Continuing our work and research on Kinder Morgan, midstream MLPs, pipeline safety, and FERC rates and regulations, we will host an expert call on October 8th at 11am EST with Elisabeth Meyers.
Elisabeth Meyers is the founding principal of Myers Energy International. An energy lawyer with twenty years of experience, she specializes in the regulation of oil and natural gas pipelines and represents companies before federal and state regulatory agencies with respect to rate and regulatory issues. She has litigated before the FERC, the California Public Utilities Commission, the U.S. Courts of Appeals, and the U.S. Supreme Court. She advises on pipeline safety compliance issues under the U.S. Department of Transportation's Pipeline and Hazardous Materials and Safety Administration regulations. Her clients have included major oil companies; a state regulatory commission; a producer trade association in rulemakings restructuring the natural gas industry; oil refineries; farmers in the mid-west seeking interconnects with interstate pipelines; independent producers and marketers of oil, natural gas, and natural gas liquids with respect to various regulatory and related transactional issues; municipalities and municipal gas distribution systems, and chemical manufacturers.
Ms. Meyers also has extensive knowledge of Kinder Morgan, as she litigated against SFPP in ground-breaking rate cases before the CPUC and FERC in the mid 2000s.
A FEW TOPICS FOR DISCUSSION WILL INCLUDE:
- What’s the current state of pipeline regulation in the US? How does the regulation of oil/product lines differ from natural gas?
- History of pipeline regulation… Where have we come from and where might we be going?
- Pipeline safety and compliance… Are companies spending enough on maintaining their pipelines? Are they spending too much just to increase the rate bases (“gold-plating”)? Is a certain level of spend mandated or regulated?
- The growing prevalence of MLPs… What’s it mean for US energy infrastructure, consumers, and investors?
- MLPs, income taxes, and regulated rates… Are MLPs “tax-advantaged” securities? Why does the FERC permit an income tax allowance for MLPs?
- And more...
- Toll Free Number:
- Direct Dial Number:
- Conference Code: 616394#
- There will be no slides associated with this call
Client Talking Points
Here's a simple market observation: Down Dollar, Down Rates = Down Stock Market now for 4 consecutive days. Make sure you've got that one straight. Our Fed Chief Ben Bernanke is both un-elected and unaccountable. So don’t worry about him being held responsible for this re-rating of US growth expectations. Want to blame somebody? Blame Congress.
No surprise here: Bond yields are down once again this morning to 2.64%. Down Dollar, Down Rates are an explicit #GrowthSlowing expectations signal. So is the Yield Spread (10-year minus 2-year) which has compressed 21 basis points since Larry Summers bowed out to Bernanke-Yellen. Decisions have consequences.
Brent took a skinny dip below our long-term TAIL risk line of $108.57. Then it popped right back up to $109.35. So, while the water looks warm and inviting, I’m not shorting Oil until this TAIL break is confirmed for more than a day. We're watching this one very closely.
|FIXED INCOME||0%||INTL CURRENCIES||15%|
Top Long Ideas
WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.
Health Care sector head Tom Tobin has identified a number of tailwinds in the near and longer term that act as tailwinds to the hospital industry, and HCA in particular. This includes: Utilization, Maternity Trends as well as Pent-Up Demand and Acuity. The demographic shift towards more health care – driven by a gradually improving economy, improving employment trends, and accelerating new household formation and births – is a meaningful Macro factor and likely to lead to improving revenue and volume trends moving forward. Near-term market mayhem should not hamper this trend, even if it means slightly higher borrowing costs for hospitals down the road.
Financials sector senior analyst Jonathan Casteleyn continues to carry T. Rowe Price as his highest-conviction long call, based on the long-range reallocation out of bonds with investors continuing to move into stocks. T Rowe is one of the fastest growing equity asset managers and has consistently had the best performing stock funds over the past ten years.
Three for the Road
TWEET OF THE DAY
Dollar and Rates falling remains a new threat to US
QUOTE OF THE DAY
"Whoever controls the volume of money in any country is absolute master of all industry and commerce." -James A. Garfield, President of the United States
STAT OF THE DAY
Americans are pessimistic about the course of the country, with 68% saying it’s headed in the wrong direction, the most in two years, according to the poll of 1,000 adults conducted Sept. 20-23.(Bloomberg)
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This note was originally published at 8am on September 11, 2013 for Hedgeye subscribers.
