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Going Global

“We have to remember we're in a global economy. The purpose of fiscal stimulus is not simply to sustain activity in our national economies, but to help the global economy as well, and that's why it's so critical that measures in those packages avoid anything that smacks of protectionism."

-Prime Minister Stephen Harper 


Next week Keith and I will be taking the show on the road to London.  Our top notch sales team has set up a great schedule and we will be engaging with 20+ of the largest investment firms in London.  Without a doubt, it will be interesting to get a sense for sentiment, outlook and flows from another continent. At the end of the week, we may even peak our heads into a pub.  (If you are a London based fund, we still have a few slots left so email if you want to set up a meeting.)


Canadian Prime Minister Stephen Harper knows a thing or two about free market capitalism.  In fact, Harper went so far as to export the head of his central bank, Mark Carney, to England.  As the newly anointed Governor of the Bank of England, Carney is already feeling the heat in British Parliament this morning in his first grilling.  On the topic of the Bank of England independence, Carney minutes stated:


“There is no question about my independence as governor of the Bank of England. There is a governance structure that has been put in place, there is an absolutely clear structure.”


So, if the politicians of England were looking for a patsy, it would seem, at least for now, Carney is not their man.


The benefit for Carney is that the U.K. appears to be starting to see stabilizing growth, even as the rest of Europe is still struggling.  The most recent British data point is December industrial trade production that was up 1.1% from November to December.  Certainly that’s not a growth statistic to get overly excited about, but on the back of U.K. home prices that were up 1.3% in January and January services PMI that was reported at 51.5.  Meanwhile, the Eurozone in total reported a PMI of 48.6, which signifies contraction.


Not surprisingly, the New York Times has been critical of Prime Minister David Cameron’s decision to get the fiscal house in order as a path to long term sustainable growth.  In fact, in a recent article titled, “God Save The British Economy”, Adam Davidson argues that Cameron’s decision to cut government spending to eliminate crowding out of the private sector has hurt the British economy vis-à-vis the American economy.


The funny thing is that in the fourth quarter of 2012 while the British economy shrank -0.3% sequentially, the U.S. economy didn’t fare much better at a -0.1% sequential decline.  Meanwhile, the U.K. has been steadily improving its fiscal situation with a debt-to-GDP of 88% versus the U.S. at 107%.  Whether you are a Keynesian or not, in the long run we all likely agree that the less government money that is used to service government debt, the better an economy will fare.


While I am on the topic, today is set to be an interesting day in Europe with the beginning of the two day EU summit kicking off in Brussels. Undoubtedly, a key topic will be the recent strength of the Euro, especially versus the Japanese Yen.  Perversely as both the Europeans and Japanese actively try to devalue, with both rhetoric and policy, it should be increasingly positive for the U.S. dollar and consumption in the U.S.  Consumption, of course, is 70% of the U.S. economy. 


In the short run, though, U.S. equities are starting to price in stabilization of economic growth.  To us, this looks like a spot to reduce some equity exposure and cover bonds and gold, especially with the SP500 up a quick 5%+ on the year and the VIX at 13.4.  Meanwhile, insiders, based on a report out yesterday, are selling at a level of 9.2:1, the highest level since the equity sell off in 2011.


On a company level, I wanted to highlight our short call yesterday on Gulf Port Energy, with the ticker GPOR.  Energy is followed by Senior Analyst Kevin Kaiser and put together a very thoughtful presentation of some 60 pages that walks through the history of the company and a sum-of-the-parts valuation.  The nut of it all is that we think GPOR is one of the better shorts in energy for the following reasons:


-          Sentiment is extremely positive with 15 buys and 1 hold, and the stock is trading at literally a 52-week high;

-          Former majority shareholder Wexford Capital has exited their entire position in GPOR;

-          Consensus numbers appear too high for this year and next (as evidenced by yesterday’s pre-release);

-          GPOR is expensive trading at $94 EV / proven reserves ($/boe) versus the peer group at $16; and

-          Our NAV valuation gets us to ~$22 per share versus the current stock price of ~$40.


Obviously, when you make a short call on a stock it raises the ire of some and interest of others. The beautiful thing about being Hedgeye is that we have no banking, trading, or asset management.  We get paid to simply generate compelling investment ideas and do great research.  A simple enough concept, though a concept not always embodied in the hallowed halls of Wall Street 1.0.


As Sigmund Freud once said:


"Flowers are restful to look at. They have neither emotions nor conflicts."

The Hedgeye research team is many things, but wall flowers they are not. Thankfully, we are also not conflicted.


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, EUR/USD, USD/YEN, UST 10yr Yield, and the SP500 are now $1, $115.14-117.86, $79.41-79.99, $1.34-1.36, 91.93-94.31, 1.96-2.05%, and 1, respectively.


