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Call Today: Hedging The Storm in Energy

Hedgeye’s Macro and Energy teams will host a guest speaker call TODAY at 1:00pm EST to discuss current trends in and implications of the commodity hedging practices of US E&Ps, natural gas processors, and various industrial commodity consumers.

 

Call Today: Hedging The Storm in Energy - Marketing ImageVF

 

The call will feature Wayne Penello and Andy Furman of Risked Revenue Energy Associates (“R^2”).  R^2 is an independent hedge advisor serving E&P companies, midstream service providers, and large consumers.  Wayne Penello is the President and Founder of R^2, and has 30 years of experience in commodity options trading, market-making, and asset management.  Andy Furman has 25 years of experience in energy trading and is an expert at valuing and trading options.

 

Participant Dialing Instructions

Toll Free Number:

Direct Dial Number:

Conference Code: 962793#

Materials: CLICK HERE

 

Topics for Discussion

  • Overview of R^2’s services, clients, and proprietary risk management systems;
  • The mechanics of entering into a commodity hedge;
  • Assessment of current industry hedge positions;
  • R^2’s commodity price outlook for crude oil, natural gas, and NGLs;
  • Client psychology – what E&Ps are currently thinking and doing in the oil, gas, and NGL markets;
  • Likely result of borrowing-base determinations from financial institutions;
  • The challenge and opportunity in hedging NGLs;
  • And more…

      

About Risked Revenue Energy Associates:

R^2 is a consultant and market agent in the energy space serving upstream, midstream, and end users of energy-related commodities (including private equity interests).  R^2 brings over 150 years of experience including but not limited to market-making, trading, asset management, and industry expertise. The firm utilizes a patented risk management strategy to help implement and stress test a company’s hedge book, leverage, and cash flows, among a long list of other metrics under various scenarios. R^2 suggests the most relevant hedging strategies and negotiates/executes on behalf of their clients on a daily basis.

 

Wayne Penello is the President and Founder of R^2. He has 30 years of market-making, option trading and asset management experience in the energy industry. Mr. Penello began his career on the New York Mercantile Exchange, where he was a market maker and served as Ring Chairman of options trading. Subsequently, he held positions managing globally distributed energy assets for Vitol S.A., Vitol U.S.A., Tenneco Gas Marketing and Torch Energy. Mr. Penello was formerly a research scientist. He holds a Masters degree in Marine Sciences from Stony Brook University and an undergraduate degree in Marine Biology from Southampton College.

  

Andy Furman was co-founder and CEO of Atlantic Capital Consultants, an options market-making firm on the NYMEX from 1987 – 2001. After leaving the NYMEX trading floor in 2001, Mr. Furman traded for hedge funds. Most recently he held the position of Managing Director for Hudson Capital Group, LLC where as Manager and Trader for Energy Futures and Options he used spread arbitrage and option strategies to achieve consistent profitability. Mr. Furman holds a Bachelor of Science degree in Chemical Engineering from MIT.

 

Macro Team


Japan, #Deflation and Switzerland

Client Talking Points

JAPAN

Surprisingly the Japanese central planners at the BOJ didn’t impress markets with enough cowbell last night – Yen +0.8% and Nikkei -0.5% as Bank of Japan Governor Haruhiko Kuroda told ½ the truth (that there’s no way he gets his monetary (inflation) math in 2015) but that he’ll eventually get what the Japanese haven’t been able to achieve since 1997.

#DEFLATION

As the central planning attempts by the Japanese and Europeans get more desperate, the world gets a stronger dollar and that’s hammering inflation expectations. The CRB Index (19 commodities) hit a fresh new low of 219 yesterday, that’s a 30% crash since June. Copper down another -1.7% this morning.

SWISS

The Swiss stock market got smoked, then bounced, and is getting hit again this morning, leading European equity index losers at -1.9% (-10.7% year-to-date) with no support on the Swiss Market Index to 7680.

