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Bubbles Pop

This note was originally published at 8am on June 20, 2013 for Hedgeye subscribers.

“I wonder how much it would take to buy a soap bubble, if there were only one in the world.”

-Mark Twain

 

The last of the central planning bubbles left in the world is now popping. It’s called the bubble in super sovereign debt.

 

Everything else that’s imploding this morning was already popping. That’s not new news.

 

Gold crashing today isn’t new news either. It’s called capitulation.

 

Back to the Global Macro Grind

 

Our Waterfall metaphor was right because the big macro factors signaling this move in bonds was measurable. As both the VOLUME (of debt) and VELOCITY (rates rising) started rising at a faster rate, you could see Bernanke’s policy decision approaching the dam.

 

And no, it wasn’t a sign to buy the damn dip. At least not in Gold or US Treasuries, that is…

 

I don’t think it’s helpful to give you live quotes and/or pictures of this bifurcation point in Global Macro market history. Neither do I think you need me to rant and/or remind you on why we saw this Waterfall coming. It’s time to tell you what we’d do next.

 

Most of the time, risk management starts with the what not-to-dos:

  1. Don’t buy Gold, Silver, or Commodities (our asset allocation to those has been 0% for 6 months)
  2. Don’t buy US Treasuries, or Yield Chasing slow growth Equity ideas like Utilities or MLPs
  3. Don’t buy Emerging Markets (#EmergingOutlows is our Q213 Macro Theme)

Once you cross all that stuff off your list, you run out of places to put your money.

 

So, slowly, from here you can start to buy back:

  1. US Dollars
  2. US Financials levered to a steepening yield curve
  3. US Consumption Equities whose demand curves enjoy #StrongDollar tax cuts

Remember, it’s summer time – and the list of options is narrow – so take your time.

 

Since US Equities are really the only place we‘d like you to be (for now), here are the key levels to watch:

  1. US Dollar Index intermediate-term TREND support = $81.21
  2. SP500 intermediate-term TREND support = 1583
  3. US Financials (XLF) intermediate-term TREND support = $18.43

Rates rising at an accelerating rate is big risk, primarily because consensus was not positioned for it. Again, going back to our favorite thermodynamic metaphor (VOLUME + VELOCITY of water rising at an exponential rate as you approach the dam), what we have here this morning is a lot of unprepared white water tourists getting really wet.

 

If you’ve never tried this at home, don’t try Niagra first. Class VI Whitewater Rafting in  West Virginia will get you all the hands on experience you’ll need. When you participate in markets, you have to respect that there are other people (who may not be able to swim) in your raft. And the risk associated with decisions they are forced to make happens fast.

 

If you have already hedged your Commodities and/or Fixed Income exposures this morning, you are on the shore. So take the time to think through the opportunity that you are staring at downstream:

  1. This point of max entropy (ripping yields) won’t happen every day – that risk is already over the Waterfall
  2. Rising bond yields is a pro-growth signal backed by accelerating 6 month consumption, employment, and housing growth
  3. Steepening curve (bond yields) = wider Yield Spread = bullish for Financials (XLF) that earn an accelerating return on that

I am sure Bernanke is a wonderful father and a nice man. But, folks, he has failed in being able to arrest gravity. He had no business promising people smoothing economic gravity was possible. That was his mistake. That’s his legacy. It’s also yesterday’s news now. The last of his soapy bubbles is finally popping. And there’s no price where he can buy “price stability” in bonds back.

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, and the SP500 are now $1297-1379, $104.08-106.64, $81.21-82.18, 96.17-98.83, 2.21-2.46%, 14.76-18.98, and 1605-1656, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Bubbles Pop - Chart of the Day

 

Bubbles Pop - Virtual Portfolio


INITIAL CLAIMS: DATA SHOWS ONGOING POSITIVE MOMENTUM

Takeaway: Another strong week for the labor market as non-seasonally adjusted claims continue to register accelerating improvement.

Below is the breakdown of this morning's claims data from the Hedgeye Financials team.  If you would like to setup a call with Josh or Jonathan or trial their research, please contact .

 

A Steadily Widening Divergence

This past week's claims data looks almost identical to that of the prior week. Rolling NSA claims were better by 9.6% YoY, which was a hair better than the 9.5% improvement in the previous week. SA claims were better WoW but essentially flat on a rolling basis. Clearly all eyes are on the Friday payrolls report. Historically the ability to forecast NFP with claims has been poor, i.e. there's typically a high correlation but with a fairly high standard error. Nevertheless, the 4-wk print (SA) this week was 346.5k, which was actually down from the 4-wk print for May at 352.5k. Based on this and last month's NSA print of 175k and this month's consensus of 161k, we'll go out on a limb and suggest that there's a better than 50% chance the NFP print will come in nominally ahead of expectations.

