Takeaway: It's getting frothy out there.
A return to all-time highs for US stocks is putting sentiment right back to where it was on 12/31.
Both front month VIX (volatility) and the bear side of the II Bull/Bear survey have dropped right back to where they were on January 1. No, that’s not a good thing.
The Bull/Bear Spread has ripped right back towards its all-time highs at +3950 basis points wide to the bull side. Only 15% admit they’re bearish. That is a generational low.
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Client Talking Points
As the U.S. "Burns the Buck" (see Obama’s spending ramp plan), #StrongEuro continues to perpetuate European purchasing power. Italy’s Service PMI has crossed the important 50 line to 52.9 in February (versus 49.4 January). Being long Italy’s stock market (up +8.3% year-to-date) sure beats banging your head against the wall on whether the Dow should be “up” or not yet YTD.
Mr. Putin may have ramped hedgie S&P 500 short positions for a day (there was a SPX net short position in Index + Emini of -41,486 futures/options contracts into the event), but both the Ruble and the Russian Stock market are still implying that being long anything Russian sucks. Russian Trading System down -0.4% after its 1-day bounce. It's still down over -18% YTD
Both front month VIX and the bear side of the II Bull/Bear survey just dropped right back to where they were on Jan1. No, that’s not a good thing. The Bull/Bear Spread has ripped right back towards its all-time highs at +3950 basis points wide to the bull side with only 15.1% admitting they’re bearish. That is a generational low.
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Top Long Ideas
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.
Las Vegas Sands has transformed into that rare stock that should appeal to “Growth,” “Value”, and “Dividend/Cash Flow” investors alike. The stock now yields higher than the S&P 500 (43% sequential quarterly dividend increase), and the company is buying back $200 million + in stock a quarter, yet still retains a pristine balance sheet. The significant capital deployment opportunities can be funded out of annual free cash flow of nearly $4 billion. Management has indicated they are willing to raise leverage 1.5x which would still keep them well below industry average and if directed toward dividends, would result in a yield of over 6%. And we haven’t gotten to the $10-14 billion in mall assets that could be monetized. We know of no other stocks in consumer land that provide this combination of cash flow, growth, cash return to shareholders, and value levers.
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.
Three for the Road
QUOTE OF THE DAY
“If you’re limiting yourself to what you experienced, you are going to be in trouble. . . . I studied the Great Depression. I studied the Weimar Republic. I studied important events that didn’t happen to me.” -Ray Dalio
STAT OF THE DAY
The EU is ready to provide $15 billion of financial support to Ukraine over the next couple of years via a series of loans and grants, European Commission President Jose Manuel Barroso said on Wednesday.
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Big overhang for NCLH shares at the same time their pricing in the Caribbean remains iffy
EVENTS TO WATCH: UPCOMING EARNINGS/CONFERENCES
Wednesday, March 5
- STAY – 7:30 a.m. Citi Global Property CEO Conference
- LHO – 9:30 a.m. Citi Global Property CEO Conference
- RHP – 10:10 a.m. Citi Global Property CEO Conference
- FCH – 11:30 a.m. Citi Global Property CEO Conference
- HT – 12:10 p.m. Citi Global Property CEO Conference
- MAR – Mitsubishi Seattle Consumer Conference
- BYD – 4Q13 earnings, AMC, 5 pm call
Thursday, March 6
- Todd in Boston
Friday, March 7
- Employment Report for February
Monday-Thursday, March 10-13
- 2014 Cruise Shipping Miami Conference
Monday, March 11
- CZR 4Q 2013 conference call
Tuesday, March 12
- MTN FY2Q 2014 conference call
Friday, March 14
- Hyatt Investor Day
NCLH: 15m secondary, Genting HK to sell entire RM7 bln stake in NCLH The Edge Malaysia
Genting HK Ltd has proposed to sell entire 31.35% stake (worth US$2.18bn) in NCLH. Chairman and CEO Tan Sri Lim Kok Thay said the disposal was in line with group's strategy to unlock the value of its NCLH investment. It plans to seek shareholder approval. Lim said "whether the disposal is made in the open market at market price or through secondary public offering(s), the minimum selling price per remaining NCLH share shall not be less than US$19." Star NCLC, Genting HK's wholly-owned unit sold 7.5m NCLH shares via a block trade yesterday. After the sale, Star NCLC will continue to own 56,819,334 NCLH shares or 27.7% of total outstanding shares. Genting HK will use the proceeds for general working capital and/or to fund new investments.
