Something is Rotten in The District of Columbia

This note was originally published at 8am on November 05, 2014 for Hedgeye subscribers.

Horatio: He waxes desperate with imagination.

Marcellus: Let’s follow. Tis not fit thus to obey him.

Horatio: Have after. To what issue will this come?

Marcellus: Something is rotten in the state of Denmark.            

-From Shakespeare’s “Hamlet”


Undoubtedly in Republican circles there are a lot of celebrations going on today.  After all, according to the scoreboard, they handed President Obama and his party a decisive loss.


In the Senate, the Republicans have already won a confirmed +7 seats and the count currently stands at 52 seats for the Republicans, 43 seats for the Democrats, and 2 seats for Independents. There are still three races that are considered undecided.


In the undecided races, it appears that Democrat Mark Warner will ultimately prevail in Virginia as he has the edge (though the margin is less than 13,000 votes and Republican Ed Gillespie has the option of a recount.)  Meanwhile in Alaska, it appears that Republican Mark Begich will ultimately prevail as he has received 49% of the vote with 97% of votes having been counted.  Finally, Louisiana is headed to a December run-off between incumbent Senator Mary Landrieu and Republican Bill Cassidy.


So in the Senate, Republicans will gain a minimum of +7 seats and perhaps as many as +9 seats.  In the House, the Republicans have already gained a net +13 seats to solidify their majority with approximately 19 seats still considered undecided.   In Governor mansions across the nation (outlined in the map below courtesy of Politico) Republicans also solidified their hold on state capitols.


Something is Rotten in The District of Columbia - dj


According to Politico, “even optimistic Republican operatives didn’t anticipate this”, but to be fair, as we wrote yesterday in an intraday note, almost every major media outlet was predicting a decisive Republican victory.  And decisive it was.  In large part this victory can be attributed to the fact that exit polls showed President Obama’s approval rating at a dismal 41%.


In our view, the bigger story from the election is really how despondent Americans have become about the future of America.  According to the exit polls, 2/3s of voters think the country is on the wrong track, a mere 22% believe their children will be better off than them, and more than 72% worry about a terrorist attack on American soil.  That is just plain sad.


But, the fact that Americans are despondent about the future shouldn’t really be a surprise.  This election was characterized by negative attack ads.  In the 34 states with Senate seats up for grabs, there were 1 million TV ads shown and more than 46% of them were attack ads.  While on one hand those ads were seemingly successful in leading the Republicans to victory, on the other hand, what was the cost?


Heading into the election, Congressional job approval was a mere +12%, with more than 80% of voters disapproving of the job that Congress is doing.  As well, consistent with exit polling data above, heading into the election a mere 28% of voters believe that the country is headed in the wrong direction.


So, was this a resounding Republican victory? Perhaps, but the bigger issue we all have to deal with is that something is truly rotten in the District of Columbia.


Back to the Global Macro Grind...


As depressing as the state of U.S. politics may be this morning, there is always a bright side.  The bright side is that we all live in America and can, if we set our minds to it, fix some of the endemic problems, such as distrust in our politicians.  In countries like Russia, of course, the people have much, much less influence.


While certainly being a voter in Russia would be depressing, even more depressing would have to have been being invested in the Russian stock market this year.  Specifically, for the year-to-date the benchmark Russian equity index is down -25%. Coincidentally, or not, the price of Brent crude is down right around -25% for the year-to-date as well.


As many of you know, we are big fans of looking at stock prices as leading indicators, which begs the question: what is the Russian stock market signaling?  Since the market is in full on crash mode, it is truly fair to consider whether the market is signaling a somewhat imminent collapse of Putin’s Russia.  While raising interest rates to strengthen the Ruble is a cute trick, the fundamentals of Russia remain highly dependent on energy exports.


According to the Energy Information Administration, in 2013 a full 68% of Russian exports, or more than $350 billion dollars, came from energy, with more than half of that from crude oil.   For comparison, the United States exports no crude oil and petroleum products comprise a mere 8%.   Given this dependence, it is really no surprise that in 2009, after crude oil declined by 80% in 2008, that the Russian economy shrunk by 7.8% in 2009, the most of any G20 economy.


