Kaiser Questions Kinder Morgan

If you‘ve been paying any attention to what’s going on in the Master Limited Partnership (MLP) space recently, you’ve undoubtedly come across Kevin Kaiser’s name. Kaiser is the Senior Energy Analyst at Hedgeye Risk Management and the guy who’s ruffling more than a few feathers questioning certain energy companies’ accounting practices. Here are some recent noteworthy headlines about his research:

  • Young analyst draws Wall Street ire taking on Kinder Morgan (via Reuters)
  • Why a 26-year-old analyst has managed to rattle Wall Street (via Quartz)
  • Research firm rebuts Kinder Morgan’s rebuttal (via MarketWatch)
  • Is Kinder Morgan Scrimping on its Pipelines? (via Wall Street Journal)

Kaiser Questions Kinder Morgan - kindm


Kinder Morgan, the current target of Kaiser’s attention, (finally) allowed him to ask a few questions in their quarterly conference call yesterday. One of Kaiser’s key contentions all along is that Kinder Morgan is understating it maintenance capex. As you’ll see in the transcript below, Kaiser was trying to get some color on the management team’s philosophy regarding the calculation of their distributable cash flow.


Analyst: Kevin Kaiser, Hedgeye Risk Management - Analyst


Question – Kevin Kaiser: A question on CapEx for gathering and processing. What is CapEx budget for gathering and processing on a quarterly basis including Copano?


Answer – Steve Kean (President and Chief Operating Officer): I don't know if we have that number broken down.


Answer – Rich Kinder (Chairman & CEO): We don't break it out separately. It's part of our natural gas CapEx.


Answer – Steve Kean: We have CapEx on Copano and Altamont and some in Texas, some in other -- in Texas as well but we don't have a break out of that.


Question – Kevin Kaiser: Okay so no break out for GNP by sustaining CapEx versus expansion CapEx either?


Answer – Steve Kean: No, I think that's just aggregated in our total Gas Group.


Answer – Rich Kinder: Total Natural Gas segment aggregates all of the -- whether sustaining CapEx or the expansion CapEx is all aggregated.


Question – Kevin Kaiser: Okay, and then on the Company wide -- so the budget for this year for sustaining CapEx will be $339 million. That's before Copano. If KMP only spent that on an annual basis, so no organic expansion CapEx, how would the segments perform over the long term? Would the Company be able to keep cash flow flat?


Answer – Rich Kinder: I'm sorry, I don't--


Answer – Kim Dang (CFO): Well, I think that we have growth -- are you asking if there's growth absent spending CapEx in KMP?


Question – Kevin Kaiser: The question is really if the budget was only limited to the sustaining CapEx, would the additional asset base be able to -- would it be maintained -- would the cash flows be maintained over the long term $339 million?


Answer – Rich Kinder: Oh, I see your question. Yes, we've said this several times and these are ballpark numbers, of course, but generally speaking that 5% or 6% this year happens to be 7% growth in distributions. We think probably 1.5% to 2% is organic growth, in other words, if you didn't spend any capital you would get that. At KMP that comes from a number of things. One is, of course, the inflation escalator that we have on our FERC-regulated products pipelines. The second is on automatic escalators that we have on some of our terminal assets. So you'd probably have we estimate 1.5% to 2% growth if you didn't spend any capital. And then the rest of that growth comes from -- primarily from new projects that come on line.


Answer – Steve Kean: That's obviously subject to market conditions. Market conditions determine the growth on just the existing asset base on a stand-alone basis.


Question – Kevin Kaiser: Right and how would 1% to 2% organic growth be possible with just $339 million if you spend about $400 million in ENP alone and that's not in the sustaining CapEx budget?


Answer – Rich Kinder: As I just said, I'm not following your question I guess. You ask how much organic growth you had without expansion CapEx and that's the kind of number that we use, about 1.5% to 2%. Kim?


Answer – Kim Dang: Kevin, is your question if CO2 production would stay flat if we weren't spending expansion capital?


