This note was originally published at 8am on June 18, 2013 for Hedgeye subscribers.
“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 - email@example.com). 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 firstname.lastname@example.org 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 $1361-1404, $103.74-106.22, $80.09-81.21, 93.24-96.42, 2.07-2.29%, 14.57-18.69, and 1605-1652, respectively.
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research