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THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – April 10, 2013


As we look at today's setup for the S&P 500, the range is 15 points or 0.49% downside to 1561 and 0.47% upside to 1576.         

                                                                                                                      

SECTOR PERFORMANCE


THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

EQUITY SENTIMENT:


THE HEDGEYE DAILY OUTLOOK - 10


CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 1.54 from 1.52
  • VIX closed at 12.84 1 day percent change of -2.65%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Applications, April 5 (prior -4.0%)
  • 7:30am: Fed’s Lockhart speaks at Atlanta Fed conference
  • 8:45am: Bloomberg U.S. Economic Survey, April
  • 10:30am: DOE Energy Inventories
  • 1pm: U.S. to sell $21b 10Y notes in reopening
  • 2pm: Monthly Budget Statement, March
  • 2pm: Fed releases minutes from March 19-20 FOMC Meeting
  • 5pm: Fed’s Fisher speaks on economy in El Paso, Texas

GOVERNMENT:

    • 9:30am: Senate Homeland Security Cmte hears from U.S. Border Patrol Chief Michael Fisher, acting Customs chief Kevin McAleenan
    • 10am: House Ways and Means hearing on govt’s ability to keep operating if Treasury reaches statutory debt limit
    • 10am: House Energy and Commerce panel hearing on Keystone bill intended to bypass the need for a presidential permit for the pipeline’s construction; TransCanada’s Alexander Pourbaix, NRDC’s Anthony Swift among witnesses 

WHAT TO WATCH

  • President Obama sends budget plan to Congress
  • Universal Entertainment’s Okada under U.S. criminal probe
  • Swap users win staggered delays in Dodd-Frank reporting rules
  • Apple said to discuss closer mobile collaboration with Yahoo
  • Citigroup hires McKinsey’s Chubak to help Corbat pare expenses
  • Home prices to decline in some cities as rates rise: Zillow
  • Exxon to seek second MTBE win in New Hampshire appeal
  • Microsoft says Surface tablet 2-yr warranty follows China law
  • Deutsche Telekom tallies MetroPCS votes to weigh higher bid
  • UnitedHealth units to pay $500m over hepatitis doctor
  • China exports miss forecasts as “absurd” data defended
  • Toyota says Corolla surpassed Ford Focus in 2012 global sales
  • Yahoo CEO Mayer puts Reses in charge of talent management, M&A
  • UBS plans to expand Asia corporate advisory headcount by 10%
  • Navistar accused in suit of misleading on engine compliance
  • APA expects offers for Australian gas pipeline in next week

EARNINGS:

    • Family Dollar Stores (FDO) 7am, $1.22
    • Fastental (FAST) 7am, $0.37
    • MSC Industrial (MSM) 7:30am, $0.90
    • Constellation Brands (STZ) 7:30am, $0.45 - Preview
    • CarMax (KMX) 7:35am, $0.46
    • Progressive (PGR) 8:12am, $0.44
    • Bed Bath & Beyond (BBBY) 4:15pm, $1.68 - Preview
    • Novagold Resources (NG CN) Aft-mkt, C$(0.03)

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • WTI Halts Two-Day Advance as Supplies Rise to Three-Decade High
  • Mine Town Rents Beating Manhattan Show Aussie Pain: Commodities
  • Copper Drops as China Exports Fuel Concern Supply to Top Demand
  • Gold Declines From One-Week High on Economic Recovery Outlook
  • Wheat Drops as USDA Report May Show Higher Reserves; Corn Climbs
  • Robusta Coffee at One-Week Low as Investors Sell; Cocoa Retreats
  • Goldman Lowers Gold Price Forecast Through 2014 as Cycle Turns
  • India Said to Consider Increasing Oilseed Prices to Boost Output
  • China’s Crude Imports Fall to Lowest in Six Months in March
  • Rebar Trades Near Two-Week High on Gain in Seasonal Demand
  • Asian LNG Set to Rise as Premium at Two-Year Low: Energy Markets
  • Gold in Yen Surges as Stimulus Erodes Currency: Chart of the Day
  • Mechel Said to Consider Revising Plan to Sell Eastern Coal Asset
  • Ex-Viterra Staff Join MAG Commodities to Trade Black Sea Grains
  • China Gold Imports From Hong Kong Rebound on Decline in Prices 

THE HEDGEYE DAILY OUTLOOK - 5

 

CURRENCIES


THE HEDGEYE DAILY OUTLOOK - 6

 

GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 4

 

