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POTOMAC INSIGHT | A Defense Budget Preview with PRG Senior Defense Advisor “Emo” Gardner

Editor's Note: Below is a special, in-depth conversation between Potomac Research Group Senior Defense Advisor LtGen Emerson “Emo” Gardner USMC Ret and Hedgeye Industrials and Materials analyst Jay Van Sciver. With the defense budget due out February 9th, Gardner previews what investors should expect ahead of its release with Van Sciver helping to distill the key takeaways for Lockheed Martin Corporation (LMT)General Dynamics Corporation (GD), and Huntington Ingalls Industries Inc (HII).


Gardner brings unparalleled insight to the defense spending process with 37 years of distinguished service as a Marine officer and as the former acting Director of Defense Secretary Gate’s Cost Assessment & Program Evaluation (please see Gardner's complete bio below the video).  


Hedgeye recently acquired the Washington D.C.-based policy research firm Potomac Research Group. This is one example of the research depth and granularity we look forward to bringing to our subscribers. More to come.



About Lieutenant General Emerson “Emo” Gardner, USMC, (ret.)

Lieutenant General Emerson N. Gardner, USMC, (ret.) is a recognized expert on the Department of Defense programming and budgeting process and assists defense and non-defense companies in strategy development as an independent consultant.


From 2007 to 2010 Gardner was the Principal Deputy Director and then acting Director of Cost Assessment and Program Evaluation within the Office of the Secretary of Defense.  In this billet he led independent evaluations of all major defense programs and managed the development of the Pentagon's $3 Trillion, six year Future Year Defense Plan for Secretary of Defense Robert Gates.  He had previously been the Deputy Commandant of the Marine Corps for Programs and Resources where he was directly responsible for the development and execution of all aspects of the Corps’ $33 Billion annual budget.


Gardner completed 37 years of distinguished service as a Marine officer in 2010.  As an aviator with 4300 hours of flight experience, his career highlights included tours as a Presidential Helicopter Command Pilot in HMX-1, operational deployments to the Middle East, Europe and Japan, and command in combat in Kuwait and expeditionary operations in Africa.  As a flag officer, he was Assistant Deputy Commandant for Marine Aviation, managed the US Central Command's joint operations center during operations in Afghanistan after 9/11, and was the Director for Operations at US Pacific Command, which is responsible for US military activities in 42 countries.


Gardner is a cum laude graduate of Duke University and was an Olmsted Scholar for two years in Göttingen, Germany.  He is a graduate of the Norwegian Defense College and the National Security Seminar at the Maxwell School of International Relations at Syracuse University.

The Macro Show Replay | January 20, 2016


Equity Market Crashes

Client Talking Points


If you were just navel gazing at the “Dow” (in points) yesterday, it was “up”, meanwhile the Russell 2000 closed down (again), taking its crash to -23.2% from the July high. The average peak/trough decline in the Russell 3000 (98% of U.S. stocks) is almost 35%.


Nikkei’s -3.7% smack-down overnight puts it in crash mode now too (down -21.2% from its July high – peaked when SPX did) as the Yen Bears take it on the chin again this morning. Singapore’s crash continues -27% and the DAX crash is not far behind at -24% (from peaks).


The UST 10YR is punching in at 1.96% this morning, doing its job for us (our favorite idea is Long the Long Bond) as both #Deflation and #Recession expectations continue to get priced in. The Yield Spread (10s/2s) at 114 basis points hits new cycle lows; staying short the Financials (XLF) as JPM, BAC guidance sounded like the Fed’s (lala land) relative to economic reality.


*Tune into The Macro Show with Ben Ryan live in the studio at 9:00AM ET - CLICK HERE

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

We added Utilities (XLU) on the long-side last Friday as the market continued to pummel everything we haven’t liked (high debt, high beta, and small-cap stocks leveraged to inflation expectations) – Utility stocks are low-beta, slow-growth bond proxies which is why they are by far the best relative performer year-to-date.


XLU is outperforming the S&P 500 by +7% and remains flat on the year. Friday’s large swath of data echoed what we have been saying for a while now on the deflationary risk of an industrial recession.


GIS led a $3 million funding round for kale chip maker Rhythm Superfoods. Although this is not a big deal and will most likely never make a strong impact to top or bottom line, it marks a changing in the tide for management thinking. They are making a distinct effort to delve deeper into the natural and organic category which will help them a lot in the long run.


Although the overall market has been atrocious year to date, down roughly -8%, GIS with its low beta, big cap, style factors has held in, down just -5%. We continue to like General Mills as a LONG, especially during the tumultuous times in the market.


With growth continuing to slow and volatility breaking out to the upside across asset classes, we expect the unwinding of a record amount of corporate credit leverage to continue. We’d put that deleveraging in the third or fourth inning currently. Credit spreads will continue to widen. That's why you're long TLT (and short JNK).   

