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Silent Apprehension

This note was originally published at 8am on January 28, 2014 for Hedgeye subscribers.

“Wall St. was a street of vanished hopes, or curiously silent apprehension, and a sort of paralyzed hypnosis.”

-New York Times


Imagine that was the header for @NYT on the eve of America’s central economic planner in chief’s State of The Union. Newsflash: it’s not. That was the front page of the New York Times on the day after the 1929 US stock market crash.


John Coates cites the aforementioned headline in chapter 1 (The Biology of a Market Bubble) of The Hour Between Dog and Wolf and goes on to remind us that “research on body-brain feedback, even within physiology and neuroscience, is relatively new.” (pg 28).


So how are you feeling this morning? While you know that hope is not a risk management process, apprehension and paralysis are all part of the game. While it’s hard to sell`em on green and buy`em on red, fading your emotional state is often the precise action to take.


Back to the Global Macro Grind


I don’t know about you, but in the heat of the decision making moment I fade how I feel about markets a lot. Through 15 years of trial and error, I’ve learned to increasingly rely on multi-factor, multi-duration, risk management signals amidst the research noise.


Since I don’t have a dog (or wolf) in the fight in marketing a perma bullish or bearish position, I use the TRADE versus the TREND in order to tone down my testosterone. Yep, I’m a dude – keeping that under control matters!


To review our process lingo:

  1. TRADE is 3 weeks or less in duration
  2. TREND is 3 months or more in duration

The reason why I use “more” or “less” is because time in my model (days) varies inversely with volatility. In other words, if front-month volatility ramps +50% in a week, the number of days in my TRADE model falls, fast – and, if implied volatility (looking out on the curve) doesn’t confirm that immediate-term information surprise, I keep an above average amount of duration (time) in the TREND model.


That may or may not make sense to you. So to put it more simply:

  1. When both front-month and implied volatility are signaling lower-highs and lower-lows, a monkey can buy stocks
  2. When both front-month and implied volatility move from bearish to bullish TRADE and TREND, monkeys get killed

Momentum monkeys, I mean.


I know, I know. Every time I call someone a monkey, I trigger an emotional response. But, please, don’t be offended. I am a monkey too – I’m just one that tends to learn from the cage door being slammed on my fingers.


Volatility, of course, is the #1 risk factor that every major fund manager who has fallen from grace has messed up. Even the world’s best messed this up in bonds last June. Many more have already messed this up in Japanese and Emerging Market Equities YTD.


This is basically why I completely disagree with the concept of being an active “long-term investor” who doesn’t use an implied volatility risk management overlay. While it would be nice to wake up to sun and bananas at the zoo every day, reality is that every once in a while a storm rips the cages open and the tigers, who have been putting up with monkey-bull chirping for a year, are hungry.


Back to the actual levels, to keep this simple, let’s just focus on the inverse relationship between the SP500 and VIX:

  1. TRADE – SPX 1837 momentum support broke as 13.81 VIX resistance became immediate-term support
  2. TREND – SPX 1779 support was tested intraday yesterday (and held), but VIX 14.91 TREND is firmly intact

And here Mucker the monkey was covering oversold shorts (and buying one long, LVS) into the close as 1779 SPX held (which would be called a high-probability gamble - dealer shows a 6 in #BlackJack)… and the minute I saw Apple (AAPL) guide down, I thought it was going to be a gamble I’d pay for today (and deserve it).


But, the US Equity Futures are up 8-10 handles and I’ll play lucky on the open today instead. I won’t, however, confuse that with the next leg up in this market ripping to fresh all-time highs. Provided that 1837 SPX TRADE resistance and 14.91 VIX TREND support remain intact, I’ll be a seller again this morning on green (like we were in #RealTimeAlerts on the open yesterday).


I know that playing the game across durations isn’t for everyone. But this is what I do. And I like it. I can assure you that the longest of “long-term” investments you can ever make is starting your own company with all of your own money. And for me at least, that investment requires absorbing 24/7 risk management, apprehension, and pain – if you want the long-term to last longer, that is.


Our immediate-term Global Macro Risk Ranges are now (12 Big Macro Ranges are in our Daily Trading Range product):


SPX 1758-1822

VIX 14.91-20.41

USD 80.18-80.79

Pound 1.64-1.66 (bullish)

NatGas 4.58-5.15

Gold 1240-1272


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Silent Apprehension - Chart of the Day


Silent Apprehension - Virtual Portfolio


In preparation for TRIP's FQ4 2013 earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.




  • Since we rolled this out to 100% of our traffic in early June, we've driven more clicks per meta session and better downstream partner conversion, and although pricing remains choppy, we've seen a modest uptick in meta revenue per session. We continue to work on improving onsite and partner conversion, running multiple tests every week, and we expect more gains in this area.
  • We'll have lapped the transition completely by the end of Q2 next year, and so the whole transition piece will be behind us and it will be continued growth based on our hotel shopper numbers, and the rest of our ongoing conversion improvements that we work on every week.
  • For partners, coverage is strong and bidding frequency is up.


