Marijuana Legalization: The Debate Begins

We look forward to hosting a special call Marijuana Legalization: The Debate Begins, featuring Dr. Beau Kilmer, Codirector of RAND Corporation’s Drug Policy Research Center, on Thursday, April 24th at 2:00pm EDT.




Dr. Kilmer will provide a framework for assessing the marijuana policy landscape, incorporating his studies on drugs as a RAND researcher and specifically his work on marijuana legalization. He’ll discuss such topics as State versus Federal regulation, the key decisions policy makers face, his “8 Ps” framework, and social costs. We look forward to a robust Q&A on this very hot topic.


Marijuana Legalization: The Debate Begins - pic. Smoking Marijuana Hit 



Beau Kilmer is a senior policy researcher at the RAND Corporation, where he codirects the RAND Drug Policy Research Center. He is also a professor at the Pardee RAND Graduate School. His research lies at the intersection of public health and public safety, with a special emphasis on substance use, illicit markets, crime, and public policy.


Some of his current projects include estimating the size of illegal drug markets, assessing the consequences of alternative marijuana policies, measuring the effect of South Dakota's 24/7 Sobriety Program on drunk driving and domestic violence outcomes, and evaluating other innovative programs intended to reduce violence.


Dr. Kilmer's research has appeared in leading journals such as AddictionAmerican Journal of Public HealthJournal of Quantitative CriminologyProceedings of the National Academy of Sciences, and his essays have been published by the BBCCNNLos Angeles TimesNew York TimesWall Street Journal, and USA Today.


His book Marijuana Legalization: What Everyone Needs To Know (co-authored with Jonathan Caulkins, Angela Hawken, and Mark Kleiman) was published by Oxford University Press in 2012. Before earning his doctorate at Harvard University, Kilmer received a Judicial Administration Fellowship that supported his work with the San Francisco Drug Court. 




Toll Free Number:

Direct Dial Number:

Conference Code: 547194#

Materials: CLICK HERE (materials will be available approximately one hour prior to the start of the call)


Please email  for more information.



Howard Penney

Managing Director


Matt Hedrick



Fred Masotta



New Best Ideas: Short Atlas Energy LP (ATLS) and Atlas Pipeline Partners LP (APL)

What will investors pay for aggressive non-GAAP accounting and financial engineering?  Apparently more than $2 billion, the current market cap of ATLS.


As the General Partner (GP) of Atlas Pipeline Partners LP (APL) and Atlas Resource Partners LP (ARP), Atlas Energy LP’s (ATLS) only material source of income is from the distributions that ARP and APL pay it.  However, we believe that the majority of ARP and APL’s “Distributable Cash Flow (DCF)” is a function of aggressive non-GAAP accounting, which those MLPs use to justify distributions to its LPs and ATLS. 


In our view, ARP and APL’s distributions are funded with capital raises – not real profits – and that can only go on for so long.  ATLS is most at risk, as we believe that neither ARP nor APL can support an LP distribution that would trigger an incentive distribution right payment (IDR) to ATLS.  We believe that fair values for all three Atlas MLPs are well below their current market valuations.  The downside is considerable, particularly for ATLS.


We will publish a full report with our investment thesis and valuation analysis on Thursday morning, April 24th.  We will hold a brief conference call on Thursday at 12:30pm EST to discuss the key points and field questions.


Conference Call Details

Thursday, April 24th at 12:30pm EST

Participant Dial-In:

Participant Code: 169921#

Send questions to


Kevin Kaiser

Managing Director

Stick With Inflation Slowing Growth

Client Talking Points


The Yen (up +2.8% year-to-date versus the US Dollar) is not selling off this morning because the US Dollar continues to make a series of lower-highs. It’s easy to be bearish on the Nikkei if you are bearish on USD – Nikkei is down -10.3% YTD with no support to 13,808.