Three for the Road


VIDEO: China Is Lying https://app.hedgeye.com/insights/48632-mccullough-china-is-lying?type=video… via @hedgeye



The talent of success is nothing more than doing what you can do, well.

Henry W. Longfellow


Adidas’s market share in China is 13.8% and Nike’s is 14.3%.

investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

CHART OF THE DAY: A Roundup Of This Morning's (Crashing) Global Equity Markets

CHART OF THE DAY: A Roundup Of This Morning's (Crashing) Global Equity Markets - 01.20.16 EL chart


Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye CEO Keith McCullough. Click here to learn more.


"... Here’s what’s going on this morning in global equity markets:


  1. Russell 2000 closed down another -1.2% yesterday, taking its crash to -23.2% vs. its July 2015 peak
  2. Russell 3000 (98% of US listed stocks) now has an average peak/trough crash (per stock) of -35%
  3. Japan’s Nikkei moved into crash mode overnight, dropping -3.7% (deflation of -21.2% vs. its July 2015 peak)
  4. Singapore’s stock market dropped another -3% overnight, taking its crash to -27.4% since its April 2015 peak
  5. Germany’s DAX is down another -2.7% this am, taking its crash to -24.2% since its April 2015 peak" 

Who Do You Trust?

“As soon as you trust yourself, you will know how to live.”

-Johann Wolfgang von Goth


Who do you trust? In both your personal life and profession that’s one of the most important risk management questions there is. If you trust the un-trustworthy, you will ultimately pay the price for that. If you trust the trustworthy, you’ll have peace of mind.


For starters, do you trust yourself? Depending on what it is, I assume the answer should often be no. Would I trust myself operating on a loved one? No. I’d look for the most competent and trustworthy professional in the world for that.


Alongside your health, I’d say your wealth ranks right up there. So why put so much blind faith in the Davos Establishment and its conflicted and compromised banking, brokerage, and media sources to tell us what we should do next? I don’t know.


Who Do You Trust? - consenseless 3


Back to the Global Macro Grind


Saying “no” and “I don’t know” are two liberating exercises. If you wanted to say “yes” to buying every crash/dip, you’ve had every opportunity to try that for the last 6 months. You’ve also had plenty of chances to say, “hold on, I don’t know what’s going on here.”


I’m not your shrink. I’m not going to take a victory lap this morning either. With global stock markets finally catching up to crashes we’ve trusted as “non-transitory” in currencies, commodities, and credit (for the last 12-18 months), it’s time for me to take a knee.


Some of you may not like that. Many of you like it when I run the ball right up the middle on the Old Wall. But we’ve arrived at the part of the game where a lot of people are getting hurt. If they keep getting hurt, they’ll eventually hurt you.


Here’s what’s going on this morning in global equity markets:


  1. Russell 2000 closed down another -1.2% yesterday, taking its crash to -23.2% vs. its July 2015 peak
  2. Russell 3000 (98% of US listed stocks) now has an average peak/trough crash (per stock) of -35%
  3. Japan’s Nikkei moved into crash mode overnight, dropping -3.7% (deflation of -21.2% vs. its July 2015 peak)
  4. Singapore’s stock market dropped another -3% overnight, taking its crash to -27.4% since its April 2015 peak
  5. Germany’s DAX is down another -2.7% this am, taking its crash to -24.2% since its April 2015 peak


In other words, from USA to Asia to Europe, major stock market corrections have turned into crashes. And the only way to get this over with faster than slower is for consensus to wake up to trusting what Mr. Macro Market has been signaling all along.


Put another way, once we can all trust that the establishment sees what we all see, we move from the end of the beginning to the beginning of the end. And we’ll stop with the nonsense of calling trustworthy economic and market sources “peddlers of fiction.”


As they say in Thunder Bay, the fish rots from the head down. And that’s why it’s important for our said “leaders” to start telling the truth about what’s going on in macro markets and economies, as opposed to what their political agendas want us to think.


Instead of the Political Class, let’s check in with business people on this:


  1. American CEOs – “confidence hit a 6yr low” in the most recent Price Waterhouse Coopers CEO survey. Only 35% of CEOs were “very confident that revenues would grow in the next 12 months.” (lowest confidence interval since 2010)


  1. US Homebuilders – with a 60 reading yesterday, the NAHB (National Association of Home Builders – one of the largest trade associations in the USA) reported its 3rd straight monthly decline in builder confidence (the cycle peaked in OCT 2015 at 65)


  1. US Investors – US Equity Volatility (VIX) is +43% YTD and +136% since US corporate profits peaked at the end of Q2 2015. Meanwhile, long-term bond yields (10yr = 1.97% this am) are hitting their lowest levels since the “rate hike”


I don’t care which Presidential candidate the manic media gets ratings from or who they vote for. Until centrally-planned otherwise, CEOs, builders, and investors in this country still have the free market liberty to vote with their wallets, every day.


