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KMB – We’re Still Bearish

Kimberly Clark remains one of our favorite names on the short side as a difficult environment is pressuring volume growth, input costs are accelerating, and macroeconomic factors have rendered the stock far less attractive as a source of yield. In addition, the market is still demanding 17x forward earnings (which are likely too high) for the stock. We expect investors to pay up for organic sales-driven growth, not share repurchases and cost savings. The long-term opportunity for the company, particularly in emerging markets, is impressive, but we would wait for 3Q and possibly 4Q earnings to pass before getting behind the stock.



Ahead of 3Q EPS on 10/22: Ahead of earnings, we are highlighting the following factors as most important to us changing our fundamental view from negative to neutral or positive:

  • Organic sales growth accelerating
  • EBIT growth re-acceleration
  • FX impact easing into 4Q
  • FCF growth (following a -2.1% decline in 2Q)
  • Positive commentary or data points on innovation pipeline


Top-line Concerns: The Company’s growth profile is hampered by difficulties in developed markets such as Korea, Australia, and the U.S. In the U.S., the higher margin personal care business registered negative volume growth despite negative product mix in 2Q, which was a concern for investors. 



Cost Savings: The Company has driven a tremendous amount of cost savings - $1.9 billion - out of its business over the past nine years, largely driven by a focus on the supply chain. Two-thirds of the savings have been generated by “lean manufacturing practices” and the remainder has been driven by the company’s global procurement organization.  Management is guiding to a $300-350 million annual savings figure (from $250-300 million prior estimate).  


At the Barclays Back to School conference, CFO Mark Buthman stated, “the more savings we drive, the more that we find”, as an explanation for the increasing dollars being slashed from the company’s budget. While adding efficiency to a business is good news for shareholders, we do not view cost-cutting as a growth business in and of itself. The company’s organic sales growth is of much greater importance and evidence of an improvement on that front is necessary for us to get comfortable with owning the stock. As the chart below highlights, recent EBIT growth has increasingly been driven by cost savings.


KMB – We’re Still Bearish - kmb cost savings



Input Costs Likely Accelerated in 3Q:  The acceleration in oil and pulp prices from 2Q to 3Q implies that raw material inflation is likely to be a greater drag on operating income in 3Q than it was during 1H12.


KMB – We’re Still Bearish - KMB inflation



Rates Rising: We have belabored this point, but it is worth emphasizing again. A rise in interest rates from current levels, driven by strong employment data, Federal Reserve commentary, or other market factors, could drive capital further from the consumer staples sector. While correlation is not, nor does it imply, causation, it is interesting to note that during the 2009-2012 period, when quantitative easing measures from the Fed dared investors to chase yield, consumer staples traded at a strong inverse correlation to 10-year Treasury yields. The inverse correlation of KMB to the 10-year yield was, in fact, even stronger during the 2009-2012 period, which may indicate that KMB was even more “bid up” by fundamental-agnostic investors, in pursuit of yield, than the XLP.


KMB – We’re Still Bearish - kmb vs yield vs xlp vs yield



Quantitative Levels: KMB is in bearish formation with intermediate-term TREND resistance at $98.23.


KMB – We’re Still Bearish - KMB levels




Rory Green

Senior Analyst

What’s New Today in Retail (9/27)

Takeaway: JCP deal -- how can you stay short from here? JCP/factoring fear is not moot -- espec w pos comp trends. FNP/Kate Saturday. JNY Loses KKR.



JCP - J.C. Penney Offers 84M Shares to Raise Capital



  • "[JCP] could raise $1 billion in the form of a stock offering. The company said after the equity markets closed Thursday that it will offer to the public at least 84 million shares of its common stock, and that it intends to give Goldman Sachs, the underwriter, a 30-day option to purchase an additional 12.6 million shares of common stock."
  • "Penney’s said it will use the net proceeds from the offering for general corporate purposes."
  • "The public offering comes after [Mike Ullman]...told investors Wednesday that the company 'wouldn’t raise capital until the end of the year' and that they should 'not believe that circus you hear about,' according to one participant."


Additional Commentary:

  • "Struggling retailer [JCP] said it expects to end the year with about $1.3 billion in cash, excluding the proceeds from a share offering."



