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New Best Idea: Short Kinder Morgan

After extensive research and analysis, we have come to the conclusion that the nation’s largest combined energy infrastructure company and oil producer  – Kinder Morgan – is a house of cards, completely misunderstood and mispriced.


We will release a full report with our thesis and supporting evidence on Tuesday morning, 9/10/2013, to all Hedgeye Energy clients.  At 11am EST that morning, we will host a brief call for clients to hit on the highlights of the report, and take Q&A.


Key topics that we will hit on:

  •  “Like a toll road” – except for that E&P segment that generates +20% of KMP’s segment DCF.
  • Cut “Sustaining CapEx” to the bone…  How does Kinder Morgan do it?
  • How “Certain” are KMP’s “Certain Items”?
  • KMP’s investor presentation “returns” vs. actual returns to the KMP unitholder.
  • Dissecting the complex corporate structure: KMI, KMP, KMR, and EPB.
  • The absurdity of the Incentive Distribution Right (IDR) and the incentives it really creates.
  • $78 BILLION of combined market cap sitting on top of $1.6 BILLION of tangible equity?  A complete valuation analysis.

We are convinced that the Kinder Morgan complex will eventually collapse.  In our view, it is not a matter of if, it is a matter of when.   We look forward to presenting our work, and the debate that is sure to follow.


Kevin Kaiser

Senior Analyst


***All Hedgeye Energy clients will receive the report and conference call dial-in information early Tuesday morning.  If you are not already a client and are interested in our work, please email .***



TODAY’S S&P 500 SET-UP – September 4, 2013

As we look at today's setup for the S&P 500, the range is 28 points or 0.60% downside to 1630 and 1.11% upside to 1658.                             










  • YIELD CURVE: 2.44 from 2.44
  • VIX  closed at 16.61 1 day percent change of -2.35%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Applications, Aug. 30 (prior -2.5%)
  • 7:45am: ICSC/Goldman Sachs weekly retail sales
  • 8:30am: Trade Balance, July, est. -$38.7b (prior -$34.2b)
  • 8:55am: Johnson Redbook weekly retail sales
  • 9:45am: ISM New York, Aug. (prior 67.8)
  • 11am: Fed to buy $1.25b-$1.75b notes in 2036-2043 sector
  • 11:30am: U.S. to sell 4W bills
  • 12:30pm: Fed’s Williams to speak on monetary policy
  • 2pm: Federal Reserve releases beige book
  • 8pm: Fed’s Kocherlakota speaks at town hall forum


    • President Obama meets with Swedish Prime Minister Fredrik Reinfeldt in Stockholm
    • Noon: House Foreign Affairs Cmte hears from Sec. of State John Kerry, Sec. of Defense Chuck Hagel, Joint Chiefs Chairman Gen. Martin Dempsey on Obama’s response to Syria conflict
    • Noon: Former President Bill Clinton speaks on health care policy, Affordable Care Act
    • 1:30pm: Vice President Biden swears Thomas Perez in as 26th Labor Secretary


  • Aug. Auto Sales: Fleet sales now are profit-maker
  • LinkedIn plans $1b share sale, may use proceeds for M&A
  • Senate panel to vote on approving limited U.S. strikes on Syria
  • Putin demands proof of Assad attack to back strikes on Syria
  • Sprint seeks early U.S. airwaves auction as rivals urge delays
  • BofA sees $750m pretax gain from China Construction stake
  • Burkle demands sale of Morgans Hotel after CEO quits
  • Bear Stearns wins dismissal of Bank of America’s CDO lawsuit
  • Best Buy loses flat panel price-fixing trial against Toshiba
  • Euro-area exports drive economic rebound after record recession
  • Australia 2Q GDP beats ests., unexpectedly accelerates
  • U.K. services growth accelerates to fastest pace since 2006
  • Billionaire Packer buys 9.4% of Zillow as U.S. housing rises
  • KKR, Permira selling ProSiebenSat.1 stake worth $1b


