What Are Your Competitors Thinking?

Our Macro team was on the road in California this week and met with a myriad of funds.  Below are some notes from some of the key meetings (with fund names removed).  Not surprisingly, the Fed, deflation, and employment were key topics of focus.


Enjoy the weekend,





Long/Short Hedge Fund with Sector Managers of $4BN+

-          Deflation main topic of conversation

-          They think Fed raises rates and ignores deflation data

-          Of the mindset that the Fed raises to create a buffer to cut down the road if necessary

-          They aren’t as concerned with the jobs report as we are

-          They are having a tough month, confused where to go from here, had a good Jan, bad Feb. They think the reversal in Feb continues vs. our view that this is an aberration and what happened in January (deflation) perpetuates throughout the yr.


Long Only Fund of $5BN+

-          In tune w/ the model, he’s trying to figure out if we’re in Quad 1 or Quad 4

-          Thinks vol is cheap and uncorrelated assets are expensive

-          Lots of policy discussion, what does the Fed do on the Feb jobs report

-          Thinks there is the potential they hike rates once and then potentially cut

-          Next three months are risky in vol terms

-          Consumption growth slowing long term on demographic headwinds, longer duration, so a focus

-          Next five yrs, wants to buy equities with free cash flow and good balance sheets

-          His clients (long duration guys) want to own hard assets

-          They underwrite $80 WTI based on project economics

-          Late cycle demand looks worse to them


Large Multi-Strat Hedge Fund of $3BN+

-          They like US fixed income, think it’s a safe harbor in global deflation environment

-          They agree on global deflation

-          QE slows the entire global economy, people hoard money, it slows consumption growth and inflates asset prices

-          In a global deflation environment, USD rises, compresses margins as top lines come down when you see FX headwinds

-          Asked on cost of education, what does that do to avg American as costs continue to rise?


Very Large Mutual Fund Complex of $100s of BNs

-          Had a good January, they pay attention and like our call, tough Feb

-          UST, JGB, Bonds, Copper, all reversed since January, what’s going on and what’s the pervasiveness

-          USD is going to go up, at 40 yr low, now arresting its decline, want to know if this move is an aberration

-          Concerned with the currency impact on the S&P 500

-          USD strength starts to take out deflations dominoes

-          We need a negative jobs report

-          Jobless claims on a % basis of available jobs, lower than it was the last cycle and the cycle before, etc

-          Consensus thinks rates rise

-          Discussed GDP comp

-          Bad demographic trends long term

-          Always curious on flows in to and out of their competition – specifically asked our thoughts on what PIMCO is doing


Long / Short U.S. Equity focused fund - $2BN+

-          They have on a similar trade to our call, they want the market to go down, think they need to wipe out crappy companies and crappy hedge funds

-          Some of their shorts are popping up on this Feb reversal

-          Think this part of the economic cycle is important

-          Very concerned about the rate move in Feb, not positioned for it

-          Discussed binary effect of the jobless claims report

-          Discussed Greece leaving EU, good/bad, we think bad, they seem to be on our side here

-          Global recession more likely than US recession

-          Discussed which companies to buy vs. sell – good balance sheets and good free cash flow


Large Mutual Fund - $10BN+

-          Most of the discussion focused on policy decisions of the Fed

-          Jobs report very important

-          Could the Fed issue treasuries at the long end of the curve as a surprise?

-          Focused on the rate of change in the Fed’s balance sheet & credit spreads

-          Thinks the Fed is price targeting

-          They are going to do everything in their power to reduce vol, which causes people to take risk

-          Corporates stopped hedging currencies

-          Understands there is always a period of volatility in any regime change

-          Thinks the only reset is for bond market volatility to go to where oil just went


Large RIA $5BN+

-          Credit & equity L/S, HY & EM

-          Bearish low quality HY & EM debt

-          In tune with the deflation theme, agree with us

-          They are focused on the divergence in the equity and credit market

-          Volatility caused by Fed uncertainty

-          Don’t think Greece gets kicked out of the EU


Also Very Large Mutual Fund Complex $100s of BNs

-          Serious concern in USD, what to do on strength

-          Big time concern in deflation

-          Euro and Yen devaluation a concern

-          Jobless claims and demographic headwinds are a concern for these guys

-          Concerned about liquidity

-          Interested in labor effect relative to housing


Special situations hedge fund with macro bent $5BN+

-          Are policy hikes a mistake?

