prev

Accepting Little Bubbles

This note was originally published at 8am on April 23, 2014 for Hedgeye subscribers.

"For a very long time everybody refuses and then almost without a pause, almost everybody accepts."

-Gertrude Stein

 

That’s the closing quote to David Einhorn’s quarterly letter for the 1st quarter of 2014. Fully loaded with social bubbles and burrito gas, it is vintage Greenlight Capital – self effacing and straight up:

 

Our longs were modestly profitable, our shorts lost a bit more than we made on our longs, and macro lost a little. The net result was a small loss in a market where some indices were up a little and others were down a little.”

 

In the March-April performance period, down a lot more than a little is how I’d characterize some of these social media and biotech bubble stocks. Having spent a lot of time with hedge fund investors, I don’t think Einhorn’s view on some of these balloons losing 90% of their value is anywhere in the area code of consensus either. Make no mistake, lots of hedgies are long these things.

 

Accepting Little Bubbles - bubbles

 

Back to the Global Macro Grind

 

There is a lot more than a little hedge fund supply in the marketplace today. HFR (Hedge Fund Research) confirmed that in Q1 of 2014, hedge fund assets under management hit a new peak of $2.7 Trillion. Not ironically, as hedge fund assets under management peak, performance starts to underperform a little too (Q1 2014 was the worst performance quarter for the industry since Q1 2008).

 

This was one of the main reasons why I was bearish on the US stock market in Q1 of 2008 (when Hedge Fund AUM peaked last time). Too many mo mo funds were long of the same names with the same catalysts. Back then it was an LBO “takeout” bubble. In 2000, it was a tech bubble. Today you can tell me how many funds are long Yahoo (YHOO) for the Alibaba IPO, but that looks a little bubbly too.

 

To be clear, being long of bubbles can be cool (as long as they don’t start to go down more than a little). Once they start to go down a lot, there’s this thing called draw-down risk that most hedge funds aren’t allowed to let ride anymore. Having toiled as a PM at some major US hedge funds in my day, I can tell you the only long-term strategy to survival is not getting smoked when everyone else does.

 

Einhorn rarely gets smoked.

 

Technically, a hedge fund should be hedged. But the super secret reality about the 2 and 20 business (or whatever Stevie was running at 5 and 50 back in the day) is that a lot of hedge funds get smoked, not when the market goes up – but when it goes down.

 

Yep. I wrote that. Been there, done that too. I’ve made every mistake you can make.

 

So, are you a consensus hedge fund or one like Greenlight who is willing to give up a little on the short side in order to make a lot? This common quest for the almighty alpha (on the short side) is called #asymmetry. And I like it.

 

Enough about what I think about this profession – I’m only a battered and bruised product of it. Here are some of the favorite quotes my teammates pulled from Einhorn’s quarterly letter. In terms of both style and substance, they are timeless:

  1. “The corollary to ‘twice a silly price is not twice as silly’ is that when the prices reconnect to traditional valuation methods, the de-rating can be substantial.”
  2. “Our criteria for selecting stocks for the bubble basket is that we estimate there to be at least 90% downside for each stock if and when the market reapplies traditional valuations to these stocks.”
  3. “There is a huge gap between the bubble price and the point where disciplined growth investors (let alone value investors) become interested buyers.”

Yes, it’s my entire team’s job to read, write, and learn about how the best players in this game think. The alternative to that would be depending on what I think (which would easily be the most dangerous thing for our business over time).

 

So, if you run a hedge fund and you’re having a tougher time than last year out there, don’t get upset with me writing about it. Think about the why and learn/do something about it.

 

Accepting that little bubbles are going to start to pop bigger ones (like, say, the US stock market’s all-time high price) is a process, not a point. While I agree with David that “what is uncertain is how much further the bubble can expand, and what might pop it” I don’t think the “what” is a silver bullet that can be legally obtained.

 

Having survived (made $ at a hedge fund in down tapes - 2000, 2001, 2002) the Tech Bubble, The LBO and Oil Bubbles (2008), and The Gold and Bond Bubbles (2011-2012), what I have learned about risk managing these suckers is quite simple:

 

First, they start to make lower-highs. Then the volume on down days eclipses the volume on the bounces (up days to lower-highs)… then bearish catalysts start to pile up… then what was happening slowly starts to happen more than a little – it happens all at once.

