“If you are a short seller, that’s cacophony of negative reinforcement. You’re basically told that you’re wrong in every way imaginable every day. It takes a certain type of individual to drown that noise and negative reinforcement out and to remind oneself that their work is accurate and what they’re hearing is not.”
As many of you know, short selling is not for the faint of heart. We've learned that in spades recently on a position we added to our Best Ideas list in late March called Linn Energy (LINE).
Barron's got to the name before us, but their write-up piqued our interest, so our energy team, led by Senior Analyst Kevin Kaiser, rolled up their sleeves and dug in. Needless to say, after looking under the proverbial cover we didn't like what we saw.
The position itself has worked out well for us and on a price basis is down more than 15% as the company reported soft earnings and has had delays closing its merger with Berry Petroleum (BRY). Unfortunately our analysis has raised the ire of the indefatigable Jim Cramer, who has had the misfortune of being on the wrong side of the trade in Linn Energy in his charitable trust.
In recent days, it has become Cramer's bully pulpit on CNBC versus Hedgeye's analysis. If the stock price action is an indicator, we like our odds in the battle.
Unfortunately, as is sometimes natural when backed into a corner, Cramer has resorted to ad hominem attacks in trying to discredit our research. Things like calling us too young to do professional analysis, implying we are violating the Securities Act of 1934 (my Compliance Officer Rabbi Moshe Silver vehemently disagrees there), and this is by far the best, he's been tweeting that we are leading an orchestrated "Bear Raid".
Don't worry you’re not the only one that doesn't know what the term "Bear Raid" means. But, then again, we don't know what Booyah means as it relates to investing either. Although, we could offer some guesses . . .
That all said, being the friendly young (Cramer's emphasis not mine) analysts we are, we would like to cordially invite him to our 11am call today on Linn Energy. (Jim, Feel free to email me for details - ). Incidentally, we have also invited the management teams of Linn Energy, Berry Petroleum, and many of the largest shareholders. At the very least, Cramer will have a hard time saying that we aren’t transparent.
Back to the Global Macro grind . . .
At 11am eastern, Kaiser will go through his “Linn Energy Not Top 10” and we will give you a little preview, with a top three selection:
1. Using LINE’s 2012 organic F&D cost of $3.66/Mcfe, LINE has to spend $1,093 in 2013 to replace produced reserves. This exceeds LINE’s 2013 maintenance cap-ex estimate by ~$636 million.
2. On a $/acre basis. LINE’s NAV suggests $35,000 - $55,000 per acre for its Granite Wash play. The most Granite Wash deal – Laredow/Enervest in May 2013 – was done at $4,000/acre.
3. Cramer is recommending you own LINE. (Joke!)
As it relates to global macro news flow, the last 24 hours have been relatively quiet. Draghi spoke in Jerusalem earlier today and reiterated his “whatever it takes” pledge saying that the ECB has an “open mind” on non-standard monetary policy if circumstances warrant. Last week, we gave an update on European economy and we wouldn’t take “whatever it takes off the table”.
We see more evidence European sluggishness this morning with EU27 New Car Registrations that were down -5.9% year-over-year in May. For those that are keeping track, that is the lowest level since 1993, or about two decades. To the extent that new car sales are a gauge for consumer sentiment and willingness to spend, this was not a great data point.
Not that we want to be known as the curmudgeon short sellers that pile on the bad news, but the other key data point from Europe relates to Spain. First, Spain sold about €5.04B of 6- and 12-month bills on Tuesday. This was at the high end of the range, but saw yields increase dramatically from last month (0.492% -> 0.821% on the 6-months and 0.994% -> 1.395% on the 12-months). As well, Spanish banks reported that banks bad loans as percentage of total credit rose to 10.9% in April from 10.5% in May. With unemployment north of 20%, this is not really a big surprise.
In other news, our #EmergingOutflows theme continues to play out. Brazil’s Bovespa dropped below 50,000 yesterday and is now in full blown crash mode (down more than -22% since January 3rd). This is on the back of some of the largest Brazilian protests in some twenty years. In China, foreign direct investment slowed to trickle in May, which is likely a sign that foreigners are recognizing the precarious debt situation in China.