Tomorrow at 1pm eastern we are going to be hosting a conference call for our institutional macro clients with former U.S. Ambassador to Russia Michael McFaul.  (Email us at for details.)  Mr. McFaul has been called, “the leading scholar of his generation, maybe THE leading scholar, on post-Communist Russia.” He was President Obama’s chief advisor on Russia through his first term and was a main policy architect of “Reset” in U.S. - Russian relations.


 A high-profile figure during his time in Moscow, McFaul was harassed and accused of orchestrating a coup.  Perhaps in light of his considerable work and reputation as an expert on anti-dictator movements and revolutions, Putin reportedly stared at McFaul across a meeting table and remarked, “We know that your Embassy is working with the opposition to undermine me.” 


We hope you can join us for the call tomorrow, which will help illuminate exactly what is happening in Putin’s Russia.  And remember, as depressing as some of the election exits polls, things are still worse in Russia.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.21-2.38%

SPX 1967-2033

VIX 13.41-17.80

USD 86.31-87.65

Yen 109.11-114.91

WTI Oil 76.43-80.51 



Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Something is Rotten in The District of Columbia - chart of day 11 5

Jim Cramer's [Lack of] Integrity #Timestamped

FLASHBACK: Remember When Jim Cramer and His Minions Slandered Hedgeye and Our Short Call On Linn Energy? We Do. Here’s What Has Happened Since.


Jim Cramer's [Lack of] Integrity #Timestamped - 36


* * * * * * * 

We take great pride in the integrity of our work here at Hedgeye. We don’t like it when people like CNBC’s Jim Cramer falsely accuse us of orchestrating bear raids (an SEC violation), or when lackeys of his like a junior varsity reporter at Business Insider imply we are “breaking the law” simply because our research team makes a compelling and comprehensive call to short a particular company’s stock.


What we do like is when the dust settles and the scoreboard proves our investment call 100% right and our accusers wrong.


You may recall Hedgeye Energy Analyst Kevin Kaiser first began warning investors about accounting shenanigans at Linn Energy toward the end of March 2013. Kaiser argued the stock was worth about $15, when it was trading a little under $40.


Well, that clearly didn’t sit well with Cramer who was long the stock in his charitable trust and advised people to buy it in his Action Alerts product. A battle ultimately ensued between Hedgeye CEO Keith McCullough and Cramer on Twitter, TV and online/print.


Cramer actually called us “unscrupulous” and went so far as accusing Hedgeye of violating the 1934 Securities Exchange Act in an article on his website and Twitter. He also attacked Kaiser’s work, not based on anything having to do with his analysis, but because he was too young according to Cramer. He also had Linn Energy’s CEO come on his “Mad Money” show to defend his company. Here’s a taste.


Jim Cramer's [Lack of] Integrity #Timestamped - cramer1


Jim Cramer's [Lack of] Integrity #Timestamped - cramer3


So what’s happened since Cramer slandered Hedgeye and told investors to stay long Linn Energy?


Take a look below.

Click image to enlarge.

Jim Cramer's [Lack of] Integrity #Timestamped - linn energy


Bottom line? Shares of Linn Energy are down 39% since Kaiser made his call in March 2013, while shares of its sister company LNCO are down 47%.


*For the record, since Cramer penned his ridiculous (libelous) piece on June 19, 2013, shares of Linn Energy (LINE) have plunged 30%, while shares of LNCO have fallen even further, dropping 43%.


Nice work, Jim. #Booyah

Real Conversations: A Dire Appraisal of Our ‘Broken Global Economy’


Dan Alpert, economic policy expert, author of “The Age of Oversupply,” and founding Managing Partner of investment bank Westwood Capital, discusses the dangerous global economic challenges the world is facing stemming from flawed government and central bank interventions with Hedgeye CEO Keith McCullough.

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Cartoon of the Day: Behind the 8-Ball

Can a horrendous economy be "printed" away? Abe seems to think so. We disagree.


Cartoon of the Day: Behind the 8-Ball - Abenomics cartoon 11.18.2014


DKS – Quick Take – Still Broken

Takeaway: Our 2 cents – This company is growing because it could, not bc it should. The financial model needs to change, but won’t. Still a short.