    • Bazaarvoice (BV) 4:05pm, $(0.07)
    • Ciena (CIEN) 7am, $0.16
    • Dollar General (DG) 7am, $0.74
    • Francesca’s (FRAN) 4:01pm, $0.35
    • Greif (GEF) 4:16pm, $0.91
    • Navistar Intl (NAV) Bef-mkt, $(1.30) - Preview
    • SAIC (SAI) 4:05pm, $0.21
    • Verint Systems (VRNT) 4:05pm, $0.52


  • Copper Slumps Most in Five Weeks on Concern Stimulus Will Slow
  • Rio to BHP Invest $244 Billion as Glasenberg Warns: Commodities
  • Soybeans Decline in Chicago Following Biggest Advance in a Week
  • WTI Crude Futures Decline as U.S. Weighs Intervention in Syria
  • Iron Ore Shipments From Port Hedland Increase as China Buys More
  • Gold Drops on Speculation Fed Will Slow Stimulus; Silver Falls
  • Baltic Dry Index Rises to 21-Month High on Iron Ore, Grains
  • Nickel Pig Iron Production in China Seen Jumping as Costs Tumble
  • Robusta Falls as Vietnam Harvest May Start Early; Sugar Declines
  • Indian Banks, Traders May Resume Gold Imports Immediately
  • Platinum 200-Day Moving Trend Shows 11% Jump: Technical Analysis
  • West Australian Grain-Crop Estimate Raised by CBH After Rain
  • Crude Supplies Drop in Survey on Driving Demand: Energy Markets
  • Natural Gas Extends Gains on Concern Storms May Curb U.S. Output


























The Hedgeye Macro Team













September 4, 2013

September 4, 2013 - DTR



September 4, 2013 - 10yr

September 4, 2013 - spx

September 4, 2013 - nik

September 4, 2013 - dxy

September 4, 2013 - euro

September 4, 2013 - oil

September 4, 2013 - natgas



September 4, 2013 - eem

September 4, 2013 - VIX

September 4, 2013 - yen
September 4, 2013 - gold

September 4, 2013 - copper

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Thinking Time

This note was originally published at 8am on August 21, 2013 for Hedgeye subscribers.

“Before I went to jail, I was active in politics as a member of South Africa’s leading organization – and I was generally busy from 7 A.M. to midnight. I never had time to sit and think.”

-Nelson Mandela


Former South African Prime Minister Nelson Mandela had more time to sit and think then most of us will ever get.   He served 27 years in prison, first on Robben Island, and later in Pollsmoor Prison and Victor Verster Prison after being convicted of sabotage and conspiracy to overthrow the South African government.


I’ve recently been reading Mandela’s biography and after reading about how he spent his nights in a damp concrete cell of 8 feet by 7 feet and his days breaking rocks into gravel, I’m not sure I would wish this type of “thinking time” on my worst enemy.  But, thinking time is important for all us, and I will be taking some thinking time myself as my first two week vacation of the last decade looms in the next couple of weeks.


In a book we have cited many times, “Thinking, Fast and Slow”, Nobel laureate Daniel Kahneman describes two modes of thought.  The first is System 1, which is fast, instinctive, and emotional.  The second is System 2 and is slower, more deliberative, and more logical.  The main purpose of his book is to describe the dichotomy between these two kinds of thought.


To illustrate how the two different systems work, answer this before you go on:


A hockey stick and puck cost $1.10 together.


If the stick costs $1.00 more than the puck, what does the puck cost?


If you are like most people, even the highly numerical, it is likely that the price of $0.10 popped into your head.  The correct answer of course is that stick cost $1.05 and the puck cost $0.05, so thus the stick cost $1.00 more than the puck.


In a day and age when we are inundated with more stimuli and decision making opportunities than ever before, it is becoming even more critical to take some Thinking Time to maintain the deep logic of System 2. The fact of the matter is, the self-induced dopamine loops of constant texting, tweeting, googling and emailing diminish our performance. (Well, at least that’s how I’m justifying my vacation to my colleagues :) ) 


Back to the global macro grind . . .


I’m going to take this concept of short term versus long term thinking and apply it to the current battleground stock of the day, J.C. Penney (JCP).  Recently Pershing Square’s Bill Ackman all but admitted defeated in his attempt to turn around the retailer as he resigned from the board of JCP and received permission for Pershing Square to sell the more than 15% of the stock it owns. This is short term capitulation.