 

Our immediate-term Global Macro Risk Ranges are now as follows:

 

Nasdaq 3974-4203

EUR/USD 1.37-1.39

Brent Oil 108.48-110.79

Natural Gas 4.62-4.79

Gold 1277-1310

Corn 4.94-5.12

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Accepting Little Bubbles - Chart of the Day


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – May 7, 2014


As we look at today's setup for the S&P 500, the range is 21 points or 0.63% downside to 1856 and 0.50% upside to 1877.                                                      

                                                                         

SECTOR PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

EQUITY SENTIMENT:

 

THE HEDGEYE DAILY OUTLOOK - 10

 

CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 2.17 from 2.17
  • VIX closed at 13.8 1 day percent change of 3.84%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Applications, May 2 (prior -5.9%)
  • 8:30am: Non-farm Productivity, 1Q prelim, est. -1.2% (pr 1.8%)
  • 10:00am: Fed’s Yellen testifies to Joint Economic Cmte
  • 10:30am: DOE Energy Inventories
  • 3pm: Consumer Credit, March, est. $15.5b (prior $16.5b)

GOVERNMENT:

    • President Obama surveys tornado, storm damage in Ark., then travels to L.A. for DSCC/DCCC fundraiser
    • 9am: U.S. Chamber of Commerce hosts economic briefing, roundtable
    • 10am: House Armed Services Cmte considers Defense Authorization Act
    • 10:30am: House Ways and Means subcmte hears from IRS Commissioner John Koskinen on 2014 tax return filing season
    • 11am: Ukrainian presidential candidate Valery Konovalyuk holds news conf. to discuss affairs in Ukraine
    • 2:30pm: Senate Banking subcmte hearing on job creation

WHAT TO WATCH:

  • Fed Chair Yellen to speak before Joint Economic Committee
  • U.S. said to seek guilty plea from Credit Suisse on taxes
  • Alibaba files for IPO with initial amount $1b; may seek $20b
  • Co.’s partners keep control with U.S. listing over Hong Kong
  • Prospectus shows Alibaba profitability vs Amazon
  • Encana planning to hold conf. call pre-mkt today
  • Alstom cancels div., delays guidance as GE, Siemens vie
  • Education Management must face fraud lawsuit, judge says
  • Siemens buys Rolls Royce gas turbine, compressor business
  • Microsoft said to use Qualcomm chips in smaller tablet
  • Judge won’t clarify Lockheed-Boeing purchase ban: Reuters
  • Liberty Global says EU to likely probe purchase of Ziggo
  • Kraft sees Vermont GMO law as bellwether in food labeling

AM EARNS:

    • Allergan (AGN) 9am, $1.13 - Preview
    • Allete (ALE) 8:30am, $0.85
    • AOL (AOL) 7am, $0.45
    • Aqua America (WTR) 7:30am, $0.25
    • Ariad Pharmaceuticals (ARIA) 7:35am, $(0.32)
    • Brookfield Asset Mgmt (BAM/A CN) 7:01am, $0.38
    • Chesapeake Energy (CHK) 7:01am, $0.48 - Preview
    • Cognizant Technology (CTSH) 6am, $0.59 - Preview
    • Devon Energy (DVN) 8am, $1.26 - Preview
    • Duke Energy (DUK) 7am, $1.12
    • Dynegy (DYN) 7:30am, $(0.15)
    • Enbridge (ENB CN) 7am, C$0.57 - Preview
    • Hertz Global (HTZ) 6am, $0.09
    • Humana (HUM) 6am, $1.96
    • Husky Energy (HSE CN) 7am, C$0.61 - Preview
    • Intact Financial (IFC CN) 6am, C$1.16
    • Lamar Advertising (LAMR) 6am, $0.06
    • Molson Coors Brewing (TAP) 7:30am, $0.35
    • Mondelez Intl (MDLZ) 7am, $0.35 - Preview
    • Pepco (POM) 6:03am, $0.24
    • Perrigo (PRGO) 7:42am, $1.51
    • Rockwood (ROC) 6:30am, $0.44
    • Sinclair Broadcast (SBGI) 7:30am, $0.21
    • Spectra Energy (SE) 6:30am, $0.51
    • Tim Hortons (THI CN) 7:30am, C$0.68
    • Twenty-First Century Fox (FOXA) 8am, $0.35 - Preview

