Standing Up

This note was originally published at 8am on July 02, 2013 for Hedgeye subscribers.

“If someone picks on your brother and you don’t stand up for him, don’t bother coming home.”

-Larry Bird, quoting his father (paraphrased)


From a stock research perspective, the last couple of months at Hedgeye have been interesting.  Specifically, our Senior Energy Analyst Kevin Kaiser has been knees deep in a classic battleground stock: LINN Energy.  Kaiser has done an immense amount of independent work on the stock and concluded that the Company is overvalued.  In fact, our fair value estimates are more than 40% lower than the current stock price.


This research has raised the ire of the Company’s management who has publicly refuted our thesis, has led to numerous ad hominem attacks from the likes of Jim “The Entertainer” Cramer, and also led to a letter to the editor of Barron’s from a large hedge funds that has accused the short sellers of LINN to be “unprincipled”.  (Ironic from a hedge fund that routinely shorts securities.)


Now, admittedly, when we think we are on to something we tend to go all in.  In this instance, that included presenting on the idea a couple of times, participating in the Barron’s article, and publicly defending our research and our analyst.  To Larry Bird’s quote above, if you are not going to defend your ideas and your teammates, don’t bother coming back to Hedgeye headquarters.


Late last night, we were rewarded for our hard work as LINN Energy announced:


“… that they have been notified by the staff of the Securities and Exchange Commission ("SEC") that its Fort Worth Regional Office has commenced a private, non-public inquiry regarding LINN and LinnCo. 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.”


Now to be fair, this is America, and certainly the Company is innocent until “proven guilty” by the SEC, but nonetheless this was part of our point in warning investors that some of LINN’s practices were likely to attract the scrutiny of the SEC.


As always, though, Mr. Market will ultimately let us know if we are correct in our research on this name.  After all, in the short run the stock market is a voting machine and in the long run it’s a weighing machine.


Back to the global macro grind . . .


Not surprisingly, one of our third quarter themes will be related to Asia, which has been home to much of the global equity market pin action this year.  As Keith noted this morning, the Yen is down for the fourth straight day versus the U.S. dollar.  In that time period, the #WeimarNikkei is up +6.4% and is once again back above our TREND line of support of 13,389.


The other noteworthy equity move in the region was from Australia.  In the land down under, Aussie stocks had their largest 1-day move in the last two years, up more than 2.5%.


The Reserve Bank of Australia left rates unchanged and also indicated that they are maintaining an easing bias with a scope to cut again. So, yes in U.S. dollar terms kangaroo pelts are cheap and getting cheaper!


The data flow out of Europe this morning is also universally supportive of more easing from the ECB.  First, French car sales came in at literally 20-year lows.  Second, Portugal’s Finance Minister resigns due to public discord over austerity.  Finally, it seems Greece may not be able to satisfy the Trioka in the next 3 days and concession will have to be reached on its next aid tranche.   This later point was obviously foreshadowed by Greek equities which are down -26% since May.


On a relative basis, the actions in both Japan and Australia, and data from Europe, are supportive of our bullish view of the U.S. dollar.   Currency trades on marginal moves in policy and, on the margin, the U.S. appears to be getting more hawkish as the rest of the world stays or gets more dovish.   Of course, as the facts change so will we and this is a big week for incremental data with U.S. payrolls being reported on Friday and the ECB meeting on Thursday.


Coming into the year, one of the asset classes we were most negative on was gold.  Primarily, this was due to expected U.S. dollar strength.  This thesis has played out in spades with gold down more than -25% in the year-to-date.   Currently, we have no position in gold, but continue to look for a re-entry point on the short side.  Consensus is still trying to call the bottom, but the reality remains that prolonged strength in the U.S. dollar will be a major headwind for gold.


Switching gears to the U.S., we will be hosting a call next week on July 9th to introduce a new investment theme on defense spending entitled, “Torpedoes in the Water?”  In summary, we are introducing a bearish view on many defense contractors, which have been outperforming industrials broadly, as we believe the earnings estimates are likely to go lower as a long term reduction in procurement spending sets in.  Email if you’d like to attend.


Our immediate-term Risk Ranges are now:


SPX 1592-1634

Nikkei 13398-14191 

USD 82.46-84.16

Yen 98.02-99.91 

Oil 102.26-104.86 

Gold 1174-1268 


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Standing Up - LINE 2


Standing Up - vp7 2

July 16, 2013

July 16, 2013 - dtr



July 16, 2013 - 10yr

July 16, 2013 - spx

July 16, 2013 - dax

July 16, 2013 - dxy

July 16, 2013 - oil



July 16, 2013 - ibex

July 16, 2013 - VIX

July 16, 2013 - euro

July 16, 2013 - yen

July 16, 2013 - natgas
July 16, 2013 - gold

July 16, 2013 - copper


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Mrs. Market's Love

“I’m whatever I need to be.”

