“This means that truth is not a constant but is actually created.”
-George F. Kennan
The aforementioned quote comes Kennan’s 1947 State Department memo titled “Psychological Background.” He was writing about Stalin’s Russia, but he could have very well been writing about Putin’s Russia and/or Bernanke’s US monetary policy today.
“The leadership is at liberty to put forward for tactical purposes any particular thesis which finds it useful to the cause at any particular moment and to require the faithful and unquestioning acceptance of that thesis by members of the movement.” (George F. Kennan, pg 260)
Who are the members of the US Dollar Devaluation Movement? Don’t blame the bureaucrat at the printing press for all of this. There’s no fair share in that. You have to lop together the entire Bush and Obama Administrations alongside Bernanke and his pandering press. Weak US Dollar policy created the weakest America you have seen since the 1970s. #StrongDollar is the only way out.
Back to the Global Macro Grind…
This is why Kennan is so very relevant to US history. Truman’s paper pushers in Washington needed someone who not only lived the game (Kennan lived in Russia), but had a completely different perspective on how to play it going forward. Evolving as time and facts do is as American as most Americans want to believe they are. The American collective eventually sniffs out the truth.
One of my investing heroes, Ray Dalio, always asks: “What is the truth?” And I suspect that if you are held accountable to the returns in your accounts every day, that’s an important question for you to answer too. But do central planners trying to uphold their academic dogmas and/or the conflicted media who fawns over them want the truth? Or do they want to save face and access?
Sadly, those are rhetorical questions at this point. When it comes to Fed front-running, policy leaks, selective disclosures, IRS preference checks, spending scandals, etc etc. at this point, The People actually expect the government to be lying. That’s not good. Until it is. And I think, with CNBC ratings hitting all-time lows as markets hit all-time highs, conflicted and compromised sources are getting the message.
Americans may not be as smart as a TV pundit, but they generally know the truth when they see it.
If you have studied the last 40 to 100 years of US Federal Reserve Policy and the US Dollar history born out of its causal maneuverings, you’ll come to a very different definition of the truth about what Americans trust and respect. The highest confidence, hiring, and consumption periods in post WWII history were 1 (Reagan) and 1 (Clinton). They were also the strongest periods for the US Dollar.
If you need a Canadian to explain that to your elected Congressman and/or wanna be financial market TV star who has never actually played the game, fine – it will take some time though – take it from someone who spent the last 3 years at CNBC trying to explain this to them. In the meantime, the market is doing a really good job explaining it to everyone else who gets paid to listen.
What is the truth? Forget about what I think – let’s look at the scoreboard:
- US Dollar up another +0.4% yesterday to a fresh YTD high of $83.79 = +5.0% YTD
- #CommodityDeflation (CRB Index – 19 Commodities) -0.4% yesterday to 287 = -2.4% YTD
- US Stocks (SPY) up another +1% yesterday to a fresh new all-time closing high of 1650 = +15.7% YTD
Indeed fellow Americans (and Canadian green card holders), a #StrongDollar sponsored US #TaxCut!
And yeah, I heard the loser whining about how Bernanke’s Friday night whispers to the WSJ about tapering QE was going to create a swoon in stocks. It didn’t though. It ripped my Dollars and rates of return (on my hard earned savings account) higher. The swoon came in the end of the world #EOW trade instead.
If you want #EOW, get out there and beg for more of what Gold and Treasury bulls really want – Bernanke to debauch the hard earned currency of the American People and our credibility as a creditor nation while they’re at it.
If you want your economic liberties and freedoms back, get out there and start yelling like this crazy Canuck is about #StrongDollar.
If you want real (inflation adjusted) US Consumption Growth (ie 71% of US GDP), you want what I want. If you want to spend the rest of your years trying to sell fear to goose your ad revs or ratings, you want crisis. That’s un-American.
I may not be able to love this country as much as those of you who were born here. But my wife, kids, and Made In America company can.
If my speaking the truth needs to come across as aggressively as a Patriot ripping across British lines did, so be it. I care more about results than political style, in case you couldn’t tell.
The truth about #StrongDollar, Strong America that I speak of doesn’t need to be created. It’s always been there – it’s a constant. This isn’t Russia.
Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, and the SP500 are $1, $100.39-103.89, $82.63-83.94, 100.06-103.09, 1.82-1.99%, 12.12-13.49, and 1, respectively.
Best of luck out there today and God Bless America,
Keith R. McCullough
Chief Executive Officer
Takeaway: Keith covered his short today of EPU, an ETF that tracks the Peru stock market.
Keith covered his short today of EPU, an ETF that tracks the Peru stock market.
Keith covered his short of EPU at 3:28pm at $40.36, booking a nice gain for his efforts. EPU is the iShares MSCI All Peru Capped Index Fund.
Keith writes of his trade, “Short commodity-linked countries; Buy consumption - risk manage the range - rinse and repeat.”
Peru produces more silver than any country in the world, and also is a major gold producer.
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Takeaway: Here's our assessment of EV Energy Partners (EVEP), following the company's earnings report last Friday.
This note was originally published May 10, 2013 at 13:09 in Energy
EV Energy Partners (EVEP) remains a high conviction short idea for us. Today’s result changes little, except for that it seems as if we gave the Company too much value for its Utica package, and EVEP’s funding situation is now even more precarious given that it will JV the oil window acreage instead of sell it outright. We would be adding to short positions today on the back of the poor 1Q13 result and outlook.
On the Quarter
Open EBITDA (before hedges) was $31.4MM, down from $36.7MM in 4Q12 due to a 1% decline in production and higher operating costs. Excluding a 1Q-only G&A expense of $3.2MM, open EBITDA was $34.6MM (this is not a one-time item, but a recurring 1Q-only item).