  • According to Skift, Tripadvisor halted its TV campaign in the US market in January.
  • We are seeing some positive signs from this campaign, but it is too early to gauge the overall effectiveness.
  • We spent a couple of million in Q2, maybe a couple of million more at the end of September Q3 when we launched the campaign. And by the time Q4 finishes, we'll probably have spent close to $30 million or so.
  • We wanted to go heavy in order to be able to detect a lift that we felt comfortable that we could correlate with the specific TV spend. And we've been in market a lot in October and that will continue in November as well. And I'll report back in early Q1 with a more definitive, hey look, this is what we've learned from everything we were doing in TV.
  • Argentina is a relatively small market for us, so we thought we would be able to see it a stronger signal for the TV spend. France and Spain, key European markets for us. Picked two as opposed to going broad based and the U.S. is home market where we have the most traffic, hey, will we be able to see the results that we're looking for.


  • Sort of 2014 and if you look at how TripAdvisor historically delivers projects, it's perhaps we're known as faster than some other companies. I think earlier part of 2014 than later part of 2014 because it is kind of the next best thing we feel we can do on the mobile front. We have a lot of installs. We're still pre-installed on Samsung S4. We've got new native apps, Android and iPhone, that just rolled out, nice engagement we're seeing on both of those, but we're missing that booking functionality, so that's the clear next phase for our mobile strategy.


  • So meta over and done with (mid-2014), mobile less of a headwind. In international, will remain a bit of a headwind. Hopefully, we can acknowledge that as an ongoing headwind, but make it up elsewhere in the company as we improve our overall monetization of the site.


  • Our brand strength and our conversion numbers in the U.K. is outstanding, arguably sort of best in the world, and Brits like to travel a lot, so that's good for us; Australia is a pretty strong market for us; Japan has some structural weaknesses in terms of the commission rates that the local players are able to collect on hotels. And so, when the local OTA isn't making as much money on the bookings, they can't pay us as much, but we continue to grow in all of our markets. Europe, the Northern European markets are better than the Southern European markets. I don't think that has anything to do with TripAdvisor per se. I just think that's the macroeconomic climate for all travel providers.


  • We view it as a tremendous market. We still continue to invest in China, and so we still have a couple of points-of-sale that are growing in China. We like the investment, we're well positioned for the future, we're not commenting on the overall timeframe when that turns profitable, but it positions us well down the road with that growing market or worse comes to worse, we could curtail our investments and take those dollars and put them elsewhere.

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The Chinese New Year celebration is providing the kick start we thought.  Here are the trends and comps.


  • According to Lusa, Macau daily GGR reached HK$1.34 billion for the 1st six days of Chinese New Year 2014.  Compared with the daily HK$999MM for the 1st seven days last Chinese New year, that translates into 35% growth in daily GGR on a CNY basis.  On a calendar basis, daily revenue may have come close to doubling.
  • CNY GGR usually picks up 7-14 days after the new year i.e. Jan 31, 2014.  Hence, GGR may be even higher for this coming week.  
  • The chart below shows very easy comps for the 1st half of February due to calendar differences.
  • The 2nd half of February laps last year’s CNY pickup and will be considerably more difficult at HK$1,030 ADTR.  But if we use December as a ‘normal’ run rate without any holiday distortions, we shouldn’t see a precipitous decline.
  • We continue to believe February could generate 20% YoY growth


[video] Kaboom! Kaiser's High-Conviction SHORT Idea Crushed

Reducing BWP Fair Value to $10/unit

Short Boardwalk Pipeline Partners (BWP) remains a Hedgeye Best Idea, and we are reducing our Fair Value price to ~$10/unit after BWP’s disappointing results, guidance, and outlook.  


We added SHORT BWP to our Best Ideas list on 12/2/2013 and issued a full report on 12/5/2013 (Link: Hedgeye Best Idea Short BWP December 2013).  There we argued that, “BWP needs to cut its distribution to a sustainable level, which we estimate would be more than 50% below the current $2.13 per LP unit per year.”  This morning BWP cut its distribution ~80% to $0.40/unit/year, and issued disappointing 2014 EBITDA guidance.  The units are down more than 40% at the time of writing.


- What’s BWP worth now?  We say Fair Value = ~$10/unit……In our 12/5/13 note, we gave a fair value range for BWP of $16 -18/unit.  After the 4Q13 results and 2014 guidance, we now believe that our prior range is too high, given:

  • BWP’s 2014 EBITDA guidance was weaker than we previously expected, primarily due to incremental weakness in BWP’s natural gas storage and PAL (parking-and-lending) businesses.
  • We are more concerned with BWP’s 2015, 2016+ free cash flow outlook, given management’s reluctance to discuss it, as well as the weaker outlook for storage and PAL. 
  • We are less positive on Bluegrass going forward after a disappointing open season and management’s cautious tone/outlook when discussing the project.
  • BWP’s leverage looks to be stuck ~5.0x EBITDA absent a significant equity injection or de-leveraging acquisition (but who wants BWP stock?).  BWP will not de-lever in 2014.

