Old Austerity

This note was originally published at 8am this morning, November 30, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“You never see the old austerity. That was the essence of civility; young people hereabouts, unbridled, now just want.”



That’s an old quote from a famous French playwright who has long been dead. “Moliere” was Jean-Baptiste Poquelin’s stage name. His urban legend was born when he collapsed and died in the middle of a play in 1673. He was 51 years old.


I’ll take some editorial liberty this morning and evolve Moliere’s quote for the Age of American Millenials and Baby Boomers: ‘You’ve never seen austerity. That was the essence of our grandparents; Millenials and their parents, unbridled, now just want.’


This is obviously a generalization but, in principle, I can’t imagine that an analyst from outer-space wouldn’t see the hypocrisy in Americans door busting each other on Black Friday for i-Pads at the same time as their Congress fights to keep interest rates on my savings account at zero percent as a result of an alleged depression.


Want, want, want. What can I get out of this market? Pretended Patriotism be damned, what’s in this for me?


The good and the bad news on this front is that we have leaders in this country who can enforce change. Some of that change is going to be slow. Some of it is going to hurt. Some of it is needed or what you’re seeing in European stock and bond markets is going to be playing at an American “Lifestyle” Center near you in 2011.


In proposing a 2-year pay freeze for US Federal employees, President Obama did the right thing yesterday in implementing the first stage of what we have been calling for since July of 2010 (when we were short the US Dollar on reckless government spending). Our Q3 of 2010 Hedgeye Macro Theme was titled “American Austerity” and we think that fiscal conservatism is the only path to US Dollar driven prosperity.


The debauching and devaluation experiments of the Big Government Interventionists have been tested and tried. From Japan to Europe and back home again, they have not worked. We need to fix these deficit and debt to GDP ratios, or the global bond market is going to fix us.


This morning you are seeing Greece’s stock market test its lows from June 2010 when the European Fiats made a conflicted and compromised promise to the world that Piling more short-term Debt-Upon-Debt was the elixir of life. Apparently 8 centuries of Reinhart & Rogoff data has once again trumped political storytelling. This time isn’t different.


Why me? Why now? Shouldn’t this be someone else’s problem?


I get that line of thinking, but I also get what wearing a team jersey means  - and, as legend USA Hockey Coach Herb Brooks said:


“You're looking for players whose name on the front of the sweater is more important than the one on the back.” 


Back to the construct of our intermediate-term global macro forecast…

  1. Growth Slowing
  2. Inflation Accelerating
  3. Interconnected Risk Compounding

We don’t have a choice but to do this now. European and Emerging Bond markets are telling you this and so are American Bond yields:

  1. European Sovereign Debt Yields continue to make a series of higher-highs as concerns push rightly towards Spain and Italy.
  2. Emerging Market Debt just had its worst month in 2 years (NOV down -2.9% on the EMBI Index with Brazilian and Russian weakness).
  3. US Municipal Debt funds just flashed their 2nd consecutive week of outflows, taking the 2-week total to north of $5 BILLION.

Yes, we recognize that a BILLION or a TRILLION dollars isn’t what it was to our grandparents, but these are still big numbers to consider on the margin. Remember, everything in global macro that matters happens on the margin.


US Treasury yields are bullish on both our immediate and intermediate-term durations (TRADE and TREND) again this morning as well (yes, that’s a very bad leading indicator for bond funds in your 401k). Despite The Ber-nank’s JapanEuro style political promises, Mr. Global Macro Market is saying hey, dude, remember The Lehman Brother?


If you or your parents are baby boomers, you know what a double digit mortgage rate means to your family’s discretionary income. God knows you don’t need a Johnny Come Lately Wall Street “economist” to warn you about that. Maybe it’s time to dig into those Old Austerity boxes of our forefathers this Christmas to remind ourselves that as good as it gets may be gone if we don’t stop ourselves from just want.


My immediate term support and resistance levels for the SP500 are now 1173 and 1197, respectively. I’ve maintained my ZERO percent asset allocation to US Equities. I’m still long the US Dollar (UUP) and short the SP500 (SPY) in the Hedgeye Portfolio.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Old Austerity - 1

Still Bearish: SP500 Levels, Refreshed



In the last 2 trading days the SP500 has sold off towards, but held, our immediate-term TRADE line of support (1173). That, not surprisingly, has my inbox ringing with questions as to why I’m not covering my short position in the SPY. Fair questions.