Question – Kevin Kaiser: No, the question is really if you -- on the business, the entire KMP business how would cash flows trend over the long term if we only spend $339 million a year in Capital Expenditures.


Answer – Kim Dang: I think Rich just answered it.


Question – Kevin Kaiser: Okay and then the last question I have is do you consider distributable cash flow to be synonymous with free cash flow?


Answer – Kim Dang: Kevin, look, what we're looking at is how much cash flow that the MLP generates before expansion capital. Because our partnership agreement requires us to finance expansion capital, to distribute everything that we generate and to finance our expansion capital. So what we are comparing, distributable cash flow is to the cash flow that we have available for distributions to our unit holders before we factor in expansion CapEx.


Question – Kevin Kaiser: Okay, so you would say it's not -- you would not say that free cash flow and distributable cash flow are the same thing?


Answer – Kim Dang: If you're defining free cash flow as cash flow after expansion CapEx, then I would say that distributable cash flow and free cash flow are not the same thing but it depends on how you're defining free cash flow.


Question – Kevin Kaiser: I would define free cash flow as cash flow from operations minus the capital expenditures needed on an annual basis to maintain those cash flows from operations?


Answer – Kim Dang: Well that is not, unfortunately, that is nice that you would interpret it that way but that's not the way that our partnership agreement defines it and therefore, that's not the way we are allowed to segregate it.


(Source: AlphaSense transcripts)

What's New Today in Retail (10/17)

Takeaway: NKE crushing apparel, UA lagging. Wexner lets loose at mtg. WMT divorces Bharti. 18k ft TUMI store??? TRU priming for failure. MW Uniqlo



Athletic Apparel Data -


Takeaway: Weekly athletic apparel numbers continue to be strong, though they decelerated slightly. Nike continues to power those numbers. 33% growth for a company with 20% share of the market is nothing to shake a stick at. UnderArmour put up one of the weakest numbers we've seen all year.


What's New Today in Retail (10/17) - chart1 10 17

What's New Today in Retail (10/17) - chart2 10 17

What's New Today in Retail (10/17) - chart3 10 17

What's New Today in Retail (10/17) - chart4 10 17


Online sales surge and demand for new furniture boost UK retailers



  • "Britain's retailers returned to health last month on the back of strong demand for new furniture and a 20% year-on-year surge in online sales, according to official figures."
  • "After a 2.1% fall in August, the Office for National Statistics said retail sales rose by 0.7% month on month in September, excluding petrol sales, following a 3% surge in the purchase of household goods."
  • "The ONS said a look back over the previous three months revealed a period of growth, with retail sales up 1.5% quarter on quarter. 'This is the largest quarter-on-quarter rise since March 2008 when the economy as a whole was at its peak, before the economic downturn,' it said."


Takeaway: Similar trends to what were seeing in the US. We'd say something cute like 'long live housing' but the survey we launched yesterday shows that housing activity is one of the least important drivers of new furniture purchased. That came as a surprise to us.




CA - Carrefour Sees Growth in All Major Markets



  • "French retail giant Carrefour...registered growth in all its major markets in the third quarter, saying its low-price strategy had allowed it to buck slow economic growth and partly offset adverse currency fluctuations."
  • "Sales in the three months through September fell 1.3% to €21.1 billion ($28.55 billion) because of a drop in Latin American currencies.
  • In the same period last year, sales came in at €21.4 billion, excluding businesses that Carrefour has exited since, such as Greece and Malaysia."
  • "Excluding currency effects, disposals and fuel sales, underlying growth rose 3.1%."
  • "The performance of hypermarkets in France was particularly in the spotlight, with sales rising 3% in the third quarter after a long slump."
  • "Other key markets also showed progress, with Brazil, China and Spain all growing in the third quarter."


Takeaway: Emerging markets fueled what little growth CA saw in its business. Sad statement about the state of its mature markets.


