Freeport is flat in an up tape (alpha). We'll go ahead and book our 13th consecutive gain on the short side for a tidy 3.86% gain. We are batting 100% all-time on this one.
Takeaway: We remain bearish on Linn Energy (LINE).
As many of you know, we’re hosting a conference call tomorrow morning outlining Hedgeye’s bearish case on Linn Energy (LINE).
Incidentally, there was a second story in Barron’s over the weekend highlighting the work of Hedgeye Energy Analyst Kevin Kaiser about what’s going on in LINE. As many of you also know, CNBC Mad Money host Jim Cramer owns LINE in his charitable trust and has been recommending the stock in Action Alerts PLUS.
Here’s what he had to say in response to a viewer question this past Friday evening. The video begins at the 3:12 mark. A transcript follows below.
“Jim, please respond. What do you see for LINE—that’s Linn Energy—AAP, that means Action Alerts PLUS recommended but it’s down every day. Help!
Okay, now. There’s a firm that is very helpful to, in this particular case, a short story, a short case, against LINN. That firm has been right about the stock. There’s no doubt about it. Action Alerts PLUS has been wrong about the stock. There’s no doubt about it. I never say that I’m doing well on something when I’m not. Okay?
That said, I like Linn from when the show began. So I’m not going to change my view on it just because the stock went down. Allright? Do I wish that the stock would go up? Yes. Because I like to make money for charity in my charitable trust.
Have the shorts been right about the stock? Yes. Will they stay right? They’re going to have a conference call apparently next week. And remember, after that the shorts are going to have to start paying the distribution, it’s gong to come monthly. And hopefully, there’s a deal for Berry Petroleum. Mark Ellis is the CEO—I trust Mark Ellis.
Does that make me a chump? Does that make me an idiot? That’s your call.
I know I did my work on it. I've done more work on it than almost anybody because I’ve liked it for many, many years. I like the accounting, you may not. I put it all out there.
The shorts have been right. Action alerts has been wrong. But, I take a longer term view as I have since the show began."
Darden remains one of our top ideas on the long side.
Expectations Unlikely To Be Met
We expect that 4QFY13 results and forward guidance for FY14 are likely to fall short of the investment community’s expectations. Despite this, equity holders should not panic, as we view the stock setup as a win-win for investors.
The “win-win” set-up, to us, looks like this:
Looking to FY14
DRI is scheduled to report this Friday on 6/21. While we believe there will be some improvement in sequential sales trends during the quarter, it likely will not be nearly impactful enough to allow management to claim victory. The biggest news during the quarter was the appearance of Olive Garden’s President Dave George on Jimmy Fallon’s “Late Night” show, on which Mr. George retired the weary Olive Garden slogan, “When you’re here, you’re family.” We expect President Dave George to take on a larger role on the upcoming quarterly earnings call in order to outline his vision and the future prospects for the Olive Garden.
While management will likely point to the slight recovery in sequential sales trends, we don’t believe they will raise the current guidance of 0-2% EPS growth for FY14. Highlighted by the same-store sales charts below for Olive Garden, Red Lobster, and LongHorn, street expectations are low for an improvement over the current trends. Furthermore, the lack of a cohesive turnaround plan suggests that management cannot manage the business as it currently exists. We continue to believe that major structural changes are necessary in order to fix DRI’s broken business model.
In the event that we are wrong, and sales trends deteriorated during the quarter, shareholders will likely be quick to demand more, potentially spelling the end of the current management team. While none of the existing shareholders will likely surface as a voice of reason, an activist could emerge to apply pressure for the necessary changes. Our analysis suggests that at current levels, the breakup value of the stock exceeds the current share price.
Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.
Takeaway: Trading Abenomics from here depends primarily on your specific investment duration.
This note was originally published June 13, 2013 at 14:05 in Macro
The minute-by-minute week-to-date chart of the dollar-yen tells us all we need to know about the Abenomics trade. Unlike last week’s sharp decline, the stair-step function exhibited in the week-to-date suggests that investors are slowly losing faith in the collective ability of Abe, Aso and Kuroda to deliver on the LDP’s contextually aggressive +3% nominal GDP and +2% inflation targets.
