Whatever Happened to Peak Oil?

Takeaway: “Peak Oil” has not only peaked. It has flipped.

(Editor's note: The excerpt that follows below is from Hedgeye's popular "Investing Ideas" newsletter which is sent out on Saturday mornings. Investing Ideas is for the savvy, longer-term self directed investor looking for fresh, long-only opportunities.  It also features macro commentary like the excerpt below. With your subscription, you'll know immediately when one of our award-winning analysts uncovers a new Idea or changes a current one. Click here to learn more.)


Whatever Happened to Peak Oil? - peakoil


Remember “Peak Oil”? 


The notion was making the rounds a few years ago that the world had run out of its readily-producible supply of oil, and that Life As We Know It would soon grind to a halt, predicated as it has been since WWII on an unending supply of cheap oil. 


Oil is already no longer cheap – the US Department of Energy says that, in constant 2011 dollars, the price of gasoline rose from under $1.50 a gallon on the eve of the Arab Oil Embargo of 1974, to over $3.50 by the end of 2011.  Peak Oil says oil is also no longer plentiful, because we have drilled the world down to a diminishing petroleum reserve. 


Books and articles proliferated – because not many people can make money trading markets, but a whole lot of folks can make money writing about how to trade markets – predicting how dire our lives were about to turn, and how soon.


Now “Peak Oil” has not only peaked.  It has flipped. 


Now, when folks use the term, they mean that demand for oil has peaked and the combination of fracking and newly-discovered US gas reserves will make our energy woes a thing of the past. 


We have no idea who will be proved right, but we again observe that it pays to speak in superlatives and paint extreme scenarios if you want to sell books about investing.

Brazil's Got Problems

Takeaway: Our #EmergingOutflows theme continues to ring the bell in both Brazil and China.

One of Hedgeye's big Q2 Global Macro Themes has been #EmergingOutflows. Our theme continues to ring the bell - particularly in Brazil.


Brazil's Got Problems - braz


In case you missed it, Brazil’s Bovespa dropped below 50,000 yesterday. It is now officially in crash mode (down -22.5% since January 3rd) as the biggest Brazilian protests in twenty years sweep the streets.


Click on the chart below. #NotPretty


Brazil's Got Problems - Brazil SP500



Takeaway: We remain the bears on emerging market asset prices.

This note was originally published June 14, 2013 at 13:10 in Macro



  • Per Bank of America Merrill Lynch data, redemptions from EM debt and equity funds totaled $8.9 billion last week, which the third largest week ever for aggregate outflows (bested only by outflows during MAR ’07 and JAN ’08).
  • We remain the bulls on the US Dollar with respect to the long-term TAIL and our analysis shows that a sustained bout of dollar appreciation (and its ancillary effects) tends to be a major headwind for EM capital markets and currencies.
  • All told, we remain the bears on emerging market asset prices. And while many EM asset classes are oversold on our quantitative risk management signals, we would be inclined to fade any dead-cat bounces in this space.



Per Bank of America Merrill Lynch data, redemptions from EM debt and equity funds totaled $8.9 billion last week, which the third largest week ever for aggregate outflows (bested only by outflows during MAR ’07 and JAN ’08). The $2.5 billion in outflows from EM debt funds was the second largest weekly outflow on record and the $6.4 billion in outflows from EM equity funds was the largest weekly outflow since AUG ’11.


According to their Investment Strategy Team’s EM Flow Trading Rule, another $8-10 billion of outflows next week or $11-12 billion of outflows over the next two weeks from EM equity funds would trigger a “contrarian buy” signal, as the trailing four weeks of outflows would then equal 3% of total AUM, up from 1.9% currently.




We are obviously inclined to fade such a signal – particularly given that it doesn’t necessarily source economic history across multiple cycles. One of the most common mistakes we see analysts make is not pulling the charts back far enough – particularly with respect to any sort of mean reversion-based analysis.


In light of this, we’d certainly be interested to see how the aforementioned analysis held up during the 1990s (and even 1980s) emerging market crises cycles. Needless to say, we have our doubts.


