The note below is from our recently-launched energy Sector Head, Lou Gagliardi. If you'd like to trial his energy sector research, which includes access to the replay of his launch presentation on natural gas, crude oil, and opportunities in the global E&P sector, please email .


Conclusion: We believe that historical levels of the crude oil to natural gas ratio will not be revisited. Crude oil will remain in the new normal range versus natural gas of 14 – 18x, and thus not return to the historical average of ~10x, which would imply $40/barrel oil at current natural gas prices.


We looked at the historical relationship of oil to gas prices since 1994, on oil to gas “fundamental” multiple basis based on the historical average, oil would be trading at an average price of ~$40/bbl. But we don’t think the probability of that occurring is high, particularly since crude oil’s emergence as a “trading” financial asset over the last few years, and the willful, or not, of the debasement of the U.S. currency through extraordinary liquidity injected into the U.S. monetary system and the ensuing ballooning of our fiscal deficit.  In effect, a weak U.S. dollar equals higher oil prices.


 From 1994 to today, the price of WTI (West Texas Intermediate) crude oil and HH (Henry Hub) natural gas has averaged ~$40.70/bbl, and $4.55/Mcf, or at an average oil to gas multiple a shade over 9 times, which is close to the Btu equivalent of 6 times oil to gas. In contrast, the average multiple for 2010 year-to-date is about 17 times, as natural gas has dropped and oil has remained above $70/bbl, whilst the U.S. dollar has remained weak relative to the Euro. The average standard deviation for each year since 1994 has been just under 2 times, year-to-date for 2010 it is 2.3 times. So it appears that the volatility in the relationship has returned to its historical mean.


Over the last few years, we have seen crude oil traded increasingly as a financial asset, which has created incremental demand for crude oil.  In addition, the general decline of the U.S. dollar over the last few years has led to an increase in crude oil since it is priced in U.S. dollars.  But not all of the price increase in crude oil is attributable to its relationship to the U.S. dollar, or financial demand.  In fact, a fair portion of its meteoric rise in price is due to fundamental structural imbalances and deficiencies in the supply/demand equation.


There are many fundamental factors from rising Resource Nationalism across the globe, to the acceleration of the developing world’s industrialization, i.e., China, India, Brazil, Russia, to insufficient energy infrastructure, to geopolitical instability, to rising lifting and finding & development costs, to insufficient excess supply capacity, which all have fueled crude’s rise upward. Indeed, increasing supply constraints due to declining production from major oil producing regions from Mexico, Venezuela, Alaska North Slope, North Sea, to Canadian Conventional, and the lower U.S. 48, have exerted upward price pressure on crude prices. While there does not appear a high probability of oil prices returning to $40/bbl for a sustained period, it does appear that the price of oil pegged to supply and demand has shifted higher on an energy equivalent basis vis-à-vis natural gas. This is in line with our long-term TAIL bullish outlook for oil.


A counter weight to the oil to gas multiple remaining higher could be the price of natural gas. Our outlook is bearish for natural gas over the intermediate term trend, driven by drilling technology ahead of supply needs; we believe that increasing natural gas supply will compete away some crude oil usage in areas where oil is used as a commercial fuel source. Increased switching to natural gas as a commercial fuel source away from crude oil due to its low gas price could exert some modest downward pressure to crude prices from a fundamental basis in the intermediate term.  But, in the long term, crude oil supply constraints will continue to pull crude prices higher. The wild card in the oil to gas multiple will remain the U.S. dollar driven by U.S. monetary policy and global deficit spending. So watch the multiple, long-term we expect it to stay wider than historical levels as we enter the new normal of natural gas and crude oil energy equivalency.


From the Oil and Gas Patch.


Lou Gagliardi 

Managing Director





Bull/Bear Battle: SP500 Levels, Refreshed...

You’ll notice a welcomed change in the title of this risk management product – we change as prices do and, unless we see a breakdown through 1144 before today’s market close, we can’t call this an intermediate term Bear Market anymore.


What we’ll call it is a Bull/Bear Battle however. With Q3 performance problems in the hedge fund industry capitulating into month and quarter end, I see no reason to make a decisive move yet in the SP500 – that’s why I am neither long nor short SPY in the Hedgeye Portfolio.


Where would I consider taking a position? From an immediate term TRADE perspective, the 1148 line is the most interesting spot on the short side and 1131 is support. The range in my 3-day probability model is as tight today (30 SPX points) as it has been in all of 2010. A tight range of probabilities (on a very short term duration) simply gives me a higher confidence interval in trading around my gross exposure and in/out of long/short positions.