-Gemma (Sons of Anarchy)


Sons of Anarchy is not Married With Children; and Gemma Teller Morrow is not Peggy Bundy. Katey Sagal won a deserved Golden Globe in 2011 for portraying pretty much everything you probably aren’t married to.


Probably is the right word to use there – because you never know. There are some unique characters on Old Wall and I’ll never rule never out of the question. There’s always a chance!


There’s also a chance that you are feeling the market’s love right about now. After 8 consecutive up days for the SP500 and yet another all-time closing high, I think it’s time we start calling Mr. Market. Mrs. Gemma would like that.


Back to the Global Macro Grind


USA style Charming, CA. Yep. Not only is that the name of the fictional town in Sons of Anarchy, it’s also what Mrs. Market has delivered you, on no-volume, for July to-date:

  1. SP500 and Russell2000 closing at all-time highs of 1682 (+18% YTD) and 1043 (+23% YTD), respectively
  2. Consumer Discretionary (XLY) and US Financial (XLF) stocks lead at +25.6% and +25.2% YTD, respectively
  3. US Equity Market Volatility (VIX) to 13.79, which is -23.5% YTD

You can twist it, whine about it, love it, kiss it, and/or yell about it – this USA stock market move is whatever she wants to be. Despite US Equity volume being down -31% versus my TREND based average yesterday (that’s bad), you have to deal with the game that’s in front of you. There is a real-time score.


On yesterday’s Q3 Global Macro Themes conference call (ping if you’d like the replay), I focused a lot on the flow. No, I don’t mean Charlie Hunnam’s flow (he’s the buff blond who plays Jax Teller in Sons). I mean Mrs. Market’s flow.


If you didn’t know that capital flows, now you know. Capital flows chase performance both ways too – that’s why we call them inflows and outflows. One of the main assets Mrs. Market (USA Equities) has going for her now is that capital is running out of places to go.


Since our Top 3 Macro Themes for Q312 are:


1.       #RisingRates

2.       #DebtDeflation

3.       #AsianContagion


Our New Haven, CT club’s strategy suggests you should not be flowing fresh assets into:

  1. Commodity Bubbles
  2. Sovereign Debt Bubbles (USA, Japan, Namibia, etc.)
  3. Asian Equities (ex-Japan)

And we aren’t particularly keen on buying anything (currencies, stocks, or bonds) in Europe right now either.


So… where does the flow go?


Yep, right back into the mother’s milk of all things liquidity:

  1. US currency
  2. US stocks

Now don’t get me wrong here - there are plenty of dysfunctional (and illiquid) equity markets out there in this world that are performing marvelously YTD. Check out the ghost of Chavez’ devalued peso past – Venezuelan stocks are +165% YTD, baby!


I know, you like it when Mrs. Market talks perf to you like that, don’t you bros. So why not chase some of the mo mo and triple down on the 3x Abu Dhabi ETF or something like that too? Dubai and Abu Dhabi are ripping, +47% and +44% YTD, respectively!


#kidding (not on the illiquid equity market performance part though)


2013 Reality Flow Show: there are only two really deep and liquid markets that are really ripping:

  1. USA
  2. JAPAN

And in a world of #RisingRates, #DebtDeflation, and #EmergingOutflows – don’t let anyone from b-school teach you otherwise bros - size and liquidity definitely matters right now.


So where do you go from here? Stay with the process and wait for the next pullback to immediate-term TRADE supports for both the SP500 and the Russell 2000 (and probably the #WeimarNikkei too).


While chasing markets up here isn’t my style, I always need to remind myself that Mrs. Market doesn’t particular care about anyone’s style. Her rules are simple – and everyone eventually needs to be whatever her performance chasing year-end bogeys become.


Our immediate-term Risk Ranges are now as follows (we also have 12 daily Global Macro ranges in our new Daily Trading Ranges product, fyi):


UST 10yr yield 2.45-2.76%


Russell2000 1018-1054

VIX 12.77-15.16

USD 82.45-83.78

Brent Oil 107.04-110.29


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Mrs. Market's Love - Flows


Mrs. Market's Love - vp 7 16


TODAY’S S&P 500 SET-UP – July 16, 2013

As we look at today's setup for the S&P 500, the range is 48 points or 1.93% downside to 1650 and 0.92% upside to 1698.       