EUROPEAN MARKETS


THE HEDGEYE DAILY OUTLOOK - 7

 

ASIAN MARKETS


THE HEDGEYE DAILY OUTLOOK - 8

 

MIDDLE EAST


THE HEDGEYE DAILY OUTLOOK - 9

 

 

The Hedgeye Macro Team

 

 

 

 

 

 

 

 

 

 


TRADE OF THE DAY: EWI

Today we shorted the iShares MSCI Italy Index ETF (EWI) at $12.08 a share at 1:31 PM EDT in our Real-Time Alerts. Back to the well as Italy bangs the top end of our risk range - bearish on the intermediate-term TREND duration. We'll cover when our signals tell us to. It's about sticking to your process and we're doing just that.

 

TRADE OF THE DAY: EWI - image001


S&P 500: The Sky's The Limit

The S&P 500 is enjoying a terrific bull run in 2013 and is up +10.2% year-to-date and up +13.6% over a one-year period. While the actions of various central banks have helped drive the index to a new all-time high, there other factors at hand that have helped boost the index. One has been the appreciation in value of the US dollar. Strong Dollar = Strong Consumption and consumption helps drive global growth. 

 

S&P 500: The Sky's The Limit - SPXytd


investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

Dollar Down, Oil Up

Get the dollar right and you'll get oil right. Such is the case today: dollar down, oil up. Oil has been taking it on the chin for the past two months as the US dollar appreciated in value and is now back above $94 a barrel (WTI crude). The US Dollar Index is down 0.50% alone today and Brent crude oil is still down -5.5% year-to-date. 

 

Dollar Down, Oil Up - USDOIL


CHART DU JOUR: MACAU: THE RISE OF VIP HOLD

  • We’ve documented mass hold climbing higher over the years.  VIP hold has also been trending higher lately above the theoretical win rate of 2.85% and closer to 2.96%.
  • March junket hold on a trailing twelve-month basis (TTM) was 3.21%, about 20bps higher than the TTM hold in January 2010.  If we take into account direct play, adjusted VIP hold on a TTM was 3.00% in March, compared with a 2.80% adjusted VIP hold TTM in January 2010.
  • While mass volumes have been resilient so far in the face of higher hold, it remains to be seen how the high hold will affect VIP volume growth.  The good news is that comps are relatively easy for the back half of the year.

 

CHART DU JOUR: MACAU: THE RISE OF VIP HOLD - ttt


LINN Energy: Tit For Tat

Sez You

Last week LINN Energy (LINE) published “LINN Energy Response To Another Round Of Short Seller Comments” on its website.  Two points are in order before we proceed.  First, Hedgeye is is not a short seller.  We are purely a research firm, an on-line financial media firm providing investment research free from the conflicts of proprietary trading or of managing money for third parties.  Second, we leave it to you to consider the implications of LINN posting this “rebuttal” on April Fool’s Day.  As we said in our initial presentation, we believe LINN’s financial reporting is… how shall we say…? lacking in transparency.  That has not changed.  Read on.

 

Your Bottom Line Hasn’t Changed

If you are like most investors, your own LINN units for the income they provide.  As was asked again at the close of today’s call – where else can you get an instrument yielding over 8%?  Would it upset you if we suggested that Argentina 2-year bonds are yielding over 8%?  The bottom line for LINN is: how safe is the distribution yield?  In our opinion – not very.  Maybe not at all.

 

Sez We

For our money – more importantly, for yours – we say LINN has not addressed the issue of Free Cash Flow.  There just doesn’t appear to be enough for them to reliably keep hitting the targets they keep setting when they announce guidance of what next quarter’s distribution to unitholders will be.

To review, we raised four fundamental issues in our March 21st call – and we added a new one today:

1-     Not enough Free Cash Flow (FCF)

2-     LINN’s unusual accounting for its options hedging gives them dollar-for-dollar credit for what they spend as cash available to the company

3-     The “Maintenance CapEx” metric is not even appropriate to this kind of company, and it understates the actual costs of m the business

4-     Thanks for the second look: on re-examination, we have lowered our valuation for LINN shares.  On March 21st we were willing to give the shares a fair value of around $15.  We now think it may be as low as $5.

5-     New item: LINN may be providing misleading calculations of how it values its acquisitions.  We believe this continues to inflate the reported value of the company, and is part of the reason we have lowered our valuation

Here are some key points we re-emphasize from our first presentation – points that we believe LINN’s April 1st response did nothing to clarify.

