Short Bearish Consensus

Client Talking Points


The #StrongDollar is loving the continued strength in US economic data. Witness the August ISM beating big with an impressive New Orders print of 62.3. Boom. That looks very 2003 breakout-ish. It's something to noodle over as bearish consensus loathes the idea. It's the 4th up week in a row for US Dollar. The Yen is down in the face of that. Cue a +3.5% two-day move for the Nikkei to start September. Nikkei is now up +36.5% year-to-date. Correlation matters.


The 10-year Treasury punched the 2.90% line again yesterday. Economic surprises continue to fight the Fed’s dogma. It's at 2.87% this morning as we continue to see a healthy back-and-fill to another higher-low. We remain short the long-bond (TLT) and Junk (JNK) on our Top Q313 Global Macro Themes of #RatesRising and #DebtDeflation. Rinse and repeat.


The Doctor definitely does not like this whole commodity bubble revival hope dance. It's fading fast (again) after yesterday’s bounce. Our Hedgeye TREND resistance of $3.39/lb remains firmly intact. Incidentally, our trend resistance for Gold is $1483. FYI, we’ve been just day trading the emotional side of that commodity.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.


Gaming, Leisure & Lodging sector head Todd Jordan says Melco International Entertainment stands to benefit from a major new European casino rollout.  An MPEL controlling entity, Melco International Development, is eyeing participation in a US$1 billion gaming project in Barcelona.  The new project, to be called “BCN World,” will start with a single resort with 1,100 hotel beds, a casino, and a theater.  Longer term, the objective is for BCN World to have six resorts.  The first property is scheduled to open for business in 2016.


Health Care sector head Tom Tobin has identified a number of tailwinds in the near and longer term that act as tailwinds to the hospital industry, and HCA in particular. This includes: Utilization, Maternity Trends as well as Pent-Up Demand and Acuity. The demographic shift towards more health care – driven by a gradually improving economy, improving employment trends, and accelerating new household formation and births – is a meaningful Macro factor and likely to lead to improving revenue and volume trends moving forward.  Near-term market mayhem should not hamper this  trend, even if it means slightly higher borrowing costs for hospitals down the road.

Three for the Road


Its time for @BarackObama to use weapons of mass currency appreciation against Putin's Oil @KeithMcCullough


"America will never be destroyed from the outside. If we falter and lose our freedoms, it will be because we destroyed ourselves." -Abraham Lincoln


The six heirs of Wal-Mart founder Sam Walton have as much wealth as the bottom one-third of all Americans combined.

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













Early Look

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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

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 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

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