But, alas, all is not terrible in the world. In fact, we believe we have discovered what we think may be the next great consumer growth market in the United States . . . electronic cigarettes. Your eyes are not deceiving, e-Cigs have the potential to be an almost 10-bagger in terms of market share growth over the next decade. On Wednesday, we are hosting a call with the CEO of one of the few e-cig pure plays who will give us an update on the market. Email for details.
We’d be remiss if we didn’t end this note with a line from one of our favorite songs from Johnny Cash:
“I keep a close watch on this heart of mine,
I keep my eyes open all the time.
I keep the end out for the tie that binds.
Because you’re mine, I walk the $LINE.”
Our immediate-term Risk Ranges for Gold, Oil, US Dollar, USD/YEN, UST 10yr Yield, VIX, and the SP500 are now $1, $103.74-106.22, $80.09-81.21, 93.24-96.42, 2.07-2.29%, 14.57-18.69, and 1, respectively.
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
Client Talking Points
#EmergingOutflows ... Yes, our Q2 Global Macro Theme continues to ring the bell in both Brazil and China this morning. Brazil’s Bovespa dropped below 50,000 yesterday. It is now in crash mode (It's down -22.5% since January 3). The biggest protests in 20 years are sweeping the Brazilian streets. Foreign Direct Investment to China slows to nothing year over year in May. #InterconnectedTradingPartners
Brent is toying with my emotions here. TREND line = $106.22 and TAIL resistance = $108.54/barrel. Question du jour. Will Ben Bernanke reflate oil on another Down Dollar move or not? #Syria still remains an obvious issue. As for Putin and Obama? No, they didn’t do beers and hockey last night.
Another big move in the 10yr UST yield yesterday is keeping bond bulls under siege. For all you home gamers out there, that's seven weeks and counting now. If Bernanke was operating independently (he's not – Obama called him a “great partner” last night), he’d taper. US employment, housing, and consumption data (aka #GrowthAccelerating) all support that. Gold and Bonds? Yes they agree. Avoid them both.
|FIXED INCOME||0%||INTL CURRENCIES||12%|
Top Long Ideas
Financials sector head Josh Steiner is the Street’s head bull on residential mortgage originator/servicer Nationstar, projecting $9 in earnings for the company in 2014. This is well above the company’s own guidance range, which tops out at around $7.50. NSM had a successful start to the year as it won servicing bids on substantial mortgage portfolios. They also reported significant increases in their profit margins on those portfolios, and double-digit increases in their own originations. Housing prices are ramping significantly higher, as Steiner predicted, as demand continues to exceed supply in both new and existing homes. Steiner says this quality mortgage company could ride the crest of a sustained wave of sector improvement.
Gaming, Leisure & Lodging sector head Todd Jordan says Melco International Entertainment stands to benefit from a major new European casino rollout. An MPEL controlling entity, Melco International Development, is eyeing participation in a US$1 billion gaming project in Barcelona. The new project, to be called “BCN World,” will start with a single resort with 1,100 hotel beds, a casino, and a theater. Longer term, the objective is for BCN World to have six resorts. The first property is scheduled to open for business in 2016.
WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.
Three for the Road
QUOTE OF THE DAY
"If everyone knows you're going to print money ... you know ... welcome to Zimbabwe."
- Jim Chanos
STAT OF THE DAY
$3,410,000,000,000: The Fed’s assets now total $3.41 trillion compared with $877 billion at the end of August 2007.
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This note was originally published at 8am on June 04, 2013 for Hedgeye subscribers.
“All growth depends upon activity. There is not development physically or intellectually without effort, and effort means work.”
Former United States President Calvin Coolidge knew a thing or two about growth. From a personal perspective, his life embodied steady growth of achievement. His first foray into politics began in the Massachusetts House of Representatives in 1907. He followed this up as Mayor of Northhampton, then became a member of the Massachusetts Senate, and after a couple of more stops became Governor of Massachusetts.
“Silent Cal”, as he was called due to his quiet demeanor, was then added to the Republican ticket as Vice President in 1920 and he and his running mate, Senator Harding of Ohio, went on to win in a landslide. On August 2nd, 1923, President Harding died while on a speaking tour and Coolidge became President. Coolidge then stood for election as President in 1924 and won his first official term as President.