The CRB Food Index was up another +2.7% last week to +21.6% year-to-date (Soybeans were up +3.8% last week to +18.8% and Coffee is up another +0.3% to +77.3%, etc.). It’s a major tax on US #ConsumerSlowing – stay with the inflation slows consumption growth theme.


The 10-year yield is down 2 basis points to start the week, so the bond market continues to agree with our slowing growth call. At 2.70% (and no support to 2.59%), the 10 year is down -33 basis points year-to-date and is frustrating bond bears.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Hologic is emerging from an extremely tough period which has left investors wary of further missteps. In our view, Hologic and its new management are set to show solid growth over the next several years. We have built two survey tools to track and forecast the two critical elements that will drive this acceleration.  The first survey tool measures 3-D Mammography placements every month.  Recently we have detected acceleration in month over month placements.  When Hologic finally receives a reimbursement code from Medicare, placements will accelerate further, perhaps even sooner.  With our survey, we'll see it real time. In addition to our mammography survey. We've been running a monthly survey of OB/GYNs asking them questions to help us forecast the rest of Hologic's businesses, some of which have been faced with significant headwinds.  Based on our survey, we think those headwinds are fading. If the Affordable Care Act actually manages to reduce the number of uninsured, Hologic is one of the best positioned companies.


Construction activity remains cyclically depressed, but has likely begun the long process of recovery.  A large multi-year rebound in construction should provide a tailwind to OC shares that the market appears to be underestimating.  Both residential and nonresidential construction in the U.S. would need to roughly double to reach post-war demographic norms.  As credit returns to the market and government funded construction begins to rebound, construction markets should make steady gains in coming years, quarterly weather aside, supporting OC’s revenue and capacity utilization.


Darden is the world’s largest full service restaurant company. The company operates +2000 restaurants in the U.S. and Canada, including Olive Garden, Red Lobster, LongHorn and Capital Grille. Management has been under a firestorm of criticism for poor performance. Hedgeye's Howard Penney has been at the forefront of this activist movement since early 2013, when he first identified the potential for unleashing significant value creation for Darden shareholders. Less than a year later, it looks like Penney’s plan is coming to fruition. Penney (who thinks DRI is grossly mismanaged and in need of a major overhaul) believes activists will drive material change at Darden. This would obviously be extremely bullish for shareholders and could happen fairly soon driving shares materially higher.

Three for the Road


FX: #StrongPound punches $1.68 vs USD as Carney teaches Yellen a lesson @KeithMcCullough


"Ability can take you to the top, but it takes character to keep you there." - Zig Ziglar


Nearly 36,000 people 9,000 more than usual — are expected to run in the 118th Boston Marathon today, a year after two bombs exploded at the finish line, killing three people and injuring many more. The runners range in age from 18 to 83. Some were among the 5,600 runners who were unable to cross the finish line last year after the explosions had stopped the race. (New York Times)

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Destiny's Coincidence

This note was originally published at 8am on April 07, 2014 for Hedgeye subscribers.

“A thin line separates destiny from coincidence.”

-T.J. Stiles


That’s a great quote about a great capitalist by T.J. Stiles in The First Tycoon. Cornelius Vanderbilt was a Dutch boy who learned the ways of one of the most important waterways in world commerce from his family’s waterside farmhouse.


Farm life has always tended to erode the line between childhood and adulthood. Cornele (his childhood name) lived a life of work and responsibility, hoeing and milking, piling and shoveling. There was church too.” (The First Tycoon, pg 19)


In other words, one of America’s most important self-made capitalists of the early 19th century was a #grinder. He didn’t borrow to spend. He built things that made money. And he bought companies that he didn’t have time to build. He wouldn’t have been long of bubbles in social media terms.


Back to the Global Macro Grind


What is the destiny of a bubble that #OldWall media refuses to call a bubble? With 74% of companies who have come public in the last 6 months not making any money (only eclipsed by the Nasdaq bubble of 1999 when that number was 80%), what could possibly go wrong?


