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Alberta Bound

“This piece of heaven that I've found;
Rocky Mountains and black fertile ground;
Everything I need beneath that big blue sky;
It doesn't matter where I go;
This place will always be my home;
Yeah I've been Alberta Bound for all my life;
And I'll be Alberta Bound until I die.”

- Paul Brandt


For those that have experienced an Alberta winter, you may disagree with Canadian singer and song writer Paul Brandt that Alberta is a great place to be bound for in December.  In fact, our Chief Operating Officer was in Calgary a month ago on a day in which Calgary registered as the second coldest place on the planet. While he was a bit whiny about that fact, in my opinion, cold weather is like anything – if it doesn’t kill you it makes you stronger.  Last night I took my nieces and nephew on a sleigh ride in -20 degrees Celsius weather and I think it made them stronger.


I always enjoy flying back home to Alberta and into the Calgary International Airport.  Each time I’m struck by two things: the vastness of my home province and the rapid growth of Calgary, the business capital of the Canadian energy industry.  The newest addition to the growth of Calgary is a 59-story office tower called “The Bow”, which will be the largest office tower in Canada outside of Toronto when it’s completed in 2012.  This tower will become the world headquarters of Encana, a global leader in non-conventional gas production.


Alberta is the home to the vast majority of Canada’s energy resources.  In particular, the Canadian oil sands, containing ~170 billion barrels of oil reserves, is second only to Saudi Arabia and accounts for just over 13% of all global reserves.  It is estimated that the Canadian reserves could supply Canadian energy needs for the next 400 years.  This is true energy independence. 


These vast energy resources are one of the key factors supporting our long position in the Canadian Dollar (or the Loonie) in the Virtual Portfolio.  Not only is Canada completely energy independent, it will also benefit in a weak dollar environment which inflates the prices of U.S. dollar-based commodities, such as oil.  While the United States gets squeezed in a high oil price environment, Canada becomes cash rich, as 99% of Canadian oil exports get sent to the U.S.  Clearly, the current U.S. Federal reserve policy of Quantitative Guessing is very supportive of our long Loonie position.


It is estimated that energy contributes ~31% of Alberta's GDP and almost 5% of Canada's GDP overall, therefore the price of oil has a real impact on Canadian GDP.  As the price of oil increases, Canadian GDP will directly benefit.  Moreover, as Canadian production increases, energy’s contribution to Canada’s GDP will grow.  Currently, Canada represents ~6% of global oil production through ~13% of global reserves.  Over time, as we’ve seen throughout the last decade, Canada’s production share globally will begin to mirror its reserve share, which should create a major tailwind for Canadian GDP in the next decade.


Our Energy Team led by Lou Gagliardi recently released their top 10 list for energy investment ideas in 2011.  Not surprisingly, a number of these ideas were Alberta based energy companies.  So without further adieu, our top 3 Alberta ideas for 2011:


1. CANADIAN OIL SANDS TRUST (COS) – Mispriced conversion


The company is converting to a corporation from a trust at the end of December 2010. The stock recently took a hit on news that COS will cut its dividend payout ratio in half upon conversion to a corporation in order to maintain cash flow within capital spending. COS is 100% levered to oil sands production, as the largest partner (36.74% interest) in the Canadian Syncrude Joint Venture.


We view COS a company with upside earnings potential in 2011 -- potentially a 63% increase from 2010 to C$2.04/share at $85 oil, and net cash flow positive C$0.20/share after capital spending. At $89 per barrel oil, earnings could increase further to C$2.28/share, with net cash flow at C$0.45/share.  We view shares as oversold, as the market overreacted to the dividend reduction news, presenting a buying opportunity. COS is undervalued by roughly 30% according to our discounted cash flow models. The company's operating fundamentals remain strong, particularly with high oil price leverage.  The balance sheet has a moderate debt-to-capital ratio at ~23%, net of cash at ~21%.