The answer relies heavily on 3 core-factors in my risk management model – PRICE, VOLATILITY, and VOLUME: 

  1. PRICE – both immediate and intermediate-term TRADE and TREND lines (TRADE = 1196, TREND = 1206) are stiff levels of new resistance.
  2. VOLATILITY – the VIX is up another +6% today and won’t calm down; it’s moved to bullish TRADE and TREND with no resistance to 23.89.
  3. VOLUME – on the intraday rallies, volume is almost laughably low; with month end (today), people haven’t capitulated selling, yet… 

Ultimately I think I’ll see my 1173 and that’s why I am patiently waiting and watching to see the river card.


Yours in risk management,



Keith R. McCullough
Chief Executive Officer


Still Bearish: SP500 Levels, Refreshed - 1


Strong year-over-year growth will continue for a number of months.



December is likely to be another strong month in Macau.  We are currently projecting about 50% growth which would exceed November’s YoY growth of approximately 40%.  Last year, November’s hold was unusually high and higher than December’s which created a more difficult comparison – 62% in Nov 2009 vs. 48% in Dec 2009.


Not only should December look strong, but Macau will likely generate 30%+ growth through March, even without any sequentially, seasonally adjusted growth.  That is, at current run rates of underlying demand, Macau will continue to defy expectations of moderation.


The following chart shows YoY growth for the next twelve months assuming no pick up in demand other than seasonality:




Of course, demand could always fall.  It’s hard to imagine a scenario where Mass visitation doesn’t continue to grow.  VIP has historically been a roller coaster and recent inflation fighting tactics in China could restrict liquidity.  So far we haven’t seen any impact but that is somewhat of a risk.  As it looks right now, demand just needs to stay steady to continue the YoY momentum through mid-2011.

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This note includes analyses of five home price series: Case-Shiller, FHFA, Corelogic, NAR Existing Home Sales, and Census Bureau New Home Sales.


All five home price series in this note show a notable worsening in the housing market in the most recent month.


Case-Shiller Continues to Fall: 20-City Down 0.7% MoM

The following chart shows Case-Shiller home price data on a month-over-month basis. As we've highlighted previously, by S&P's own admission, investors should not rely on the seasonally adjusted (SA) data as their seasonal adjustment factors are essentially unreliable. Rather, investors should rely on the non-seasonally-adjusted data as a better indicator of underlying trends.  It's worth emphasizing that the Case-Shiller series does have a notable seasonality - specifically, it generally improves sequentially through April, May, and June - so the NSA data has its own shortcomings.  




The chart of year-over-year price change below shows another deceleration in September.




Looking at the breadth of the data, 16 of 20 cities showed worsening MoM price changes and 19 out of 20 showed worsening YoY price changes.  Las Vegas was the only city to see a better YoY print (though still came in at -3.5% YoY).  It's interesting to note that the overall index figures seem to overstate how "good" things are when put in comparison with the charts below. In other words, the strongest markets are also the heaviest index components: NYC, LA, DC. This is also why the 20-city index looks much worse than the 10-city index. Consider Cleveland, where home prices dropped 3.0% last month (month-over-month) compared with a 30 bps drop sequentially the month before.






It's also interesting to note, as the following two charts show, that those cities with the highest prices are also those seeing the strongest price performance/resilience. Consider the regression line, which shows clearly that higher home price markets are trending better. This is a reflection of the growing divide between Washington and New York and the rest of the country.






It's evident from the charts above that an equal-weighted average of the 20 cities would yield a significantly more negative growth rate on both a MoM and YoY basis. Specifically, the 20-city equal-weighted month-over-month change was -1.1% compared with the volume weighted average of -0.7% and the 20-city equal-weighted year-over-year change was -1.1%, as compared with the volume weighted average of +0.5%.


Investors frequently look at affordability as a sign that demand is likely to improve.  We have analyzed this data and found that homebuyers usually don't buy low and sell high.  Instead, they buy when prices are going up and sell when they're going down.  There are two interpretations to this.  One is that homebuyers get sucked into momentum moves at the wrong time (much like retail investors in the stock market are generally taken as a contrary indicator).  The other interpretation is that potential homebuyers are not interested in levering up to buy a depreciating asset.  Either way, decreasing home prices aren't a catalyst for demand by themselves.  




It's critical to understand the timing associated with the Case-Shiller series.  The printed number is a 3-month rolling average released on a two-month delay, so the September release today is the average of July, August, and September.  Case-Shiller measures closing activity, which tends to lag signing activity by 1-2 months. To compare Case-Shiller to the MBA Mortgage Purchase Applications Index, we should look at applications from May/June/July.  Thus, today's Case-Shiller print is the first that does not capture a benefit from the April tax credit. With supply remaining at historical highs, we expect prices to increasingly come under pressure.  The chart below demonstrates.  