At any rate, a “contrarian buying opportunity” is only a buying opportunity if EM equities are poised to meaningfully rally from here. Irrespective of the #WeakDollar sweet nothings Jon Hilsenrath continues “blog” about, we think our #EmergingOutflows thesis paints a pretty clear picture on why that is a low probability scenario. Moreover, we remain the bulls on the US Dollar with respect to the long-term TAIL and our analysis shows that a sustained bout of dollar appreciation (and its ancillary effects) tends to be a major headwind for EM capital markets and currencies.






In the event you missed our 122-slide and 61-slide presentations detailing our bearish thesis on emerging markets, please shoot us an email we’d be delighted to walk you through them.


All told, we remain the bears on emerging market asset prices. And while many EM asset classes are oversold on our quantitative risk management signals, we would be inclined to fade any dead-cat bounces in this space.


Have a great weekend,


Darius Dale

Senior Analyst

Early Look

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Diverging Europe By The Charts

There were some important pieces of data out of Europe this morning that we believe are in line with our European update call titled “Where Does Europe Go From Here?” that we gave last Tuesday. (Presentation: CLICK HERE ; Podcast: CLICK HERE)


Below we’ll reiterate our presentation’s main points and reference them to today’s data:


1.)  Do not discount the ECB’s intervention commitment to stoke markets and preserve the common currency.

  • Draghi spoke in Jerusalem earlier this morning and reiterated his “whatever it takes” pledge to keep the euro and said the ECB has an “open mind” on non-standard monetary policy if circumstances warrant.
  • >> Our outlook on the EUR/USD has not changed: the cross is being supported by Draghi’s bullish comments that the ECB will leverage its balance sheet should it need to. We think the Bank is in a wait-and-watch mode as it forecasts a “gradual recovery” in growth in the back half of the year.  We expect Draghi’s rhetorics and the commitment of the Eurocrats to maintain the Eurozone’s existing fabric to push the cross higher, however capped in the near term under $1.40 given our StrongDollar call and the weak underlying fundamentals. (see slide 39 in the presentation for more).

Diverging Europe By The Charts - UU. EUR



2). Fundamentals remain sluggish across the region and we expect long-term below-mean growth.

  • The EU-27 New Car Registrations data came out for MAY at -5.9% Y/Y.
  • >> Despite optimism last month over the +1.7% APR reading, registrations have been down for 18 straight months. We do not expect this trend to materially inflect into the summer, as we expect structural headwinds across the region to have a long tail. (see slide 8 for more).

Diverging Europe By The Charts - uu. cars


Here are the figures broken down by manufacturer, with change Y/Y, according to the European Automobile Manufacturers' Association (ACEA):


Volkswagen (VOW.GR) 264,768 (2.8%)

PSA (UG.FP) 132,670 (13.2%)

GM (GM) 99,183 (11.3%)

Renault (RNO.FP) 94,535 (10.0%)

Fiat (F.IM) 80,930 (10.8%)

Daimler (DAI.GR) 58,360 +0.7%

Toyota (TM) 41,413 (4.9%)

BMW (BMW.GR) 65,392 (7.2%)

Nissan (NSANY) 33,747 +5.8%

Honda (HMC) 10,401 (3.5%)

Ford (F) 82,953 (0.3%)



3.)  Europe will remain bifurcated, with clear winners and losers.

  • According to the ZEW Survey, German Economic Sentiment (6-month forward looking) improved to 38.5 in JUN vs 36.4 in MAY.
  • >> We expect relative outperformance from Germany vs its peers, especially as its exports benefit from a weak euro . (see slide 42 for more).

Diverging Europe By The Charts - uu. ZEW Germany



4.)  Long the UK on the Rebound

  • CPI rose to +2.7% in MAY Y/Y vs +2.4% in APR and wages growth improved from +0.6% to +1.3%.
  • >> Our call remains that the UK will have headwinds, including sticky stagflation, but on balance we’re seeing an improved outlook, including from wage growth catching up to rate of inflation. (see slide 59 for more).

Diverging Europe By The Charts - uu. uk cpi


Matthew Hedrick

Senior Analyst

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


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