Keith's Daily Trading Ranges [Unlocked]

This is a complimentary look at today's Daily Trading Ranges - our proprietary buy and sell levels on major markets, commodities and currencies sent to subscribers weekday mornings by CEO Keith McCullough. Click here to subscribe.

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Short CHK | New Best Idea | Thesis and Call Invite

Thesis Overview


In this new era of low hydrocarbon prices, North American E&Ps can no longer pursue reserve and production growth at any cost.  We believe that equity investors have, and will continue to, shift their primary preference away from growth, and to profitability: full-cycle economics, returns on invested capital, and free cash flow.


We are adding Short Chesapeake Energy Corp. (CHK) to our Best Ideas list with a fair value range of $3 - $7/share based on an Investor Recycle Ratio of 1.5x at above-current-strip commodity prices.  It is possible that CHK could become severely distressed over a 2 – 4 year time frame, calling into question any equity value at all, should commodity prices remain low for long.  At the current price of $13.50/share, we believe that CHK is pricing in ~$90 WTI and ~$4.00 Henry Hub.  CHK equity investors are paying $1.90 per proved Mcfe for a company that only generates $1.60 of undiscounted EBITDA per Mcfe produced (at $65 WTI and $3.25 Henry Hub).


In our view, the market is mispricing CHK’s move to one of the highest-cost, large-cap E&Ps in North America, largely due to its massive and growing midstream expenses, a situation that worsens in the years ahead.  These iron-clad, multi-decade commitments make CHK a highly-unlikely takeout candidate, and may also make asset sales difficult.  We also believe that the market is underappreciating CHK’s leverage due to its $2.9B cash balance and $1B realized hedge gain in 2015; by our model CHK will burn ~$1.5B of cash each year for the foreseeable future, and net debt / EBITDA will be ~5.0x at YE16.


CHK is no longer growing production and its economic earnings / free cash flow are sharply negative; in 2016 we expect CHK to lose ~$1.2B ($1.85/share) at current strip prices, before minimum volume commitment payments.  We estimate that CHK needs ~$70 WTI and ~$4.00 Henry Hub just to sustain production and be cash flow neutral.  In short, unless commodity prices increase meaningfully from current levels, the long-term outlook for CHK is dire




We will publish our analysis supporting our short CHK thesis in a comprehensive slide deck on Thursday, June 11th.  We will host a conference call that day at 1pm EST to walk through the key slides and field questions.  The slide deck and dial-in information will be sent to all current subscribers next Thursday morning.  The slides and call will explore:


  • CHK’s full-cycle cost structure with an emphasis on its midstream expenses and price differentials;
  • A deep-dive into the CHK / ACMP gas gathering agreements (it’s not the minimum volume commitments that really hurt!);
  • Comparative analysis of CHK’s full-cycle economics relative to peers (E&P investing is often a relative game);
  • Valuation analysis and commodity price sensitivities.
  • Catalysts, risks, sentiment
  • Sidebar: Should Williams Companies (WMB) be worried?


Kevin Kaiser

Managing Director

Epic 3-Day Move

Client Talking Points


We think ECB President Mario Draghi made his 1st big mistake yesterday in classifying economic growth the way he did (sequentially most European growth data has been slowing) and basically saying #deflation isn’t a risk anymore. The German DAX is down -1.5% this morning and down -3.1% in the last month.


German Yields have almost doubled (not a typo) in the last 3 days – that’s normal! Swiss Yields have gone from negative to positive +0.04% and all this matters if only because markets weren’t ready for it. Probably the best buying opportunity in long-term U.S. Treasuries in a year, especially if the jobs report is bad tomorrow (35-40 basis points of daily downside in the UST 10YR). 