Nothing came from the numbers or the conference call that dissuades us from being short this stock. Yes, it was an in-line print, which is a slight victory for a company that has missed four of the past eight quarters. But 9% revenue growth deleveraging to 1% EBIT growth is anything but impressive. In fact, the two categories that are hurting the comp the most – guns and golf – are two of the categories where Dick’s Brick & Mortar stores should have the best competitive advantage (ie you don’t buy a Mossberg 12-guage or a $500 Taylor-Made driver on Amazon).  Our point here is that DKS is adding new stores because it could – not because it should. Current store count is 691, and management will continue to march toward 1,100. That’s a bad idea. We think that the company should stop growing and change up its financial model to maintain its footprint and buy back stock. But that’s not what it will do.


We think that near-peak gross margins can’t co-exist for long with peak productivity and a trough SG&A ratio. In fact, the company leveraged SG&A this quarter by 40bps on only a 1% comp. That’s not sustainable.  We understand that this is a ‘best in breed’ company, but so is Macy’s, and we wouldn’t touch that one either. We’ll see where consensus numbers shake out over the next few days to determine how loud we should get on the short side.


DKS – Quick Take – Still Broken - dks q comp

DKS – Quick Take – Still Broken - dks sigma


Takeaway: Homebuilder optimism continues to percolate as more signs of light at the end of housing's tunnel begin to emerge.

Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume.




Today's Focus: November NAHB HMI (Builder Confidence Survey)

Home builder confidence rose to 58 on the NAHB HMI Index in November, a +4pt increase vs September and just under the 9-year high reading recorded in September. 


It has taken the balance of the year but confidence has retraced back to the pre-polar vortex levels observed in the July to December period of 2013.   What hasn’t rebounded - despite some intermittently solid reports out of a selection of the publicly traded homebuilders - is actual, aggregate new home sales which have done virtually nothing over the TTM.    


Perhaps builder’s are co-opting our top down view and considering the implications of a 2nd derivative stabilization in HPI in conjunction with progressively easier volume comps and looser regulation but, given the ongoing divergence between confidence and construction YTD, we’re more inclined to view the November advance in sentiment as a simple continuation of trend. 


  • Sub-Indices:  After declining in October, all 3 sub-indices rose MoM with the magnitude of increase in Current Sales (+5pts) outpacing more modest increases in Current Traffic (+4pts) and 6M Expectations (+2pts) and driving a moderate sequential compression in the “optimism spread”. 
  • Regional: Builder Confidence gained across all regions with the 12 point gain in the Northeast – the largest sequential change in a year and the 2nd largest since 2010 -  being the most notable.


We’ll get the housing starts/permits data for October tomorrow, but with SF starts up just 2.8% YoY on ave YTD and permits middling, we don't see much upside for single family construction to close out the year. 




“Growing confidence among consumers is what’s fueling this optimism among builders,” said NAHB Chairman Kevin Kelly.  “Members in many areas of the country continue to see increasing buyer traffic and signed contracts.”


“Low interest rates, affordable home prices and solid job creation are contributing to a steady housing recovery,” said NAHB Chief Economist David Crowe. “After a slow start to the year, the HMI has remained above the 50-point benchmark for five consecutive months, and we expect the momentum to continue into 2015.” 



Our bearish call on housing thus far in 2014 has been playing out as the XHB remains the worst performing sector YTD. That said, many of the negative dynamics that we flagged earlier this year have largely or completely played out and we're now seeing some signs of light at the end of the tunnel (see the volume of "green" in the compendium at the top of this note). We'll be hosting a call in early December to update our views on housing heading into 2015. 

















About the NAHB HMI:

The Housing Market Index (HMI) is based on a monthly survey of NAHB members designed to take the pulse of the single-family housing market. The monthly survey has been conducted for 30 years. The survey asks respondents to rate market conditions for the sale of new homes at the present time and in the next 6 months as well as the traffic of prospective buyers of new homes. The HMI is a weighted average of separate diffusion indices for these three key single-family series. The HMI can range from 0 to 100, where a value over 50 implies conditions are, on average, improving, a value below 50 implies conditions are worsening, and an index value of 50 indicates that the housing market is neither improving nor worsening.



Joshua Steiner, CFA


Christian B. Drake


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