup runs the longest running approval poll and the spread in that poll is even wider. Currently, according to Gallup, Obama’s approval is at 41. This is the worst approval rating of Obama’s Presidency and lower than President George W. Bush at the same time in his Presidency.
The fact that President Obama’s approval rating is in free fall is likely to be felt by the Democrats in the upcoming midterms. In fact, the generic congressional poll aggregate, which effectively asks the respondent to say whether they would vote Republican or Democrat in congressional races, is basically tied (with the Republicans actually leading in some polls). This is an inflection point as the Democrats have led in this generic poll very consistently since the last mid-term elections.
Speaking of polls, yesterday our daily Hedgeye poll asked, “Are you feeling the price pinch at the breakfast table?” More than 75% of the respondents responded, yes. This obviously shouldn’t be a surprise given the fact that coffee, orange juice and lean hog prices have had almost parabolic moves in the year-to-date. Of course, for those consumers who don’t eat breakfast (or eat for that matter), they may yet be immune to food based inflation!
As my colleague Christian Drake highlighted yesterday in an intraday note, inflation is also percolating in other parts of the economy. Specifically, CPI Services growth continues to hold above 2% and the growth trend looks similar even if you strip out the Shelter and Energy components of the Index.
Even as most consumers are seeing inflation, the bigger question will be whether the Fed sees it. Fed Chair Janet Yellen will get a chance to address this in her first news conference today at 2:30 pm (following the Fed statement at 2:00 pm). Certainly the stock market is seeing the consumer getting squeezed as well, as the consumer discretionary and consumer staples sectors are both down on the year.
Speaking of the stock market, despite the somewhat tepid return in the year-to-date, (the SP500 is only up just over 1% in the year-to-date and most major markets are down on the year), the latest US Investor's Intelligence poll shows that a predominance of investors remain bullish.
According to the poll:
To be fair, it is likely difficult to envision much of a correction when the stock market is barely up on the year, but nonetheless investor complacency, at least based on this polls, seems noteworthy to say the least.
Our immediate-term Global Macro Risk Ranges are now (we have 12 ranges in our Daily Trading Range product):
UST 10yr Yield 2.62-2.74%
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
Takeaway: A Starboard investor presentation was deservedly highly critical of Darden’s current management team and is a must-read.
Starboard released an investor presentation this morning, detailing its analysis of Darden management and the proposed Red Lobster spin-off. Starboard believes Darden’s real estate portfolio is worth approximately $4 billion and that separating Red Lobster and its real estate from Darden’s portfolio would destroy approximately $850 million in value.
The presentation was deservedly highly critical of Darden’s current management team and is a must-read for interested parties. Below, we highlight what we believe are the most important quotes from the 100+ page deck.
A Perpetual Self-Serving Agenda
Shareholder-Unfriendly Corporate Governance
Premeditated, Misleading Statements
The Ill-Advised Wall of Silence
This research note was originally published April 1, 2014 by Hedgeye Restaurant Sector Head Howard Penney (@HedgeyeHWP).
General Motors CEO Mary Barra testified before Congress today that the company is still investigating why the company failed to order a recall until February 2014 on cars with flawed ignition switches that killed at least 13 people.
“Sitting here today, I cannot tell you why it took years for a safety defect to be announced in that (small-car) program, but I can tell you that we will find out.When we have answers, we will be fully transparent with you, with our regulators and with our customers.”
We wanted to get your opinion in today’s poll: Is GM hiding something?
At the time of this post, 65% responded YES; 35% said NO.
Of those who voted YES, one responder wrote it’s just like when “Ford lied about Pinto and explosive gas tanks on rear view collisions. Too expensive to fix and they felt a ‘little’ loss of life justified saved cost of recall.”
On the other side, one NO voter said, “There's a difference between A) malicious intent in hiding or burying information and B) being stupid, poorly structured, mismanaged, and just a piss-poor quality organization. Did someone, somewhere, inside GM hide something? Probably. They should be fired. But is there a valid conspiracy theory that the organization is deliberately hiding information? Probably not. It just needs to be reorganized and run like a real business.”
Another NO commenter explained, “If you study the Ford Pinto fires case, you can uncover how recall works and the challenges behind it. You must identify a problem, find traceable cause, and then decide if the recall is needed. That can take time. When thousands die in fully functional cars, it’s hard to identify real traceable problems.”
Hedgeye Managing Director Moshe Silver also argued NO, summing up that “someone within GM is probably hiding something, but they've been taking advantage of weak spots in the oversight structure and hiding it from management and the board too. It’s highly unlikely that the corporate entity is hiding anything relating to the recalls. Every organization has its blind spots. The bigger the organization - and the more the compensation is detached from performance - the bigger the blind spots become.”
Sands China seeks to buy back its stock which would effectively increase LVS’s stake and modest value.
CALL TO ACTION:
While trading in Macau stocks could be choppy, a fully implemented share repurchase program for Sands China Limited would be positive for LVS shares. We believe SCL creates value for LVS shareholders with cash that would otherwise be earmarked for dividends or sitting in the bank. Macau generates LVS’s highest valued cash flow stream so to the extent that SCL represents a higher percent of total EBITDA, that value should accrue to LVS shares.
While reviewing our 1Q14 notes and company filings, we were pleased to see a proposal in Sands China’ proxy to repurchase up to 10% of the issued shares. The proposal is Ordinary Resolution #5 on the Proxy for the Annual Shareholders Meeting scheduled for Friday, May 10, 2014 at 11 am at the Venetian Macao-Resort-Hotel.