Asset Allocation

CASH 56% US EQUITIES 5%
INTL EQUITIES 2% COMMODITIES 0%
FIXED INCOME 31% INTL CURRENCIES 6%

Top Long Ideas

Company Ticker Sector Duration
EDV

The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). As our declining rates thesis proved out and picked up steam over the course of the year, we see this trend continuing into Q1.  Short of a Fed rate hike, there’s no force out there with the oomph to reverse this trend, particularly with global growth decelerating and disinflationary trends pushing capital flows into the one remaining unbreakable piggy bank, which is the U.S. Treasury debt market.

TLT

As growth and inflation expectations continue to slow, stay with low-volatility Long Bonds (TLT). We believe the TLT has plenty of room to run. We strongly believe the dynamics in the currency market are likely contribute to a “reflexive deflationary spiral” whereby continued global macro asset price deflation and reported disinflation both contribute to rising investor demand for long-term Treasuries, at the margins.

HOLX

Hologic (HOLX) is a name our Healthcare Sector Head Tom Tobin has been closing monitoring for awhile. In what Tom calls his 3D TOMO Tracker Update (Institutional Research product) of U.S. facilities currently offering 3D Tomosynthesis, month-to-date December placements signaled a break-out quarter after a sharp acceleration in October and slight correction to a still very high rate in November. We believe we are seeing a sustained acceleration in placements that will likely drive upside to Breast Health throughout FY2015. Tom’s estimates are materially ahead of the Street, but importantly this upward trend in Breast Health should lead not only to earnings upside, but also multiple expansion and a significant move in the stock price.

Three for the Road

TWEET OF THE DAY

Boom! We're going LIVE at 8:30am ET. @KeithMcCullough hosting morning macro markets call w/@HedgeyeDDale It's free. https://www.youtube.com/watch?v=oWAwgpx27yA …

@Hedgeye

 

QUOTE OF THE DAY

Wisdom begins in wonder.

-Socrates

STAT OF THE DAY

The top 1% of income earners in the U.S. get over a 1/3 of that income from capital gains. 


CHART OF THE DAY: How Did You Manage Deflation Risk?

CHART OF THE DAY: How Did You Manage Deflation Risk? - Chart of the Day

Editor's note: This is a brief excerpt from today's Morning Newsletter written by Hedgeye CEO Keith McCullough.

*  *  *  *  *  *  *

As you know, you can make a ton of money on the long side of asset prices tied to both A) Policies to Inflate (not to be confused with real economic growth – see 2011 for details) and B) #GrowthSlowing (buy Long Duration Bonds!). #TLT

 

What’s much more damning to asset prices than the rate of change in growth slowing is the rate of change in inflation #crashing. That’s mainly because asset #bubbles that were perpetuated by easy money Policies to Inflate get crushed by #deflation.

 

In hindsight, the #deflation risks to certain asset prices have been crystal clear:

 

  1. Commodities (CRB Commodities Index = 219, new lows, -30% since June 2014)
  2. Debt – and I mean high yield and junk bonds tied to cash flow streams that have implied inflation expectations

 

That’s why big debtor nations (and the companies who thrive on leverage to inflation in selling prices) try to avoid #deflation like the bubonic plague. #Deflation hammers debtors.



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History's People

“History isn’t really about events – it’s the people who really matter.”

-Glenn Beck

 

That’s from the intro of the latest US #history book I’ve been grinding through, Dreamers And Deceivers by Glenn Beck. And while I’m sure you have your own opinions about Beck, I personally think he’s a great storyteller.

 

No, Beck isn’t my political idol (here’s a shocker - I don’t have one!). Neither is President Obama. While sometimes fictional, both of these guys tell stories in a way that makes us feel something. That’s what gives birth to a healthy debate about the truth.

 

Ostensibly, in a free-market democracy it is The People who really matter. Do they believe in this Marxist #ClassWarfare argument of the “rich” vs. the “middle class”? Or does that insult them? I guess after last night’s State of The Union storytelling we’ll see…

 

Back to the Global Macro Grind

 

If you listen to just about anyone who loves Obama’s economic policies, they’ll tell you (as he trumpeted last night) that the “economy is back! growing 5%”. That’s obviously fiction, in year-over-year growth rate terms.