“Understanding the errors may afford new light.”
As I was banging around NYC client meetings yesterday, the US stock market was hitting fresh September highs (new YTD high of +23.5% for the Nasdaq), and the sun was shining. It was a great day. It’s been a great year.
On this day in 2001, many of us were devastated. My thoughts are with all my friends and those families who are still feeling that pain. While it will always be there, we still need to find the courage to carry on. We can only do that together.
As families, friends, and firms, we share that opportunity every day. It’s an opportunity to listen to one another and learn from our many human mistakes. Risk managing markets is a lot like life that way. For the open-minded, there is always a light to be found somewhere. Her virtues are time, patience, and change.
Back to the Global Macro Grind…
One of the most obvious changes I’ve had the pleasure and privilege in seeing in our client base over the course of the last 5 years is dismissing many of the economic dogmas of academia. You (as in the buy-side) are way ahead of the world on that.
Yes, these are early days. Change takes time. But we are finally getting broad-based and cross-disciplinary support on this front from some of the most coincident indicators there are – books.
Whether it’s from the behavioral side of economics (Dan Kahneman’s Thinking Fast, and Slow) or the more recent applications of Chaos Theory to market-based economics (George Gilder’s Knowledge and Power) it’s getting out there – and the new light I wake up to every morning certainly feels good.
In Chapter 7 of Knowledge and Power, Gilder does a great job summarizing the history of economic theory:
“During much of the century, they clustered in tribes around three or four major totemic light sources: Adam Smith, with his magical self-extending markets; John Maynard Keynes, with his amazing self-fulfilling demand… Meanwhile Hayek and Samuelson defended the spontaneous order and equilibrium of Walras and Marshall.” (pg 62)
All the while, the entrepreneurial spirit of capitalists crushed Smith’s invisible hand; Keynes government spending ideas morphed into multipliers of mass currency destruction; and some people who gave up on both Smith and Keynes just decided to be Hayekian because they had no idea what else to sign up for…
Like most fictional stories in human history, enlightenments like the one we are experiencing in economics put all of these dogmas to bed. Eventually, everyone who gets it moves on. And we have the opportunity to start growing intellectually again.
I don’t worship at the altar of a social science. I’m not a Hayekian. I’m no Keynesian either. I am Mucker. I have my own team and market based models. Here’s what Mr. Market has been telling me to think about for the last 10 months:
- Bullish on the US Dollar
- Bullish on US Growth Stocks
- Bearish on almost everything Slow-Growth (Gold, Bonds, etc)
In our multi-factor, multi-duration model, the 2nd derivative matters most (visually speaking, it’s the slope of the line). That’s why we’ve been bullish on US #GrowthAccelerating. A #StrongDollar and #RatesRising perpetuate that.
For those of your friends who are still locked-down in the dark ages by their textbooks and compensation structures, here’s a friendly fact for them on how impactful a “weak currency” was to “export growth”:
- US Dollar Index hit a 40yr low in Q2 of 2011 (post Nixon abandoning the Gold Standard in 1971)
- US Net Exports in Q4 of 2011 were down (as in negative) -0.6% in terms of their quarterly contribution to US GDP
In other words, a strong currency coincides with a strong country. Strength in currency = strength in consumption, confidence, and character. This is not a new light I am shining on our failed academic institutions this morning. This is economic history.
And yes, after moves like we’ve had to start September (the US Dollar has been up for 4 weeks in a row and the SP500 is up +3.12% for the month-to-date), it’s scary to be chasing the stocks you could have bought with the VIX 20% lower in August…
So don’t do that – the SP500 and QQQ’s are immediate-term TRADE overbought (within their bullish TREND), so sell some of what you bought when everyone was whining about another opportunity to buy things on sale. And enjoy the rest of your day.
UST 10yr 2.86-3.03%
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
“Money, not morality, is the principle of commercial nations.”