WMT - India Clears Wal-Mart in Probe of 2010 Purchase



  • "An Indian finance ministry investigation has cleared Wal-Mart Stores...of allegations that the American retailer illegally put money into a local supermarket chain despite a ban on foreign direct investment in the sector, two senior officials familiar with the matter said."
  • "The ministry was investigating a purchase by Wal-Mart of $100 million in convertible debentures from a retailing arm of Indian conglomerate Bharti Enterprises in 2010."


Takeaway: With this ruling, WMT has officially ended its ties with Bharti in India. The question that needs to be answered now is how will it pursue its growth objectives in Asia?


JOSB, MW - Jos. A. Bank Won’t Rule Out Hostile Bid for Men’s Wearhouse



  • "... [JOSB] Chairman Robert Wildrick said he wouldn’t rule out making a hostile bid for Men’s Wearhouse Inc., which turned down his company’s offer last week. 'We want this to happen on a friendly basis,' Wildrick said today in an interview. 'But at this point we have not ruled anything out.'”
  • "Wildrick said he won’t make a new, higher bid without looking at the company’s books. He said he prefers to acquire...[MW] with a friendly offer that’s best for the shareholders of both companies."


Takeaway: We don't know what the outcome here will be, but hostile bids almost never end well.


LTD - L Brands' Leslie Wexner Lets Loose at Investor Conference



  • "At the firm’s investor conference Wednesday, Wexner was as provocative as ever, stating he can double L Brands’ business in North America and generate 'sustained and significant international growth.' He also said that department stores are irrelevant and that there’s virtually no room for outlets in his retail empire."
  • "Globally, the goal is to bring L Brands (formerly Limited Brands Inc.) to $20 billion in revenues within the next five to six years, though no specific time frame was cited. Another big goal: elevating the operating margin a few points to the high teens."
  • "With L Brands’ domestic growth, Wexner sees La Senza coming to the U.S. from Canada, and additional square footage for Victoria’s Secret, Bath and Body Works and Pink in the pipeline. La Senza plans to open five or six stores in the U.S. next spring, at about 2,500 square feet each, in Midwest malls…"


Takeaway: Wexner gives department stores a kick in the jaw. It wasn’t the first time, and it won't be the last.


JNY - Stuart Weitzman Launching Digital Pop-Up With Gilt



  • "Stuart Weitzman has partnered with Gilt on a pop-up digital shop that goes live at noon Thursday, dedicated solely to its signature over-the-knee 5050 boot. For the first time, Gilt has created a separate URL at that will offer 20 different styles of the boot…"


Takeaway: This could be an interesting opportunity for brands in the future to leverage Gilt Groupe's retail strategy and user base.


9983 - Uniqlo opens store in NYC subway station



  • "Uniqlo has opened a pop-up store in the 14th Street-Union Square subway station in Manhattan. The store, which will be open through the holidays, will offer shoppers will get a $5 Metro Card in a limited-edition sleeve with any purchase."


Takeaway: Unique strategy for Uniqlo as they try to establish their footprint in North America. This is a rather common strategy in Japan.


TUMI - Tumi Opens New York Flagship



  • "The accessories brand will unveil a new concept for all of the company’s stores and shops-in-shop when it opens a flagship here today."
  • "Located at 610 Madison Avenue, the 18,000-square-foot store will be considered Tumi’s main New York location, as its current flagship on 520 Madison Avenue will shutter early next year."


What's New Today in Retail (10/17) - chart5 10 17


Takeaway: 18,000 sq ft to sell luggage and handbags? The store looks surprisingly good. But can it possibly be profitable.




  • "Antonio Urcelay has been named Chief Executive Officer, Toys“R”Us, Inc., effective immediately, after serving as the company’s interim CEO since May of this year."
  • "Hank Mullany, an experienced retail executive with a strong background in operations, finance, customer service and strategic planning, has been named President, Toys“R”Us, U.S., effective November 5."


Takeaway: This is in the top three jobs that you could not pay me enough money to take.