On EVEP’s management metrics – which are pretty meaningless to us even though everyone else uses them – “adjusted EBITDA” was $48.5MM vs. $56.7MM expected and $69.6MM in 4Q12. “Distributable cash flow (DCF)” was $21.8MM ($0.51/unit) vs. $37.9MM ($0.89/unit) in 4Q12, for a distribution coverage ratio of 0.67.
The main reason for the miss was the hedge book rolling off, especially on the NGL side. Realized cash gains from commodity derivatives were $12.3MM vs. $28.4MM in 4Q12.
Discounted cash flow (DCF) would have been lower had it not been for the generous (and inexplicable) approximately $5MM haircut to “maintenance CapEx” in the quarter. Production fell 1% q/q and EVEP invested $21.1MM into its E&P operations in the quarter, though deducted only $13.6MM ($0.91/Mcfe) of maintenance CapEx from DCF vs. a consistent run-rate of $18 - $19MM ($1.25/Mcfe) over the prior four quarters.
EVEP defines maintenance CapEx as “expenditures necessary to maintain the production of our oil and gas properties over the long term.” But, EVEP could not manage to keep production flat on $21.1MM of total E&P spending. In our view, EVEP slashed maintenance CapEx this quarter to make the already poor coverage ratio look a little better, and that a realistic maintenance CapEx number is approximately $20MM per quarter. If maintenance capex were $20MM in 1Q13, the coverage ratio would have been 0.47.
On the Utica Shale Sale Process
EVEP is no longer looking to sell its acreage in the oil window of the play, which it once boasted would fetch more than $15,000/acre. It will now attempt to find a joint venture partner for the majority (~82%) of its marketed acreage, which is in the oil window. If any deal gets done, it will likely be for a drilling carry (and maybe a small cash bonus); we won’t be holding our breath – CEO John Walker said on the call,
“There are not enough wells drilled there yet and through one or more joint ventures we intend to find the completion technique that will solve this problem. It could take one to two years for us to find these solutions and maximize the value of our position in the supply.”
That leaves EVEP with 18,200 net acres (18% of marketed acreage) to sell in the wet gas window (majority in NW Carroll county). Timing and price remains uncertain.
EVEP is still trading above a price that would reflect anything close to the intrinsic value of the assets. We’ve updated our NAV analysis taking into account the change in plans for the Utica acreage, the decrease in FV of the hedge book, and the increase in net debt. Our NAV is $22/unit.
On conventional E&P valuation metrics, the story is the same: EVEP trades at 40x 2013e earnings, 16x Adjusted EV/2013e Open EBITDA, 1.9x book value (despite having acquired the majority of its assets), and 3.1x standardized measure. The Company is over-levered with net debt of $925MM exceeding the value of its proven reserves (YE12 PV-10 $867MM), and adjusted net debt/2013 open EBITDA at 5.0x. Leverage ratios will tick higher this year without meaningful asset sales or equity-funded acquisitions as the Company invests heavily in its nascent midstream businesses.
Takeaway: Copper is taking its turn as the latest commodity price to go lower.
Commodity deflation is taking turns, and Copper is tagged as "it" on the downside, writes Keith this morning. Keith, as usual, is keeping a close eye on all commodity prices, but noted specifically the decline in Copper this morning.
With the US Dollar intermediate-term TREND overbought here, Keith says commodities prices can be a bit whippy, but that the overall TREND in commodities prices, like copper, remains decidedly bearish.
Here's a three-month chart of Copper.
A revival of trends in the U.S. is a key pillar of the bull case on MCD. In light of the “menu innovation” year-to-date, we feel confident standing by our bear case.
A few months ago we wrote that McDonald’s was going to abandon its Angus burger and now we read that a new line of quarter pounders is replacing the product in an effort to deliver the top-line growth needed to meet expectations.
Bull Case Crumbling
One bullish analyst on the Street has suggested that the company needs a “hero-like lifting” from U.S. consumers as the global macro picture looks mixed. The expectations that comps will reflate seems stretched, given our view on MCD’s pricing flexibility, and we expect U.S. comps to fall short of the level needed to carry the stock higher. We believe the most likely outcome is that the fundamentals of McDonald’s business continue to suggest a lowering of EPS expectations for 2013.
The recent news that McDonald's is adding to its Quarter Pounder line up has spurred a lot of dialogue among the investment community. These additions are not quite as striking as past innovations but are unusual in that they fall on a generally stable part of the McDonald's menu. Greg Watson, McDonald’s USA SVP-Menu Innovation Team said, “we haven’t touched the Quarter Pounder since its inception 40 years ago. We think this is a great way to bring new news to the brand.”
Six months ago, the question on investors’ minds was, “what menu innovation will MCD push through to grow the top line?” Now, we know: premium wraps and a new line of quarter pounders. In light of this, we remain confident in our bearish thesis.
From late May or early June, there will be three new Quarter Pounder varieties offered at McDonald’s with national advertising starting in mid-June.
- MCD is going to take most popular condiments from the Angus line and put them on the Quarter Pounder brand
- The company is creating a third new flavor—Habanero Ranch with white Cheddar, bacon, lettuce, tomato, and habanero ranch sauce tested
- The new quarter pounders will be served on bakery-style buns
What Does the Failure of The Angus Burger Tell Us?
It is difficult to know why the offering failed. It could have been too expensive for the McDonald’s customer or the construct of the burger may have been unpopular. If either of these speculations is true, it could suggest that the new quarter pounder offerings – drawing from the Angus ingredients – are unlikely to resonate or, if pricing was the issue, that McDonald’s has limited pricing flexibility. Neither scenario would be positive for shareholders.
The early August release of July sales will be the day when we gain the most significant insight into the effectiveness of this year’s menu changes. We continue to believe that the Street’s numbers are too high.
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