Takeaway: Please join us today at noon. Call details below.
Please join us for a flash call titled “Dismantling Darden” today, October 11th at 12:00pm EDT. On the call we will discuss the opportunities we see to significantly increase shareholder value at Darden. We have pursued this topic extensively and put together a 30 page Black Book, highlighting Darden’s inefficiencies as well as our vision for a potential turnaround.
TOPICS OF DISCUSSION INCLUDE:
- Reshaping the enterprise
- Operating trends among the worst in the casual dining industry
- Darden’s bloated cost structure
- Sum of the parts valuation
- What are the implications of the Barington Capital news and what is next for the company?
- Toll Free Number:
- Direct Dial Number:
- Conference Code: 493295#
- Materials: CLICK HERE
If you have any questions, please email or call.
REMINDER: Hedgeye's Macro Team, led by CEO Keith McCullough and DOR Daryl Jones, is hosting its Quarterly Macro Themes conference call TODAY, October 11th at 11:00am EDT. The accompanying presentation will detail the THREE MOST IMPORTANT MACRO TRENDS that our team has identified for the quarter, as well as the associated investment opportunities.
- Toll Free Number:
- Direct Dial Number:
- Conference Code: 419384#
- Materials: CLICK HERE (slides will download one hour prior to the start of the call)
Q4 THEMES INCLUDES:
- #BernankevsCongress: The biggest, current risk to forward growth domestically is not Congress, it's the prevailing policy position of the Fed. The #StrongDollar + #RatesRising dynamic has backstopped our bullish U.S. growth call YTD and the acute risk here is that a perpetuation of unprecedentedly dovish monetary policy catalyzes a reversal in the strong dollar based growth cycle we've observed over the last year. Policy drives currencies and the Dollar is breaking down - with significant global macro investment implications.
- #EuroBulls: European economic performance has been a shipwreck in its protracted "crisis", but the tide is turning. We're bullish on the marginal, positive change in the fundamentals, the improving risk climate, and the EUR versus the USD as Bernanke and Co. talk down U.S. growth and the Greenback. We'll identify the countries and asset classes that we expect to outperform across the continent.
- #GetActive: With the equity fund flow story on hold for now, we think the easy money has already been made in 2013. For much of the year, tuning out the ever-changing consensus bear case and staying long of market beta was alpha. Now that is no longer the case, as alpha generation will increasingly be determined by stock/industry selection and risk managing one's gross and net exposure. Additionally, monetary and fiscal policy uncertainty is likely to contribute to rising volatility across a variety of asset classes.
Client Talking Points
What's that? Chinese Auto Sales ripped +21% year-over-year in September? Yup. Kaboom! The Shanghai Composite really liked that print. It closed up +1.7%. More importantly, China has moved back into the black for 2013 year-to-date. Make no mistake, this market is still hated. We are taking the other side and are now long of it via the FXI.
It was the "People vs Congress" this week and The People won! Witness the U.S. Dollar Index which is holding our long-term TAIL risk line of $79.21. That there was the most important market signal of the week. Now, I'll be the first to say that we are nowhere near out of the woods yet. We will outline our scenario analysis at 11am today on our Q4 Macro Themes conference call.
Both Gold and Bonds absolutely nailed front-running the blistering #NoDebtDefault move in US Equities yesterday. Silver is down basically -2.0% this morning. Meanwhile Gold continues to crash (alongside fear) at -23.5% year-to-date. Incidentally,
SPX risk range is 1682-1708. We're back to bullish TRADE and TREND. Risk goes both ways, and it happens fast.
|FIXED INCOME||0%||INTL CURRENCIES||16%|
Top Long Ideas
WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.
Health Care sector head Tom Tobin has identified a number of tailwinds in the near and longer term that act as tailwinds to the hospital industry, and HCA in particular. This includes: Utilization, Maternity Trends as well as Pent-Up Demand and Acuity. The demographic shift towards more health care – driven by a gradually improving economy, improving employment trends, and accelerating new household formation and births – is a meaningful Macro factor and likely to lead to improving revenue and volume trends moving forward. Near-term market mayhem should not hamper this trend, even if it means slightly higher borrowing costs for hospitals down the road.
Financials sector senior analyst Jonathan Casteleyn continues to carry T. Rowe Price as his highest-conviction long call, based on the long-range reallocation out of bonds with investors continuing to move into stocks. T Rowe is one of the fastest growing equity asset managers and has consistently had the best performing stock funds over the past ten years.
Three for the Road
TWEET OF THE DAY
GOLD: continues to crash -23.5% YTD to $1285/oz as manic media scrambles for another crisis @KeithMcCullough
QUOTE OF THE DAY
"The only thing we have to fear is fear itself." - Franklin D. Roosevelt
STAT OF THE DAY
China's economic growth will exceed the official target of 7.5% this year while some economic risks such as local-government debts and "shadow banking" remain under control, web portal Sina.com reported Friday, citing the vice governor of China's central bank.
This note was originally published at 8am on September 27, 2013 for Hedgeye subscribers.