JCrew, M, COH, JWN, LULU, etc. -  Stella Monthly Benchmarks: Tops All Retailers for Third Consecutive Month



  • "Each month, StellaService sheds light on the service performance of online retailers within their respective retail categories. The companies are measured across four service areas: Phone, Email, Shipping and Returns. Phone and Email are measured daily, while shipping and returns are measured across multiple orders. StellaService Monthly Benchmarks are designed to provide consumers with guidance for smarter shopping and retailers with an independent, reliable benchmark for measuring and improving their customer service."
  • "Looking at combined scores for all four service areas in Benchmarks, the following companies were strongest overall (in alphabetical order):"




Retail Rents Continue to Rise in New York



  • "Retail rents along the Fifth Avenue corridor between 49th and 59th Streets have surpassed $3,000 a square foot, according to the CBRE Fall 2013 report, 'Manhattan Retail Market.'”
  • "The average asking rent for the Fifth Avenue stretch between 42nd and 49th Streets is $1,082 a square foot, which CBRE noted is up 146 percent from 2009…"
  • "Over at what is known as Herald Square, the space along 34th Street from Fifth Avenue to Seventh Avenue, average asking rents are $738 a square feet, compared with $500 two years ago. The report said a few opportunities have asking rents of $1,000 a square foot, suggesting that average rent for the area is likely to continue to rise."

NPD Group releases holiday spending survey results



  • "This year’s results found that 12% of U.S. consumers who were surveyed plan to spend more, while 67% said they plan to spend about the same and 21% said they plan to spend less."
  • "Overall, the holiday shopping season will get off to an earlier start compared to last year. According to the NPD Annual Holiday Spending Survey, this year more consumers have already started, or will start shopping before Thanksgiving...The survey found that 17% of U.S. shoppers have already started their holiday shopping and 22% plan to start before Thanksgiving."
  • "More than half (52%) of consumers surveyed said they plan on hitting discount stores, while 43% plan on shopping online. Twenty-nine percent of consumers plan to shop at national chains, 22% at department stores, 19% at toy stores, 18% at warehouse clubs, 17% at outlet stores, 17% at electronics stores, 15% at clothing specialty stores and 15% at off-price retailers."


Takeaway: With these sureveys, you want to look at one tail of the distribution vs the other -- does not bode well for shopping intent.

Where's the Party?

Client Talking Points


Well the U.S. government is back to work and the debt ceiling is averted. For the time being at least. So now global equity markets should be rallying hard right?  That’s not quite how it is working out this morning.  U.S. futures are down, Europe is off 25 – 80 basis points, and Asia is up, albeit small.  So much for the party! Our immediate risk range for SPX is 1685-1725. Now we have to focus on the Fed.  The key question there is, of course, will they taper or not taper?


As global asset allocators, we have the choice to be underweight the U.S. and our view on Europe is looking very compelling on a comparative basis as we highlighted in our recent Q4 theme - #EuroBulls. The euro, a currency we do have longer term issues with, is breaking out on our quant models and is up another 70 basis points this morning to $1.3629 versus the U.S. dollar. Some interesting recent items of note include the Greek 10-year yield down 206 basis points month-over-month to 8.4% and European new passenger car registrations up the most in two years at +5.4% year-over-year in September.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

In line with our #EuroBulls Q4 theme, we’re long the German DAX via the etf EWG. With European fundamentals showing improvement off low levels, we expect outperformance from Germany, and in turn for the region’s largest economy to pull the rest of the region higher. ECB policy remains highly accommodative and prepared to aid any of its sovereign members to preserve the Union. Inflation remains moderate and fundamentals are positive: confidence readings and PMIs are up since June, with factory orders trending higher and retail sales inflecting to push the trade balance higher. Finally, the unemployment rate has held steady at the low level of 6.9%, all of which signals to us that Germany’s economic climate is ramping up. 


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.


Financials sector senior analyst Jonathan Casteleyn continues to carry T. Rowe Price as his highest-conviction long call, based on the long-range reallocation out of bonds with investors continuing to move into stocks.  T Rowe is one of the fastest growing equity asset managers and has consistently had the best performing stock funds over the past ten years.