From an economic perspective, largely based on a series of broad tax cuts, Coolidge oversaw a very economically prosperous time in U.S. economic history known as the “roaring 20s”. Interestingly, as well, as the top tax rates were cut from 58% in 1922 to 25% in 1929, the economy grew and the share of the tax burden of the wealthiest Americans, those making more than $100,000 per year, also grew from 35% to 63%.
In addition to the economic growth he oversaw, Coolidge also eventually outgrew his introverted personality. In one his most outspoken moments, he said of his eventual successor Herbert Hoover, "for six years that man has given me unsolicited advice—all of it bad.” Needless to say, the United States was not as economically fortunate under the stewardship of his successor President Hoover.
Back to the global macro grind . . .
Yesterday was a classic one for the ongoing debate over whether economic growth in the U.S. is accelerating or stagnating. The Purchasing Managers Index (PMI) reading from Institute for Supply Chain Management (ISM) came in at a contraction indicating 49.0. The internals of the report were negative across the board, as well, with new orders coming in at 48.8 and production coming in at 48.6. The employment component of the index was still in expansion mode, albeit only marginally at 50.1.
The key read through from this reading is that as it relates to growth in the industrial sector in the U.S., headwinds remain. On a relative basis, the United States is still faring better than the Eurozone where a 48.3 was reported in its latest PMI report, the latest in almost two straight years of factory output contraction in Europe. The Chinese economy is also struggling on the industrial front as the HSBC PMI came in at 49.2 most recently.
Another data point that came out yesterday that supported the slowing growth case was government spending on construction. Public construction spending dropped 1.2% in April to the lowest level since 2006 and down 5.7% from October. This decline is obviously due to sequestration that is being implemented at the federal level. In the short term, this may be an economic headwind, though the offset is that the deficit is declining much faster than expected. In its most recent update the non-partisan Congressional Budget Office (CBO) projected that the deficit for fiscal year 2013 will fall to $624 billion, or about 4% of GDP, and almost $200 billion less than the CBOs estimate from three months before.
Our view of economic growth in the U.S. continues to be underscored by the consumer side of the economy. On this front, the economic data released yesterday was positive as auto sales for May came in at an annualized rate of 15.3 million. This was the fourth straight month of sales over 15.0 million and continues to show strong growth over the 14.5 million in auto sales from last year. Certainly, auto sales are being driven by compelling financing programs, but as a proxy for consumer demand, they remain a positive indicator.
A key emerging American growth industry that will be a key tailwind for strong car production numbers is the U.S. energy industry. In the Chart of the Day, we highlight this in a chart of U.S. oil production going back twenty years. As the chart shows, largely thanks to technology advances, U.S. daily oil production is hitting 20-year highs. This of course follows decades of production declines starting in the 1970s.
The International Energy Administration recently published a report that projected the North American oil supplies will grow by 3.9 million barrels by 2018. This is almost 2/3rds of the non-OPEC production growth projected over that period. If accurate, this will also reduce American imports by almost 40% over that period. If the IEA is correct and this growth in production leads to a global “supply shock”, in coming years, the upside to global growth may be dramatic with declining oil prices.
Turning back to the shorter term and the U.S. stock market, another key positive we see relating to growth is expectations. Currently, consensus aggregate SP500 revenue growth for the next three quarters is 0.5%, 3.4% and 2.3% respectively. This is an expected revenue growth rate of just over 2.0% in the projected period and less than half the average reported year-over-year growth rate of north of 4% in the prior three quarters. For U.S. stock market bulls, these low expectations are very supportive. For U.S. stock market bears, these expectations may well be, as Shakespeare said, “the root of all heart ache.”
Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, and the SP500 are now $1351-1424, $100.27-103.29, $82.48-83.74, 99.98-103.24, 2.07-2.23%, 14.63-16.59, and 1630-1651, respectively.
Daryl G. Jones
Director of Research
TODAY’S S&P 500 SET-UP – June 18, 2013
As we look at today's setup for the S&P 500, the range is 47 points or 2.08% downside to 1605 and 0.79% upside to 1652.