FHFA Home Price Index Shows No Signs of Life


The two greatest differences between Case-Shiller and FHFA home price indices are that Case-Shiller uses a value-weighted approach whereas FHFA uses an equal weighted approach, and Case-Shiller uses a 3-month rolling average whereas FHFA uses the most recent month. As such, sales of more expensive homes have a proportionately larger influence than sales of less expensive homes under the Case-Shiller methodology.


For those interested in how the the FHFA series differs from Case-Shiller, we include a brief description at the end of this note.




Corelogic Home Price Index Declines Year-over-Year

The Corelogic Home Price Index posted its second year-over-year decline in September.  September 2010 was down 3.5% versus September of 2009.  The only bright spots of improvement in the FHFA Index over the last year have lined up with the tax credits. The chart below shows the trend in home prices.  We include a description of Corelogic's methodology at the end of this note as well.  






Existing Home Sales Median Price Index

The National Association of Realtors publishes the median sale price of existing homes in conjunction with the Existing Homes series.  This series is not seasonally adjusted, so the year-over-year comparison is the right metric to consider, eliminating seasonal volatility.  The chart below shows that the median sale price for October fell -0.9% versus a year ago. Median price fell -0.7% versus the prior month, which is in line with the typical seasonal pattern.  




New Home Sales Median Price Index

The median price of new homes dropped sharply in October, according to Census Bureau data.  Median price fell 14% MoM to $194,000, the lowest price level since September of 2003.   On a year-over-year basis, median new home prices are down 9.4%. While the series is volatile, this is a significant move worth noting. 




How FHFA differs from Case-Shiller

Both indices employ the same fundamental repeat-valuations approach, but there are a number of data and methodology differences:

a. The S&P/Case-Shiller indexes only use purchase prices in index calibration, while the all-transactions FHFA HPI also includes refinance appraisals.  

b. FHFA’s valuation data are derived from conforming, conventional mortgages provided by Fannie Mae and Freddie Mac. The S&P/Case-Shiller indexes use information obtained from county assessor and recorder offices. 

c. The S&P/Case-Shiller indexes are value-weighted, meaning that price trends for more expensive homes have greater influence on estimated price changes than other homes. FHFA’s index weights price trends equally for all properties.

d. The geographic coverage of the indexes differs. The S&P/Case-Shiller National Home Price Index, for example, does not have valuation data from 13 states. FHFA’s U.S. index is calculated using data from all states.


Methodology of the Corelogic HPI

Corelogic explains, "The CoreLogic HPI incorporates more than 30 years worth of repeat sales transactions, representing more than 55 million observations sourced from CoreLogic industry-leading property information and its securities and servicing databases. The CoreLogic HPI provides a multi-tier market evaluation based on price, time between sales, property type, loan type (conforming vs. nonconforming), and distressed sales. The CoreLogic HPI is a repeat-sales index that tracks increases and decreases in sales prices for the same homes over time, which provides a more accurate "constant-quality" view of pricing trends than basing analysis on all home sales. The CoreLogic HPI provides the most comprehensive set of monthly home price indices and median sales prices available covering 6,208 ZIP codes (58 percent of total U.S. population), 572 Core Based Statistical Areas (85 percent of total U.S. population) and 1,027 counties (82 percent of total U.S. population) located in all 50 states and the District of Columbia."


Joshua Steiner, CFA


Allison Kaptur


On behalf of my teammates here at Hedgeye, I'd like to thank all of you - our subscribers, partners, and friends - for giving us all of the research feedback that you do. Today, we would like to share with you some interesting and well-thought out feedback on the U.S. Dollar’s long term outlook from one of our subscribers, as well as our responses to that subscriber.


We remain long the U.S. Dollar via the etf UUP in the Hedgeye Virtual Portfolio.


Hedgeye Editorial

To: Darius Dale

Subject: Long Term Outlook for the U.S. Dollar


JEFF: “You guys do great work and are providing a fantastic service to the investor/wealth manager marketplace.


Question for you, has Hedgeye considered doing a longer term prognosis for the USD and what that entails from an investment thesis perspective? You have been very adroit at calling short term inflection points and directional changes in the USD, but what about longer term?  The reason I ask this is that despite the recent fall off in correlation between the $$ buck and commodities and metals, hasn't it typically been a higher correlation (since all this "stuff" is dollar denominated?) Longer term, so goes the dollar, so goes (inversely) oil, gold, silver, PGMs, most agriculture, etc. Is that truth or myth?”