-          They are pretty in tune with our view and feel the same

-          Pressing the deflation trade, don’t care about near term pain

-          Discussed the Greek exit from the EU, don’t think it happens

-          Think the Fed will raise rates

-          Hyper focused on consensus’ view

-          Fed language a focus

-          Like growth in this environment

Cartoon of the Day: Moon Shot

Cartoon of the Day: Moon Shot - Kuroda cartoon 02.20.2015

Bank of Japan Governor Haruhiko Kuroda earlier today said that he likes his chances of achieving the central bank's 2% inflation target. In related news... we don't.

LINN Will Lose More than $1 Billion in 2015 | 4Q14 Results, Guidance, and 10-K Recap

Link to Report: LINN Will Lose More than $1 Billion in 2015 | 4Q14 Results, Guidance, and 10-K Recap


Summary Bullets

  • We expect LINN Energy’s oil and gas business to lose $(1.2)B and generate no CFFO in 2015.  EBITDAX = interest expense.  The hedge book will generate $1.0B of “cash flow,” which is what will fund $600MM of CapEx and $417MM of distributions in 2015.
  • LINE and LNCO are worth $0.  We value LINN between $4.7B - $6.5B.  Its net debt is $10.3B.  
  • “DrillCo” and “AcquisitionCo” are unlikely to solve any of LINN’s problems.
  • We believe true maintenance CapEx to be ~$1.0B - $1.1B per year.  LINN will only spend $600MM in 2015.
  • A capital efficiency and reserve replacement analysis is included in the note.
  • A detailed review of the 10-K is included in the note.


Kevin Kaiser

Managing Director


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Retail Callouts (2/20): JWN, Ports, ANN, VFC, BBY

Takeaway: Removing JWN from our long bench with the company guiding flat earnings in 2015 and the stock at 20x P/E.



JWN - 4Q14 Earnings: Removing From Long Bench


Takeaway: We added JWN to our long bench on 10/16 following our Department Store Black Book. There are a lot of things to like about the name: e-commerce proficiency, brand portfolio, and square footage growth. But, we couldn’t get comfortable with the fact that it was operating in a space that has grown at a -2% CAGR over the past 20 years and needs to see 93mm square feet not just close, but exit the industry all together over the next 5 years. Since that time, the stock is up about 11%, in-line with the S&P. Now the company is guiding the mid-point of the earnings range to flat on 8% revenue growth. Either the company is sandbagging or this name is uninvestable trading up here at 20x next year's earnings. We're removing it from the long bench.

Retail Callouts (2/20): JWN, Ports, ANN, VFC, BBY - 2 20 chart1

Retail Callouts (2/20): JWN, Ports, ANN, VFC, BBY - 2 20 chart2





Report: West Coast ports running at 50%-60% of capacity; retailers stockpile inventory



ANN - Ann Taylor Parent Said to Be Working With JPMorgan on Sale



VFC - VF Settles ITC Laser Denim Case



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H2O Plus Names Joy Chen CEO


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Hedgeye Director of Research Daryl Jones shares the top three things in Keith's macro notebook this morning.

Keith's Daily Trading Ranges, Unlocked

This is a complimentary look at Daily Trading Ranges - our proprietary buy and sell levels on major markets, commodities and currencies sent to subscribers every weekday morning by CEO Keith McCullough. It was originally published February 20, 2015 at 08:36. Click here to learn more and subscribe.

Keith's Daily Trading Ranges, Unlocked - Slide1


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