This note was originally published at 8am on March 20, 2014 for Hedgeye subscribers.
“If you have to forecast, forecast often.”
You probably don’t know who Fiedler was. Like many Keynesian “economists” of the Nixon/Carter and Bush/Obama eras, his growth and inflation forecasts were useless.
But I like his quote.
And I really like the opportunity the market gave us yesterday to add to things we’ve liked from lower prices all year. That list of big macro stuff includes Commodities (Gold, Food, etc.), Foreign Currencies (vs. the USD), and Bonds (long-term Treasuries in particular).
Back to the Global Macro Grind…
But, but, she said that the economy wasn’t slowing and that rates could rise, eventually…
“I do want to emphasize this is a forecast”
-Janet Yellen (March 19, 2014)
I hear you on what the market did in reaction to her forecast (Dollar up, Rates up, Gold down). Nice day-trade. But do you hear Mr. Macro Market’s trending forecast? He updates his forecast often.
So, now there are 2 big conflicting forecasts to concern yourself with:
And, since you have to pick one of the two, which one will it be?
To recap the Fed’s forecast:
And to update you on what Mr. Macro Market has to say about that this morning:
So, on the “what Janet meant to say” part, you might need Hilsenrath to spell it out for you circa 3PM on a market Friday. I get that. You should too. Most people don’t have a macro process, and they have to take the Fed’s word for it, literally.
From a risk management perspective, if the following three things happen:
Well, then I forecast that I will change my forecast. In the meantime, I say you fade the Fed’s forecast because I forecast that Janet Yellen will get less bullish on US Growth after growth slows.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.61-2.81%
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
TODAY’S S&P 500 SET-UP – April 3, 2014
As we look at today's setup for the S&P 500, the range is 29 points or 1.37% downside to 1865 and 0.16% upside to 1894.
CREDIT/ECONOMIC MARKET LOOK:
MACRO DATA POINTS (Bloomberg Estimates):
WHAT TO WATCH:
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
The Hedgeye Macro Team
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After all the finger pointing at this year’s epic-ly frigid winter as an excuse for weak company performance, the white wash snow days of winter are (finally) coming to an end.
With no more excuses about why consumers stayed inside, we asked in today’s poll: Will consumer spending bounce back this spring?
At the time of this post, 53% responded YES; 47% said NO.
Of those who voted YES, one responder pointed out that “this winter is what killed the dinosaurs (coldest in 13 years) - people stayed home from work and the shops.”
Another YES commenter further explained, “There's pent up demand from a bad winter and the oil longs are way too bold and when prices correct, the consumer wins!”
One voter summed up their YES vote by comparing previous seasons: “Last summer was the wettest on record in a decade. That's a good year-over-year comp. Bottom line, April through July has a positive tailwind. After that, accelerating inflation will crimp spending in the late summer/early fall.”
And, while one YES voter agreed that weather had a hand in the slow down, calling it simply “fact,” they admitted that “the bounce won't be great, just better than it has been.”
Conversely, among the NO voters, one commenter said consumer spending will not bounce back due to “tepid job growth.”
Berry Petroleum filed stand-alone reserves, costs incurred, and PV-10 data for 2013 in the back of its 3/31/14 10-K. With legacy BRY comprising ~25% of LINN Energy’s pro forma total production and ~50% of LINN’s pro forma oil production, these results are important to review for anyone interested in LINE/LNCO.
We’ve summarized and synthesized the 2011 – 2013 data in the five tables below, where the takeaways should be relatively self-evident. But some high-level thoughts….
Overall, the results were mixed. In 2013 BRY again directed the majority of its capital to its oil plays, but cost creep exceeded the revenue uplift, and profit margins slipped slightly from 2012 (EBITDAX margin fell 300 bps YoY) – SEE TABLE 1. Despite a 39 MMboe PUD write-off, BRY had a decent year with the drill bit, growing total production 14% and oil production 20% while the PD F&D cost came in at $29/boe and reserve replacement was 140% – SEE TABLES 2 and 3. We note that LINN’s 2014 maintenance CapEx guidance implies an F&D cost of ~$22/boe for BRY. That $7/boe difference on 15 MMboe of expected BRY production in 2014 equates to another $105MM ($0.30/unit) of maintenance CapEx on the legacy BRY assets alone. The most interesting data to us were the changes in PV-10. Despite stable price decks (oil flat, NGLs down, gas up), BRY’s PV-10 dropped $545MM (-11%) YoY to $4.6B, with the PD PV-10 down $87MM (-2%) and the PUD PV-10 down $457MM (-36%) YoY. LINN wrote down $856MM of PV-0 due to negative revisions of previous quantity estimates, which appears to be mostly related to the negative PUD revisions – SEE TABLES 4 and 5. BRY’s PD PV-10 has been flat at ~$3.8B since YE11, while its PUD PV-10 has fallen from $1.9B to $800MM. Over that time, the company added ~$1B of debt to the balance sheet, paid out a small dividend (~$17MM/year), and had share count creep due to SBC. We don’t see much in the way of “value creation” in these results – perhaps why BRY was such eager seller.
Veteran Hedgeye Restaurants analyst Howard Penney explains why he's in lockstep agreement with activist investor Starboard's new 200-page manifesto on Darden Restaurants and why the company's oblivious management team needs to be replaced in order to unlock significant shareholder value.
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