PM EARNS:

    • American Water Works (AWK) 4:05pm, $0.35
    • AmeriGas Partners (APU) 4:45pm, $2.32
    • Annaly Capital Mgmt (NLY) 4:05pm, $0.27
    • Antero Resources (AR) 4:05pm, $0.34
    • Avis Budget (CAR) 4:15pm, $0.08
    • Caesars Entertainment (CZR) 4pm, $(1.33)
    • CenturyLink (CTL) 4:07pm, $0.61
    • CF Industries (CF) 4:05pm, $4.52 - Preview
    • Continental Resources (CLR) 6:12pm, $1.53
    • Corrections Corp. of America (CXW) 4:15pm, $0.43
    • Envision Healthcare (EVHC) 4:05pm, $0.18
    • Furiex Pharmaceuticals (FURX) 4:05pm, $0.22
    • Globalstar (GSAT) 4:05pm, $(0.04)
    • Gulfport Energy (GPOR) 4:05pm, $0.21
    • Halcon Resources (HK) 4:15pm, $0.02
    • Keurig Green Mountain (GMCR) 4pm, $0.94 - Preview
    • Kimco Realty (KIM) 4:01pm, $0.14
    • Kinross Gold (K CN) 5pm, $0.03 - Preview
    • McDermott Intl (MDR) 4:10pm, $(0.12)
    • Nektar Therapeutics (NKTR) 4:15pm, $(0.38)
    • Novavax (NVAX) 4:10pm, $(0.07)
    • Plains All American Pipeline (PAA) 4:05pm, $0.65
    • Prudential Financial (PRU) 4:07pm, $2.25
    • QEP Resources (QEP) 4:05pm, $0.24
    • Regency Centers (REG) 4:30pm, $0.15
    • Sanchez Energy (SN) 5:44pm, $0.25
    • SandRidge Energy (SD) 4:05pm, $0.03
    • Sotheby’s (BID) 4pm, $(0.17)
    • Sprouts Farmers Market (SFM) 4:05pm, $0.20
    • Tesla Motors (TSLA) 4:01pm, $0.07 - Preview
    • Transocean (RIG) 4:39pm, $1.02
    • TW Telecom (TWTC) 4:46pm, $0.10
    • UGI (UGI) 4:45pm, $1.58
    • Unum (UNM) 4pm, $0.86
    • Zillow (Z) 4:30pm, $(0.08)

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Iron Ore Glut Spurred by Vale, BHP Seen Shuttering China Miners
  • WTI Rises for Second Day as Crude Stockpiles Drop; Brent Climbs
  • De Beers Diamond Prices Rising as Anglo Chases Goal: Commodities
  • Copper Declines as Factory Orders Unexpectedly Slump in Germany
  • Gold Rises on Ukraine as Palladium Near Highest Price Since 2011
  • Soybeans Drop Before USDA Report Set to Show Ample World Supply
  • Cocoa Falls With ‘Good’ West African Crops Seen; Sugar Declines
  • Global Steel Markets Are All Systems Go as Profits Soar
  • Florida’s Fuel Dwindling as State Braces for Hurricanes: Energy
  • Europe Seen Limited in Options to Reduce Russian Gas Reliance
  • Patchy Power Challenges Indonesia Minerals Goal: Southeast Asia
  • Coffee Consumption in Indonesia Seen Climbing to Record in 2016
  • China Copper Imports May Be Subdued as Arbitrage Window Shut
  • Steel Rebar Falls to Record Low in Shanghai as Output Surges

THE HEDGEYE DAILY OUTLOOK - 5

 

CURRENCIES


THE HEDGEYE DAILY OUTLOOK - 6

 

GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 4

 

EUROPEAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 7

 

ASIAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 8

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - 9

 

 

The Hedgeye Macro Team

 

 

 

 

 

 

 

 

 

 

 

 

 


May 7, 2014

May 7, 2014 - Slide1 

BULLISH TRENDS

May 7, 2014 - Slide2

May 7, 2014 - Slide3

May 7, 2014 - Slide4

May 7, 2014 - Slide5

May 7, 2014 - Slide6

May 7, 2014 - Slide7

May 7, 2014 - Slide8 

BEARISH TRENDS

 

May 7, 2014 - Slide9

May 7, 2014 - Slide10

May 7, 2014 - Slide11
May 7, 2014 - Slide12


Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.