2. NORTH AMERICAN ENERGY PARTNERS (NOA) – Predictable cash flow and dirt cheap


This Canadian oil sands resource "services" provider has been hit hard by the downturn in Oil Sands project expansion that began in 2009 and continued into 2010. NOA provides oil sands mining and site preparation, piling and pipeline installation services: as of the end of September, revenue from oil sands services generated 83% of net revenue, 84% of which is recurring revenue. Although its balance sheet remains under pressure at ~57% debt-to-capital and net of cash at ~50%, recent projected increases in capital spending by oil sands companies and the resumption of oil sands growth projects is good news for NOA, which will benefit from increased project spending.


Oil sands project growth will provide the catalyst to earnings growth into next year. For NOA's fiscal year ending March 2011, earnings are expected to decline 21% to C$0.61/share, but earnings for fiscal year 2012 (beginning in April 2011) should bounce back by ~120% to $1.36/share, driven by higher oil sands spending, which equates to just under 10x earnings. Net cash flow for both years should remain positive, with fiscal 2012 expected at $32 million or C$0.90/share.


3. MEG ENERGY (MEG) – Growth with a monster balance sheet


MEG Energy is a bitumen producer based in Calgary, Alberta with shares traded on the Toronto Stock Exchange. We expect MEG's 2011 earnings to benefit from a full year in operation, a 3% increase in oil sands production lower operating costs per barrel, and expanding margins. With its strong balance sheet, a strategic partner in China's CNOOC owning 15%, debt-to-capital at 21% and net of cash at negative ~13%, we believe MEG is being underpriced by the market by roughly 30%.


The company is sitting on roughly C$1.4 billion in cash -- more than enough to meet its expected net cash flow deficit after capital spending of roughly ~C$600 million for 2011. It is in the growth mode, ramping up production for its next phase of expansion at Christina Lake, with expected start-up in 2013. Based on $85 oil in 2011, MEG's 2011 earnings should top consensus, reaching ~C$0.92 per share, up more than 150% increase from 2010. Should crude oil average $89 in 2011, MEG's earnings could go about 16% higher to ~C$1.06.


You would be remiss not make your energy portfolio “Alberta Bound” in 2011.


Yours in risk management,


Daryl G. Jones

Managing Director


Alberta Bound - 1

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.


The Macau Metro Monitor, December 30th, 2010



Attorneys for LVS argued that while Jacobs had sued LVS and Sands China, he had failed to name an “indispensable” party as a defendant — his actual employer Venetian Macau Ltd.  For this reason, his lawsuit in the US should be dropped and any disputes should be resolved in Macau.


Some causes of Jacobs' termination are:

  • Negotiated “arrangements” for Sites 5 and 6 without approval; and commissioned a brand study for those sites involving changing their names without informing the boards of Sands China and Venetian Macau.
  • Negotiated a transaction with Caesars for certain development sites (site 3 and or sites 7 and 8). It’s unknown what type of deal Caesars had worked with Jacobs on.
  • Disagreed in public with Adelson’s position on the growth prospects for Sands China.
  • Exercised LVS stock options and sold LVS stock without first informing superiors.



Visitor arrivals to Singapore registered 16.1% growth to reach 963,000 in November 2010.   It is also the 12th consecutive month of record visitor arrivals. 


Indonesia (176,000), Malaysia (100,000), P R China (94,000), India (73,000) and Australia (64,000) were Singapore's top five visitor-generating markets in November 2010.  These markets accounted for 53% of total visitor arrivals for the month.  India (+46.3%), Hong Kong SAR (+45.3%), and South Korea (+41.8%) registered highest growth out of the top 15 markets.





As part of his individual long-term strategy for asset diversification, tax and family planning, acting Sands China CEO, Michael Leven, plans to sell up to 1,758,349 shares of company stock during 2011, with 133,349 stock option shares planned to be exercised and sold in January 2011, 125,000 stock option shares planned to be exercised and sold in February 2011 and 150,000 stock option shares planned to be exercised and sold in each month from March through December 2011.


