Hedgeye

GLOSSARY OF TERMS

Trade Trend Tail / The Hedgeye 3T Process - These are the three durations over which we analyze investment ideas and themes. Hedgeye has created the 3T process as a way of characterizing our investment ideas and their risk profiles, to fit the investing strategies and preferences of our subscribers. See Daily Risk Management.

• "Trade" is a duration of 3 weeks or less
• "Trend" is a duration of 3 months or more
• "Tail" is a duration of 3 years or less
• Anything longer than 3 years is unpredictable.

Our daily risk management process identifies specific probabilistic levels of price support and resistance around each of these durations, typically expressed as horizontal lines on the price chart of a security:

• Buy Trade / Sell Trade - These lines are lines of 3 week or less support and resistance for the price of a security
• Buy Trend / Sell Trend - These lines identify lines of 3 month or more support and resistance for the price of a security
• Buy Tail / Sell Tail - These lines identify lines of 3 year or less support and resistance for the price of a security
• Shark Line - The Shark line exists when the Buy Trade and Sell Trade lines overlap, creating a situation in which price can move dramatically upon the cross-over of the line with a closing price.

Bullish Formation - A bullish formation occurs when the TRADE, TREND, and TAIL lines of support for a security's price sit below the current price, with the TRADE line closest to the current price and the TAIL line farthest below, with the TREND line in between. A Bullish Formation predicts a behavioral response by the market in which investors of different durations are driven by the price to conspire to drive the price higher through their mutually reinforcing investment activity.

Bearish Formation - The inverse of a bullish formation, a bearish formation occurs when the TRADE, TREND and TAIL lines of resistance for a security's price sit above the current price, with the TRADE line closest to the current price, the TAIL line farthest above, and the TREND line in between.A Bearish Formation predicts a behavioral response by the market in which investors of different durations are driven by the price to conspire to drive the price lower through their mutually reinforcing investment activity.

Squeezy the Shark - Squeezy the Shark is a character we deploy to talk about the short-selling hedge fund community's exposure to the risk of Macro-driven short squeezes, in which an unlooked for increase in the price of a security forces short sellers to cover those shorts, increasing upward momentum, forcing even more short sellers to cover their shorts (etc. etc.). Squeezy the Shark can lay waste to short sales investors without a daily risk management process. See Short Selling.

Daily Risk Management - Daily Risk Management is the process of constantly measuring Macro, Sector and Fundamental risk factors around an investment or portfolio of investments in order to project probabilistic outcomes - allowing one to take actions that reduce exposure in real-times, all toward the goal of earning an absolute return. See Risk Management.

Hedgeye Asset Allocation - The Hedgeye Asset Allocation is an output of Hedgeye's Daily Risk Management process, in which allocations to various asset classes, including cash (univested), is updated daily. The Hedgeye Asset Allocation updates our target asset allocation for a risk managed portfolio, all toward the goal of earning an absolute return. See Risk Management.

Responsibility in Recommendation - At Hedgeye, we believe that there is responsibility in recommendation, meaning that even though a particular firm or market commentator may not legally have a fiduciary responsibility to everyone who reads his opinions, there is an ethical responsibility when making a recommendation to demonstrate Transparency, Accountability, and Trust.

Mr. Market - At Hedgeye, we believe that prices don't lie, people do. We discuss that arbiter of price as the most trustworthy of advisors: Mr. Market.

He Who Sees No Bubbles-We believe that the current Federal Reserve Chairman, Ben Bernanke, is continuing in the path of his predecessor, Alan Greenspan, in many ways. One of these, and the most troubling, is Bernanke's inability to spot, or unwillingness to see a bubble, whether it be in the broader market, banker pay, or a specific asset class. As such, we refer to Mr. Bernanke as He Who Sees No Bubbles.

The Squirrel Hunter-Tim Geithner, Treasury Secretary for the first year of the Obama administration, has proven himself to be unprepared and outgunned in dealing with the economy's challenges. For his undersized arsenal, we refer to Mr. Geithner as the Squirrel Hunter.