Destiny's Coincidence - Bubbles floating in the a 007


BREAKING: Nasdaq -2.6% on Friday, snapping @Hedgeye TREND support of 4203


Risk happens fast. With the social media stock bubble crashing (single stock moves have been -20-45% from their all-time peak), the Nasdaq is already -5.3% off its YTD high. Since the SP500 is only -1.3% from her all-time-bubble closing high, it must be a bargain!


To review what last weeks snappy correction in the Nasdaq looked like within the context of everything else:

  1. Nasdaq -0.7% on the week to -1.2% YTD
  2. Dow (which we signaled SHORT on Thursday in #RealTimeAlerts) +0.5% last week, but -1.0% YTD
  3. US Consumer Discretionary stocks (XLY) down another -0.1% last wk to -3.3% YTD

This all makes sense to us as our Top Q1 Global Macro Theme was #InflationAccelerating, which:

  1. Slows real consumption growth (short consumer stocks)
  2. Pays those who are long of inflation, in inflation terms

How does one own 2011 style stagflation?

  1. Utilities (XLU) up another +1.1% last week to +9.2% YTD
  2. REITS (MSCI Index) up another +1.3% last week to +9.5% YTD
  3. Gold up +0.7% last week to +8.3% YTD

That boring #GrowthSlowing setup sure beats being long Yelp (-32% since it’s 1st wk of March social media-bubble high)! See our new Internet Analyst, Hesham Shabaan’s, bearish note on YELP from last week. The growth expectations embedded in that stock are scary.


Away from being long #YieldChasing, you can also be long things like inflation via:

  1. CRB Commodities Index +0.6% on Friday vs Nasdaq -2.6% (CRB Index = +8.8% YTD)
  2. CRB Foodstuffs Index up another +0.6% last week to +19.8% YTD
  3. Coffee up another +2.4% last week to +63.8% YTD

I know, I know. Some of the smartest hedge funds on the planet are not long Coffee – they are long Twitter (TWTR) and Facebook (FB)! Why would you buy something like Pigs (+20.4% YTD), Soybeans (+15.4% YTD), or what Vanderbilt loved to get long of in his early days (Cotton +9.5% YTD)?


Smart in this game is as smart does. That’s capitalism. And so is reminding people of the score. This time won’t be different. Market history says that if A) Inflation Accelerates and B) Growth Slows, equity markets see multiple compression.


Two points of multiple compression on the SP500 (to 14x an earnings number that is too high) gets you 1638. Consensus is still looking for what it should have been looking for at this time last year (multiple expansion as inflation fell and growth accelerated). SP500 consensus for 2014 is still 1928.


Growth, as an investment style factor, looks like this for the last month:

  1. Top 25% Sales Growth (top quartile in the SP500) is -2.8%
  2. Top 25% EPS Growth is -2.6%
  3. High Beta -1.2%

So, is this the beginning of the end for growth stocks, or is it the end of the correction?


Consensus (measured by the net long or short position in futures and options contracts) seems to think the latter. SP500 Index and E-mini moved to a NET LONG position of +38,651 contracts into Friday’s close. That’s the longest the the Street has been of beta since late December.


In other words, right as the front-month of US Equity Fear (VIX) made another higher-low last week, consensus hedge funds covered high and got longer. In our playbook that’s no coincidence. The destiny of bubble prices confirming lower-highs on accelerating down-day volume isn’t either.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.66-2.81%

SPX 1840-1890

Nasdaq 4090-4203

USD 79.96-80.66

Gold 1273-1318


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Destiny's Coincidence - Chart of the Day


Destiny's Coincidence - Virtual Portfolio

Nimble and Changing

“Small, nimble, fast changing.”

-Julia Lovell


That’s how Julia Lovell described early 19th century England (relative to China) in The Opium War. “While China’s slavish people had been homogenized into speaking one language … and sympathizing in the same manners.” (pg 79)


As a company or a country, you do not want to become 17-19th century China. You don’t want to be what Europe morphed into during the 20th century either. As a Canadian capitalist who came to this country in the 1990s, I often wonder what America’s 21st century will look like. It’s not what it used to be.