Since Las Vegas Sands owns 70.17% of the outstanding shares of Sands China Limited, we expect this resolution to pass. Said differently, because the public float of Sand China Limited is 29.83%, the outcome is pre-ordained.
While the resolution if approved would allow for a 10% share repurchase, based on our read of the Hong Kong Stock Exchange listing requirements, Sand China Limited may reduce the public float to 25% without any approval requirements.
However, based on its equity market capitalization, SCL may petition the Hong Kong Stock Exchange for an exception to the 25% float requirement as the listing rules allow for a lower float of between 15% and 25% based on large equity market capitalization (see the rules below).
For LVS to achieve a 75% ownership stake in Sand China Limited, Sand China Limited would need to acquire 519,440,665 shares (based on 8,063,193,845 shares outstanding). Assuming HKD70.00/share, a 519.4 million share repurchase requires about US$4.69 billion. The 519.4 million shares represents about 6.44% of the total outstanding Sands China Limited shares.
For LVS to achieve a 80% ownership stake in Sand China Limited, Sand China Limited would need to acquire 990,925,239 shares (based on 8,063,193,845 shares outstanding). Assuming HKD70.00/share, a 990.9 million share repurchase requires about US$8.94 billion. The 990.9 million shares represents about 12.3% of the total outstanding Sands China Limited shares.
We believe because the Macau EBITDA is growing faster and is valued higher than the EBITDA from either Singapore or Las Vegas, such a repurchase makes sense. Also, as a result of the greater ownership interest in Sand China Limited (Macau), this value is beneficial to LVS in the form of greater share of future Macau dividends.
The buyback vs dividend use of cash flow is normally a slam dunk from a tax perspective. However, the Macau Gaming Tax offset already shields SCL dividend from US taxes. As of December 31, 2013, LVS maintained a deferred tax asset of $1.280 billion for U.S. foreign tax credit carry forwards. LVS’s incentive would clearly lie in owning more of the EBITDA stream and the value creation imbedded therein. Taxes are not relevant.
ADDENDUM: HKSE LISTING REQUIREMENTS
There must be an open market in the securities for which listing is sought. This will normally mean that:
(a) at least 25% of the issuer’s total issued share capital must at all times be held by the public
(b) where an issuer has one class of securities or more apart from the class of securities for which listing is sought, the total securities of the issuer held by the public (on all regulated market(s) including the Exchange) at the time of listing must be at least 25% of the issuer’s total issued share capital. However, the class of securities for which listing is sought must not be less than 15% of the issuer’s total issued share capital, having an expected market capitalization at the time of listing of not less than HK$50,000,000.
Notes: (1) Issuers should note that the minimum prescribed percentage of securities must remain in public hands at all times. If the percentage falls below the minimum, the Exchange reserves the right to suspend trading until appropriate steps have been taken to restore the minimum percentage of securities in public hands. In this connection, the Exchange will normally require suspension of trading in an issuer’s securities where the percentage of its public float falls below 15% (or 10% in the case of an issuer that has been granted a public float waiver under rule 8.08(1)(d) at the time of listing)
(2) Where the percentage has fallen below the minimum, the Exchange may refrain from suspension if the Exchange is satisfied that there remains an open market in the securities and either:
(a) the shortfall in the prescribed percentage arose purely from an increased or newly acquired holding of the listed securities by a person who is, or after such acquisition becomes, a connected person only because he is a substantial shareholder of the issuer and/or any of its subsidiaries. Such substantial shareholder must not be a controlling shareholder or single largest shareholder of the issuer. He must also be independent of the issuer, directors and any other substantial shareholders of the issuer and must not be a director of the issuer. If the substantial shareholder has any representative on the board of directors of the issuer, he must demonstrate that such representation is on a non-executive basis. In general, the Exchange would expect this to apply to holdings of the listed securities by institutional investors with a wide spread of investments other than in the listed securities concerned. Holdings of the listed securities by venture capital funds which have been involved in the management of the issuer before and/or after listing would not qualify. It is the responsibility of the issuer to provide sufficient information to the Exchange to demonstrate the independence of such substantial shareholder and to inform the Exchange of any change in circumstances which would affect his independence as soon as it becomes aware of such change; or
(b) the issuer and the controlling shareholder(s) or single largest shareholder undertake to the Exchange to take appropriate steps to ensure restoration of the minimum percentage of securities to public hands within a specified period which is acceptable to the Exchange. (3) At any time when the percentage of securities in public hands is less than the required minimum, and the Exchange has permitted trading in the securities to continue, the Exchange will monitor closely all trading in the securities to ensure that a false market does not develop and may suspend the securities if there is any unusual price movement.
(c) Notwithstanding the requirement that the minimum prescribed percentage of securities must at all times remain in public hands, the Exchange may consider granting a temporary waiver to an issuer which is the subject of a general offer under the Takeovers Code (including a privatisation offer), for a reasonable period after the close of the general offer to restore the percentage. The issuer must restore the minimum percentage of securities in public hands immediately after the expiration of the waiver, if granted.
(d) The Exchange may, at its discretion, accept a lower percentage of between 15% and 25% in the case of issuers with an expected market capitalisation at the time of listing of over HK$10,000,000,000, where it is satisfied that the number of securities concerned and the extent of their distribution would enable the market to operate properly with a lower percentage, and on condition that the issuer will make appropriate disclosure of the lower prescribed percentage of public float in the initial listing document and confirm sufficiency of public float in successive annual reports after listing (see rule 13.35). Additionally, a sufficient portion (to be agreed in advance with the Exchange) of any securities intended to be marketed contemporaneously within and outside Hong Kong must normally be offered in Hong Kong;
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