 

Adjusted cash flows from operations: our analysis of LINN’s DCF (Discounted Cash Flows) calculation indicates there was a $1.047 billion cash shortfall over the 2009-2012 period, being the difference between what we calculate to be $686 million in actual free cash flow, and $1.732 billion paid out in distributions.

 

When we net out the treatment of option premiums, the numbers get worse.  The cash shortfall over the period doubles, to $2.165 billion.

 

Material?  We think so.

 

How safe is your 8% yield looking now?

 

LINN management says they are no longer buying put options to hedge production.  But that still leaves over 30% of their annual production hedged with existing puts out to 2017.  The way we figure it, this could overstate future cumulative DCF by more than $600 million.

 

To hit their distribution guidance targets – in other words, to keep you happy getting your 8% yield – LINN needs to raise between $500 million - $850 million every year, either from the capital markets, or by selling off assets.

 

Maintenance Capex: Kaiser says he has questioned LINN’s investor relations department on numerous occasions for clarification of their Maintenance CapEx calculation.  IR says it is impossible for anyone but LINN to calculate this, because it is derived from non-public company internal data.  To put it bluntly: Maintenance CapEx is unverifiable, which means it is what management says it is.  The real nugget here is that LINN’s asset base is much more capital intensive than investors seem to recognize.  Kaiser’s work indicates LINN’s actual maintenance capex expense may be nearly twice what company figures indicate.

 

More to the point (see our write-up of Kevin’s March 21st presentation) Maintenance CapEx is a metric that applies to pipeline companies, not to Exploration & Production companies.

 

Value: So what’s LINN worth, anyway?  The company claims its shares are undervalues.  Says Kaiser, “Markets don’t care what managements say.”  With so many estimates and non-public factors going into the calculation of LINN’s asset base, the net asset value calculation starts to look like a free-for-all. 

 

Kaiser says that, compared to companies in its peer group, LINN is trading at a significant premium on a number of key ratios.  As just one example, the Price to Undeveloped Acreage metric.  Most companies in the group have an average 75% still undeveloped acreage value to stock price ratio.  LINN’s ratio is 3%.  LINN says they have unproven drilling inventory worth between $27-$48 per unit.  In fact, based on comparisons to other companies, and using LINN’s publicly reported figures, Kaiser says LINN’s unproven drilling inventory may very well be zero. 

 

As an example of how confusing LINN’s reporting is, Kaiser points to the company’s independent auditor who assigned a reserve of 0.67 BCFE to 2500 of LINN’s locations.  (Billions of Cubic Feet Equivalent – an industry term meaning how much untapped gas can actually be pumped and delivered over the life of the well.)  In contrast, LINN – using its own data – assigns an average of 1.67 BCFE across more than 8500 locations.  This is a completely unequal comparison and all but impossible to analyze.  Kaiser says an investor would want to see the calrification for management assigning a BCFE figure two and one-half times the quantity assigned by their independent auditor.

 

Finally, Kaiser says LINN assigns high values to properties it acquires, implying that some of the biggest and most sophisticated energy companies are giving away valuable acreage.  He points to instances where LINN has cranked up the valuation of a property to three times the value implied in the purchase price.  Once it gets on LINN’s books, it appears these acquisitions all of a sudden become far more valuable than the amount LINN paid to acquire them.

 

Comparing LINN’s producing properties to other companies in the same geographic regions, Kaiser calculates that last week’s asset sales imply the units are potentially worth only… are you ready?  As little as $1-$6.50 a unit.

 

Acquisitions:  Kaiser’s work indicates LINN may have substantially overstated the value of its acquisitions.  By using its method of accounting for its options, LINN does not include the options expense in the stated price of an acquisition.  This makes deals look more accretive than they are, and Kaiser points to a key 2012 acquisition that LINN said was completed for 6.1 X first year EBITDA (Earnings Before Interest, Taxes and Depreciation, a key investment banking metric).  On examination, Kaiser says LINN appears to have paid over 10 X EBITDA.

 

Conclusion:

Nothing has changed.

 

LINN Energy continues to be one of Kaiser’s “Worst Ideas” – a cautionary tale for investors desperate for safe returns in this low-interest rate environment.  Holders of LINN units should reflect that the energy business by its nature throws off unpredictable revenues.  That means they have to find the cash somewhere else, in order to keep the distributions at the same level.  Unitholders will have to decide for themselves whether a steady, predictable return of 8% on your money looks too good to be true.

 


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