Blue Horseshoe “Golden Sun Securities” under siege as the sketchy-ness of it all ramps. The Shanghai Composite Index dropped 5% intraday, then experienced a straight up ramp into the close that put it +0.8% on the day = +144% in the last year.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

We see stability in regional gaming revenues over the next several months providing some much needed earnings visibility. PENN maintains the best new unit growth story in domestic gaming with the opening of the Plainridge casino in Massachusetts in June and the Jamul casino in Q2 2016. Both properties should well exceed current Street estimates for win per slot and EBITDA. PENN has a proven track record as the best regional casino operator and recently proved its prowess at successfully opening racinos (casinos at racetracks) with estimate beating Dayton and Mahoning commencing slot operations last year.


Housing went 3 for 3 as the Trinity of Fundamental Data Points released in the latest week continued to reflect accelerating rates of improvement across both the New and Existing markets. New Home Sales in April rose +6.8% month-over-month to +517K.  More notably, sales were up a remarkable 26% on a year-over-year basis as NHS re-converged back to the trend in New Home construction. Pending Home Sales rose +3.4% sequentially in April, accelerating to +14% year-over-year with the Index making a new 101-month high.  Pending Home Sales represent signed contract activity and are a historically strong lead indicator of Existing Home Sales.  The MBA’s weekly Mortgage Purchase Application Index re-captured the 200-level, rising +1.2% week-over-week and accelerating +250bps sequentially to +13.1% year-over-year.  


We believe the U.S. economy is past peak in rate-of-change terms and sliding down the slope to an eventual cliff (i.e. recession). That’s our call and we’re sticking to it. Friday’s negative revision takes our full-year estimate for real GDP growth down to +2% (from +2.3% prior). Both the Fed and Street are up at +2.5%, both of which continue to careen down from perpetual expectations of rainbows-and-puppy dogs (i.e. 3-plus percent growth) earlier this year. We reiterate our call to be long of long-duration in its many forms:  TLT, VNQ, EDV, and GLD (gold has historically performed well in down-dollar and down-interest rate environments and we think the June 17th FOMC statement has a high probability of being dovish and dollar-bearish).

Three for the Road


We've got an Idea Vetting Book on $RL coming down the pike on Mon to drill down the battleground issues.



The empires of the future are empires of the mind.

Winston Churchill


MBA Purchase Activity was mixed as demand declined -3.0% sequentially but accelerated from +13.1% to +13.9% on a year-over-year basis.  


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  • June 4: CCL special press announcement in NYC


G13.SI- Genting Singapore bought back 136,500 shares at 90.5 Singapore cents each on Tuesday and another 2 million shares Wednesday at 91 Singapore cents per share. 


RCL - The upcoming dry docks for Azamara Club Cruise's two ships, Journey and Quest, will result in significant changes to the two upscale vessels. "From bow to stern, and stern to bow, there is no area on the line's ships that will be untouched," Azamara CEO Larry Pimentel said.


The refurbishment of the 15-year-old ships - both former R-class vessels, so named because they were acquired from Renaissance Cruises - will take place in 2016.  Azamara Journey will enter dry dock in January 2016 in the Bahamas and Azamara Quest will receive the changes during an April 2016 dry dock in Singapore.

Takeaway: Much needed makeover for Azamara.




Junket smoking area request rejected - Secretary for Economy and Finance, Lionel Leong, dismissed requests from Macau's junket association for smoking rooms in VIP gaming areas. This rejection comes shortly after secretary Alexis Tam also asserted his position against the request in a meeting with the group three days ago.


MGM China CEO Grant Bowie also called for casinos to be able to retain smoking lounges. While the company supports the ban, the customers’ interests also have to be taken into account, he was cited as saying by TDM Macau. “We clearly support the initiatives of the government in terms of protecting the interest of the staff, and therefore, have supported the banning of smoking on the gaming floor but we would also suggest that we should allow people to smoke in smoking lounges,” he said.


Takeaway: Full smoking ban is an inevitability 


China river tragedy - Major travel agencies, when contacted, said there have been no trip cancellations yet as of Tuesday. 


"It is an exceptional case," said Zhou Yingfeng, product manager at China Youth Travel Service Shanghai. Zhou said the travel agency had no customers on the boat and it has not yet received any notices of cruise cancellations on the Yangtze River after the accident.