May the Battle begin,



Keith R. McCullough
Chief Executive Officer


Bull/Bear Battle: SP500 Levels, Refreshed...  - S P


McDonald’s has been dominating the QSR space of late and is looking at expanding its reach with a new product.


McDonald’s is testing a larger premium version of its Chicken Snack Wrap.  The wrap is burrito-sized and costs about $3.99, according to media reports this morning.  Containing chicken, cucumber, cheese, tomato, lettuce, and coming in three varieties, this product is clearly aimed at the chipotle customer.   The current, much less substantial, Snack Wrap product costs $1.49.




Howard Penney

Managing Director

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TODAY’S S&P 500 SET-UP - September 24, 2010

As we look at today’s set up for the S&P 500, the range is 19 points or -1.05% downside to 1113 and 1.62% upside to 1143. Equity futures are trading higher ahead following a weak close yesterday and ahead of key US Durable Orders data later today. Also, Federal Reserve Bank of Richmond President Lacker speaks today on economics and policy, while the Federal Reserve Bank of Philadelphia President Charles Plosser speaks on monetary policy. Today's macro highlights include: August Durable Orders at 08:30 ET and Aug New Home Sales at 10:00 ET.

  • Advanced Micro Devices (AMD) forecast 3Q rev. ~$1.58b-$1.64b, vs estimate of $1.71b
  • Bristol-Myers Squibb (BMY) plans to cut 3% of global workforce during next 6 months
  • Comtech Telecommunications (CMTL) reported 4Q rev $257.0m vs estimate of $236.7m
  • Finish Line (FINL) reported 2Q EPS 31c vs est. 36c; rev. $301.1m vs estimate of $317.4m
  • Nike (NKE) reported 1Q EPS 17c vs estimate of 15c
  • Vical (VICL) plans to sell shares, amount undisclosed


  • One day performance: Dow (0.72%), S&P (0.83)%, Nasdaq (0.32%), Russell 2000 (1.20%)
  • Month-to-date: Dow +6.47%, S&P +7.20%, Nasdaq +10.08%, Russell +7.77%
  • Quarter-to-date: Dow +9.09%, S&P +9.13%, Nasdaq +10.33%, Russell +6.46%
  • Year-to-date: Dow +2.25%, S&P +0.87%, Nasdaq +2.55%, Russell +3.75%


  • ADVANCE/DECLINE LINE: 1216 (-452)
  • VOLUME: NYSE - 944.37 (-1.08%)  
  • SECTOR PERFORMANCE: All sectors were down and the XLF was the first sector to break TRADE.  The MACRO calendar was somewhat of a mixed bag, with little upside evidence of a recovery in the labor and housing markets.
  • European sovereign contagion concerns continued to escalate - Ireland and Portugal the big focus.  Concerns seemed to be exacerbated by weak Q2 GDP data out of Ireland, along with the seven-month low in the Eurozone September composite PMI.
  • MARKET LEADING/LAGGING STOCKS YESTERDAY: Red Hat +9.02%, Washington Post +4.31% and NY Times +4.30%/Novell -6.61%, Wynn -4.53% and Metlife -3.88%
  • VIX: 23.87 +6.04% - YTD PERFORMANCE: (+10.10%)
  • SPX PUT/CALL RATIO: 1.70 from 2.14 -20.57%


  • TED SPREAD: 14.13, 0.203 (1.458%)
  •  3-MONTH T-BILL YIELD: 0.16% unchanged
  • YIELD CURVE: 2.11 from 2.12


  • CRB: 280.14 +0.45%
  • Oil: 75.18 +0.63%
  • COPPER: 359.05 +0.72%  
  • GOLD: 1,295 +0.48%


  • EURO: 1.3356 -0.07%
  • DOLLAR: 80.01 +0.23%  




  • European markets are trading lower on the back of Irish banking concerns which was offset by better than expected German Ifo business confidence data.
  • Trading remains choppy amid low volumes as investors remain unsure on market direction.
  • Basic resources, Oil & Gas, Construction and Telcos are pacing declining sectors with Autos and industrial Goods showing modest gains.
  • Germany Sep Ifo Business Climate Index 106.8 vs consensus 106.2 and prior 106.7
  • Current Conditions Index 109.7 vs consensus 108.5 and prior 108.2
  • Business Expectations Index 103.9 vs consensus 104.0 and prior 105.2
  • French Q2 GDP revised up to +0.7% vs prev given +0.6%
  • European Automobile Manufacturers' Association;  Commercial Vehicles Registrations +5.4% y/y in July, +10.1% in August