  • YIELD CURVE: 2.21 from 2.21
  • VIX  closed at 13.79 1 day percent change of -0.36%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7:45am: ICSC retail sales
  • 8:30am: CPI M/m, June, est. 0.3% (prior 0.1%)
  • 8:30am: CPI Ex Food & Energy, M/m, June, est. 0.2%
  • 8:55am: Redbook weekly retail sales
  • 9am: Total Net TIC Flows, May (prior $12.7b)
  • 9:15am: Industrial Production, June, est. 0.3% (prior 0.0%)
  • 9:15am: Capacity Utilization, June, est. 77.7% (prior 77.6%)
  • 9:15am: Manufacturing Prod., June, est. 0.2% (prior 0.1%)
  • 10am: NAHB Housing Market Index, July, est. 51 (prior 52)
  • 11am: Fed to purchase $1.25b-$1.75b in 2036-2043 sector
  • 11:30am: U.S. to sell 4W bills
  • 2:15pm: Fed’s George speaks in Kansas City
  • 4:30pm: API crude, oil product inventories


    • Vice President Joe Biden officiates over Ed Markey (D-Mass.) swearing-in ceremony, 10am
    • Senate Majority Leader Harry Reid, D-Nev., said he plans procedural vote on nomination of Richard Cordray to head CFPB
    • Senate Energy and Natural Resources Cmte holds hearing on how U.S. gasoline, fuel prices are being affected by current boom in domestic oil production, restructuring of refining industry, distribution system, 10am
    • Fed, OCC, FDIC swaps pushout rule effective date
    • Senate Banking Cmte considers nominations of Mel Watt to lead Federal Housing Finance Agency, Jason Furman as chairman of Housing Finance Agency, and Kara Stein, Michael Piwowar and Mary Jo White to be members of SEC, 10am
    • House Energy and Commerce Cmte’s panel on health holds hearing on drug compounding regulations, 3pm

WHAT TO WATCH         

  • Baidu to buy 91 Wireless for $1.9b to add an app store
  • Loeb’s Third Point Reinsurance files for U.S. IPO
  • Honeywell beacon faces scrutiny in probe of Boeing 787 fire
  • Senate nears showdown votes on nominees as leaders seek solution
  • European car sales fell to 2-decade low in June
  • China widens drugmaker probe as Glaxo bribery charges outlined
  • Gross adds to holdings of Treasuries after TIPS losing bet
  • AT&T offers monthly smartphones plan in nod to T-Mobile move
  • German July ZEW investor confidence unexpectedly drops
  • New York regulator seeks details on Athene, Aviva deal: WSJ
  • Orchard Supply gets court approval of $176m in financing
  • Generali said to sell private-equity fund stakes to Lexington
  • Fed should make unconventional tools norm, Posen says in FT
  • U.K. June inflation rate 2.9% Y/y vs est. 3%, previous 2.7%


    • Comerica (CMA) 6:40am, $0.70
    • Mosaic (MOS) 7am, $1.15 - Preview
    • Coca-Cola (KO) 7:30am, $0.63 - Preview
    • Goldman Sachs (GS) 7:35am, $2.89 - Preview
    • Johnson & Johnson (JNJ) 7:45am, $1.39 - Preview
    • Charles Schwab (SCHW) 8:45am, $0.19
    • CSX (CSX) 4:01pm, $0.47
    • Interactive Brokers (IBKR) 4:01pm, $0.21
    • Yahoo! (YHOO) 4:05pm, $0.30 - Preview
    • United Rentals (URI) 4:10pm, $1.00
    • Packaging Corp of America (PKG) 5pm, $0.63


  • WTI Trades Near Three-Day High as Oil Stockpiles Seen Shrinking
  • Record Pork Supply Seen as U.S. Farms Profit Again: Commodities
  • Copper Advances Before Figures on U.S. Industrial Production
  • Coffee Reaches Seven-Week High on Vietnam Exports; Cocoa Gains
  • Corn Rises on Signs of Worsening U.S. Crop Conditions After Heat
  • Gold Swings in London as Investors Await Bernanke’s Testimony
  • Palm Oil Exports From Indonesia Drop on Weak India, China Demand
  • Gold Longest Below 200-Day Average Since ’01: Technical Analysis
  • Glencore Xstrata to Suspend Its Australian Iron Ore Operations
  • China to Import More Oil as 2013 Demand Set to Rise 5%: Barclays
  • Rebar Rises to Highest in Almost Three Months as Inventory Drops
  • Indonesia-EU Palm Oil Exports Jump on Biodiesel Use: BI Chart
  • Tea Party May Lose Food-Stamp Cuts Sought by Dividing Farm Law
  • Rio Tinto’s Iron Ore Output Increases 7% as Copper Target Raised


























The Hedgeye Macro Team

















Macau's Tourist Price Index (TPI) for the 2Q 2013 increased by 6.08% YoY and 6.22% QoQ, attributable to higher charges for hotel accommodation and restaurant service.  


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