Sadly, the path of least resistance is one of a slower-growth bureaucracy. That’s not my opinion. That’s the history of countries who age. So don’t do that. Do what you can to put two-feet on the floor every morning and earn your keep; fight the tyranny of government groupthink; be nimble and changing.


Nimble and Changing - nimble


Back to the Global Macro Grind


If only because I finally took a vacation, watching the US equity market melt-up to lower-highs on no volume was interesting to watch, intermittently. But one week does not an intermediate-term TREND make. As a friendly reminder, it’s late April and most major US stock market indices are down year-to-date.


Inclusive of the Dow (which we are short in Real-Time Alerts via the DIA) and US Consumer Discretionary stocks (XLY) rising +2.4-2.5% last week, they are both still -1.0% and -4.6% for 2014. If you are long America thinking this is the 1990s #StrongDollar growth cycle again, that is not good.


Two of our most outside of consensus Global Macro Themes are:

  1. US #InflationAccelerating
  2. US #ConsumerSlowing

Both have continued to play out in April. While they are bearish from a cyclical and secular US consumption growth perspective (see our Q2 Global Macro Themes deck for details), there are obvious ways to play this from the LONG side:

  1. Long Inflation, explicitly, via Commodities (DBA, UNG, CAFE, etc.)
  2. Long Inflation, protection, via Treasury Inflation (stagflation) Protection (TIPs)
  3. Long #GrowthSlowing via Bonds (TLT) and any slow-growth Equity (XLU) that looks like a bond

Those speaking the Fed’s language (“there is no inflation”) and/or #OldWall consensus (“Wall Street Bond Dealers Whipsawed on Bearish Treasury Bets” –Bloomberg this morning) don’t get this, yet. But markets do.


Speaking of YTD market scores, how about those commodity markets!

  1. CRB Food Index up another +2.7% last week to +21.6% YTD
  2. Coffee and Soybean prices up again last week to +77% and +19% YTD, respectively
  3. Natural Gas +2.6% last week to +15.8% YTD

I know, I know. As long as you don’t eat and/or plan on running the air conditioning in your house this summer, those food and utility bills (according to those speaking one language in Washington) are “non-core” to what you really need to be spending on – a $600-700 iPhone 6 upgrade!


Nimble and Changing - Chart of the Day


While I was in the pool with my kids Thursday, our long Natural Gas (UNG) and Coffee (CAFE) buy-signals in Real-Time Alerts ripped. But don’t tell the Fed that. They’re still saying what US consumers had to pay (front-month) to heat their homes this winter was “transient.”


Sure, almost every “fundamental” analyst in the Federal League can tell you that there is an “over-supply of Natural Gas” in America. But most of them won’t tell you there is an over-supply of people who were long the Dow and social media stocks on January 1st.


The YTD score doesn’t lie though; those saying there is no inflation do.


Into the belly of US “earnings season” (and away from the aforementioned asset allocations to commodities and bonds), how does all of this look from a Hedgeye Style Factoring perspective (in US Equities) in the last month?

  1. Top 25% Sales Growth Companies (Top Quartile of SP500 Companies) are -2.2% (vs. the bottom 25% being +2.2%)
  2. Top 25% EPS Growth Companies are -1.3% versus the bottom quartile being +2.6%
  3. High Beta Equities are -0.2% versus Low Beta +1.8%

Since it’s also NHL Playoff season, as Herb Brooks said in Miracle, “Again!”


Again, and again, and again… for centuries, big, fat, centrally planned countries who have devalued the purchasing power of their people in exchange for political safety have lost this war. It ends with inflation. And inflation slows both growth, and the multiples markets pay for them.


Our immediate-term Global Macro Risk Ranges are now:



Nasdaq 3  

USD 79.11-80.03

Brent Oil 108.21-110.62

Natural Gas 4.46-4.78

Gold 1

Corn 4.94-5.11


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer

Early Look

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