TODAY’S S&P 500 SET-UP – September 4, 2014
As we look at today's setup for the S&P 500, the range is 19 points or 0.64% downside to 1988 and 0.31% upside to 2007.
CREDIT/ECONOMIC MARKET LOOK:
MACRO DATA POINTS (Bloomberg Estimates):
WHAT TO WATCH:
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
The Hedgeye Macro Team
Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.
Takeaway: Pigs will fly before Lebron leaves Nike for Payless.
1) You're not making money.
2) LeBron couldn't care less about lowering the price of his shoes. Nike has sold LBJ footwear for over $300 and he laughed all the way to the bank.
3) LBJ is not gonna wear Red Wings.
4) Do you really think he can be incentivized by stock in Payless?
5) Last we checked, he's in bed with a company called Nike that won't let him go.
Darden’s board is so desperate that it wants us to believe the company is on a slippery slope, which is also known as a logical fallacy.
A slippery slope is a fallacy in which a person asserts that some event must inevitably follow another without any argument for the inevitability of the event in question.
This argument typically assumes the following form:
In this case, Event X is Starboard getting all 12 board seats and Darden wants us to believe it will be a destabilizing event for the company. This is simply not true. In fact, Starboard getting control of the company might be exactly what the company needs at this point. Look at the strength of the potential independent directors Starboard has proposed.
Yesterday’s announcement about the continued shakeup at Darden is another example of how poorly managed and desperate the company is. As of yesterday, Starboard will be awarded four board seats and Darden will replace four other board members at its October shareholder meeting. We’d note that we believe two of the five directors that are leaving the board (Leonard L. Berry, Victoria D. Harker, Charles A. Ledsinger, William M. Lewis and William S. Simon) would have been strong members of the new Darden board, but we can certainly understand why they are leaving.
The four remaining directors are:
Now shareholders are faced with backing the eight directors nominated by the company or throwing out the entire board and electing the 12 directors nominated by Starboard. It’s come down to which group of independent directors shareholders want to oversee the company: Darden’s or Starboard’s? We believe Starboard’s slate is better qualified.
The person directly responsible for the aforementioned logical fallacy is the ex-Lead Director and now ex-Chairman of the Board, Charles A. Ledsinger Jr., who also publically supported the Red Lobster spinoff. According to Ledsinger, “We believe this slate avoids many of the risks and destabilization that would result from full board turnover and giving control to a single shareholder’s nominees, particularly given the positive momentum we are achieving in Darden’s operations.” If all of Starboard’s slate is elected, why can’t the departing board members assure the transition goes smoothly? After all, management is running the day-to-day operations, not the board!
Additionally, why should shareholders trust a board member who apparently knows he’s not going to be re-elected to the board and is effectively abandoning the company? The WSJ even challenged the company’s and Ledsinger’s credibility with shareholders in a recent article titled “Fishy Financial Disclosure at Darden’s Red Lobster.” Ledsinger would not be leaving the company if he didn’t fail to fulfill his fiduciary duties to shareholders.
Some sell-side analysts are even buying into Ledsinger’s logical fallacy. According to the WSJ, a KeyBanc analyst is quoted as saying: “We expect shareholders will like this plan as it should provide the change agents that shareholders are seeking without giving Starboard complete control.” The article also goes on to quote a Barclays analyst who called Darden’s board offering “more balanced” and a “reasonable concession, particularly along with the company’s improving results.”
Let’s be clear about a few things:
On the surface, it may appear as though giving Starboard control of the company could be a destabilizing force, but an important piece of the puzzle is missing: Starboard’s plans to revitalize Darden and, more importantly, Olive Garden. While we don’t know all the details of Starboard’s plan, we’re confident it’s a better way forward for the company. The people that Starboard has retained to form its advisory group for the Darden investment are some of the very best players in the restaurant industry.
Let’s take a quick look at Starboard’s slate of directors. You have a past Vice Chairman of Darden and President of Olive Garden, the former CFO of Brinker, the Founder of Friday’s and others with significant experience in the casual dining industry.
Looking at Darden’s slate, you have long-tenured Darden directors who voted for the sale of Red Lobster, someone who ran a third-tier regional brand (O’Charley’s) into the ground the same way Otis destroyed Darden and someone running a drive-thru burger joint (Checkers) who previously served in a mid-level operations role at Burger King. Restaurant experience is important, but running a quick-service restaurant is much different than running a casual dining restaurant.
We disagree with the notion that giving control to Starboard would be a destabilizing force. In fact, it’s exactly what the company needs at this point. The next big event for Darden shareholders will be when Starboard reveals their plans to revitalize operations at the company.
In the meantime, try not to get sucked into Darden’s logical fallacy.
On August 21st we hosted an expert call with Judith Gaines of J. Gaines Consulting featuring her fundamental, non-consensus call that the outlook for Brazil’s crop into 2015-16 is much worse than expected. Coffee has remained in a BULLISH @Hedgeye TREND set-up for all of 2014 and spot prices have increased +8% since we hosted the call less than two weeks ago (+80% YTD).
Spot Arabica finished +4.4% yesterday after The International Coffee Organization (ICO) reported that cash market prices have been markedly-higher in recent days by Brazilian and Colombian farmers:
Most importantly we will continue to watch the change in cash prices from farmers over the next several weeks for a read-through on the severity of the tree damage as an indicator for the health of next year’s crop.
Here are a few of the key catalysts- which we expect to continue playing out over the next several weeks:
Over the next several weeks we expect a continuation in analysts pointing to irrelevant catalysts including current weather patterns…
One of the key differentiators for Judy’s argument vs. consensus reasoning as to why prices will increase is that the damage from poor weather has already been done. Here were some of the headlines yesterday after the ICO reported higher cash market prices:
Why we will certainly be watching the change in expectations for the supply/demand outlook in the coming weeks, market activity has supported the move higher:
Note: The adjustment in upside skew (difference in implied volatility between at the money calls and out of the money upside calls) to the average relative implied volatilities despite the +7.8% move suggests the market is willing to pay the same value for the same relative upside price risk after a significant run.
Despite a market that is positioned for higher prices into next summer, Judy’s price estimate in the $2.75-$4.00/lb. range remains well above current consensus positioning. We expect more color on the potential crop devastation into October and November.
As always, please ping us with any comments or questions.
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