Three for the Road


Street isn't bearish enough on $WTW



This country has come to feel the same when Congress is in session as when the baby gets hold of a hammer. -Will Rogers 


U.S. National Debt: $16,964,507,500,000 (

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ICI Fund Flow Survey and our take on the BlackRock Conference Call

Takeaway: ICI's weekly data marked outflows across the board in both stocks and fixed income with D.C. gridlock having spooked investors last week

Investment Company Institute Mutual Fund Data and ETF Money Flow:


Equity mutual funds joined all product classes last week with outflows in front of the gridlock in Washington with a $3.1 billion outflow, a slight deceleration from the prior week's outflow of $3.3 billion. Despite these soft trends near term, total equity mutual funds have reversed weekly outflow trends from last year and are averaging a $2.5 billion weekly inflow in '13 versus 2012's $3.0 billion weekly outflow 


There wasn't even a flight to quality last week, with fixed income mutual funds booking redemptions of $2.5 billion, an acceleration from the week prior's $397 million outflow and now sending 2013's weekly average fund flow to a negative $561 million. This compares to the weekly inflow from last year in 2012 of $5.8 billion for fixed income funds


ETFs were also a source of funds last week, with outflows in both equity and fixed income products. Passive equity products experienced outflows of $4.7 billion for the 5 day period ending October 9nd with Bond ETFs losing $1.3 billion in investor funds during the same time period


In the Hedgeye Thought of the Week, we outline our 5 main takeaways from yesterday's conference call of industry leader BlackRock, the largest asset manager in the world with now over $4 trillion in assets-under-management


ICI Fund Flow Survey and our take on the BlackRock Conference Call - ICI table 1 revised



For the week ending October 9nd, the Investment Company Institute reported another weekly outflow in combined stock funds to the tune of $3.1 billion, a slight improvement from the $3.3 billion outflow the week prior. The $3.1 billion outflow for the week broke out to a $2.0 billion inflow into international equity products and a $5.1 billion outflow within domestic stock funds. The equity category has been a tale of two tapes recently with domestic equity funds having had outflows in 8 of the past 13 weeks compared to international equity funds which have had inflows every week in the past 13. Despite this weak run in domestic stock fund flows, the year-to-date weekly average for 2013 for all equity mutual funds now sits at a $2.5 billion, a complete reversal from the $3.0 billion outflow averaged per week in 2012.


On the fixed income side, bond funds were not able to generate any new investor interest despite the uncertainty created by Washington and for the 5 days ending October 9nd, the aggregate of taxable and tax-free bond funds booked a $2.5 billion outflow. Both categories of fixed income contributed to outflows with taxable bonds having outflows of $1.5 billion which joined a $1.0 billion outflow in tax-free or municipal bonds. While the sharp outflows that marked most of the summer and the start of the third quarter have moderated, the appetite for bonds has hardly rebounded. The 2013 weekly average for fixed income fund flows is now a $561 million weekly outflow, a far cry from the $5.8 billion weekly inflow averaged last year.



ICI Fund Flow Survey and our take on the BlackRock Conference Call - ICI table 2

ICI Fund Flow Survey and our take on the BlackRock Conference Call - ICI table 3

ICI Fund Flow Survey and our take on the BlackRock Conference Call - ICI table 4

ICI Fund Flow Survey and our take on the BlackRock Conference Call - ICI table 5

ICI Fund Flow Survey and our take on the BlackRock Conference Call - ICI table 6



Passive Products:



Exchange traded funds also experienced weak trends last week with equity products booking a large outflow and bond ETFs also experiencing mild redemptions. Equity ETFs lost $4.7 billion in funds, a reversal from the $1.3 billion inflow in the prior week and also down from the impressive $25.8 billion inflow three weeks ago. Including this week's outflow however, 2013 weekly average equity ETF trends are averaging a $3.1 billion weekly inflow, an improvement from last year's $2.2 billion weekly inflow average.


Bond ETFs experienced their second consecutive weekly redemption of $1.3 billion which was a slight improvement from the $2.0 billion in funds lost the week prior. Including this most recent redemption within passive bond products, the 2013 weekly bond ETF average is flagging at just a $325 million inflow, much lower than the $1.0 billion average weekly inflow from 2012.



