The Economic Data calendar for the week of the 19th of May through the 23rd of May is full of critical releases and events. Attached below is a snapshot of some of the headline numbers that we will be focused on.
Takeaway: We are removing Darden (DRI) from Hedgeye's high-conviction stock idea list.
Darden announced earlier today that it has entered into a definitive agreement to sell its Red Lobster business and related assets to Golden Gate Capital for $2.1 billion in cash.
Destroying a business and giving it away for free is a familiar practice for CEO Clarence Otis – he first did this with Smokey Bones and has now done it again with Red Lobster.
What’s shocking about this transaction is that shareholders explicitly told management and the board not to sell or spin off Red Lobster without their approval. By pushing through this sale, the company has once again displayed a complete lack of corporate governance and an egregious disregard for shareholders.
In our view, the stock reaction to this news has all but sealed the fate of management come the annual meeting in September.
Our bullish thesis on DRI hinged on a management change that would, in our opinion, be a catalyst for significant value creation. With the sale of Red Lobster and the implied 10% to 15% decline in the earnings power of the company, it’s difficult for us to like the stock in the immediate-term. The management change shareholders are longing for is unlikely to occur until later this year.
Today, Darden announced that it has entered into a definitive agreement to sell its Red Lobster business and related assets to Golden Gate Capital for $2.1 billion in cash. Destroying a business and giving it away for free is a familiar practice for CEO Clarence Otis. He first did it with Smokey Bones and has done it again with Red Lobster.
What's shocking about this transaction is that shareholders explicitly told management and the board not to sell or spinoff Red Lobster without their approval. By pushing through this sale, the company has once again displayed a complete lack of corporate governance and an egregious disregard for shareholders. In our view, the stock reaction to this news has all but sealed the fate of management come the annual meeting in September.
Thoughts on the transaction:
Management is intellectually dishonest with this transaction:
The deal is expected to close in the first quarter of FY15.
Our bullish thesis on DRI hinged on a management change that would, in our opinion, be a catalyst for significant value creation. With the sale of Red Lobster and the implied 10% to 15% decline in the earnings power of the company, it’s difficult to like the stock in the immediate-term. The management change shareholders are longing for is unlikely to occur until later this year.
More details to come.
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Smoking ban is real but likely to exclude VIP/Premium Mass and deadline delays likely
CALL TO ACTION
Today’s pronouncement regarding full smoking ban on mass floors beginning Monday, October 6, 2014 is not a positive. Unfortunately, the operators appear to have not taken the health issue as seriously as they could/should have given all the discussions, working groups and testing. However, given that the partial smoking ban had no discernible impact and we don’t believe the premium mass nor VIP smokers will be affected, the disruption could only be minor. Moreover, the deadline is likely to be pushed back.
Given the recent Labor Day protests in Macau and the smoking debate, this policy outcome seemed an inevitable conclusion. Based on our conversations with our contacts in Macau, we understand:
Since the opening of the casinos and gaming floors in Macau, the question of whether or not to allow smoking on gaming floors has been raised. We outline the smoking ban development in the timeline below.
June 17, 2010
SMOKING TO BE ALLOWED IN CASINOS FOR A THREE-YEAR PERIOD Macau Daily Times
The latest version of the tobacco ban bill draft declares that smoking will be allowed in "venues for adults"--i.e. casinos, bars, terraces and business open areas, massage lounges and dance halls--for a three-year period. According to Chan Chak Mo, who heads the Second Standing Committee of the Legislative Assembly, pressure from several industries led to this decision. “ After two years, the government says that a revision of the law should be done in order to decide if the suspension continues in the third year or not,” added Chan.
April 18, 2011
LEGISLATURE APPROVES SMOKING BILL Macau Daily Times
As expected, the tobacco bill passed the final reading. Ng Kuok Cheong, Au Kam San, Chan Wai Chi, José Pereira Coutinho, Ho Ion Sang voted against the partial smoking ban in casinos. They believed that casinos should be subject to a complete smoking ban. The smoking law will be enacted on January 1, 2012, while casinos will be required to build a smoking area with a size not larger than 50% of total public area by January 1, 2013.