Meanwhile, NCLH issued a 15m share secondary by selling shareholders, Star NCLC and Apollo Global Mgmt last night.
Takeaway: Genting HK may need capital to finance its Resorts World Vegas project. Any way you cut it, these stock sales are negative for NCLH. Our cruise pricing survey suggests that Caribbean discounting continues.
IGT – announced a 40% floor share of games running on the newly installed IGT Advantage Systems at Dania Casino and Jai-Alai. Dania Casino has 549 slot machines.
Takeaway: Another system install for IGT. Taking share back from BYI?
PENN – Judge Eliza Ovrom granted the city of Sioux City's request to intervene in the Argosy Sioux City riverboat casino's lawsuit against the Iowa Racing and Gaming Commission. This ruling occurred after Argosy owner Penn National Gaming Co. last Friday voluntarily withdrew its motion opposing the city's intervention. Judge Ovrom also canceled a hearing on the issue that had been scheduled for Friday in Des Moines.
Takeaway: This legal dispute will culminate with final arguments on September 6, followed by rebuttal filings shortly thereafter and a hearing in November or December. It is looking increasingly likely analysts will have to pull SC out of their 2015 estimates.
HOT – CEO, Frits Paasschen, speaking at the Citi Global Property CEO Conference indicated the most misunderstood aspect of the company is the attractive growth and cash flow characteristics of its asset light operating model. HOT’s EBITDA is >60% fee based today vs. ~25% six years ago. The long term goal remains 80% through continued asset sales and unit growth.
Takeaway: While we wouldn't quite characterize it as misunderstood, we appreciate the asset light strategy. What we don't appreciate is HOT's under leveraged balance sheet. With the transactions market continuing to improve, more asset sales are likely. HOT ramped up it's return of capital to shareholders but there is a long way to go. HOT remains our favorite lodging name.
HST – CEO, Ed Walter, speaking at the Citi Global Property CEO Conference said “equity issuance this year should be minimal in the absence of significant acquisition opportunities, as HST is approaching its leverage target of 3x.”
Takeaway: This is welcome news as we’d like to see the positive earnings leverage to the lodging cycle flow to the bottom line without further equity dilution which occurred in prior up lodging cycles.
Black Sea season affected Cruise Industry News
Is the Black Sea cruise season in jeopardy? It might seem so as the three most popular ports, Odessa, Sevastopol and Yalta, are all in the Ukraine, and one happens to be the naval base that Russia’s Vladimir Putin is reportedly so concerned about. Cruise lines have not yet announced any changes, but among the major operators, Costa and MSC, as well as Azamara and Crystal, have programs in the Black Sea this coming season.
Takeaway: This could dampen the resurgence in Eastern Europe. So far, pricing remains steady.
Downtown BR hotels get boost from Mardi Gras bookings Business Report
While New Orleans hotels have been full with Carnival revelers over the five-day Mardi Gras holiday, those visitors are not translating into spillover crowds in Baton Rouge hotels. Nevertheless, officials at the city's growing number of downtown hotels say they have enjoyed some of their busiest weekends yet, thanks to local Mardi Gras festivities. DDD Executive Director Davis Rhorer, "All the hotels were sold out last weekend. More importantly, several have had high occupancy rates in the 80% to 90% range over the past several months. That is very good news for downtown and quite high in the market." Citywide hotel occupancy rates in Baton Rouge typically average between 65% and 70% for any given month, which is slightly better than the national average but not as good as some local hotels would like it to be
Takeaway: Good news for the Baton Rouge market. PNK has the largest exposure to BR.
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.
“Reality is wrong. Dreams are for real.”
My colleague and energy Sector head, Kevin Kaiser, approached me in the office the other day and told me that he had a disconcerting dream about me. It turns out the dream itself wasn’t all that crazy, but was simply that I decided to get a Mike Tyson-esque face tattoo. My takeaway was that Kaiser was probably just spending a little too much time on MLP accounting.
Incidentally we are still short Kinder Morgan (KMI) and Linn Energy (LINE) on our Best Ideas list.
In tribute to Kaiser’s dream, though, I’ve included as the Chart of the Day below an exhibit from his most recent note on LINE. The exhibit shows the actual free cash flow from every quarter in 2013 as well as his projected 2014 free cash flow. Admittedly, free cash flow might be a bit of a misnomer as cash flow is actually decidedly negative.