HEDGEYE: We have done a great deal of longer-term work on the $USD, none more powerful than our August Monthly Strategy Call – Should U.S. Government Debt Be Rated Junk Status (email us if you need a copy of the replay and presentation materials).


It’s true that commodities have historically moved inversely with the $USD (see chart below).




JEFF: “Not to come off as overly cynical, but for all the rhetoric by politicians on cutting government spending and fiscal responsibility, we have heard this before. Deficit spending in and of itself isn't disastrous, but long term sustained and growing deficit spending eventually is, and that's the situation the U.S. is in.  I couldn't tell you precisely when the US began it's sustained deficit spending binge (aside from WW2), but my sense is that it has been going on at least since Ike and has been virtually unabated, except for a year or two during the Clinton administration, for the better part of 50 years.  


At this point I would venture several observations:  1) 50 years is a long time, 2) it is both a republican and democrat problem, both parties are guilty of it, so simply changing the political guard is not a solution, and 3) it has been aided and abetted by a willing electorate, of which 45% of households now pay little to no income taxes (WSJ). To think that the U.S. will suddenly find the "new religion" of austerity and fiscal responsibility on the heels of half a century of spending beyond it's means, one would have to suspend one's faculties. People have gotten too used to getting free stuff, and politicians have gotten too used to giving stuff away to get re-elected, and government has gotten too big and bloated and wants to sustain itself and the populace, like the proverbial frog in the slowly boiling water, has grown to increasingly think we actually need this government. And with enlarged government, comes the need to spend, and spend the U.S. has like no government before it in the history of the world. Obviously, this has major implications for where we find ourselves and equally major implications for where we go from here.


And this is where I come to the crux of my question(s) for Hedgeye.


The Reality on U.S. Deficit Spending

First, ignoring unfunded liabilities (or maybe not?), if you graphed annual U.S. government deficit spending since the 60's I think you might find pretty quickly that deficit spending was a structural problem in the U.S.  All rhetoric to the contrary is simply that: rhetoric. The question in the U.S. is not "will there be a deficit?" It's how LARGE the deficit will be?  I believe I am correct in saying that if you look at the data, one would have to believe in elves in the forest to believe for a moment that the U.S. is capable of balancing a budget. "Fiscal restraint" is political code for running smaller deficits. It just doesn't seem do-able.”


What's the Run-Rate on U.S. Debt (where are we going?)

With Washington essentially gridlocked for the next two years, what is the run-rate on U.S. Government Debt? David Stockman has said that we are adding $1T to the national debt every 15 months. That actually seems low to me. Today we are at $13-$14T national debt, by end of 2011 where will we be? $15T ? Where will we be by the end of 2012? $16T + ? With a slowing global economy and the U.S. economy with more drags on it than a farm tractor (housing, high unemployment, de-leveraging, major state level budget issues, banks with huge loan impairments still sitting on their books, etc.), what is your outlook for US GDP to government debt? Looks like we are getting ready to flip upside down with government debt soon to exceed GDP. Maybe that's already happened. It used to be that people justified spending as long as economic growth exceeded it. "It's not how much debt you have, it's how much GDP you have." Now the runaway train of debt appears to be getting ready to race past GDP (isn't this a historical and somewhat foreboding event?) and while it's hard to grow an economy by $1T of GDP in a year, our run-amuck government  doesn't seem to have any problem exceeding that in debt creation (year after year).  In fact the US is now buying it's own debt . This all seems to be pushing us to some kind of tipping point.”


HEDGEYE: It’s downright frightening to consider that the U.S. government debt will soon exceed GDP – especially when you consider the seminal work of Reinhart and Rogoff, who have shown empirically that debt > 90%/GDP structurally impairs economic growth by nearly half in advanced economies. We could blow by 100% debt/GDP much sooner than consensus thinks, as our deficit/GDP projections for the next two years are significantly greater than the likes of the CBO and OMB (see charts below).






JEFF: “What's the Historical Correlation of U.S. Debt Growth to the Decline of the USD?

Seems like a pretty clear correlation, not every year, but over time. You out-spend your economic growth, you run structural deficits year after year, you pile debt upon debt. You ultimately create a drag on economic growth and de-base your currency.  Is this the case with the USD? “


HEDGEYE: The $USD has responded as you would expect to long-term debt buildup and structural deficit spending.