I trust their collective confidence on that.


For all of today and tomorrow I’ll be meeting with Institutional Investors in both Boston and New York. These have been very difficult times for many, and my hope is that our risk management #process starts helping more than a few.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.94-2.10%


Nikkei 162


VIX 21.30-29.87
USD 98.35-99.81
EUR/USD 1.07-1.10
Oil (WTI) 26.95-31.63


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Who Do You Trust? - 01.20.16 EL chart

INVITE | THE IRAN FACTOR: Contextualizing Iran's Impact on the Global Energy Industry

This Friday, January 22nd at 1:00 PM EST the Hedgeye Macro Team will host a conference call with Senior Energy Analyst Joe McMonigle from Potomac Research Group to discuss the implications of the U.S. and EU lifting sanctions on the Iranian energy industry. A corresponding slide deck will be available approximately 1 hour in advance of the call.


As part of Hedgeye’s recent acquisition of Potomac Research Group , we’re excited to introduce both McMonigle and former U.S. Energy Secretary Spencer Abraham to Hedgeye subscribers.

Watch the reply below.




This past weekend the International Atomic Energy Agency (IAEA) certified that Iran met its legal obligations as part of July’s agreement. The US and European Union (EU) lifted all nuclear related sanctions on Iran within hours.


In Friday’s call, we will outline some of the obvious and possibly unforeseen winners and losers after Implementation Day. The goal of the call will be to leverage the Potomac team’s policy experience, expertise, and network to contextualize key upcoming geopolitical catalysts amid a sea of mainstream noise post-deal.   



  • Near Term Surprise?: Iran has the capability to increase production near-term by a larger quantity and at a faster pace than most analysts and policymakers have forecasted.
  • Direction and Policy Tone of Releasing Deliverable Crude: We’ll give an update on the nearly 50MM barrels of crude stored on tankers offshore that is available for immediate delivery and on the move. Iran will move quickly to get into OPEC’s “market share” game (a game that Saudi Arabia will play for the foreseeable future).
  • Updated Iranian Oil Contract:  We’ll discuss the likely outcome of a re-worked Iranian Oil Contract. Iran’s Oil Ministry is planning a conference in London for oil companies and investors on February 22-24 to unveil its new Iran Petroleum Contract. In November, Iran held an introductory briefing for international oil companies on the new oil contract, and the general approach was received quite favorably.
  • Short-Term vs. Long-Term: While initial production capabilities may be significantly understated in the short-run, billions in western investment is needed to bring Iran back to pre-sanctions production levels.   
  • Which companies will participate? European oil companies are now free to do business in Iran. However, while the US lifted nuclear sanctions on Saturday, other US sanctions related to terrorism and human rights remain in effect and prevent US companies from immediately doing business in Iran.
  • Geopolitical Rivalries: A price war with rival, Saudi Arabia will commence. Russia is geopolitically-aligned with Iran, but they are business competitors. Russia was successful in taking many of Iran’s southern European clients. Iran will look to compete for this business at the same time that Europe is looking to diversify its energy needs away from Russia.  



Toll Free:


UK: 0-

Confirmation Number: 13628992

Materials: CLICK HERE






Spencer Abraham

Secretary Spencer Abraham serves as Senior Energy Analyst and is Chairman and CEO of The Abraham Group, an international strategic consulting firm focused on the energy sector and based in Washington, DC.

Secretary Abraham is a member of the Board of Directors of Occidental Petroleum, NRG Energy and PBF Energy. Secretary Abraham served as the tenth Secretary of Energy in United States history from 2001-2005 under President Bush. Prior to being named a Cabinet Member, Spencer served as an effective and highly productive U.S. Senator from Michigan for six years.

Secretary Abraham is a member of the Board of Directors of Occidental Petroleum, NRG Energy and PBF Energy.  In addition, he is a frequent commentator on FOX News, CNN and Bloomberg TV as well as a periodic contributor of op-ed articles to the Financial Times, The Wall Street Journal, The Washington Post, The Weekly Standard and other publications.

Secretary Abraham holds a law degree from Harvard University, where he co-founded the Federalist Society, and is a native of East Lansing, Michigan.


Joseph McMonigle

Joseph McMonigle serves as a Senior Energy Analyst and is president and co-founder of The Abraham Group LLC.

Mr. McMonigle is the former Vice Chairman of the Paris-based International Energy Agency. He also served concurrently as U.S. Representative to the IEA (2003-2005).

In addition, Mr. McMonigle served as Chief of Staff at the U.S. Department of Energy and also as the American co-chair of the U.S.-China Energy Cooperation Working Group. He is also an attorney and member of the Energy Bar Association as well as the Pennsylvania and District of Columbia bars.


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.