This is primarily due to the trifecta of headwinds that we outlined last Friday in a research note. Perhaps the most critical of those headwinds is the fact that the BOJ appears increasingly content to “play chicken” with market participants, meaning that they continue to stand pat on their previously outlined policies and guidance.
Essentially, they are asking the market to patiently trust that they’ll deliver the results that the Abe administration seeks with regards to not just ending structural deflation expectations, but instituting inflation and the broad-based expectation that inflation will be sustained. As we pointed out in a 3/15 research note titled, “JAPAN’S “INVERSE VOLCKER” MOMENT IS UPON US”, Japan’s monetary policy phase change is not unlike what the US experienced with the transition from Arthur Burns to Paul Volcker in the late 70s/early 80s.
Just today, BOJ policy board member Sayuri Shira warned that: A) it will take considerable time to achieve +2% inflation target given that the economy has been in a deflationary slump for 15 years and B) there needs to be more focus on the downside risks. She also affirmed previous guidance by BOJ Governor Haruhiko Kuroda that the board is not planning to implement additional programs to calm JGB market volatility, stating that “sufficient tools” already exist.
All in, the BOJ’s opting to stand pat as the currency market demands additional easing measures is the primary reason for the recent bout of yen strength (up +9% vs. the USD since its 5/17 YTD low). More importantly, the USD/JPY cross has broken our intermediate-term TREND line of support at 95.95.
To the extent you have been short the yen or playing the Abenomics Trade in ancillary vehicles, it may prove prudent to sell/reduce your exposure upon confirmation (i.e. give it time to breathe) of a breakdown through the TREND line. The long-term TAIL line of support is down at 88.67; that would be a good level to put the position back on/increase your exposure (as would a breakout back above the TREND line).
As one of our core research views, we remain the bears on the Japanese yen with respect to the long-term TAIL. We’re merely attempting to manage the immediate-to-potentially-intermediate-term risk of the position.
Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor". If you'd like to receive the work of the Financials team or request a trial please email .
European Financial CDS - Financials swaps across Europe were mostly wider last week, consistent with the month-over-month trend.
Sovereign CDS – Sovereign swaps blew out in Portugal (+27 bps), but were only nominally wider elsewhere, and tightened again in the U.S.
Euribor-OIS Spread – The Euribor-OIS spread widened by 1 bps to 12 bps. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States. Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal. By contrast, the Euribor rate is the rate offered for unsecured interbank lending. Thus, the spread between the two isolates counterparty risk.
ECB Liquidity Recourse to the Deposit Facility – Liquidity deposits declined by 18 billion Euros last week. The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB. Taken in conjunction with excess reserves, the ECB deposit facility measures excess liquidity in the Euro banking system. An increase in this metric shows that banks are borrowing from the ECB. In other words, the deposit facility measures one element of the ECB response to the crisis.
Takeaway: A quick look at some top stories on the Hedgeye radar screen.
Josh Steiner – Financials
Former Bank of America workers allege it lied to home owners (via Reuters)
Keith McCullough – CEO
Natto Makers to Public Baths Suffer in Abenomics Divide (via Bloomberg KM note … burning currency doesn't work)
Singapore Exports Fall More Than Estimated on Electronics Slump (via Bloomberg)
British man survives 15th floor fall in New Zealand (via BBC)
Howard Penney – Restaurants
Borghese v. Borghese: Battle for a Royal Name (via New York Times)
Daryl Jones – Macro
New Iran Leader Seen as Moderating Force (via WSJ)
Energy Journal: Will Iran Set a New Path on Energy? (via MoneyBeat)
Brian McGough - Retail
China’s Huge Cotton Stockpile – Bullish or Bearish for Cotton Prices? (via Sourcing Journal Online)
Kevin Kaiser – Energy
Self assessment Monday: an old letter to a client… (via Bronte Capital)
Saipem shares plunge after new profit warning (via Reuters)
Matt Hedrick – Macro
Greek PM dismisses talk of early election over TV closure (via YahooNews)
Turkey Police Escalate Crackdown as Erdogan Rallies Support (via Bloomberg)
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