At the same time, a number of other hedge funds have been taking sizeable positions at the stock has declined, including Kyle Bass, Soros Fund Management and Perry Capital.   Bass, as reported by Bloomberg is actually buying the debt.  These are long term investment positions.


Before I dig into the stock a little more, I wanted to let you know that our Retail Sectorhead Brian McGough will be doing a deep dive on the stock on August 27th at 1pm. (Ping sales@hedgeye.com for details.)  As many of you know, Brian was in early in recommending investors short and/or sell the stock when Ackman got involved.  He then tried to call the turn around and added the stock to our Best Ideas list, but ultimately removed the name at about the current price level on March 14th as there was little evidence of a turnaround and his view was that JCP was dead money (which it was).


The Chart of the Day today is a chart of JCP credit default swaps that shows that while a bankruptcy isn’t a foregone conclusion, there is certainly risk as investors are willing to pay a meaningful premium to insure JCP debt.  Interestingly, while JCP debt has declined versus its peer group over the last couple years, it is not yet at extreme levels.


As examples, per Bloomberg and Forbes, the J.C. Penney 5.65% notes due 2020, yesterday traded up two points, at 73.5.  While the long-tenor 6.375% bonds due 2036 traded up half a point, at 69.5, for a net gain of 3.5 points week over week.  In the loan market, J.C. Penney’s covenant-lite term loan due 2018 (L+500, 1% LIBOR floor) were slightly firmer, recently quoted at 96.5/97. As a reference, the $2.25 billion loan was issued at 99.5 in May.


As McGough noted yesterday, “the fact that JCP hit the liquidity levels it guided toward at quarter-end is notable. Add on the fact that capex next year is guided to be down as far as $300mm, and the liquidity picture looks less pressured. We’d argue that these two factors are the sole reasons why the stock was up today. Why?

Let’s stress test the model. We quarter-ized our model for the next three years using the following assumptions a) JCP reaches 2012 sales per square foot levels in 2015, with a gradual comp lift throughout, b) the company generates 37% gross margins – a level we think there is no structural reason it can’t hit again relatively quickly (we know we'll get pushback on that -- but will happily entertain the debate), EBIT margins don’t turn positive until 2016, c) capex increases by $50mm each year, d) working capital patterns are similar to what we saw before 2012.

In tracking the cumulative liquidity for the next three years, there are two periods where it definitely gets dicey for JCP (the worst is 3Q15 -- in two years) – close enough such that it will likely need to find some asset sales that are not already tied to the GS secured debt offering. But even without assuming a miraculous turn at the company, we don’t get to a big liquidity event.”


So, if there is no major liquidity event for the next three years, there is decent runway for the company to turnaround and the shorter term debt, at the very least, looks reasonably safe.  But what do you think?


Next Thursday at 1pm, we’ll introduce some new information and dig into more of our thoughts.  If the turnaround actually happens, based on historical margin levels, JCP equity is a really cheap option at these levels.


Our immediate-term Risk Ranges are now:


UST10yr 2.71-2.94%

SPX 1642-1674

Nikkei 13,301-13956

USD 80.80-81.94

Brent 108.78-110.32

Gold 1324-1392


Keep your head up and stick on the ice,


Daryl G. Jones



Thinking Time - JCP COD


Thinking Time - vp 821

Shatteringly Simple

“Money is one of the shatteringly simplifying ideas of all time; it creates its own revolution.”

-Paul Bohannan


That’s the opening quote to an important book I started reading this week, The History of Money, by Jack Weatherford. The book’s first paragraph goes on to ring the Gold bull bell with “The Dollar is dying; so too are the Yen, the mark and the other national currencies…”


When it was published in 1997, Charles Schwab called this “the book to read.” And I agree, you should read every economic history book you can get your paws on – your hard earned money is too important to leave to the people opining on it from Washington.


The shatteringly simple observation about money is context. Its history is at least 3,000 years old. And when debating it, consensus tends to cram its craw into the moment in which it lives. The Dollar isn’t dead this year; it’s breaking out from a 40 year low. The Yen didn’t die after 1997 either (it ended up hitting a 40 year high by 2011). Everything, including the value of your moneys, is relative.