 

Tactically thinking about the Friday number aside, the real takeaway is that the fundamentals of the labor market (NSA YoY) continue to improve at an accelerating rate. Deep value, credit quality-levered longs like BAC remain among our top picks on this basis, coupled with the fact the recovering housing market shows no signs of derailing on the recent back-up in rates.

 

The Data

Prior to revision, initial jobless claims fell 3k to 343k from 346k WoW, as the prior week's number was revised up by 2k to 348k.

 

The headline (unrevised) number shows claims were lower by 5k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -0.75k WoW to 346.5k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -9.6% lower YoY, which is a sequential improvement versus the previous week's YoY change of -9.5%

 

INITIAL CLAIMS: DATA SHOWS ONGOING POSITIVE MOMENTUM - JS 1

 

INITIAL CLAIMS: DATA SHOWS ONGOING POSITIVE MOMENTUM - JS 2

 

INITIAL CLAIMS: DATA SHOWS ONGOING POSITIVE MOMENTUM - JS 3

 

INITIAL CLAIMS: DATA SHOWS ONGOING POSITIVE MOMENTUM - JS 4

 

INITIAL CLAIMS: DATA SHOWS ONGOING POSITIVE MOMENTUM - JS 5

 

INITIAL CLAIMS: DATA SHOWS ONGOING POSITIVE MOMENTUM - JS 6

 

INITIAL CLAIMS: DATA SHOWS ONGOING POSITIVE MOMENTUM - JS 7

 

INITIAL CLAIMS: DATA SHOWS ONGOING POSITIVE MOMENTUM - JS 8

 

INITIAL CLAIMS: DATA SHOWS ONGOING POSITIVE MOMENTUM - JS 9

 

INITIAL CLAIMS: DATA SHOWS ONGOING POSITIVE MOMENTUM - JS 10

 

INITIAL CLAIMS: DATA SHOWS ONGOING POSITIVE MOMENTUM - JS 11

 

INITIAL CLAIMS: DATA SHOWS ONGOING POSITIVE MOMENTUM - JS 12

 

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 

 


Linn Energy – A LINE in the Sand?

Takeaway: We believe LINE has room to fall much further. In fact, Hedgeye believes that fair value for LINE (LNCO) is around ~8.00/unit (share).

What a difference a couple of days can make. In case you haven’t been following this story, the price of LINN Energy (LINE) has cratered the last two days.

 

Linn Energy – A LINE in the Sand? - LINE 070313

 

What triggered LINE’s plunge? News that the SEC is now investigating the company’s use of use of non-GAAP financial measures, its hedging strategies, and its proposed acquisition of Berry Petroleum Company (BRY) jointly with its affiliate, Linn Co, LLC.

 

According to the press release put out by LINN Energy Monday night:

 

The SEC has requested the preservation of documents and communications that are potentially relevant to, among other things, LinnCo's proposed merger with Berry Petroleum Company, and LINN and LinnCo's use of non-GAAP financial measures and hedging strategy.

 

For the record, Hedgeye Energy Analyst Kevin Kaiser has been all over the “Old Wall Street” aggressive accounting practices over at LINN Energy. Kaiser first sounded the siren back in February when the stock was trading around $38. It’s currently trading around $23 dollars.

 

We have been relentlessly banging the drum of transparency, and shining the light of accountability for all investors who bothered to listen. It has not been an easy road. All along, we have been attacked and vilified by various high-profile members of the mainstream media, big shots on Wall Street and angry people long LINN on Twitter. These attacks didn’t weaken our resolve. Rather, it strengthened our determination to get the truth out.

 

Fortunately, it now appears the market has come around. To paraphrase a line from Jim Chanos, “We are not the only guys crying in the wilderness” about the accounting at LINN now. While we certainly do not celebrate the losses of investors long LINN Energy, we do celebrate the market holding this company accountable. We don’t like it when companies play games. It’s bad for the markets and it’s bad for America.

 

For the record, Hedgeye believes this SEC inquiry puts the proposed LINN/BRY merger at serious risk. And yes, we believe the stock has room to fall much further. In fact, Hedgeye believes that fair value for LINE (LNCO) is around ~8.00/unit (share).

 

We’re not done with LINN – we think this story is far from over.


Early Look

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Jobs Picture Improving

Takeaway: Another week of solid labor market improvement. We would take advantage of beaten down deep-value names on the long side on this data.

