Skinning Bears

This note was originally published at 8am on January 24, 2013 for Hedgeye subscribers.

“The skin of the bear must not be distributed until the bear has been killed.”

-Sir Winston Churchill


That’s what Churchill said after the Allies invaded Italy at Salerno in late 1943. If you’ve ever thought about trying to skin a bear yourself, locals from my neck of the woods would suggest you make sure it’s dead first too.


Risk management lessons in markets and in life tend to rhyme – if you practice common sense, that is. Some people get all religious about this stuff. Others practice some “technical” form of voodoo. I’m more into Churchillian-style strategic thinking myself.


During WWII, Churchill’s strategy was “to assign a larger importance to opportunism and improvisation, seeking rather to live and conquer in accordance with the unfolding event than to aspire to dominate often by fundamental decisions.” (The Last Lion, page 708)


Back to the Global Macro Grind


If your risk management strategy is to A) Embrace Uncertainty and B) react to changing probabilities based on time and price, you’ll be satisfied doing a whole lot of nothing sometimes. Waiting and watching is a risk managed choice.


That’s what we did heading into Apple’s (AAPL) earnings event. Since we didn’t have any fundamental “edge” on the quarter, and our risk management signal (Bearish Formation, TAIL RISK $561) said to stay away, any other decision would have been a gamble.


That doesn’t mean today’s reactions to AAPL (down -8%) or Netflix (up +30%) don’t present opportunities. And that’s the point. The great goals in my life have been scored when preparation meets opportunity. Patience is a virtue.


With the SP500 up for 6 consecutive days (up +4.8% YTD and +10.4% from its mid-November 2012 fiscal cliff freak-out closing low), plenty a stock market bear’s bum has been skinned – but has The Bear been killed?


If your answer to that is yes, you and I (and the T Bay locals) need to have a little chat about wild animals.


To review, there are 2 core components to what we do:

  1. Quantitative Risk Management (Signals, Factoring, etc.)
  2. Fundamental Research

On both, there are a few chinks in the bull’s growth horns this morning.


Quant Signals:

  1. KOSPI (-3.3% correction now from its YTD high) broke TRADE line support of 1985
  2. CHINA (Shanghai Comp), down -0.8% overnight, broke its immediate-term TRADE line of 2308
  3. JAPAN (Yen vs USD) failed to overcome 87.71 resistance again and is trading down hard, -1.2%
  4. Implied volatility in both the Yen and Japanese Equities is rising, fast
  5. Overbought signals across European Equities are being confirmed by lower immediate-term highs
  6. CRB Commodities Index failed at its long-term TAIL risk line of 306 (should snap 300 again today)
  7. Gold failed fast at intermediate-term TREND resistance of $1692
  8. Oil remains sticky, testing a TAIL duration breakout in both Brent and WTIC
  9. Copper, immediate-term TRADE overbought at $3.72/lb is making a series of lower long-term highs
  10. SPX overbought at 1496 and VIX oversold at 12.16 are what they are until they aren’t

Fundamental Research:

  1. Spain’s unemployment hits a higher-high at 26.02% (#PoliticalClass gets paid before The People)
  2. Japanese Exports fall another -5.8% y/y in DEC, despite setting their currency on fire!
  3. France printed a nasty Manufacturing PMI report for JAN, 42.9 (vs 44.9 in DEC)

Of course there are bullish Fundamental Research data points in this morning’s macro grind as well (imagine there wasn’t?). Chinese PMI of 51.9 in JAN was a little better than 51.5 in DEC; Germany’s Manufacturing PMI for JAN came in at 49.8 vs 46 last month, and the US economic data that’s pending (jobless claims today; New Home Sales tomorrow) continues to be bullish.


There’s always bulls and bears somewhere. Our daily service isn’t to be either – it’s to be objective and opportunistic when risk/reward changes (in any market or security) on the margin.


On the margin, was the Russell2000 making a lower-high yesterday a signal or was it noise? How about the US stock market’s breadth (advancers 46% vs decliners 50%) being negative on an up SP500 day? Why was there no volume (down 9% vs my TREND avg)? Channeling my inner-Churchill, inquiring risk management minds should never, ever, ever, give up asking questions.


Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, USD/YEN, UST 10yr Yield, AAPL, and the SP500 are now $1662-1692, $110.23-112.27, $3.65-3.71 $79.79-80.14 (USD bullish, Yen bearish), 80.71-90.41, 1.81-1.87%, $464-506 (Apple = immediate-term TRADE oversold in the post), and 1479-1496, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Skinning Bears - Chart of the Day


Skinning Bears - Virtual Portfolio


Today we shorted Delta Air Lines (DAL) at $14.38 a share at 3:18 PM EDT in our Real-Time Alerts. Airline bulls are all looking for the same catalyst that A) may not happen (US Air deal) and B) won't change Hedgeye Industrials Sector Head Van Sciver's Industry call that this time it's not different. Shorting Delta at immediate-term TRADE overbought with oil down.



Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.


Takeaway: Long MPEL for a trade on today's weakness

Keith added MPEL to our list of Real Time Positions at $19.40.  The TRADE risk range is $19.21-$21.31 with TREND support at $16.85.



An MPEL selloff on today's beat on earnings wasn't surprising.  Investors were already already expecting a beat and the London Times story on a junket crackdown didn't help.  However, a 6% sell-off looks overdone and we expect the sell side to be defending the stock and downplaying the Times article tomorrow.  We actually think the article has some teeth but we won't find out until after Chinese New Year (2/10/13) if that is the case.  In the meantime, we expect the stock to recover fairly quickly.



Expert Call; An Insider's Look into Pricing and the Restaurant Industry

Expert Call; An Insider's Look into Pricing and the Restaurant Industry - restaurant call pricing


We will be hosting an expert call titled "An Insider's Look into Pricing and the Restaurant Industry". The call, featuring Leslie Kerr of Intellaprice, will offer expert analysis on current industry trends as well as an opportunity to explore pricing power as we move through Q1 2013.  



  • The aim of this call is for us and our clients to develop a better understanding of companies' view of pricing as a strategy to absorb inflation in operating expenses over the next couple of years. 


The call will be held Wednesday, February 20th at 1:00pm EST. Please dial in 5-10 minutes prior to the 1:00pm EST start time using the number provided below. A link to the presentation will be distributed before the call, if you have any further questions email .

  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 946362#



  • How brands define pricing power
  • Methods companies typically use to measure traffic sensitivity to pricing
  • Macroeconomic factors that are worth monitoring to ascertain pricing power of the industry or a given company
  • Personnel within a restaurant company that are typically charged with making pricing decisions
  • The pitfalls of using test markets to measure pricing power
  • Any standard calculations that our expert or companies use in measuring pricing power



  • President & founder of Intellaprice, a pricing advisory firm for the restaurant industry
  • Built the pricing function for Dunkin' Donuts, formerly Allied Domecq Retailing US
  • While at Allied Domecq, she also held roles in strategy, finance, and brand management for Baskin-Robbins
  • Previously held roles in operations at PepsiCo Restaurant Services Group and in finance for Disney Consumer Products
  • Worked with Customer Relationship Management at Berkeley Enterprise Partners
  • Gained pricing and research experience at Coopers and Lybrand's Compensation Consulting practice
  • Earned her bachelor's degree in marketing and entrepreneurial management from the University of Pennsylvania's Wharton School
  • Earned her MBA at Duke University's Fuqua School of Business


Howard Penney

Managing Director


Rory Green

Senior Analyst


GPOR: The Short Case

Gulfport Energy (GPOR) is a darling of Wall Street.  Fifteen out of the 16 analysts covering the stock have Buy ratings, with an average price target of over $50 (the stock closed Tuesday 5 February at $42.27 and opened down a bit today after an early press release included disappointing production figures.)  


Our Energy Sector Senior Analyst Kevin Kaiser calls GPOR “one of the riskiest stocks in the energy sector.”  Kaiser’s analysis indicates a fair value for GPOR shares of between $15-$23 per share, about half of where the shares currently trade, and well below analysts’ optimistic price projections.  Hedgeye hosted a conference call today on GPOR for our institutional clients presenting Kevin’s in-depth analysis of GPOR’s reported earnings, recent press releases and guidance for 2013 and beyond, and comparing the common outlook with Hedgeye’s very different view.  This deep-dive presentation is what we call a Hedgeye “Black Book.”  Produced by our sector heads several times a year, Black Books offer our institutional clients in-depth analysis of a high-conviction idea, such as key developments within a sector, emerging regional trends, or analysis of an individual company.


GPOR: The Bull Case

GPOR owns substantial drilling rights in the Utica Shale, a vast geologic formation underlying 8 US states, including Ohio, West Virginia and Pennsylvania, through New York and up into Canada.  The Utica Shale is a hot target for oil and gas exploration, with drilling permits in Ohio reaching record highs since 2011.  The crux of the bull case for GPOR is its net ownership of 106,000 operating acres in the Utica Shale and projections for tremendous revenues, profits and cash flows as a result.  GPOR’s cost is around $6,000 per acre.  Kaiser says that if GPOR’s boosters are right, and the numbers come in at an equivalent to the highest levels of revenue and profitability their competitors have achieved, the stock could go to $80.  Bullish analysts say GPOR has been very successful – or very lucky – at acquiring “the sweet spot” in what should be the highest producing region in the US.