JEFF: “What are the Implications of all this?

IF deficit spending is a structural problem in the U.S. with a lengthy history going back a half century (I think the data suggests it is); and

IF little progress can be made over the next 2 years due to Washington gridlock, in any case, the current deficit run-rate is a complete runaway train regardless; and

IF there is a longer term correlation between growth of public debt and devaluation of the USD


Then what are the longer term implications for investing in things that are denominated in the USD?


HEDGEYE: One would think up, but the likelihood that the USD gets replaced as the world’s reserve currency grows with each passing day (see recent SDR adjustments). Why not crude oil denominated in Chinese yuan? It’s not that far of a conceptual leap as it was even five years ago. This is a very long term call, of course, so there will be a lot of volatility to weather from here to now. That’s why we proactively manage risk on a duration-agnostic basis.


I know this is a complicated question. It's actually a bundle of questions. On one hand, in the context of history, it seems quite simple: you run up unsustainable debts, you ultimately hammer your currency, maybe create a crisis and put a drag on economic growth (Japan). But on the other hand, currencies are baskets of other currencies, it's all relative. In the short term what matters is how you stack up relative to everyone else and Europe clearly has significant problems, but it seems like our time is coming, perhaps a couple of years down the road. Perhaps it's just a question of duration.  The SS United States is sinking more slowly, taking longer, but sinking nonetheless.”


HEDGEYE: You hit the nail on its head here, particularly with your points on duration. Duration Mismatch gets a lot of super-duper smart investors ran over because they don’t realize the fundamental difference between investment research and actually investing. Japan and one/all of the PIIGS could blow up before the U.S. has its day of reckoning.


JEFF: “Does US debt (excluding unfunded Liabilities) now exceed GDP?  Will that be a seminal event in U.S. economic history? Does it matter?”  


HEDGEYE: No, not yet, and yes, this will be a seminal event in the U.S.’ economic history. Whether the markets lend the appropriate focus to it or not will be another story. At any rate, anyone who understands the effects of leverage on the way down will arrive at the conclusion that piling debt upon debt will always matter and it is a negative thing once the Rubicon of 90% Debt/GDP is crossed.


JEFF: “While the dollar may be breaking out to the upside in the short term, what is your longer term take on the USD in light of mounting U.S. debt problems?” 


HEDGEYE: Bearish.


JEFF: “What is your take on the run-rate for U.S. debt? Do you see a tipping point? Even if we waved a magic wand over Washington and political contention ceased and harmony and singleness of purpose suddenly prevailed, isn't the best case that we run $500-$600B annual deficits?  Is the US debt a runaway train at this point even under better circumstances?”


HEDGEYE: Yes, the boat has left the dock. As we uncovered in our call w/ Peter Orszag, former director of the OMB, we can only cut so much – perhaps to the tune of just 1% of GDP. To really rein in the deficit, we need a revenue adjustment – and a major one at that. Whether or not there will be any political spine to implement such a solution is, at best, up for debate and, at worst, unlikely. 


JEFF: “If this is the case, what is the investment implication for usual suspects like oil, gold and other commodities?”


HEDGEYE: We are bullish long term on both crude oil and gold – but not at every price. There will be alpha to uncover on both the long and short side of all three (USD, gold, oil) over various durations within the context of the long-term structural decline of the USD.


I could be totally wrong here and some of the comments I put forward as facts may not be fully accurate and may in fact be pseudo-facts (I think they are substantially accurate, but I may be wrong), but this overall question on debt, the dollar and it's implications for investing seem like the "elephant in the room". Hedgeye has proven itself quite skilled at making macro calls and you certainly aren't afraid of calling BS when you see it. It seems like "having a take" and being positioned for where we are headed a few years down the road, would be an extremely worthwhile endeavor.  Food for thought.


All the best to Hedgeye,



Daily Oil & Gas Perspectives

From the Global Oil and Gas Patch: November 30, 2010

Current positions in the Hedgeye Virtual Portfolio: long LUKOY, long CEO

Chart of the Day……


Daily Oil & Gas Perspectives - nov 30 chart

Key Metrics……


Daily Oil & Gas Perspectives - nov 30 table

North American Energy News……

Husky to Buy Assets from XOM……Husky Energy (HUSKF ADR) – Canada’s 3rd largest oil producer and refiner – will buy ExxonMobil’s (XOM) oil and gas properties in Alberta and British Columbia for $860M.  The deal will add 21,900 boe/d and 113 Mboe of reserves to Husky’s portfolio.  Husky raised its 2011 capex budget by 20%.  The company will raise $1B through an equity offering.  (Reuters)


Hedgeye Energy’s Take: Husky has struggled the last few years to grow through the drill-bit and XOM’s desire to shed non-core and conventional assets fits HUSKF’s immediate needs. Additionally, the company intends to scrap a spin-off of its South China offshore discoveries in Liwan-3 Block and will submit a joint development plan with CNOOC (CEO).