Mitsubishi Heavy Industries has won Macau's LRT contract (1st phase) by bidding MOP4.688 BN (US$586 MM).  Construction is expected to start in 2011 with the 1st phase of the system opening in 2015.


TODAY’S S&P 500 SET-UP - December 30, 2010

Equity futures are trading little changed to fair value following Wednesday's low volume gains which saw the S&P add to its best December performance in nearly 20 years. Today's MACRO data points may provide some incremental direction.



  • Initial jobless claims, Dec. 25, est. 415k
  • Net export sales (cotton, corn, soy meal, soybeans, soy oil, wheat), Dec. 23
  • Chicago purchasing manager, December - est. 61.0
  • Pending home sales MoM, November - est. 0.8%
  • EIA natural gas storage change (Dec. 24) est. -143
  • DOE inventories - December 24
  • Britain’s media regulator Ofcom will probably recommend tomorrow that News Corp’s bid to buy the remaining 61% of BSkyB be subject to further 6- mnth inquiry, Guardian reports
  • Sony files patent-infringement claims seeking to block LG Electronics from shipping mobile phones to U.S.
  • JPMorgan gets accused with others in lawsuit of getting $300m from a fraud run by Thomas J. Petters that involved buying Polaroid Holding 
  • Small wind developers and large solar projects including WIND, NEE and IBE SM, will benefit from extension of U.S. grant program for renewables, Bloomberg News
  • Pimco sees dollar keeping reserve status in 2011 as China, Europe aren’t developed enough for their currencies to replace it
  • East West Bancorp (EWBC) said it fully repaid $306.5m of preferred stock under TARP
  • Emcore (EMKR) delays 10-K filing as auditor reviews goodwill accounting
  • Lockheed Martin (LMT) won $492m contract for Littoral Combat Ships; contract could have cumulative value of $4b
  • Qwest Communications International (Q US) redeemed $1.1b 3.5% notes for total cash cost $1.7b


  • One day: Dow +0.09%, S&P +0.10%, Nasdaq +0.15%, Russell +0.10%
  • Last Week: Dow +0.72%, S&P +0.28%, Nasdaq +0.21%, Russell +0.34%
  • Month-to-date: Dow +5.26%, S&P +6.71%, Nasdaq +6.75%, Russell +8.70%
  • Quarter-to-date: Dow +7.39%, S&P +10.39%, Nasdaq +12.59%, Russell +16.88%
  • Year-to-date: Dow +11.10%, S&P +12.97%, Nasdaq +17.53%, Russell +26.36%
  • Sector Performance mixed (7 sectors up,2 down) - Energy +0.99%, Materials +0.42%, Consumer Discretionary +0.32%, Tech +0.20%, Industrials +0.09%, Healthcare +0.03%, Consumer Staples +0.03%, Financials (0.20%) and Utilities (0.35%)               


  • ADVANCE/DECLINE LINE: 747 (+872)  
  • VOLUME: NYSE 520.09 (-7.16%)
  • VIX:  17.28 -1.37% YTD PERFORMANCE: -20.30%
  • SPX PUT/CALL RATIO: 1.74 from 1.45 (+19.49%)  



Treasuries rebounded from yesterday's sharp sell-off as today's 7-year auction showed solid demand. The auction was sufficient to spark a rally that gave the 10-year yield its largest decline (14 bp) since early June.

  • TED SPREAD: 18.21 -0.101 (-0.554%)
  • 3-MONTH T-BILL YIELD: 0.13% -0.02%  
  • YIELD CURVE: 2.71 from 2.65


CRB: 330.71 -0.22%


Oil: 91.12 -0.40% -  Trading down 0.02% in the AM

Crude Oil Trades Near 26-Month High Amid Speculation U.S. Stockpiles Fell

COPPER: 431.15 -0.38% - Trading up +1.15% in the AM

Copper climbed to a record in London  after a report that China’s manufacturing is expanding