An order from the Macau CEO regarding the smoking ban was published in the Macau Gazette on November 5th and is summarized below:
January 1, 2013
Chief Executive Fernando Chui Sai On said that while the government is strictly enforcing the partial smoking ban in casinos they are still fine-tuning some of the rules. The partial smoking ban that took effect on January 1, allows casinos to have smoking areas in up to 50% of the gaming floor area. The rules do not set up a minimum ratio for the number of slots and tables to be included in smoking and non-smoking area.
The Macau Health Bureau repeatedly tested the casinos for air quality during 2013
Many casinos fail the air quality tests… Trade unions blamed the government for being too lenient towards casinos in the enforcement of partial smoking bans in all gaming venues.
Takeaway: TAIL risk is on (to the upside) in the bond market and we think investors should react accordingly.
Is your portfolio prepared for this?:
FOLLOW THE FLOWS
Every week Jonathan Casteleyn, co-head of our Financials Vertical, publishes a in-depth update on all the puts and takes in fund flow space. In going through his piece this week, there were a number of data points that commanded my undivided attention:
If you’ve internalized any of our research in the YTD, the fund flow reversal from stocks to bonds is not new news, as that is one of the contrarian calls we’ve been making all year. What is new news, however, is the acceleration of funds flowing into the bond market at the expense of equities.
TAIL RISK: “ON”
Not surprisingly this coincides with the aforementioned snapping of our long-term TAIL line of support on the 10Y Treasury bond yield. Whenever this happens (irrespective of direction) please listen to us. Our track record using this point of entropy to front-run major asset class rotations is not inconsequential. Going back to May of 2013:
GETTING WHIPPED AROUND
Let us not forget how grossly unprepared both sell-side and buy-side macro consensus was for our 2013 #RatesRising theme. The sell-side had a EOY ’13 forecast of 2.18% for the UST 10Y yield. That was obviously way off (it finished 2013 at a cycle-high of 3.03%) and it pales in comparison the Bloomberg consensus EOY ’14 estimate of 3.24%.
Not to be outdone, the buy-side was net long of Treasuries in the futures and options markets to the tune of +21.4k contracts, which stands in stark contrast to the maximum net short position of -176k futures and options contracts, which they coincidentally held at the beginning of this year. That’s come in quite a bit as Treasuries have rallied substantially in the YTD (TLT etf +11.9% vs. IWM etf -5.8%), but only to a net short position of -65.7k futures and options contracts.
Conclusion: both the buy-side and sell-side are inappropriately stuck on the Hedgeye Macro Team’s 2013 #RatesRising theme.
TACRM™ SAYS STICK WITH THE PLAYBOOK
Also not surprisingly, TACRM™ has been front-running the aforementioned acceleration in fund flows into the bond market for months (specifically, since JAN). For those of you who are unfamiliar with TACRM™, just think of it as that super-smart, geeky kid who sat in the front of your math class and was too shy to raise his hand to answer questions – even though he knew all of the answers. As such, it is my job to explain and interpret his signals to you.
There are four primary tools our TACRM™ All-Weather System employs to accomplish its stated goals of helping you front-run major asset class rotations alongside us:
(CLICK HERE to download)
From a thermodynamic perspective, TACRM™ is signaling a considerable degree of heat across various components of the fixed income space – both in nominal and inflation-linked securities (shhh… did someone say #InflationAccelerating?):
From a weather perspective, the spread between the relative momentum in Fixed Income & Yield Plays and DM Equities continues to widen, with the former taking share from the latter in marginal capital flows:
From an atmospheric perspective, pressure for investors to chase returns in Fixed Income & Yield Plays is near peak from both a TTM and trailing 5Y perspective, while the opposite is true for DM Equities:
All told, TAIL risk is on (to the upside) in the bond market and we think investors should react accordingly.
For those of you who’d like to learn more about TACRM™ and how it can add value to your investment process, please shoot us an email and we’ll gladly set up a call. The user guide can be accessed via the following link: http://docs.hedgeye.com/HE_TACRM_2014.pdf.
Have a fantastic weekend!
Associate: Macro Team
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