Best Idea Conference Call: Long BOBE

We recently added BOBE to the Hedgeye Best Ideas list as a LONG.

 

We’re hosting a brief conference call TOMORROW at 11am EST to run through our thesis and field questions.

 

If you haven’t been following the Bob Evans / Sandell saga closely, we suggest you begin to.  We like Sandell’s relentless resolve and believe they have identified several, feasible opportunities to unlock shareholder value.  As such, we believe BOBE represents an attractive entry point on the long-side for investors that don’t mind seeking strong returns from special situations.  During the call, we plan to hit on several key topics including, but not limited to:

 

  • Sandell’s feasible proposals and admirable resolve
  • Potential sale or spinoff of BEF Foods
  • Transition to an asset light model
  • Poor capital allocation and opportunities to attack the middle of the P&L
  • The inherent value of its significant real estate portfolio

 

CALL DETAILS

Toll Free Number:

Direct Dial Number:

Conference Code: 988314#

Materials: CLICK HERE

 

 


Howard Penney

Managing Director

 

Fred Masotta

Analyst


APL 1Q14: "Enormous Value" Creation?

"So far, truth and good have prevailed.  Our stock closed last week near a three-month high.  I'm hopeful that partly as a result of this call, and the very positive news and results recently announced, APL stock price will begin to reflect more of the enormous value that we are producing for our unit holders and other constituents." - APL CEO Eugene Dubay, 5/6/14 CC

 

Soft 1Q14 financial results……Atlas Pipeline's (APL) reported adjusted EBITDA came in at $90.8MM, below Bloomberg consensus of $93.2MM.  Excluding stock-based comp and premiums paid, we have adjusted EBITDA at $81.7MM and open EBITDA at $90.1MM (all pre GP drag).  Reported DCF was $60.8MM and APL claims that coverage was 1.09x.  Know that APL’s definition of coverage conveniently disregards the PIK distribution to the convertible preferred unitholders.  After backing out SBC, non-cash interest expense, GP distributions declared, and PIK distributions declared, LP DCF was $0.45/unit for 0.73x LP coverage, before any adjustment to reported M-CapEx.  M-CapEx was only $5.3MM in 1Q14, down from $7.8MM in 4Q13, and just 11% of D&A.  Management claims that M-CapEx will be back-end loaded in 2014, but the full-year guidance of $30 - $35MM pales in comparison to the G-CapEx guidance of $450 - $500MM.  As we have already argued, APL’s reported M-CapEx is unrealistically low, such that DCF is not indicative of this Company’s true earnings power.  Speaking of earnings, LP GAAP net loss (estimated until we get the 10-Q) was ($22.8MM); excluding one-time items, LP net loss was ($2.7MM) or ($0.03/unit).  This was the 4th consecutive quarter that APL has posted GAAP and adjusted net losses to its LPs.  See Table:

 

APL 1Q14: "Enormous Value" Creation? - apl1

 