For 2014, we estimate BWP LP EPU of $0.86 and LP EBITDA of $648MM, putting BWP at the current price ($14.30/unit at the time of writing) at 16.7x 2014 earnings and 10.7x EV/2014 EBITDA. 


When thinking through BWP’s valuation, consider that BWP’s cash flows are at the front-end of secular decline - 2014 could be peak EBITDA; the Company has understated maintenance CapEx such that it’s DCF overstates its run-rate FCF; its over-levered at ~5.0x EBITDA with $525MM of principle due in 1H15; it likely needs a substantial equity injection in order to de-lever; it still has IDRs up to the 50/50 split; it has no "yield support" with an annual distribution of only $0.40/unit, and there is no hope of a distribution increase in the foreseeable future.  Given all of these factors, we believe that BWP should trade at below-average multiples: at 8x – 10x EV/EBITDA, we value BWP at $7.00 - $12.50/unit.


The bull case for BWP will likely now shift to value buyers viewing it as a take-out candidate.  Okay, we have some recent M&A comp transactions for similar long-haul natural gas transportation and storage assets.  KMP acquired TGP and EPNG from KMI at ~8x forward EBITDA in 2012 and 2013, and SEP acquired the SE drop-down assets at ~9x EBITDA in 2013.  We have a hard time believing that a potential buyer would be interested in BWP at more than 8x EBITDA given the potential future cash flow declines.  Still, if we assume that a buyer could squeeze $50MM of cost synergies out of BWP, a bid for BWP at 8x PF EBITDA would be at ~$9.00/unit.  Perhaps there is a case for a takeout, but not the current price.


- 2014 EBITDA guidance worse than expected……BWP guided 2014 EBITDA to $650MM vs. Bloomberg Consensus ~$780MM and our expectation of ~$700MM.  BWP’s clean EBITDA (ex. base gas sales and other items) was $712MM in 2013.


- 2014 EBITDA is likely the high-water mark going forward; base business in secular decline……On the conference call, analysts repeatedly inquired about BWP’s outlook beyond 2014, to which management would give no color.  The Company’s refusal to discuss 2015+, despite the fact that they should have revenue visibility on long-term contracts, gives us a good idea of what we need to know.  Even with a full-year of the SE Expansion in service in 2015, we think it’s unlikely that this incremental EBITDA (we estimate ~$50MM) offsets continued weakness in BWP’s base transportation, storage, and PAL businesses.  By our estimates, 2015 and 2016 will have more firm transportation contracts rolling off than in 2014, and 2014 transportation revenues will be down $40MM YoY on $75MM of contracts rolling.  Transportation revenues could be down at least that much again in 2015 and 2016.  Beyond that, 2019 could be a cash flow bloodbath, with ~2.5 Bcf/d of contracted capacity rolling off on Gulf Crossing and Texas Gas (see our 12/5/2013 report for contracted capacity rolls).  The key point here is that BWP’s issues are very long in the tail – it’s not just 2014 weakness.  In our view, DCF (~$1.60/unit in 2014) is overstated relative to run-rate FCF because “expansion” projects are merely making up for cash flow declines on the base businesses; longer-term, we expect CFFO to be flat-to-down while debt and units out increase. 


- BWP will NOT be de-levering in 2014 (or 2015?  or 2016?)……Management's comments suggest that it will not increase the distribution until its debt/EBITDA ratio falls to 4.0x from the current 4.9x (current debt/TTM adj. EBITDA as BWP presents it).  That is not going to happen anytime soon!  BWP guided 2014 DCF to $400MM; distributions will be $100MM and "Expansion" CapEx $330MM.  There is NO free cash available for de-leveraging absent equity issuance (which management insisted they would not do in 2014)


Assuming net debt stays about flat around $3.4B over the next year, BWP will be 5.2x levered at YE14, in breach of its 5.0x covenant ratio.  If we give BWP an additional $50MM of full-year EBITDA from the SE Expansion that is expected to be put into service in late 4Q14, BWP will be 4.9x levered on a pro forma basis at YE14.  If BWP pays down the $175MM revolver by issuing subordinated debt to Loews, the leverage ratio from the standpoint of the equity holder will not change, though it will help with the debt covenant.  Still, BWP would be at 4.6x covenant debt/PF EBITDA at YE14.  BWP has no long-term debt due in 2014, but has $525MM due in 1H15 and $250MM in 2016.  How does that get paid down?  Equity issuance?  Management is telling us not to expect more equity, but we're having a difficult time seeing how that's possible.


Call with any questions,


Kevin Kaiser

Managing Director

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