BP to Fund Oil Sands Project……BP (BP) will provide the first $2.5B for the Sunrise oil sands project in northern Alberta, Canada – which it owns a 50% stake in.  They will collaborate with Husky Energy (HUSKF ADR) on the project, which cancelled plans in Southeast Asia to focus on the Canadian sands (see above post).  This is BP’s first major commitment since the Deepwater Horizon disaster.  (Financial Times)


Hedgeye Energy’s Take: As BP is forced to sell assets for Macondo GOM liability, oil sands, as a low political and exploratory risk environment, looks increasingly appealing.  Husky and BP have a joint venture: HUSKF works in the Sunrise oil sands and BP contributes its Ohio Toledo Refinery.

Seadrill Increasing Investment……Led by billionaire John Fredriksen, Seadrill (SDRL) has invested $2B in the past two month on oil rigs, leading the jump in orders as safety concerns over BP’s spill has sparked demand for newer, safer platforms.  Deepwater rig companies like Seadrill and DryShips (DRYS) have ordered 20 deep and shallow-water rigs since BP’s disaster, raising global orders by 22%.  Deepwater rig rates have stabilized after a 30% plunge after the Macondo spill and may return to pre-recession levels in three years.  (Bloomberg)


Hedgeye Energy’s Take: New rig demand is being driven by the need to retire the majority of the existing aging rig fleet, the need for more complex rigs to operate in deeper waters and more remote and difficult terrain, and an increasing concern for operating rig safety post-Macondo.

In U.S. West, Oil Rush could Exacerbate Gas Glut…… The promise of oil and liquids-rich shale plays in the U.S. West has resulted in a rush of E&Ps to the region, and some analysts believe the production of associated gas could exacerbate regional competition in a market already awash in gas.  (Platts)


Hedgeye Energy’s Take: We have voiced this concern in earlier energy notes as a very real issue, that will continue to weigh on natural gas prices into 2012. This is a particular concern in the Rocky Mountain areas that are oversupplied with gas and are hot targets for liquids plays.

World Energy News……

Lukoil Beats Estimates……Russian oil giant Lukoil (LUKOY ADR) reported Q3 net profit of $2.82B vs. Reuters $2.11B.  Revenue and EBITDA also beat estimates and year-ago levels.  The company says it plans to gradually increase their dividend.  The profit increase was due to higher oil prices, a $438M one-off gain, and a large disposal of crude from the company’s inventory, the company said.  (WSJ)


Hedgeye Energy’s Take:  We are currently long LUKOY in the Hedgeye Virtual Portfolio. This 87% oil weighted Company is living within its means, with 2010 net cash flows (NCF) after capital spending expected to grow nearly threefold to ~$7.70/ADR, and 2010 expected earnings to soar ~40% to ~$11.80/ADR. Stock trades at an attractive eight times enterprise value to NCF.

Russia Approves XOM Budget……ExxonMobil’s(XOM) production budget in Russia’s offshore Sakhalin 1 field has been approved by the government.  The budget calls for a long-term development until 2055 under which expenditures are to be $95.3B.  The Kremlin monitors the budget strictly because they share in the revenue – an increase in expenditures leads to a cut in the state’s share of revenue.  (Platts)


Hedgeye Energy’s Take: Despite rumors that XOM would be replaced as the operator in Sakhalin (30% working interest) due to project cost increases, XOM’s technical expertise is too important to the development of the complex offshore Sakhalin fields and will remain the leader there.  The Kremlin realizes how critical production growth from the Sakhalin Fields has been to Russian domestic production – one of their few fields not reporting a net decline.

Anadarko Finds More Mozambique Gas……Anadarko Petroleum Corp (APC) has made its third gas discovery in offshore Mozambique this year, making the total great enough to warrant an LNG development.  This will be East Africa’s first LNG project.  (Platts)


Hedgeye Energy’s Take: Abundant gas resources in offshore East Africa are valuable because the region is an attractive export destination for gas-hungry Asia.


Lou Gagliardi


Kevin Kaiser

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