  • The offering is priced at $9.65/share


Takeaway: The worst kept secret on Wall Street. We still contend that JCP is doing this deal because it wants to, not necessarily bc it needs to. Now it will have well over $2bn in cash at year end plus another $1bn in cash it could raise through monetizing assets and tapping revolver and accordion.  Is there dilution with the deal? Of course. But the ‘JCP going to zero’ short case is very difficult to make at this point. We still like JCP as we think that the damage done over the past two years is fixable. We’re hosting a call later today to discuss our thoughts on the name and take Q&A. 


JCP - J.C. Penney Projects Positive Comp Trends



  • "[JCP]...said, 'The company still anticipates it will experience positive comparable-store sales trends coming out of the third quarter and throughout the fourth quarter of 2013.'
  • "Penney’s also noted it was 'pleased with its progress thus far' in its turnaround efforts and in the 'traction' its initiatives are starting to achieve."
  • "The retailer noted that 'it is starting to see greater predictability in its performance across many areas.'"
  • "'The company continues to be encouraged by improvements in purchase conversion both in store and on jcp.com, primarily due to being back in stock in key items and sizes the customer expects to find at J.C. Penney...Overall sales on jcp.com continue to trend double digits ahead of last year.'"


Takeaway: This came on the heels of several firms commenting that comps were negative and would stay that way. Guess not.


JCP - Penney suppliers face credit squeeze as fears mount



  • "So-called 'factoring' companies that finance clothing deliveries to Penney are tightening credit terms, shortening payment windows and tacking on extra surcharges as worries about the retailer’s business mount, The Post has learned."
  • "Commercial-lending giant CIT is approving Penney orders selectively and has increased its surcharge to 2 percent, despite holding a $100 million letter of credit from Penney that the chain had tried unsuccessfully to claw back this summer, sources said."
  • "Wells Fargo, which also has a large factoring arm, is still supporting Penney orders, although the bank has acquired a financial hedge worth $50 million in the event of a Penney bankruptcy, according to a source."
  • "The clampdowns — which in some cases have also shortened payment windows to 30 days from 45 to 60 days — are more opportunistic than a signal of real worries about a potential bankruptcy filing this year, according to insiders."
  • "However, an insider noted that the firm, which is raising its own surcharge to 2 percent, doesn’t believe a Penney bankruptcy filing is 'imminent' this year."
  • "Other firms that are raising fees including Capital Business Credit, which is asking for a 3-percent surcharge on some deliveries, according to sources."


Takeaway: There’s a new story about JCP battling factoring firms just about every month. At best half of them are true. Also keep in mind that factoring firms breed fear. When the public gets concerned about business trends and liquidity by reading the Post, factoring firms gain leverage to raise fees.  The equity deal this morning shoots this in the foot, as factoring firms have zero leverage when cash balances are going up by $1bn.


JNY - KKR Drops Out of Jones Hunt



  • "Private equity giant KKR & Co. has dropped out of the hunt for The Jones Group Inc. The investor had teamed up with Sycamore Partners in a bid to buy the company. A source familiar with the situation said Thursday that Sycamore was still in pursuit, with managing director Stefan Kaluzny now taking the lead. Although KKR is on the sidelines, the firm might still have a role to play down the line, the source said."
  • "The process is now centered on determining 'what people really want and what they will pay' and 'figuring out the pathway to a transaction,' said one source."
  • "Although a sale of the entire company would be simpler, Jones might ultimately get a better price if it sells the business off in parts. And that dynamic appears to have played a part in KKR’s departure."


Takeaway: This is a sign of the times. Recall that FNP had the top suitor for Lucky and Juicy both walk out earlier this week.  



FNP - West Third Street Keeps Independent Flavor



  • Kate Spade Saturday, the younger concept collection from New York brand Kate Spade, just recently opened a store on Los Angeles’ West Third Street, generally considered to be a thoroughfare of independent boutiques.