“What people fail to realize is that we spend ~70% of the time at record highs in the equity market.”
-Anonymous Seasoned Investor
Keith and I picked up that gem in a recent meeting with a client out in San Francisco. Truly a savvy investor, this gentleman belongs to the increasingly rare camp of investors that has managed market risk across multiple decades and economic cycles.
Regarding the aforementioned quote, he dropped that line in a discussion about the pervasive lack of enthusiasm for 2013’s non-consensus equity market rally, specifically in response to our conjecture that baggage from the hard times of 2008-09 is broadly preventing investors from buying into the sustainability of said rally.
While I believe he was merely throwing a number out there to make a [wise] point, the reality is that he’s actually not that far off as it relates to the assertion he was trying to make:
- Being worried about allocating capital to the equity market at/near its all-time high is hardly as big of a deal as the average investor – fully loaded with 2000-02 and 2008-09 baggage – would have you believe.
- Over the past 30Y, the S&P 500 has traded within 5% of its [then] all-time high 43.8% of the time.
- Over that same duration, only 26% of the time has the index traded 20% below its [then] all-time high.
Oddly enough, when looking at aggregated fund flow and securities market allocation trends, it seems that investors are still positioned for yet another blow-up in the equity market, when, in reality, it’s the inevitable unwinding of Bernanke’s bond bubble they should be most concerned about.
Per Jonathan Casteleyn, the newest member of our highly-regarded financials team:
- Per the most recent data (2008-11 period), pension fund allocations to stocks is at an all-time low of 44%, while their allocations to bonds is at an all-time high of 37%. That ratio was 52% to 33% in the 1984-94 period, 64% to 27% in the 1995-00 period and 60% to 28% in the 2001-07 period.
- From the start of 2008 through the most recent data (JUL ’13), bond mutual funds have seen a cumulative $1.09T of inflows, or 17% of starting AUM. This compares to a -$441B outflow from equity mutual funds, or -7% of starting AUM.
- At $38T outstanding across the various categories, bonds represent 68% of the total US securities market (equities and debt). That compares to a 20Y average of 64% and a balanced ratio of 50/50 in 1999. Reversion to the mean implies a greater than $2T outflow from bonds into stocks over the long term.
Regarding that last point, we get a lot of pushback from fixed income managers that bonds funds don’t necessarily need to see outflows for the equity funds to receive inflows, citing record “cash on the sidelines”.
Indeed, un-invested cash in money market mutual funds, credit balances in margin accounts and deposit and currency assets on household balance sheets currently totals ~$12.4T, which is just off of all-time highs. As a percentage of the securities market, however, it hovers just above all-time lows (23% vs. a record low of 22% in 1999 and a record high of 32% in 2009).
If in 1999 someone thought the aggregate investment community was going to take its liquidity ratio down to new all-time lows in order to continue financing a bubble in stocks or even to take up its gross exposure by simply increasing its allocations to bonds, boy, were they sorely mistaken. Making that argument in defense of fixed income right now is equally off base, in our opinion.
In summary, we continue to believe there is a compelling, long-term fund flow case to be made in favor of the equity market in lieu of the bond market.
Not from every price, however…
We need to see the US Dollar Index recapture its TREND line of $81.35 for us to believe that tapering is an intermediate-term event, rather than one that is far off in the distant realm of “potentially never”.
Simply put, as long as a collection of fear-mongering doves dominate the domestic monetary policy debate, the probability of a Japan-like, no-growth economic scenario will remain heightened.
Besides a natural monetary policy response to economic gravity, what else would get investors excited about investing for growth in lieu of safety?
Corporate America would be a good place to start. My, how they have been conspicuously absent from this recovery!
- Record cash on their balance sheets ($1.8T per the latest data);
- A near-record ratio of liquid assets to short-term liabilities (47.3%; 1.8 standard deviations above the 30Y mean);
- An effective tax rate of 19.9% that is near all-time lows (-1.6 standard deviations below the 30Y mean);
- An estimated $700B in interest savings since 2009 that can be specifically attributed to QE*; and
- Profits that have grown +34.7% since 2007…
… Corporations have reduced employee headcount by -2.9% since 2007 and grown nominal CapEx by a measly +0.6% on a trailing 5Y CAGR basis – a growth rate that is just above a generational low.
Regarding the former point on corporate, QE-derived interest savings, $700B is enough to employ 9.6M workers for 1Y, assuming a $51k median income (per the Census Bureau) that represents 70% of all-in employee compensation costs (per the BLS), effectively taking up the median annual comp to $72.9k. To put that in context, there have been only 6.8M net hires since 2009 per the seasonally-adjusted nonfarm payrolls numbers.
Obviously that’s nothing more than a hypothetical analysis meant to draw attention to the fact that QE to-date has been little more than an overt transfer of wealth to Corporate America and the rest of the top-10% that owns the lion’s share of financial wealth in the this country.
It’s time both parties said, “thank you” by putting capital to work (corporations) and allocating capital back to pro-growth assets (investors).
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.57-2.74%
Keep your head on a swivel,
the macro show
what smart investors watch to win
Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.