Weak volumes, particularly in the Eagle Ford……Volumes were disappointing, with only the Permian ("WestTX") posting sequential volume growth (processed gas +7.1% QoQ).  Consolidated gathered gas volumes were -1.4% QoQ, processed gas -1.4%, NGL sales -4.5% and condensate sales +23.4%. Eagle Ford ("SouthTX") processed volumes and NGL sales were -30% QoQ.  With 93.8 MMcf/d of processed gas in 1Q14, Silver Oak I operated at 47% of nameplate capacity (200 MMcf/d).  We note that APL changed how it reports SouthTX volumes in this PR (see Footnote #4) in an effort to make the weak results look a bit better; APL is now including third-party processed volumes in the SouthTX number.  APL does have a 140 MMcf/d minimum volume commitment (MVC) for Silver Oak I, which masked the weak on-the-ground performance.  Silver Oak II is scheduled to come online in June 2014, another 200 MMcf/d processing plant.  Silver Oak I has been operational for more than 18 months and is running at just 47% capacity utilization… We wonder where are the Silver Oak II volumes going to come from, and what the margins will look like.  We thought that TEAK would disappoint this year, but this result is worse than we expected.  On the CC mgmt guided to a strong 2H14 ramp (typical), suggesting that Silver Oak I would be full and Silver Oak II at ~100 – 150 MMcf/d by YE14.  That seems optimistic to us given Silver Oak I’s ongoing issues, but we'll see.  In the chart below we show APL's net processed gas volumes per debt-adjusted unit since 1Q11.  We calculate the debt-adjusted unit count by dividing the quarterly change in debt by the quarterly VWAP of APL.  We treat the convertible equity as equity (common units) and the perpetual preferred equity as debt (debt-adjusted units); we think the chart shows the dilution / value destruction well:

 

APL 1Q14: "Enormous Value" Creation? - apl2

 

Paying a distribution does not = creating value……APL management touts all the value it creates/is creating for APL unitholders, but we’re having a hard time seeing it in the actual results.  EBIT per fully diluted unit was $0.34 in 1Q14, down 25% from $0.45 a year ago.  APL’s annualized ROIC (pre GP drag) in 1Q14 was ~4.7%, well below its WACC.  APL has posted GAAP and adjusted net losses to its LPs in each of the last 4 quarters.  The 2Q13 $1B acquisition of TEAK Midstream (Eagle Ford) gets worse with every quarter of disappointing results (fear not, the guidance remains optimistic).  Processed gas per fully diluted unit was -9.5% YoY in 1Q14, and -11.1% YoY on a per debt-adjusted unit basis.  The Company is again highly-levered at ~4.5x debt/reported EBITDA pro forma the recent West TX LPG sale, putting equity holders in an uncomfortable spot.  The de-leveraging that management hopes for will not come without additional equity, a distribution cut, or asset sales, as APL is FCF negative.  We think that APL has little room for error – both operations (volumes, project execution) and the macro environment (commodity prices, cost and availability of capital) need to be strong for APL to avoid another 2008-like debacle.  APL’s equity price has gone nowhere for 3 years amid ideal macro and industry conditions – the tailwinds are unlikely to be so strong going forward, and APL is now in the 50%/50% IDR split, without much additional debt capacity, and sub-1.0x coverage.  The bull case is the familiar, “next quarter … next year,” as it often is for any company that relies on capital raises to fund distributions.  We’re not convinced, and reiterate our APL fair value price of $17.00/unit (up ~$1.00/unit from our prior FV price due to the TX LPG asset sale announced today) based on 12x EV/2014e EBITDA – M-CapEx (an 8.3% earnings yield):

 

APL 1Q14: "Enormous Value" Creation? - apl5

 

Our preferred way of expressing our negative view on APL is via short the General Partner, Atlas Energy (ATLS), which reports AMC tomorrow 5/7.

 

Original Analysis: Hedgeye Best Idea: Short ATLS, APL (4/24/2014)

 

Kevin Kaiser

Managing Director

 


#HousingSlowdown: Is This the Nastiest Chart of the Year?

Takeaway: We’ve been hitting on the #HousingSlowdown trend since Q1, and here’s another piece of evidence that confirms our view.

#HousingSlowdown: Is This the Nastiest Chart of the Year? - house keys and money

 

Core to our US #HousingSlowdown Macro Theme for Q2 2014 is the rate of change (slope of the line) going negative on US Home Prices.

 

This isn’t the weather.

 

And it’s happening with rates falling, which makes it all the worse.

 

#HousingSlowdown: Is This the Nastiest Chart of the Year? - chart1

 

To receive the best macro information out there, subscribe to the Morning Newsletter, written by Hedgeye CEO Keith McCullough.


get free cartoon of the day!

Start receiving Hedgeye's Cartoon of the Day, an exclusive and humourous take on the market and the economy, delivered every morning to your inbox

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.

next