This note was originally published at 8am on February 07, 2013 for Hedgeye subscribers.
“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 email@example.com 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 $1651-1686, $115.14-117.86, $79.41-79.99, $1.34-1.36, 91.93-94.31, 1.96-2.05%, and 1492-1517, respectively.
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research