What’s New Today in Retail (9/27) - chart1 9 27


RUE - rue21 discloses comps



  • "rue21...is disclosing the following information , which has not been previously reported and may be provided to prospective lenders in connection with the financing of the transactions contemplated by the previously announced merger agreement, dated as of May 23, 2013…"
  • "The soft sales pattern seen in Fiscal August is continuing in the third quarter to date with comparable store sales down 9.5% through September 24th. To date in Fiscal September, which began September 1, 2013 and will end on October 5, 2013[ 9/1-10/5], comparable store sales were down 12.8%. Compared to the comparable periods of last year, total sales for the third quarter to date are up 2.3% and for Fiscal September to date are down 1.3%."


L - Joe Fresh Taps Mario Grauso



  • "Joe Fresh has hired Mario Grauso as chief operating officer, a new position geared to help put the brand on the global stage."
  • "Joe Fresh is currently distributed only in North America and, in the past few years, has focused on opening stand-alone stores in Canada and the U.S. and rolling out shops inside J.C. Penney stores." 
  • "Grauso has more than 20 years of experience in the fashion industry. Most recently he was president of the Vera Wang Group, beginning in 2009."


TGT - Attention Amazon Moms: Target.com Wants You



  • "Target.com announced the launch of a subscription service that allows parents of infants and toddlers to put aside some of their worries and save money by ordering items such as diapers, formula and wipes on a recurring basis."
  • "Like the Subscribe and Save program on the Amazon Mom page, customers of Target.com can now order from a group of items and have them delivered to their doorsteps at regular intervals, from four to 12 weeks. Target says consumers who participate in the program can save up to 15 percent and receive free shipping. "Those who pay using Target's REDcard will save an additional five percent."
  • “A total of 150 items from Target's up&up private label are included in the program, as well as national brands including Enfamil, Huggies, Pampers, Seventh Generation and Similac."


CROX - Crocs hires Nike director Tim Lyons to lead European retail operation



  • "Lyons, who is based in The Netherlands, is responsible for Crocs’ 115 owned stores and 98 franchise stores across 45 countries."
  • "He was previously director of Nike’s factory stores throughout western Europe."


Takeaway: Going from Nike to Crocs? Seriously? We have to do the obligatory double-take on CROX when they start attracting that kind of talent.


Bi-Lo, Winn-Dixie parent files for IPO



  • "The parent company of Bi-Lo and Winn-Dixie supermarkets, Southeaster Grocers, has filed for an initial public offering." 
  • "The shares are expected to be offered by Southeastern Grocers, and the number of shares to be offered and the price range for the offering have not yet been determined."






Travellers International Hotel Group Inc. - a joint venture between Malaysia's Lim Kok Thay and Filipino businessman Andrew Tan - plan to raise up to $500 million in an IPO.  Travellers plans to use its IPO proceeds to fund more casino-related developments, including the $1.1 billion Resorts World Bayshore resort.


Travellers had hoped to raise up to $1 billion before downsizing its offering, and then postponing it altogether in July citing weak markets.



Wynn Macau is suing Li Jun, a Chinese tycoon who owns Abest Group, for HK$14 million in gambling debts.

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.

September 27, 2013

September 27, 2013 - dtr



September 27, 2013 - 10yr

September 27, 2013 - spx

September 27, 2013 - dax

September 27, 2013 - nik

September 27, 2013 - euro

September 27, 2013 - oil



September 27, 2013 - VIX

September 27, 2013 - dxy

September 27, 2013 - yen

September 27, 2013 - natgas
September 27, 2013 - gold

September 27, 2013 - copper

Economic Weapons of Mass Destruction

This note was originally published at 8am on September 13, 2013 for Hedgeye subscribers.

“There lived a certain man in Russia long ago,
He was big and strong, in his eyes a flaming glow,
Most people looked at him with terror and with fear,
But to Moscow chicks he was such a lovely dear.”

-Boney M


Over the course of history, Russia has certainly been known for its strong leaders.  The Boney M song, “Rasputin”, from which the verse above was taken, is about one of the most enigmatic of Russia’s leaders: Grigori Rasputin.


Rasputin was a Russian mystic that lived from 1869 – 1916.  He became an advisor to the Romanovs, the reigning royal family in Russia at the time, after being asked to try and heal their son Alexei, who suffered from hemophilia.  Probably more by the stroke of luck than any knowledge of medicine, Rasputin was successful in healing Alexei and became a key advisor and intimate to the Czar’s family, especially his wife Alexandra Feodoronva.