That’s the opening quote to chapter 7, “The Birth of The Dollar”, in Jack Weatherford’s economic history classic The History of Money. We study history so that we can attempt to contextualize the madness of the moment in which we are living. Watching Bernanke debauch the value of the American People’s money is obviously immoral – but who cares?
Morals? This isn’t about morals. This is about getting paid. And for political types, since the speech circuit pay-wheels have already been greased for life, you only get paid by politicians if you can spin. Storytelling that this recent 4-day drop in the US stock market is “all about Congress” is paramount to the unaccountable @FederalReserve’s fiction.
That’s the short-run. In the long run, most politically conflicted narratives are dead. We’re a long way removed from 1787 (1st issuance of coins in the United States) when “copper coins bore the motto “Mind Your Business” (Weatherford, pg 119).” But my business of protecting against the loss of your capital to poorly timed policy decisions remains.
Back to the Global Macro Grind…
My business adheres to a rule that Warren Buffett used to uphold as “Rule #1” of investing (before he went all chuckles @CNBC and pro government socialization of his P&L’s risk on us): “Don’t lose money.”
In order for we commoners who don’t get insider and government “preferred” investment terms to execute on this rule, we need to let Mr. Market tell us what to do next.
As of this morning, the most obvious of the new obvious in our Correlation Risk model is the US Dollar moving to an immediate-term correlation versus bond yields of almost 1.0 (US Dollar Index 3-week correlation to US 10yr Treasury Yield = +0.98).
What does that mean?
- Bernanke’s causal impact on the value of American Purchasing Power (US Dollar) is massive
- There’s an explicit link between US currency and bond yields in the face of policy information surprise
- When moving in tandem, US Dollars and Bond Yields are coincident (leading) US growth indicators
I realize that this isn’t the framework you are going to read from Morgan Stanley this morning. And that’s precisely why our contrarian bull case on US Growth was right this year. Consensus economists and market strategists don’t use our framework.
To review our (and world history’s) account of mapping economic gravity:
- When a country’s currency is rising alongside its country’s interest rates = #GrowthAccelerating signal
- When a country’s currency is falling alongside its country’s interest rates = #GrowthSlowing signal
To be clear, a signal can whip around and change direction more often than you can remain solvent trying to trade every move. But the intermediate-term TREND signals don’t lie nearly as often as the Fed’s forecasts do.
This is why we overlay our A) fundamental research with B) a quantitative risk management signal that is multi-duration and multi-factor. Since I never know what Mr. Market is going to start signaling as risk, I just need to wait and watch for trending signals.
Now some might say that doesn’t make sense because the trends can change. But that is precisely the power of the process. As policies, prices, correlations, etc. change - we do. The alternative strategy is dogmatic naval gazing about what “should” happen.
In summary, what’s “new” in our model as of the last week?
- US DOLLAR: our intermediate-term TREND line of $81.35 broke on Bernanke’s decision to break it
- US 10YR TREASURY YIELD: our immediate-term TRADE line of 2.79% broke; and TREND support of 2.55% is under attack
Since the #1 Style Factor leading market performance in 2013 YTD = LONG GROWTH, this very immediate-term information surprise to the market on both the US Dollar and Bond Yields matters, big time. Why? Because, unlike the Fed’s marked-to-model dogma of 0% interest rates on the short end of the curve, US growth expectations are marked-to-market.
One other way to consider Mr. Market’s current #GrowthSlowing message within this Down Dollar, Rates Down move was in yesterday’s US stock market sub-sector divergences. The Financials (XLF) led losers on the day (-0.6%). The why on that isn’t that complicated to follow – as long-term rates fall, the leading indicator for the Financials (Yield Spread) compresses.
Since Larry Summers was eliminated as a prospective Fed head (his policy would have been more hawkish = #StrongDollar, #RatesRising), the Yield Spread (10yr minus 2yr yield) has compressed by -8.5% to +229 basis points wide. That’s not a point of difference between Bernanke and my definition of morality; that’s just going to eat into the principle of profits.
Our immediate-term Risk Ranges are now as follows (we have 12 Global Macro ranges in our Daily Trading Range product too):
UST 10yr Yield 2.61-2.79%
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
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