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Going Global - Chart of the Day


Going Global - Virtual Portfolio


TODAY’S S&P 500 SET-UP – February 7, 2013

As we look at today's setup for the S&P 500, the range is 25 points or 1.33% downside to 1492 and 0.32% upside to 1517.          



BRAZIL – the Bovespa has joined the KOSPI confirming TRADE and TREND duration breakdowns – this, combined with European Indices breaking their immediate-term TRADE lines almost across the board, is new. We respect new.













  • YIELD CURVE: 1.73 from 1.71
  • VIX  closed at 13.41 1 day percent change of -2.26%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: BoE announces interest rates
  • 7:45am: ECB announces interest rates
  • 8:30am: ECB’s Draghi holds news conference
  • 8:30am: Nonfarm Productivity, 4Q P, est. -1.4% (prior 2.9%)
  • 8:30am: Initial Jobless Claims, Feb. 2 est. 360k (prior 368k)
  • 9:30am: Fed’s Stein speaks on financial stability in St. Louis
  • 9:45am: Bloomberg Consumer Comfort, Feb. 3 (prior -37.5)
  • 10am: Freddie Mac mortgage rates
  • 10:30am: EIA natural-gas storage change
  • 11am: Fed to purchase $1.25b-$1.75b debt in 2036-2042 sector
  • 3pm: Consumer Credit, Dec., est. $14b (prior $16.045b)


    • NTSB Chairman Deborah Hersman provides update of investigation into Jan. 7 fire that occurred on Japan Airlines Boeing 787 at Logan Intl Airport in Boston, 11am
    • Sen. Bernie Sanders, I-Vt., holds news conference on legislation to stop corporations from sheltering income in Cayman Islands, other tax havens, 10:30am
    • N. Anthony Coles, CEO of Onyx Pharmaceuticals, attends Senate briefing with FDA Commissioner targaret Hamburg, 12pm
    • ITC votes on dumping of frozen, warm-water shrimp from China, Ecuador, India, Indonesia, Malaysia, Thailand, Vietnam
    • FAA, DOT hold mtg on performance standards for collision avoidance systems, 8:30am
    • USPS Board of Governors hold closed mtg, 10am


  • Euro strengthens against the dollar before ECB policy decision
  • BOE will likely maintain benchmark interest rate at 0.5%
  • January retail sales likely helped by clearance
  • China injects record $138b into financial system
  • Barclays said to dismiss traders amid 275 job cuts in New York
  • U.S. Airways talks with AMR said to intensify as deadline looms
  • McGraw-Hill defense seen as diversion against U.S. fraud claims
  • Deep-water safety defect threatens global offshore oil drilling
  • Libor accords leave banks facing states with massive claims
  • JPMorgan overtakes Wells Fargo as most valuable bank in U.S.
  • Yahoo links up with Google to put ads on finance, news sites
  • BofA said to shift U.S. Trust bonuses in push for more clients
  • Dell sets Nov. 5 deadline to complete $24.4b LBO deal
  • Teck Resources earnings beat est; sees 2013 coal input of 25mt
  • U.K. manufacturing rises most since July on machinery, chemicals
  • Spain sells EU4.6b bonds vs maximum target EU4.5b