 

When someone throws that 5% number at you, they either A) don’t get that a quarter-over-quarter SAAR reading doesn’t equate to a year-over-year growth rate or B) are trying to obfuscate the number because the uninformed wouldn’t get it anyway.

 

Here’s the last 4 quarters of US GDP growth, on a year-over-year growth rate basis:

 

  1. Q413 = +3.1%
  2. Q114 = +1.9%
  3. Q214 = +2.6%
  4. Q314 = +2.7%

 

And since our macro model (GIP - Growth/Inflation/Policy Model that, using Bayesian Inference, has done as good a job as any research firm in predicting the rate of change in both growth and inflation for the last few years) was:

 

A)     Bullish on the y/y rate of change in US #GrowthAccelerating for all of 2013 until the growth rate peaked in Q413

B)      Bearish on the y/y rate of change in US growth starting at the beginning of 2014, as Q114 slowed…

 

I don’t have to make mediocre apologies for getting the rate of change in long-term bond yields right (bullish on #RatesRising in 2013, bearish on rates surprising to the downside in 2014) either.

 

Instead, being true to evolving the macro debate on Wall St., what I need to do after the #SOTU2015 speech is remind you that:

 

  1. The bond market (and economic data for December) signaled that the y/y US GDP growth rate slowed again in Q414
  2. Q414 US GDP growth will be reported much lower than “5% growth” within the coming weeks
  3. The annualized (year-over-year) US GDP growth rate for 2014 will be closer 2% than 4-5%

 

Obama won’t revise his storytelling about economic growth, after that. But #history will.

 

As you know, you can make a ton of money on the long side of asset prices tied to both A) Policies to Inflate (not to be confused with real economic growth – see 2011 for details) and B) #GrowthSlowing (buy Long Duration Bonds!). #TLT

 

What’s much more damning to asset prices than the rate of change in growth slowing is the rate of change in inflation #crashing. That’s mainly because asset #bubbles that were perpetuated by easy money Policies to Inflate get crushed by #deflation.

 

In hindsight, the #deflation risks to certain asset prices have been crystal clear:

 

  1. Commodities (CRB Commodities Index = 219, new lows, -30% since June 2014)
  2. Debt – and I mean high yield and junk bonds tied to cash flow streams that have implied inflation expectations

 

That’s why big debtor nations (and the companies who thrive on leverage to inflation in selling prices) try to avoid #deflation like the bubonic plague. #Deflation hammers debtors.

 

Japan (BOJ) and Europe (ECB) either convince the world that they can create inflation again – or they do not. After cutting his “inflation target” in ½ last night, the BOJ’s Kuroda looks about as confident about inflation as a chart of West Texas Crude Oil.

 

When this epic and unprecedented central planning experiment ends, it will be the people who signed off on it who are held responsible, not the politically conflicted speech events themselves.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.74-1.89%

SPX 1

Yen 116.12-120.23

Oil (WTI) 45.02-47.66
Gold 1

Copper 2.48-2.61

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

History's People - Chart of the Day


January 21, 2015

January 21, 2015 - Slide1

 

BULLISH TRENDS

January 21, 2015 - Slide2

January 21, 2015 - Slide3

January 21, 2015 - Slide4

 

BEARISH TRENDS


January 21, 2015 - Slide5

January 21, 2015 - Slide6

January 21, 2015 - Slide7

January 21, 2015 - Slide8

January 21, 2015 - Slide9

January 21, 2015 - Slide10

January 21, 2015 - Slide11
January 21, 2015 - Slide12


Consensus Macro Memes

This note was originally published at 8am on January 07, 2015 for Hedgeye subscribers.

“Memes propagate themselves in the meme pool.”

-Richard Dawkins

 

Born in Nairobi, Kenya, 73 year old Richard Dawkins is a well known evolutionary biologist who wrote The Selfish Gene in 1976. He developed a gene-centered view of evolution and has plenty of interesting writings on one of my main market focuses, #behavior.