In fact, in 2013 free cash flow (defined as discretionary cash flow less cap-ex and contribution to JV) was negative $-374 million. In 2014E, we are projecting free cash flow of negative $-132 million. An astute analyst might actually note that at least the free cash flow deficit is improving, which is true if you believe LINE’s guidance. The bigger issue, though, is one of distributions.
Based on current guidance, LINE will be paying right around $960 million in distribution in 2014E. How does a company that has negative $-132 million in free cash flow pay almost $1 billion in distributions you might ask? Well, in this instance, we can only assume that either they are going to issue massive amount of debt and new shares (they already have $9.1 billion in net debt), or as the famous American poet Tupac said in the quote above ...dreams are for real.
(Incidentally, you can rest assured that I won’t be getting a Mike Tyson face tattoo anytime soon!)
Back to the Global Macro Grind ...
Speaking of dreamland, President Putin proved yesterday that he may not actually be living in one based on his press conference to discuss Russia’s actions in Crimea. We wrote in yesterday’s Early Look that Putin’s ambitions may not actually be as grandiose in the Ukraine as many in the manic media would have us believe. In fact, it seems the key take away from the rambling press conference is that Putin has no intention to use force and is merely protecting legitimate Russian interests in the region.
The broader take away from this incident may actually be its impact on President Obama and, by default, the Democrats heading into the mid-term elections next fall. As I wrote yesterday, we did a poll in which the results indicated pretty decisively that Putin would come out as the stronger leader and it seems this is certainly the case. The New York Post (admittedly a Republican leaning newspaper) made an apt analogy between Obama and Jimmy Carter this morning in an op-ed in which they wrote:
“Vladimir Putin has taken the measure of Barack Obama. He’s found Jimmy Carter.
Like Jimmy Carter, who boasted he was free of any “inordinate fear of communism,” Obama began his term as president vowing to “reset” relations with Russia.
Like Jimmy Carter, who conveyed weakness when Iran took our embassy staff hostage, Obama confirmed his own weakness when he drew a red line in Syria and then backed down from enforcing it.
Like Jimmy Carter, who was rewarded by Leonid Brezhnev with a Soviet invasion of Afghanistan, Putin has returned Obama’s favor with a Russian invasion of Ukraine
And just like Carter, who responded with what his staff called “a strong public statement,” Obama responded with his own statement saying he is “deeply concerned” by Russia’s military movement in Ukraine.
As in the Carter era, Obama-era defenders of inaction suggest there is little they can now do to get Russia out of Crimea. They are likely right.”
Now whether Obama is truly a foreign policy comrade (for lack of a better word) of Jimmy Carter, or the NY Post is actually living in Republican dreamland, is certainly up for some debate. But there can be no question that that is something that Republicans will push aggressively into the upcoming mid-terms, especially if the Russians remain in Crimea.
Even before the Ukrainian situation, President Obama’s approval rating was doing the Democrats no favors. Since last summer, the last time his approval rating was higher than his disapproval rating, his rating has turned negative and decidedly so. Based on the current Real Clear Politics poll aggregate, Obama’s disapproval rating is 52.7 for an almost 10 point spread versus his approval rating of 43.1.
In other news in the world of dreams, the Chinese this morning may be experiencing their first corporate bond default ever. Specifically, Shanghai Chaoroi Solar announced it won’t be able to pay roughly $14.6 million in interest on a bond issue from two years ago. It is likely too early to tell whether this is the canary in the Chinese debt coal mine, but one thing is for certain - the Chinese GDP target of 7.5% will be a mere dream if the $1.5 trillion Chinese corporate bond market starts to shake.
Conversely, the European economic recovery seems much less of a dream as PMI data accelerated to 32-month high 52.6 versus 51.6 prior. Additionally, European retail sales came in at a better than expected +1.3% year-over-year gain versus an expected decline of -0.4%. When combined with the fact the periphery yields are now near all time lows, as evidenced by the Spanish 10-year yield ticking lower ahead of tomorrow’s auction, it may be time to do more than dream about the European revival.
Our immediate-term Risk Ranges are now as follows (our Top 12 macro ranges are in our Daily Trading Range product):
Keep your head up, stick on the ice and dream big,
Daryl G. Jones
Director of Research
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