  • Asian Markets: Nikkei (0.99%); Shanghai Composite (closed)
  • Asian markets were mixed today.  Indonesia +1.81%; India +0.93
  • Automakers led South Korea higher on expectations that the strong yen will harm their Japanese rivals.
  • Technology stocks fell on bad economic data from the US.
  • Miners fell in Australia despite higher metals prices. Rio Tinto fell 1% after it said it would invest $230M to expand its Pilbara operations.
  • Banks followed their US peers down.
  • Japan started down, turned positive as the yen weakened, but then finished down again.  More intervention; the yen is trading at 84.57 to the US dollar.
  • China was closed for Mid-Autumn Festival.
  • Singapore’s industrial production slowed M/M
Howard Penney
Managing Director

THE DAILY OUTLOOK - levels and trends













FINL: A Few Callouts

FINL’s earnings of $0.31 after the close yesterday came in considerably lighter than consensus estimates at $0.35 causing shares to trade sharply lower in the aftermarket. After taking a closer look at the numbers, here are a few notable callouts ahead of the company’s call this morning:

  • Top-line growth of +1% marked a clear divergence between on and off-mall players in the space with both DKS (+9%) and HIBB (+14%) posting solid numbers while results out of FINL and FL (-0.3%) lagged their off-mall counterparts considerably.
  • Inventories down only -2% relative to +1% sales growth resulted in the most significant SIGMA turn in the space following several quarters of significant reductions in inventory. Similar to top-line trends, within the four company peer group, Q2 was evenly split between those building inventory (DKS +4% & HIBB +2%) versus those reducing inventories (FL -5% & FINL -2%). While top-line trends lagged for mall-based players, inventories remain tighter. With sales in August and into September improving materially, this is a good scenario and likely to continue to keep promotional activity in check.
  • The comp (+2%) is reflective of just how soft Q2 was during June and July. Additionally, while the early read on Q3 was positive with comps up +7% in the first 3-weeks of June, it’s important to consider that comps were considerably more difficult on a 1-year basis due to the timing of stimulus checks in ’08 - see the monthly comp trend table below. Comps up +6.7% on a +7% comp in the same period last year so far through September 19th is consistent with what we are seeing in weekly data trends.  
  • Footwear comps up +2.0% were in-line with softgoods comps up +2.1% in Q2.

While comps are catching our eye once again, we are confident that industry weakness in June and particularly July was the primary cause of a weaker comp relative to consensus expectations. We’ll have additional color after the call at 8:30am EST.


FINL: A Few Callouts - SG SIGMA 9 10


FINL: A Few Callouts - FINL MoComp 9 10


FINL: A Few Callouts - SG CompTable 9 10


FINL: A Few Callouts - SG CompChart 1 9 10


FINL: A Few Callouts - SG CompChart 2 9 10


Casey Flavin


R3: TSA, HD, Kobe, and China F/X



-Call it a sign of the times and a huge opportunity for the action sports industry. Skateboarding is slowly making its way into gym classes across the country. A standardized skateboard P.E. program developed by a company called Skate Pass has now been approved by 500 schools in 31 states and countries including Canada, Germany, Singapore, and the Dominican Republic. It is estimated that 1 million kids now have the opportunity to take “skate” as part of their phys ed requirements.


-The fashionista Twitterati are all over the Prada’s Spring/Summer ’11 line which brought back bright pinks, day-glo orange, and other neon hues. If this is the beginning of a trend, then Express is the place to go for mainstream prices on 80’s styled goods. Or, better yet dig into your closet and pull out your favorite neon wares that are now coming up on age 30.


-Keep an eye on mall traffic and the practice of banning unaccompanied minors from malls. It turns out that the trend of banning unaccompanied teens from the mall is gaining some steam and it has having a positive impact on traffic. Apparently, kids appear to be dragging their parents to the mall to comply with the rules, which in turn is likely leading to additional purchases by mom and dad. It’s unclear if the traffic/sales trend will continue, however the practice of turning away mall rats appears here to stay. 66 malls currently ban unaccompanied minors, up from 37 just 3 years ago.




Sports Authority Taps Team Detroit - Team Detroit has landed creative and media duties on Sports Authority after a review, the brand has confirmed. Team Detroit managing director Brad Audet said he was "delighted to partner with Sports Authority to help them become the number-one retailer in sporting goods."  <>

Hedgeye Retail’s Take:  Gearing up for an IPO with a fresh creative effort.  Smart move.