    • Cigna (CI) 6am, $1.48
    • Cognizant (CTSH) 6am, $0.91
    • Manulife Financial (MFC CN) 6am, C$0.32 - Preview
    • ON Semiconductor (ONNN) 6am, $0.07
    • Patterson-UTI Energy (PTEN) 6am, $0.29
    • Starwood Hotels (HOT) 6am, $0.65
    • Air Canada (AC/A CN) 6am, C$(0.23)
    • Bunge (BG) 6:30am, $2.32
    • Coca-Cola Enterprises (CCE) 6:30am, $0.44
    • Flowers Foods (FLO) 6:30am, $0.25
    • Hasbro (HAS) 6:30am, $1.16
    • International Flavors (IFF) 6:40am, $0.84
    • Ingredion (INGR) 6:45am, $1.42
    • Teradata (TDC) 6:55am, $0.74
    • Philip Morris (PM) 6:59am, $1.22 - Preview
    • BCE (BCE CN) 7am, C$0.66
    • Fortis (FTS CN) 7am, C$0.50
    • Lazard (LAZ) 7am, $0.33
    • Sally Beauty (SBH) 7am, $0.34
    • Scripps Networks  (SNI) 7am, $0.92
    • Sprint Nextel (S) 7am, $(0.44) - Preview
    • Xylem (XYL) 7am, $0.46
    • Noble Energy (NBL) 7:28am, $1.13
    • FLIR Systems (FLIR) 7:30am, $0.50
    • MSCI (MSCI) 7:30am, $0.53
    • Och-Ziff (OZM) 7:30am, $0.72
    • Monster Worldwide (MWW) 7:30am, $0.07
    • Exelon (EXC) 7:30am, $0.65
    • Graphic Packaging Holding (GPK) 7:30am, $0.08
    • KKR & Co (KKR) 7:55am, $0.21
    • Arrow Electronics (ARW) 8am, $1.08
    • Brookfield Renewable Energy (BEP-U CN) 8am, $0.01
    • Sigma-Aldrich (SIAL) 8am, $0.95
    • Shoppers Drug Mart (SC CN) 8:21am, C$0.84
    • Advance Auto Parts (AAP) 8:30am, $0.75
    • New York Times (NYT) 8:30am, $0.31
    • Medical Properties Trust (MPW) 8:30am, $0.26
    • Great-West Lifeco (GWO CN) 10:49am, $0.53 - Preview
    • NCR (NCR) 4pm, $0.70
    • Coinstar (CSTR) 4:01pm, $0.76
    • Genpact Ltd (G) 4:01pm, $0.24
    • Nuance Communications (NUAN) 4:01pm, $0.36
    • XL Group (XL ) 4:01pm, $(0.36)
    • American Capital Agency (AGNC) 4:01pm, $0.95
    • Regal Entertainment Group (RGC) 4:01pm, $0.20
    • CareFusion (CFN) 4:02pm, $0.52
    • Prospect Capital (PSEC) 4:02pm, $0.42
    • Activision Blizzard (ATVI) 4:05pm, $0.72
    • Republic Services (RSG) 4:05pm, $0.43
    • SunPower (SPWR) 4:05pm, $0.14
    • Riverbed Technology (RVBD) 4:05pm, $0.29
    • DCT Industrial Trust (DCT) 4:10pm, $0.10
    • Apartment Investment & Management Co (AIV) 4:11pm, $0.50
    • LinkedIn (LNKD) 4:15pm, $0.19
    • Microchip Technology (MCHP) 4:15pm, $0.39


OIL – huge headwind developing for global consumption #GrowthStabilizing with Brent Oil signaling higher-highs and higher lows on our intermediate-term TREND duration. If you need a reason to start selling some stocks and covering Treasury shorts, that’s it.

  • Brent Crude Rises to Four-Month High, Extends Premium Over WTI
  • U.S. Soy Supply at 48-Year Low as Brazil Ships Held: Commodities
  • World Food Prices Were Stable in January, According to UN Index
  • Zinc Falls for Third Day as Euro-Area Economies Keep Struggling
  • Corn Drops on Speculation USDA May Raise U.S. Stockpile Outlook
  • Platinum Rally Stalls on Speculation Miners May Boost Selling
  • Offshore Drilling Halted by U.S. on Wells With Flawed Bolts
  • Rebar Advances to Nine-Month High as Iron Ore Rallies on Demand
  • Cooking Oil Imports by India Seen Climbing to Record to Beat Tax
  • China Buys Gas at Record as Crude Imports Capped: Energy Markets
  • Copper Seen in ‘Struggle’ to Exceed $8,422: Technical Analysis
  • Olam Second-Quarter Profit Jumps 20% on Grains, Nut Volumes
  • Astra Agro Sells 11,000 Tons of Palm Oil in Auction (Table)
  • Nickel Seen by Deutsche Bank Rebounding After Chinese New Year








EUROPE – what would be really interesting is if we saw the EuroStoxx50 snap its intermediate-term TREND line of 2615 support; its hanging on, barely, this morning – but we need to give this one some time. Waiting/watching for headfakes has been key.













The Hedgeye Macro Team





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The Macau Metro Monitor, February 7, 2013




Secretary Tam said that the government is stepping up its inspection on the gaming industry and imposing stricter examination on the backgrounds of the casino junkets in order to “purify” the industry.  “It’s been the government’s established policy to maintain a stable and healthy development of the gaming industry,” Tam said, “should we find any illegal activities in the sector, we won’t turn a blind eye to it, nor take no action against such activities.  The junket system has been operating in Macau for many years, during which we have been optimizing the system with all kinds of adjustments, and reinforcing our supervision of the system. Junket operators need to register with the authority and get a license before they can do business here and we’re planning to exercise stricter examination of their registration. The government is reviewing its current practice in this respect in order to have a closer check on their qualifications, particularly whether or not they have criminal records."



Philippine casinos were excluded from the amendments passed on stronger money-laundering controls. Senator Teofisto Guingona said casinos and Internet gaming were excluded at the request of the House and of the state regulator Philippine Amusement and Gaming Corp.  “(They) excluded casinos from coverage because (House members) warned it would deter investors. That’s the number one reason. And number two, Pagcor,” Guingona said.


The Senate’s passage of the law came five weeks before the opening of Entertainment City, a $4 billion Manila casino complex.



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

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