Takeaway: Damage control by the river cruises following incident. Given media coverage, the sentiment could be negative towards any cruising in China. 


Yellow Brick Road Casino - had a grand opening on June 2nd. The casino near Schenectady, NY has 430 slots. 


Hedgeye Macro Team remains negative on Europe, their bottom-up, qualitative analysis (Growth/Inflation/Policy framework) indicates that the Eurozone is setting up to enter the ugly Quad4 in Q4 (equating to growth decelerates and inflation decelerates) = Europe Slowing.

Takeaway:  European pricing has been a tailwind for CCL and RCL but a negative pivot here looks increasingly likely in 2015.

[MUST-SEE] CHART OF THE DAY: Newsflash ... Global Growth Is Slowing

Editor's Note: The chart and excerpt below is from today's Morning Newsletter. It was written by Hedgeye senior macro analyst Darius Dale. Click here to learn more about how you can subscribe.  


Click to enlarge

[MUST-SEE] CHART OF THE DAY: Newsflash ... Global Growth Is Slowing - Chart of the Day


...In fact, anyone who does the work will arrive at the conclusion that global growth is slowing on both a sequential and trending basis into the most difficult compares of the year (i.e. the 2nd and 3rd quarters).


As such, the probability for global growth to get cut in half on a YoY basis in 2015 is extremely great. That would represent the slowest rate of global growth in this cycle and ~100bps shy of the trailing 3Y average of +2.2%.


What Is True?

“Above all else, I want you to think for yourself to decide: 1) what you want, 2) what is true and 3) what to do about it.”

-Ray Dalio


If you’re reading this note, you are undoubtedly familiar with Ray Dalio and more than likely familiar with his book Principles. In that book, he details three things:


  1. The importance of having principles;
  2. His life principles; and
  3. How he applies those principles to managing Bridgewater, the world’s largest hedge fund.


While Keith would be the first to tell you that he’s no Ray Dalio, we are also big on principles at Hedgeye.


From a philosophical perspective:


  1. Transparency: “No banking” means you don’t ever have to worry about what we really think about a specific security or economy. We aren’t trying to sell you anything but our research views.
  2. Accountability: “No asset management” means we don’t earn a management fee. We only get paid when we add value to our customers’ research processes.
  3. Trust: “No broker-dealer” means you don’t ever have to worry about us front-running your order flow – or worse…


From a research perspective:


  1. History: For every indicator we come across, we strive to analyze as much historical data as we can, across cycles, in order to identify or dispel the existence of critical mean reversion thresholds.
  2. Math: Core to our process is an overt focus on rate-of-change, which is derived from a well-researched view that market participants react to incremental developments, rather than to absolute states. As such, we employ basic differential calculus methods to project accelerations, decelerations and inflections in growth rates.
  3. Behavioral Psychology: We believe there is a considerable degree of actionable information to be derived from market prices and that contextualizing investor sentiment and positioning is critical to immediate-term risk management. Moreover, we believe the supply/demand narrative surrounding any asset is heavily influenced by its own price trends.


Back to the Global Macro Grind


Q: What [do] you want?


A: We want to determine whether or not this trending back-up in rates from the JAN 30th lows is a signal for us to: A) abandon our lower-for-longer thesis or B) double-down on said view.


Q: What is true?


A: Supportive of option “A” is 1) the recovery in Eurozone inflation expectations and 2) the recent breakdown in domestic fixed income, credit and equity income plays within our Tactical Asset Class Rotation Model.