Hedgeye Ongoing Macro Themes

Break the Buck / Burning the Buck / Bombed out Buck - In February of 2009, Keith called for President Obama's administration to "Break the Buck" (cause its value to fall), in order to drive a relation of assets priced in dollars, including the U.S. stock market, homes, and other assets priced in U.S. dollars. The administration subsequently allowed the dollar's value to fall, but in an accelerating and reckless fashion such that we named one of our Q3 2009 Macro themes"Burning the Buck", in which we were seeing a rip in the stock market, but with the frightening trade-off of U.S. dollar levels last seen during the crash of 2008. Not a good sign! In Q4 2009, this Macro theme morphed into the "Bombed Out Buck" - representing our thesis that the upturn in reported inflation combined with the shift to positive GDP growth would cause us to put in a bottom in the dollar's value - with significant implications for the reflation trade that has driven this year's massive performance by equities and commodities priced in dollars. See Reflation Rotation.

Banker Bonanza - One of our Macro Themes for Q4 2009, the Bankers Bonanza calls out the financial industry being able to make hay using two things: 1) the politicized Piggy Banker Spread (yield curve between 2-year (borrow cheap) and 10-year (lend long) rates, and 2) The historically low cost of credit combined with balance sheet pressures to make deals wildly appealing to illiquid firms. See Queen Mary Turning.

M&A Meltup - One of our Macro Themesfor Q4 2009, the M&A Meltup is the theme of incrementally positive market performance, on the margin, being driven by a confluence of factors: tightening credit availability driving illiquid firms into distressed ‘sell mode'; Baby Boomer-aged CEOs feeling that not having sold in the last two years, now might be the best time to retire; and Investment Bankers with access to the cheapest capital ever - at a time when there's nowhere for the cost of credit to go but up. See Queen Mary Turning.

MEGA Squeeze / MEGA - One of our Macro Themes for Q1 2009 was the MEGA Squeeze. MEGA stands for Mortgages, Employment, Gas, and Assets. In Q1 2009 we saw that despite the gloom and doom caterwauling in the financial press, the American consumer's pocketbook was set up to see significant support as Mortgage costs dropped through the floor, Employment stopped crashing precipitously, Gas prices plummeted from their 2008 highs, and Assets (both in 401Ks and in home prices) stopped going down. This Macro force was an un-remarked tailwind for consumer spending in 2009.

Queen Mary Turning - One of our Macro Themes for Q2 2009, the Queen Mary Turning is the call that with the cost of credit at zero, it has nowhere to go but up. Given that entire sectors of the economy have geared themselves to a steadily declining cost of borrowing over the last 30 years, this has huge potential tail risk. See Daily Risk Management.

Reflation Rotation / Rate Rotation - One of our Macro Themes for Q3 2009, Reflation Rotation called out the continued rise in the values of assets priced in dollars (equities, oil, etc.) as the Buck Burned. As with any strong correlation, in this case ‘dollar down = everything priced in dollars up', this inverse relationship will not last, and when it unwinds, the reflation trade that worked for most of 2009 will stop working. As a result, our Macro Themes for Q4 2009 included Rate Rotation, in which the creditor economies with a real rate of return (Australia, Brazil, Canada, China) are set up to attract capital inflows, away from the debtor economies with a zero rate of return (Japan, UK, US). See Tail Risk.

Tail Risk - A risk which could emerge to impact a security or market over a TAIL duration (3 years or more). Tail risks are also implicitly low-probability, and almost always not talked about.

Terms of Art

Outside Reversal - A market or security price phenomenon in which the price reaches a new high (or low) intraday, but retreats inside of an established range at the close of the market.

Absolute Return - An investing strategy which generates positive absolute returns in an up or a down market.

Risk Management - The practice of managing position exposures in a portfolio in order to reduce the exposure to potential losses in value from any one factor or set of factors. Key to an Absolute Return strategy. See Daily Risk Management.

Short / Short Sale / Short Position - The practice of borrowing shares of a given security from a third party, selling those shares on the open market, and promising to replace those shares to the third party at a later date. When an investor believes the price of a security will fall, selling it short allows the investor to sell at the current, higher price, and replace the shares by buying them on the open market at the later, lower price. The difference between the prices represents the gain on the investment.

Short Squeeze - a self-perpetuating upward movement in the price of a security which has large amounts of short interest against it ("bets" that the price will go down). Because of the unlimited exposure of a short position, upward movements in price drive some portion of short sellers to cover their short positions. Because covering a short position forces one to purchase the security, this reaction increases demand, driving the price even higher. As successive portions of those who are short of a stock find the losses too painful and sell, the price can accelerate upward in a proactively predictable way.