This past week's initial jobless claims data looks almost identical to that of the prior week. Rolling, non-seasonally adjusted (NSA) claims were better by 9.6% year-over-year, which was a hair better than the 9.5% improvement in the previous week.

 

Jobs Picture Improving - josh

 

Clearly all eyes are on the Friday payrolls report. Historically the ability to forecast non-farm payrolls with claims has been poor (i.e. there's typically a high correlation, but with a fairly high standard error). Nevertheless, the 4-week print (seasonally adjusted) this week was 346,500, which was actually down from the 4-week print for May at 352,500.

 

Based on this and last month's NSA print of 175,000 and this month's consensus of 161,000, we'll go out on a limb and suggest that there's a better than 50% chance the NFP print will come in nominally ahead of expectations.

 

Tactically thinking about the Friday number aside, the real takeaway is that the fundamentals of the labor market (NSA YoY) continue to improve at an accelerating rate. 


Morning Reads on Our Radar Screen

Takeaway: A quick look at top stories on Hedgeye's radar screen.

Keith McCullough – CEO

CNBC Quarterly Ratings Fall To Lowest Level Since 1994 (via ValueWalk)

Reds' Homer Bailey throws his 2nd no-hitter in last 10 months (via ESPN)                

Egyptian army in crisis talks as Morsi deadline looms (via BBC)

Portugal’s Coalition Splinters on Austerity Fatigue (KM note: Marxists don't like the discipline … via Bloomberg)

Drone Attack Kills 17 in Pakistan’s Waziristan Region (via New York Times)

 

Morning Reads on Our Radar Screen - radar

 

Kevin Kaiser – Energy

“Mad Money” host Jim Cramer on LINN Energy Debacle  (1:05 mark via CNBC)

 

Tom Tobin – Healthcare

Obamacare’s employer mandate shouldn’t be delayed. It should be repealed. (via Washington Post)

 

Josh Steiner – Financials

For online lenders, Wall Street cash brings growth and risk (via Reuters)

 

Jonathan Casteleyn – Financials

Which way for bonds? Mapping a path forward (via PIMCO)

 

Brian McGough - Retail

Restoration Hardware Appoints Gary Friedman Chairman of the Board and Co-CEO (via Herald Online)

 

Matt Hedrick – Macro

Riksbank Keeps Rate at 1% as Krona Slump Helps Price Target (via Bloomberg)


RH: Titles Are Irrelevant, Still On It's Way to $100

Takeaway: Don't read too much into the Board's decision to tweak titles in the C-suite -- the growth plan is completely on track.

The  net of RH's announcements this morning are positive.

 

Specifically, the company announced that Gary Friedman, who had 'stepped down' from CEO to be 'Chairman Emeritus, Creator and Curator' changed his title to Co-CEO alongside Carlos Alberini.   Let's be clear about something…what Friedman does on a day to day basis won't change. The reality is that the Board stepped up and changed his title at the time of the IPO to draw a line between the company, his personal life, and percieved surrounding conflicts. But from the Board's perspective, with the stock up 150% since the IPO and the quality of the long-term growth story becoming more apparent over the past six months, it's fair to say that any credibility issues associated with his role in the company are more than ameliorated.

 

Over the past nine months, Friedman and Carlos Alberini have been operating much like how we see Ralph Lauren (Right half of the brain) and Roger Farrah (Left half), which represents one of the best and most successful creative vs. operating relationships the retail world has ever seen. Friedman and Alberini have the potential to mirror that success. 

 

Our point is that the only thing that changed pre-IPO was Friedman's title. Day-to-day he has always donned the role that represents the Right half of the brain. Alberini was the Left half.  Use the title of Curator, CEO, COO, or Chief Janitor…it really does not matter. Both gentlemen are doing the same thing today that they did yesterday, but simply with more recognized confidence by the Board (the statement in the press release from Michael Chu -- former RH Chairman -- lends ultimate support).

 

The other announcement is that RH is going to begin to curate apparel, footwear, accessories, and jewelry under the brand  'RH Atelier'. By no stretch are we going to treat this as a layup for RH, as it is a category where more concepts have failed than succeeded. But the reality is that the company already has the operating infrastructure to slowly and deliberately test the concept -- and alter it as the market opportunity dictates.

 

We continue to believe that one of the few things that can derail RH is the company's execution of the numerous business opportunities it has in the air.

 

Ultimately, we think this is all consistent with our view that the company will be viewed as having $5+ in earnings power.

 

RH: Titles Are Irrelevant, Still On It's Way to $100 - rh


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