GOLD: 1,411.97 +0.60% - Trading up +0.01% in the AM

Gold May Climb as Weaker Dollar Spurs Investment Demand



  • Copper Rises to Record in London After Report on China's Factory Growth
  • Rubber Increases, Posting Second Annual Advance, on Supply Deficit Concern
  • Soybeans Advance, Reversing Losses, as Argentina Drought Concerns Persist
  • Shanghai Traders Pushing $1,600 Gold Thwart China Closing Silicosis Mines
  • Tata Steel, JSW May Increase Prices by 3% Next Quarter, Nirmal Bang Says
  • Mining IPOs May Reach Record Next Year as Investors Bet on Metal Demand
  • Queensland Floods May Cost Billions as Rain Ravage Australian Crops, Mines
  • Palm Oil Ends 2010 at Highest in 15 Years on Vegetable Oil Supply Outlook
  • Chilean Copper Venture Collahuasi Seeks Permits for Alternative Shipping
  • `More Stringent' Ownership, Governance Rules for Swaps Called for by U.S.
  • Malaysia's 2010 Glove Exports May Have Risen 23% to Record, Times Reports



Another weak day for the greenback saw the dollar index fall by 0.71% - of note, the dollar has now declined in eight consecutive sessions against the yen to a seven-week low vs yen amid speculation China will allow yuan to appreciate at a faster pace.

  • EURO: 1.3189 +0.47% - Trading up +0.45% in the AM
  • DOLLAR: 79.796 -0.71% Trading down -0.16% in the AM (6 straight down days)


  • European Markets: FTSE 100: (0.07%); DAX: (0.97%); CAC 40: (0.70%) (as of 06:30 EST)
  • European markets opened little changed and is now down for the first time in three days on minimal regional news flow.
  • European retail sales increased at fastest pace in 2 1/2 years in Dec., Markit Economics says.
  • German government bonds found support after a successful US Treasury 7-year auction yesterday.
  • Italian bonds were pressured ahead of today's long dated bond auctions.
  • For half of Europe this is the final day of trading for the year with markets including Germany, Italy, Switzerland, Spain and all of Scandinavia closed tomorrow.
  • All but one sector, autos +0.1%, trade lower led by telecom (0.8%) and oil & gas (0.6%).
  • There are no major economic releases scheduled


  • Asian Markets: Nikkei (1.12%); Hang Seng +0.13%; Shanghai Composite +0.29%
  • Today was the year’s last trading day in Japan, Indonesia, Malaysia, the Philippines, South Korea and Thailand.
  • Markets close early tomorrow in Hong Kong, Australia and Singapore.
  • Most Asian markets rose slightly today.
  • Taiwan was up 0.47%. Post-close, citing a source, Reuters reported that Taiwan will raise interest rates by 12.5 bp today, which would match expectations.
  • On bargain-hunting, banking stocks rose to lift China +0.29%. But property developers and carmakers continued their recent descents on policy concerns. Jiangxi Copper gained 4% on record copper prices.
  • Miners led Australia to a small gain +0.32%. Coal and Allied fell 1% on Rio Tinto’s announcement of force majeure yesterday, but Cockatoo Coal rose despite saying a mine has been flooded, and Wesfarmers remained flat despite saying floods have caused it to suspend operations at Curragh North.
  • Hong Kong was flat. Carmakers continued higher, ignoring China’s announcement that it will end tax incentives for small cars January 1st.
  • Exporters fell on a stronger yen, taking Japan to a 1.12% loss. Megabanks followed their US peers lower. Breadth was strongly negative as all 33 sectors on the TSE declined.
  • China November purchasing manufacturers’ index 54.4 vs prior 55.3. 

Stubborn Believers

This note was originally published at 8am on December 29, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“This stubbornness in the face of clear data is right up there with the efficient market believers.”

-Jeremy Grantham (Quarterly Letter, October 2010)


Quite often I get asked whose research thoughts I try to incorporate into my global macro risk management process. In terms of risk managers who are still alive, I have a relatively short list. Jeremy Grantham, Jim Grant, and John Hussman are at the top of it. All three of these gentleman write consistently, quantitatively, and accountably.