GPOR: The Bear Case

Kaiser asks a simple question: What do we really know about GPOR’s Utica Shale properties?  The answer he comes up with is: very little.  


It is difficult to model the production, profitability, and projected cash flow from GPOR’s Utica Shale operation.  All the company has released is production statistics as “peak IP rates” – the best rate of flow in the first 24 hours of production of a new well.  Independent industry experts agree you need several months of actual production figures to make a reasonable projection of a well’s output. 


GPOR has not released actual well drilling costs.  Cost data on similar producing wells released by GPOR’s competitors indicates GPOR’s cost projections are very optimistic – Kaiser believes they are unrealistic and will end up being raised substantially.  There are also additional costs associated with bringing a well on-line – construction of roads and storage, and seismic analysis for example.  None of these seems to have been factored into GPOR’s cost projections.  


The economics of drilling are highly sensitive to small shifts in a variety of inputs, but GPOR has only released peak IP rates, which have been enthusiastically snapped up by the bullish analysts.  We are left guessing at actual well costs, geological studies, completion data, and internal rate of return per well data – the actual components of profitability.  In order to make money in the exploration and production industry you have to get a lot of things right, and get them right consistently, and over a long period of time.  GPOR has not given us the data to get comfortable around this complex reality.


The composition of the Utica Shale production is also a factor.  Kaiser thinks the output will have a much higher gas component than other analysts believe.  Kaiser says this morning’s press release from GPOR validates this view.   Perhaps more important, Kaiser notes that today’s announcement confirms what he sees as GPOR’s pattern of issuing enthusiastic guidance, then later lowering their guidance, then confirming the lowered guidance with actual reported numbers – in this case bearing more potentially bad news, as the peak IP production figures were disappointing, and there was surprisingly high gas content.


Dropping The Other Shoe

Perhaps the biggest indicator that GPOR stock is not headed to dramatic new highs is its longstanding relationship with major Connecticut-based money management firm Wexford Capital.  Wexford brought GPOR into existence with the 1997 reorganization of a bankrupt conventional exploration and production company.  Over the years, Wexford has done extremely well for GPOR shareholders.  Wexford’s careful oversight of GPOR took the stock up to more than a 2,000% profit.  This relationship appears to have ended abruptly at the end of last year.  From an all-time high ownership stake of over 60% of GPOR shares, Wexford now owns about 0.2%.  Perhaps more important, Wexford owned substantial acreage in the Utica Shale, having bought in alongside GPOR.  Last year, Wexford sold its entire Utica Shale acreage to GPOR.  Asks Kaiser: there’s no one in the world who knows GPOR better than Wexford.  Wexford would not be likely to sell off their holdings if they believed GPOR was sitting on top of a gold mine – or in this case, an oil well.  The last insider buy of GPOR stock was 10,000 shares in September 20080.


As owners of operating Utica Shale acreage, Wexford has hard figures about well production, actual drilling costs, and profitability.  Their selling of GPOR stock can be tied to any of a number of considerations – notably to taking profits before changes in the tax code.  But selling their producing acreage is a different story.  Here, Wexford appears to have seen the future and said “No thanks.”  Kaiser believes this is the single most important data point, and one the rest of Wall Street is blithely ignoring.



For the Bull Case to come true, it looks like everything has to go right.  All projections – profitability, cash flow, asset value, and stock price – are based on what appear to be a very sparse set of vague statistics of the kind GPOR’s competitors would never use internally to plan their own business.  For the Bear Case to pan out, it should be sufficient for any one of the assumptions to break down.  If the Utica Shale ends up being worth substantially less than GPOR’s acquisition cost, if average production levels run substantially lower than the peak IP levels GPOR has released, if the composition of the resulting production has a high gas content, if the cost of well completion ends up being just the industry average – rather than the aggressively lower costs GPOR says they can attain – any one of these elements could be sufficient to create a major disappointment and a significant decline in stock price.


Kaiser points out there is a relatively small short position of about 8%, not enough to offer the hope of a major short squeeze.  All but one of the analysts covering the company rate the stock Buy, leaving little bullish reserve.  Options premiums appear very expensive on both the put and call sides of the market, which indicates the market is anticipating volatility.  Under most circumstances, a volatile outlook tends to lead to lower stock prices.  If GPOR breaks down because of a disappointment, there may be no safety net.


You can follow Kevin Kaiser on Twitter at @HedgeyeENERGY

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.