From 1906 – 1914, many Russian politicians and journalists used Rasputin’s influence over the Romanovs to discredit them.  His influence only accelerated with the advent of World War I when the Czarina took over domestic policy, with Rasputin as her key advisor. 


Eventually, Rasputin’s influence created contempt amongst the Czar political allies and rivals.  Ultimately, a group of conspirators led by the Czar’s first cousin Grand Duke Dmitri Pavlovich, murdered Rasputin.  Rasputin had the last laugh as he wrote to Czar Nicholas shortly before his death that if he were killed by government officials, the entire imperial family would be killed by the Russian people.


Rasputin’s prophecy came true a short 15 months later when the Czar, his wife and all their children were murdered by assassins during the Russian Revolution.  Directly and indirectly, Rasputin has been pointed to as a key catalyst for the fall of the Romanovs.


Certainly, the current situation in Syria does not have direct parallels to the Russian Revolution, but to be seen to be under the influence of a Russian, especially the Botox laden Putin, will not be a positive turn of events for President Obama.  In part, Obama backed himself into a corner by deciding to go to Congress to get approval to use military force in Syria, even as he acknowledged he didn’t legally need Congressional approval.


When it became clear that Congress wasn’t going to support the action, the door was left open for the Russians to propose a more “commercial” solution.  Of course now President Obama has lost all leverage and, as a friend of mine who runs a major investment bank said, has been completely re-traded.  So much so that President Assad is now making demands on the United States (via Russian TV of course)!  As the state-owned Syrian newspaper put it bluntly in a headline on Thursday, “Moscow and Damascus have pulled the rug out from under the feet of Obama.”


Given the turn of events, it is no surprise then that President Obama’s approval rating has plummeted close to all-time lows.  Currently, on the Real Clear politics poll aggregate, 7.6% more people disapprove then approve of Obama.   As it relates to foreign policy, 17.6% more Americans disapprove of the job he is doing.  It seems the President has become a lame duck quicker than most second term Presidents.


My colleague Keith McCullough proposed a unique idea yesterday to James Pethokoukis at the American Enterprise Institute yesterday, which was to turn Larry Summers loose on the Russians.  As Keith said in the interview:


“We really need to embrace the weapon that we have as a country, which is the most powerful weapon that we’ve had for a very long period of time, which is, of course, the currency of the people, and that currency has basically been de-botched and devalued ’til the cows come home. We need to start to stand up for these things and that’ll help us stand up against guys like Vladimir Putin. Bring in, probably, a guy like Larry Summers to deliver the message because you do need somebody to stand up with a backbone and actually say it in a really forceful way, which, at a bare minimum, that’s what Larry Summers can do. $65 oil would be fantastic for the American people and it would be absolutely pulverizing to Putin’s power.”


As we’ve been writing for a while, a strong dollar equals a strong America.  If the rumors from the Japanese press this morning are even remotely true and Larry Summers is destined to be the next Chairman of the Federal Reserve then it is very bullish for the U.S. dollar and bearish for commodities.  The action this morning, with gold down, oil down and the U.S. dollar up, is likely only the beginning of the sustained move we will see if Chairman Summers becomes more than prophesy.


Of course, there is economic data at play here as well.  On that note, jobless claims came in at the lowest absolute number since 2000 at 228,000 yesterday.  Year-over-year improvement on this data series moves to -23.8% versus -13.2% last week and the rolling 4-week average is -14.5%.


In the Chart of the Day, we show what this improving data series means for interest rates as we chart the 10-year yield versus the 4-week rolling initial claims.  As you can see from the chart, there is a very tight correlation between the labor market improving and interest rates going up.


The combination of a continued improvement in the U.S. labor market and increasing chatter of the likelihood that Larry Summers takes over the Federal Reserve will combine to be an economic weapon of mass destruction for bonds, gold, oil and the Russians alike.


Our immediate-term Risk Ranges are now as follows:


UST 10yr Yield 2.86-3.03% (bullish)

SPX 1664-1701 (bullish)

Nikkei 14117-14638 (bullish)

USD 81.39-81.93 (bullish)

Brent 110.54-113.91 (bullish)

Gold 1307-1365 (bearish)


Enjoy your weekend.