 

“Examples of memes are tunes, ideas, catch phrases, clothes, fashions … leaping from brain to brain via a process, in the broad sense, can be called imitation.” –Dawkins (The Medici Effect, pg 17)

 

Do Global Macro Themes propagate themselves into consensus narratives? You bet your Madoff they do. But timing them matters. You really get paid by front-running them by 3-6 months. “So” (good #OldWall meme word right now), let’s keep trying to do that.

 

Consensus Macro Memes - 1.7 book

 

Back to the Global Macro Grind

 

For anyone with an objective (Bayesian) research process of analyzing the prior in order to probability weight the next posterior, the fundamental trends of global #GrowthSlowing and #Deflation have been plainly obvious for the last 3-6 months.

 

To be fair, you didn’t have to call the top in big things like long-term bond yields (12 months ago) or other major macro things like Oil, the Euro, and the CRB Commodities Index (6 months ago) to protect your client moneys against these major macro risks.

 

In the last 3 months however, you’ve had multiple opportunities to sell your Emerging Markets, High Yield/Junk Bonds, Energy stocks, etc. – even in the major US equity meme chasing indices, you had fantastic selling opportunities at the:

 

  1. Late SEP top
  2. Late NOV top
  3. Late DEC top

 

As always, market performance propagates consensus macro memes, so I highly doubt you get another lay-up JAN high to sell into like you had in SEP, NOV, and DEC… but doubt is where the short-squeezes are born, “so” I try to never say never!

 

At 1.94% on the US 10yr Treasury Yield this morning, most American mainstream financial “news” memes are picking up on the simple reality that the US A) is not a “closed” economy B) US economic data slowed in December and C) #deflation is a risk to the jobs market.

 

Amidst the epic storytelling of why the “market was up” on December 29th, there’s one big thing the perma-growth and inflation bulls have left - the ongoing “booming 5% economy with wage growth and capex cycles” meme that is about to appear like a castle in the air…

 

“So” what if the data goes something like this for the next month instead?

 

  1. US Jobless Claims Rise (think Texas, the Dakotas, etc)
  2. Late-cycle indicators (like inflation and employment) both slow, at the same time
  3. Q414 GDP slows to 2% (or less)

 

Since the politicized, and to some extent ignorant, description of US GDP Growth is a sequential (not an annualized, year-over-year rate of change) number, that doesn’t mean that come February that headline-meme-news won’t be that US GDP in 2014 was actually closer to 2% year-over-year than 3, 4 or 5%.

 

Then the Consensus Macro Meme might just get why a 10yr bond yield of around 2% reflects an economy whose rate of year-over-year change was tracking in line with 2% (or lower). If real year-over-year GDP was accelerating > 3%, I think the 10yr yield would too (that was our call in 2013 though, when we wanted you to buy every dip in US stocks and short the Long bond, TLT).

 

Front-running predictable #behavior in both mainstream newsflow and macro market reactions by central planners is not easy, but we have proven that it is doable. Humor me for another minute and tell me what the US Federal Reserve does if the following three face cards show up in the flop:

 

  1. #Deflation (as in collapsing oil, commodities, breakevens, headline CPI, etc.)
  2. Slowing monthly (December and January data) and slowing Q414 GDP
  3. Rising jobless claims and risks to the labor market

 

Alex, I’ll take “what is pushing out the dots?” on a June rate hike for my entire asset allocation. And the 10yr yield goes lower on that. TLT Tizzle. Yep.

 

I’ll outline our scenario analysis on our Q1 Macro Themes Conference Call tomorrow (ping sales@hedgeye.com if you’d like access). Probability weighing phase transitions in macro consensus memes – that’s my job. That’s also risk management.

 

Our immediate-term Global Macro Risk Ranges (I publish 12 of these with our intermediate-term TREND view in our Daily Trading Range product) are now:

 

UST 10yr Yield 1.87-2.14%

SPX 1983-2046

VIX 16.99-21.96

EUR/USD 1.18-1.20

YEN 118.26-121.01

Oil (WTI) 45.42-53.22

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Consensus Macro Memes - 01.07.15 chart


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 80.33%
  • SHORT SIGNALS 78.51%
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