Back to the Global Macro Grind


After another shatteringly strong string of US economic data points (starting last Thursday with US roiling jobless claims hitting another YTD low and culminating with a blockbuster New Orders component of yesterday’s ISM report for August), yesterday’s US stock market ripped a +1% morning move to the upside and Treasury bonds continued to collapse.


Up for the 4th consecutive week, another #StrongDollar move was nipping on the heels of #RatesRising too. Consensus isn’t positioned for that, so I loved it. Then, all of a sudden, the most bearish catalyst of all hit the tape – a US politician’s opinion.


In the last year, there have been very few market risks that have scared me more than US central planners intervening during critical periods of market entropy. Going back to November of 2012 (when bond yields bottomed), Boehner’s voice was as market bearish as any you could find. He was the bearish factor yesterday too – the whole thing is just plain sad to watch.


Back to the economic gravity part…

  1. New Orders (in the ISM report for August) hit a monster shot of 63.2! yesterday (vs 58.3 in July)
  2. Go back to 2003 (see Chart or The Day) and look at how quickly economic gravity shocked growth bears to the upside
  3. Not unlike 2000-2002, consensus has become shatteringly bearish about growth; it’s a lagging indicator

To be clear, there’s a big difference between consensus being bearish and Mr. Market’s bullish opinion. While yesterday’s intraday gains in the SP500 were cut in half, the decliners were led by the slow-growth sectors (gainers were once again all about growth):

  1. Slow-Growth Utilities (XLU) got smoked again (after being down -5% for AUG), leading losers on the day at -1.2%
  2. Dividend Yield Chasing Consumer Staples (XLP) were down -0.1% in an up market as well (XLP -4.5% in AUG)
  3. Nasdaq (QQQ) +0.63% and Financials (XLF) +0.9% led gainers, as they have throughout 2013

In other words, if you are bummed out about Kimberly Clark (KMB) or Kinder Morgan (KMP) not getting you paid on the principal appreciation side of the equation, that’s just too bad. This Bernanke Yield Chaser style factor was as much a bubble as Gold was.


#RatesRising for the right reasons (growth expectations rising), is public enemy #1 for overvalued, slow-growth, securities. Whether it feels right or not, money chases positive returns. It flows away from draw-down risks.


Since I’m already out of everything Commodities, Fixed Income, and Emerging Markets (0% asset allocations), I have had relatively low stress on the draw-down risk side of big macro asset class moves in 2013 (Gold bounced, but is still -17% YTD and bonds are getting smoked), but that doesn’t mean I can afford to give up a lead for the sake of being beholden to this great growth data.


There are 3 big Macro things that would get me out of being long growth equities:

  1. If #StrongDollar snaps its long-term TAIL risk line of $79.11
  2. If #RatesRising stops and the 10 yr UST Yield breaks 2.44% @Hedgeye TREND support
  3. If #GrowthAccelerating Style Factors (like Nasdaq diverging from the Dow) reverse and break TREND

Johnny one-time Boehner’s intraday comments mattered because they kept the #1 risk to what’s been strong US consumption growth in play. It’s called an Oil tax at the pump. And Putin likes it.


The best way for Obama to pulverize Putin in St. Petersburg this week would be to stick a weapon of mass currency appreciation in his grill. If I was advising the President, I’d have him bring that #StrongDollar ace to the table – and maybe say something like this:


“Vlad, if you don’t tone this down, I am going to taper, then tighten – and if you don’t think I can get Summers to do it, try me – your little Petro-Dollar Putin power problem will look like Fukushima, and fast.”


But that’s just me – I’m a doer type of a guy who likes to make decisions without asking the bureaucracy of the world for its opinion. I’d like to see a US President build a #StrongDollar, Strong America revolution on the back of your hard earned currency.


Our immediate-term Macro Risk Ranges are now:


UST 10yr Yield 2.73-2.93%


Nikkei  133

VIX 15.93-17.98

USD 81.78-82.65

Brent 113.12-117.98


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Shatteringly Simple - ISM new Orders


Shatteringly Simple - vp94

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.48%
  • SHORT SIGNALS 78.35%