Daryl G. Jones

Director of Research


Economic Weapons of Mass Destruction - 10Y vs NSA


Economic Weapons of Mass Destruction - Virtual Portfolio


TODAY’S S&P 500 SET-UP – September 27, 2013

As we look at today's setup for the S&P 500, the range is 21 points or 0.86% downside to 1684 and 0.37% upside to 1705.            













  • YIELD CURVE: 2.29 from 2.31
  • VIX closed at 14.06 1 day percent change of 0.36%

MACRO DATA POINTS (Bloomberg Estimates):

  • 5:45am: Fed’s Evans speaks in Oslo
  • 8:30am: Personal Income, Aug., est. 0.4% (prior 0.1%)
  • 8:30am: Personal Spending, Aug., est. 0.3% (prior 0.1%)
  • 8:30am: Fed’s Rosengren speaks in New York
  • 9:55am: U Mich. confidence, Sept. final, est. 78 (prior 76.8)
  • 10:15am: Fed’s Evans speaks on panel in Oslo
  • 11am: Fed to purchase $4.75b-$5.75b in 2018-2019 sector
  • 1pm: Baker Hughes rig count
  • 2pm: Fed’s Dudley speaks in Syracuse, N.Y.


    • House, Senate in session; weekend session possible to avoid govt shutdown on Oct. 1
    • President Obama meets Indian Prime Minister Manmohan Singh at White House
    • 1:05pm: Attorney Gen. Eric Holder, HUD Sec. Shaun Donovan, National Economic Council Dir. Gene Sperling, Gov. Rick Snyder, R-Mich., Detroit Mayor Dave Bing hold press conf. after roundtable discussion on revitalization of Detroit


  • J.C. Penney to sell 84m shares to fund turnaround
  • J.C. Penney says CEO Ullman misquoted on capital raise
  • Boehner plan to tackle debt limit stalls amid shutdown standoff
  • Nike 1Q profit beats ests. as sales climb in North America
  • KKR to buy Panasonic health care business for $1.67b
  • JPMorgan urged to pay more in mortgage settlement: NYT
  • Intel said to seek Web-TV service partner after strategy shift
  • Wal-Mart supplier Li & Fung says no order cutbacks in U.S.
  • Oracle CFO says cloud computing will lift operating margins
  • Mylan, Agila must divest 11 generics for FTC deal approval
  • Euro-Area Sept. economic confidence rises more than forecast
  • Japan inflation accelerates to fastest since 2008 on energy
  • Takeda failed to properly warn about Actos risks, jury rules
  • Thompson says Microsoft CEO search independent of Gates: WSJ
  • U.S. Shutdown, Jobs, Bernanke, ECB: Wk Ahead Sept. 28-Oct.5


    • Blackberry (BBRY) 7am, prelim. 2Q loss/shr 47c-51c
    • Finish Line (FINL) 7:05am, $0.45
    • Vail Resorts (MTN) 7:15am, $(1.71)


  • Timah Sees Tin Trade at Two-Year Low on New Rule: Southeast Asia
  • Gold Bulls Dominate on Debt Talks as Stimulus Held: Commodities
  • WTI Set for Third Weekly Loss as UN Nears Vote on Syrian Weapons
  • Copper Climbs for Third Day as China’s Industrial Profits Rise
  • Soybeans Rise as Export Sales Indicate Demand for U.S. Supplies
  • Sugar Seen Extending Rally by Czarnikow as Demand Cuts Glut
  • Cocoa Gains as Demand Compensates for Ivorian Sales; Sugar Falls
  • Base Metals Prices May Surge 35% by 2016, Supporting Miners
  • Gold Advances 0.5% to $1,330.89 an Ounce in London Trading
  • Nuclear Shutdowns’ Two-Year Low to Cap Fuel Cost: Energy Markets
  • U.S. Hog Herd Shrinks for First Time in 3 Years as Virus Spread
  • Norilsk Sees Nickel Surplus Shrinking Next Year on Idled Plants
  • Shipping Bear Says Sell Now as Glut to Endure: Chart of the Day
  • China’s Feed Mills to Import U.S. Sorghum as Corn Quotas Run Out


























The Hedgeye Macro Team













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