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Morning Reads on Our Radar Screen

Takeaway: A quick look at top stories and videos on the Hedgeye radar screen.

Josh Steiner – Financials

Insight: Why Citi wants to rack up U.S. taxes (via Reuters)


Daryl Jones – Macro

European Car Sales Fall to 20-Year Low Amid Unemployment (via Bloomberg)

Quant Trading Comes to Main Street (via Fortune)


Morning Reads on Our Radar Screen - radar


Keith McCullough – CEO

Brazil protests spread in Sao Paulo, Brasilia and Rio (via BBC)

India Can Take More Steps to Cut Gold Imports, Mayaram Says (via Bloomberg)

The bumbling building boom in China (Video via Thomson Reuters)


Brian McGough - Retail

Labor Unrest On the Rise in Cambodia (via Sourcing Journal Online)


Matt Hedrick – Macro

Draghi Says ECB Has ‘Open Mind’ on Non-Standard Measures (via Bloomberg)

Swiss Bankers Stripped of Secrecy as Data Swap Embraced (via Bloomberg)


Darius Dale – Macro

Obama: Bernanke Stayed Longer Than Fed Chief Wanted (Video via Bloomberg)

LINN Energy Not Top 10: Materials and Dial-In Info

Call is TODAY (Tuesday, June 18th) at 11am EST.


LINN Energy Not Top 10 - SLIDES


Participant Dialing Instructions

  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 112928#




LINN Energy (LINE, LNCO) is a ~$13B enterprise value upstream MLP with 4.8 Tcfe of proved reserves and 800 Mcfe/d of production from multiple US onshore basins.  By enterprise value, it is the largest upstream MLP in the US.


Since its IPO in 2006, it has been a self-proclaimed “acquisition machine,” completing more than $9B worth of deals. In February 2013, LINN announced its largest acquisition yet - a $4.3B all-stock (LNCO) merger with C-Corp E&P Berry Petroleum (BRY).  This deal is still pending, and LINN/BRY expect it to close in 3Q13.


All along the way LINN has rewarded its investors with a steady, growing distribution payment; and as the distribution grew, so did the unit price.  LINN investors have done well, and for years the Company’s business model and accounting practices went unchallenged.  LINN is revered in the oil and gas community; in fact Oil & Gas Investor recently named its Chairman, President, and CEO Mark Ellis as its 2012 “Executive of the Year.”


But scrutiny has arrived.  Our research suggests that it’s been distribution growth at all costs, and that the distribution is funded largely with cash from capital raises, not operations.  As evidence, LINN’s non-GAAP measure of “distributable cash flow” looks nothing like GAAP net income or free cash flow.  Say ‘net income doesn’t matter’ at your own risk… 


We urge LINE and LNCO investors to scrutinize as we have.  We urge the Berry Petroleum board, management team, family, and shareholders to take a good, hard look at the security, LNCO, that they are trading their 100+ year old company for.  In our view, LNCO is worth a small fraction of what it’s trading at today, and BRY shareholders are receiving grossly overvalued “paper” for their valuable assets.  In short, we think that this is a bad deal for BRY shareholders.


In our view, LINN is the best short in the oil & gas space today.  In this presentation we will show you why…


Kevin Kaiser

Senior Analyst



We received JACK’s press release last night as a positive for the stock with more details forthcoming at 9:30 ET when management is due to speak at the Jeffries conference.



Our View


As we wrote on May 21st, “If or when the company moves to restructure Qdoba, we believe the impact on the stock could be a negative over the short-term but, ultimately, the decision will pave the way for the brand’s profitability to be improved, allowing investors to become more confident in assigning it a growth multiple.”


The upside in JACK, as we have often written, is in the multiple assigned to the Qdoba business. To the extent that it occurs, future upside to earnings is obviously also positive.  In last night's release, CEO Linda Lang stated that the closures were expected to have a positive impact on financial performance, resulting in higher future earnings, AUV’s, restaurant operating margins, cash flow, and ROIC. Lang also reiterated the company’s commitment to open 70-75 new Qdoba system locations in 2013.  


Synopsis of the press release from last night

  • Closing 67 co-op Qdoba by end 2013 following unit-level analysis
  • $40 million pre-tax charge ($28m non-cash impairment, $12 million charges related to cash lease obligations)
  • This is a shrink-to-grow initiative aimed at initially “optimizing the company’s footprint”
  • Planned new openings not impacted by this initiative






Howard Penney

Managing Director


Rory Green

Senior Analyst

CHART OF THE DAY: The Great Bear Raid of 2013


CHART OF THE DAY: The Great Bear Raid of 2013 - Chart of the Day

The Great Bear Raid of 2013

“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.”

-Jim Chanos


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


The Great Bear Raid of 2013 - Chart of the Day


The Great Bear Raid of 2013 - Virtual Portfolio

Stay On Your Toes

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.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

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


While I have been personally attacked, my analysis of $LINE $LNCO has not. If you think I am wrong, please tell me WHY.



"If everyone knows you're going to print money ... you know ... welcome to Zimbabwe."
- Jim Chanos


$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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