Home Depot and MRM Split Up After Just 9 Months Because HD Won't Pay Up - MRM, a direct and digital marketing unit, has split with Home Depot, just nine months after landing digital and customer relationship management duties for the retailer, according to an internal MRM e-mail. Sources attributed the split to Home Depot requesting work beyond the original scope without paying additional compensation. In the e-mail, MRM New York managing director Corey Mitchell wrote that "for reasons based on a fair exchange of services and a mutual inability to arrive at realistic expectations, we are choosing to walk away from our relationship with The Home Depot completely."  <>

Hedgeye Retail’s Take:  Without being privy to the intricacies of the arrangement, there’s not much to say here.  Despite this snafu, we expect the digital platform at HD to continue to grow in relevance both from a sales and marketing standpoint.


Kobe Bryant Repeats as Top-Selling Jersey in China - During the 2009-10 season, reigning two-time NBA champion Kobe Bryant had the top-selling NBA jersey in China for the fourth consecutive season. <>

Hedgeye Retail’s Take:  We wonder if Starbury and Iverson and can unseat Kobe this year with their moves to actually play in China?  Yes, that’s a joke. 


U.K. Online Shopping Will Slow `Significantly,' Verdict Says - U.K. online shopping will grow at a “significantly” slower pace as the Internet becomes more common among the population and government spending cuts weigh on shoppers, according to Verdict Research. Average annual growth will be 12% between 2009 and 2014, compared with 35% in the previous decade, the market researcher said. Online sales rose to 20 billion pounds ($31 billion) in 2009, or 7% of total retail spending. <>

Hedgeye Retail’s Take:  While this survey appears to be taking the path of conventional wisdom, it’s important to note that many of Europe and the UK’s most relevant retailers are just entering the world of e-commerce now.  As such, we’d expect growth rates to remain robust, much like we see here stateside over the near to intermediate term.


Forrester Study on American M-Commerce - 5% of U.S. adults who own mobile phones have used their phones to research products before making purchases. 2% of those consumers have purchased merchandise via their phones, according to a new study from Forrester Research Inc. This translates into millions of consumers engaging in mobile commerce, which experts believe will continue to grow as more consumers purchase smartphones, a key driver of m-commerce. The market has shown over recent years that the more smartphones that land in consumers’ purses, hands and pockets—and their number is growing dramatically—the greater the use of the mobile web. <>

Hedgeye Retail’s Take:  With only 25% penetration of smartphones, there is still substantial runway ahead for m-commerce growth.  Over the intermediate term, product research is likely to remain the key use of the device until a better shopping interface evolves on a tiny screen.


Tourism Spending Grew Faster than GDP in Q2 - Real spending on travel and tourism rebounded much fast than the overall economy in the second quarter as travel and lodging prices continued climbing, the U.S. Department of Commerce reported. Spending on all tourism goods and services, including passenger air transportation and traveler accommodations,  increased at an annual rate of 3.0% in the second quarter, following an increase of 5.0% (revised) in the first quarter. By comparison, real gross domestic product (GDP) increased 1.6% (second estimate) in the second quarter after increasing 3.7% in the first quarter. Travel and tourism prices increased 2.7% and 4.1% respectively during the two quarters. <>

Hedgeye Retail’s Take:   While improved, we’re still not seeing retailers with tourism-centric locations driving disproportionately positive results as we have seen at times over the past couple of years. 


US-China Currency Battle - President Obama has put China’s currency policies front and center. Obama and Chinese Premier Wen Jiabao had their longest and most “intensive” discussion about the issue on the sidelines of the United Nations General Assembly meeting in New York on Thursday, the White House said, as tensions between the two nations escalated on the eve of a vote in the U.S. Congress on a punitive bill targeting China’s currency. The leaders’ bilateral meeting came after a week of tough talk that prompted concerns in the business community about a new trade fight over China’s allegedly undervalued currency. Critics say the yuan is undervalued by as much as 40 percent, putting U.S. products at a competitive disadvantage to China’s cheaper exports.  <>

Hedgeye Retail’s Take:  The battle here is ongoing, but the qwest to find companies with a macro process and an ability to manage/mitigate currency risk is becoming increasingly more relevant.  Nike and Li & Fung remain companies well positioned relative to the ever changing China/US/ROW currency battle.

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