Supportive of option “B” is 3) a likely trending deceleration in U.S. economic growth into a likely recession in CY16, 4) secular stagnation brought on by widely misunderstood demographic changes in both the domestic and global economies and 5) a trending material deceleration in global economic growth


Addressing those factors in order:


  1. Eurozone CPI accelerated to +0.3% YoY in MAY from 0.0% prior and continues to accelerate on both a sequential and trending basis. Eurozone Core CPI accelerated to +0.9% YoY in MAY from +0.6% prior and is now accelerating on a sequential and trending basis. Moreover, our predictive tracking algorithm has reported inflation in the Eurozone accelerating through the balance of 2015. In light of these developments, it’s no surprise to see that Germany’s 5Y breakeven rate (as a proxy for Eurozone inflation expectations) has backed up +107bps from its JAN 13th low to the current 0.81% – with +38bps of that delta coming in the last week alone!
  2. Without running the risk of boring you with the details of how TACRM is constructed, it’s worth noting that the model issued a “DECREASE Exposure” signal for the “Domestic Fixed Income, Credit and Equity Income Plays” primary asset class during the week-ended MAY 8th. Since then, the Bloomberg U.S. Treasury Bond 10+ Year Index has declined -3.4%, extending its YTD decline to -5.0%. From a bottom-up perspective, the eight factor exposures (out of ~200) exhibiting the greatest degree of negative VWAP momentum across multiple durations on a marginal basis are explicit bets on lower interest rates: AGG, LQD, BND, FLAT, TLT, BNDX, ZROZ and EDV. Conversely, the three factor exposures exhibiting the greatest degree of positive VWAP momentum across multiple durations on a marginal basis are explicit bets on higher interest rates: KRE, STPP and IAI.
  3. We discussed this thesis in great detail in a note earlier this week (CLICK HERE to review).
  4. Ditto.
  5. Keith and I make a point to visit each of our top customers at least ~1x/quarter. That adds up to a lot of meetings over the course of a year and a lot of travel all across the country and globe (e.g. we’re in CA next week and in London the following week after having done Chicago, Boston, NYC, Greenwich and Kansas City in the past three). The point I’m making is that we hear the perspectives of all types of investors and can readily glean when a view is becoming consensus on the buyside. Currently, one of those consensus views is an assertion that global growth is accelerating and/or poised to accelerate.


Nothing could be further from the truth.


In fact, anyone who does the work will arrive at the conclusion that global growth is slowing on both a sequential and trending basis into the most difficult compares of the year (i.e. the 2nd and 3rd quarters).


As such, the probability for global growth to get cut in half on a YoY basis in 2015 is extremely great. That would represent the slowest rate of global growth in this cycle and ~100bps shy of the trailing 3Y average of +2.2%.


Fortuitously for you, you don’t have to do the work because you pay us to have your back on all things Global Macro.  If you do nothing else for the rest of the week, the one thing you must do is download the following presentation which quickly contextualizes the rapidly deteriorating global growth picture:


All told, if Industrials (XLI) is your best idea on the long side of U.S. equity sectors, then now is the time to start working on thesis drift…


Q: What [do you want] to do about it?


A: All things considered, we want to take advantage of this weakness in long duration securities to double-down on our lower-for-longer thesis.


Going back to Draghi’s press conference yesterday, we will note that he was keen to address recent bond market volatility by reiterating that ECB QE will continue as planned throughout the stipulated duration of the program – which is at least through SEP ‘16 and until the ECB sees a “sustained adjustment in the path of inflation” towards its goal of +2%. As such, investors needn’t worry about an untimely removal of the ECB’s bid from European sovereign debt markets.


The immediate-term risk to that decision is that the MAY Jobs Report is strong and the Fed anchors on that as justification for pulling forward their guidance on “liftoff” timing in the JUN 17th FOMC statement.


The intermediate-term risk to that decision is that no matter how “data dependent” the Fed claims itself to be with respect to “policy normalization”, they are actually politically motivated to move the Fed Funds Rate well off of the zero bound no matter what. In light of the aforementioned global growth trends, that is definitely a view being intensely scrutinized across global macro markets right now.


The long-term risk to that decision is that “we are all dead” anyway…


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.03-2.39% (bearish)

SPX 2098-2130 (bullish)

USD 94.73-96.78 (neutral)
EUR/USD 1.07-1.14 (bearish)

Oil (WTI) 57.32-61.91 (bullish)

Nat Gas 2.52-2.67 (bearish)

Gold 1175-1210 (bullish)


Keep your head on a swivel,



Darius Dale



Click to enlarge 

What Is True? - Chart of the Day

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