This isn’t to say that there aren’t plenty of thoughtful people out there who are worth reading. This is to say, however, that there are plenty more opinions in the market place than there is time. Taking the time to focus on doing your own work is critical.


I’m fairly maniacal about writing down my investment thoughts. I use the same amount of space, on the same number of pages, in the same notebooks, every day. When my own work isn’t working, I shut down the noise, review my notes, and rethink my theses.  Then, if I have time, I re-read some of the more pertinent intermediate-term TREND thoughts of some of the aforementioned thinkers to keep myself in check.


Yesterday, I was re-reading Jeremy Grantham’s Quarterly Letter for October titled “Night of the Living Fed” and that helped me re-think my global macro positioning heading into 2011.


Before you scroll down, don’t worry – I’m not covering my short position in the SP500 (it’s -2.81% against me). I currently hold 11 SHORT positions in the Hedgeye Portfolio (versus 10 LONGS) and my biggest loser on the short side is an unrealized loss of -4.8% in Hudson City Bancorp (HCBK). I’ve been bearish plenty enough times on US stocks in my career with performance that’s worse than that.


Being bearish on US stocks here doesn’t mean you have to be bearish on everything – that’s a US-centric stock market investor’s risk management problem, not yours. You can also be bearish on the Fed and make money being long the US Dollar (or short US Treasury bonds). Both are bets that Bernanke fails to debauch America’s currency and hold rates of return on American savings accounts unsustainably low.


Grantham, Grant, and Hussman aren’t fans of The Ber-nank either. So, while hope is not an investment process, I’m really hoping we can start a little Groupthink Club of our own ahead of Bernanke having to face both Ron Paul and more dissenting Fed Voting Members in 2011.


On the politicized US central bank, here are some valuable excerpts from Grantham in the “Night of the Living Fed”: 

  1. On Evolution: “… displaying a complete refusal to learn from experience has left Fed policy as a large net negative to the production of a healthy, stable economy with strong employment.”
  2. On Quantitative Guessing (QG): “Quantitative easing is likely to turn out to be an even more desperate maneuver than the typical low rate policy.”
  3. On US Economic Growth: “… on the positive side, all it can do is move demand forward by a few weeks and then give it back later. This is the paper world. It is, in an important sense, not the real world.” 

The “real world” is, of course, real-time… and… as Ludwig von Mises said, “For many people, the “long run” quickly becomes the short run.” There’s no better evidence of that than daily, weekly, and monthly price, sentiment, and expectations data.


On the inflation side, with the 19 component CRB Commodities Index hitting another fresh YTD high yesterday up at 331, here’s what the expectations of higher prices (inflation) have done: 

  1. Week-to-date = +0.61%
  2. Month-to-date = +9.6%!
  3. Quarter-to-date = +16.1% 

For a man who preaches “price stability”, that’s nice Heli-Ben… really nice. The 45 MILLION Americans on food stamps salute you.


On the sentiment side, not surprisingly now that holiday cheer is becoming a rear-view event, this morning’s ABC Consumer Confidence reading dropped to minus -44 versus minus -41 last week. Jobless Stagflation in America perpetuated by a Fed policy to inflate isn’t cool for the 90% of Americans who aren’t levered-long the SPY.


Meanwhile, US-centric stock market bulls continue to be Stubborn Believers (like they were in late 07’ and early 08’) that stocks are “cheap” even though corporate earnings are being fueled by record low costs of capital (interest rates) and peak operating margins.


Managing risk using record low interest rates and peak margins as perpetual plugs in an earnings model is something that only a historian who has never run a business or a global macro P&L would do. Or should I say, dare you to do. Ben Bernanke, good luck with that in 2011.


My immediate term support and resistance levels for the SP500 are now 1250 and 1266, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Stubborn Believers - 1

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.48%
  • SHORT SIGNALS 78.35%