CREDIT/ECONOMIC MARKET LOOK:
- YIELD CURVE: 1.92 from 1.92
- VIX closed at 16.8 1 day percent change of -2.04%
MACRO DATA POINTS (Bloomberg Estimates):
- FOMC starts two-day meeting
- 7:45am: ICSC weekly sales
- 8:30am: Consumer Price Index, May, est. 0.2% (prior -0.4%)
- 8:30am: CPI Core Index, May, est. 233.255 (prior 232.879)
- 8:30am: Housing Starts, May, est. 950k (prior 853k)
- 8:30am: Building Permits, May, est. 975k (prior 1.005m)
- 8:55am: Johnson/Redbook weekly sales
- 11am: Fed to purchase $1.25b-$1.75b notes in 2036-2043 sector
- 11:30am: U.S. to sell 4W bills
- 4:30pm: API weekly inventory data
- President Barack Obama leaves G8 summit in Northern Ireland to travel to Berlin on official visit
- Swiss lawmakers in lower house of parliament to discuss “black box” agreement to allow banks to cooperate with U.S., end a tax evasion dispute
- 8:45am: Senate Energy and Natural Resources ranking member Sen. Lisa Murkowski, R-Alaska, delivers opening keynote address at U.S. EIA Energy Conf.
- 10am: Senate Finance Cmte holds hearing on health care costs, issues of transparency
- 11am: Rep. Steve Daines, R-Mont., leads group of lawmakers in news conf. on opposition to the Marketplace Fairness Act
- 1pm: Vice President Joe Biden speaks on administration plan for improving gun safety
WHAT TO WATCH
- Obama says Bernanke staying at Fed “longer than he wanted”
- Liberty Global bids for Kabel Deutschland to rival Vodafone
- Johnson Controls said to mull auto-electronics unit breakup
- Third Point boosts stake in Sony as Daniel Loeb seeks talks
- ECB has “open mind” on non-standard monetary policy: Draghi
- Sprint sues Dish in Delaware seeking to block Clearwire buyout
- Verizon said to have interest in buying Canada’s Wind Mobile
- Boeing unveils 787-10 Dreamliner, has 102 commitments
- Yahoo received up to 13k data requests from U.S. authorities
- Mengniu to buy 75.3% stake in Yashili from Zhang, Carlyle
- EasyJet orders Airbus jets, risking clash with founder
- GM Holden says labor costs need cuts to save Australian plants
- Housing starts probably rose in May as expansion gets boost
- EU car sales reach 20-yr low as recession hurts GM demand
- U.S. video-game retail sales fell 25% in May, NPD says
- Microsoft’s Xbox tops U.S. retail game console sales in May
- Ex-UBS trader Hayes said to face U.K. Libor charge this week
- Tissue Regenix licenses dCell technology to U.S. tissue bank
- John Wiley & Sons (JW/A) 7am, $0.84
- FactSet Research (FDS) 7am, $1.26
- Adobe Systems (ADBE) 4:02pm, $0.34 - Preview
- La-Z-Boy (LZB) 4:05pm, $0.28
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- Palm Exports From Indonesia Rising for First Time Since January
- Rubber Poised for Record Glut as Shippers End Curbs: Commodities
- WTI Trades Near Four-Month High as U.S. Stockpiles Seen Falling
- Wheat Prices Seen Extending Decline as Global Production Surges
- Copper Falls a Second Day as Investors Await Fed Stimulus Signs
- Gold Retreats a Second Day in London Before Fed Policy Meeting
- Coffee Resumes Decline on Vietnam, Bearish Bets; Sugar Retreats
- Americans Exporting Oil First Time Since ’70s Seen on Production
- Keystone Seen Failing to Sop Up Canada Oil Glut: Energy Markets
- India Plans to Sell 17.5 Million Tons of Grain From Stockpiles
- Keystone XL Pipeline Shuns High-Tech Oil Spill Detectors: Energy
- Marubeni, Partners to Set Up Floating Wind Turbine Off Fukushima
- Mongolia Taps North Korea Oil Potential to Ease Russian Grip
- Wheat Advances on Indications Rain Is Delaying Harvest in U.S.
The Hedgeye Macro Team
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