ICI Fund Flow Survey and our take on the BlackRock Conference Call - ICI table 7

ICI Fund Flow Survey and our take on the BlackRock Conference Call - ICI table 8



Hedgeye's Asset Management Thought of the Week:


We view the BlackRock earnings conference call as an important indication of broader asset management industry trends with the wide spectrum that the $4 trillion asset manager covers. Our top 5 takeaways from the firm's conference call yesterday are:


1.)  CEO Larry Fink had an interesting perspective on potential future communication from the Federal Reserve. In essence his commentary alluded to a Fed that will be on hold in regard to tapering for longer than expected as the real byproduct of the current government shut down has not been a stock market sell off but potentially a Fed that will want to evaluate the impact of the shut down and will wait longer than expected to start any reduction in bond buying. Aside from BlackRock's inherent bias to pitch its strong fixed income franchise which would benefit in this scenario, this outcome may make some sense considering the change in Fed Chairman upcoming (any current communication change will wait to be made after the Fed transition).


2.) The firm's scientific equity or quant products experienced outflows in the quarter which were performance related but the category continues to remain out of favor according to the company. This has the biggest implication for Janus Capital (JNS) which has $41.3 billion in quant assets, over 25% of its total assets-under-management.


3.) One of the fastest growing categories within the firm's third quarter was BlackRock's LifePath franchise which had $3 billion in net inflows in the quarter or a 17% annualized organic growth. While the $70 billion in total LifePath assets is only a small percentage of BLK's overall assets, similar target date funds and the entire 401K category comprise over 15% of assets-under-management at T Rowe Price (TROW), which is a positive read through for them.


4.) While the firm guided down expectations for year-over-year performance fees (citing an abnormally strong period last year on a one time PPIP fee), BlackRock is entering the 4th quarter with some earnings momentum. Period ending assets-under-management are up over 6% quarter-over-quarter which will help base fees and the firm cited only a slight upward drift on marketing spend in the fourth quarter which could be really good for year ending margins.


5.) The firm also alluded to a reversal in flows within its important emerging market franchise. While the second quarter marked outflows in some of its flagship products including the EEM exchange traded fund, the firm saw inflows into the EM category in September which is positive for overall realization rates as these products have some of the highest fees within the BLK product suite. 



Jonathan Casteleyn, CFA, CMT







Joshua Steiner, CFA








At the end of 3Q, there were 5,748 gaming tables (+2 tables QoQ) and 14,775 slot machines (-535 machines QoQ).



Questions have arisen about the future of 80 gaming tables currently assigned to a Taipa casino and belonging to SJM.  An executive connected with the New Century Hotel and Greek Mythology Casino has been arrested in Macau on suspicion of fraud.  Chen Mei Huan – also known as Chan Mei Fun – was held on Sunday over the allegations, which involve 35 Macau and mainland Chinese investors and more than HK$300 million (US$38.7 million), said police.


SJM had previously stripped Greek Mythology of a third of its then 120 tables in August 2012 following a dramatic and bizarre series of events.  They included an attack the previous June by masked men on Chen’s former boyfriend and business partner, the Macau junket veteran Ng Man Sun, and complaints from tourists that they had been locked out of their rooms at the hotel portion of the property.


In October last year Ambrose So, SJM CEO said that the 40 gaming tables previously confiscated from Greek Mythology had been transferred to Grand Lisboa and were operational.  



Visitor arrivals in package tour increased by 6.6% YoY to 973,766 in August 2013.  Visitors in package tour mostly came from Mainland China (770,365), with 292,733 from Guangdong Province; followed by Taiwan (62,622); Hong Kong (38,586); and the Republic of Korea (32,706).


There were 97 hotels and guesthouses operating at the end of August 2013, providing 27,761 guest rooms, up by 14.4% YoY, of which the 5-star hotels had 18,373 rooms, accounting for 66.2% of the total.  The average length of stay of guests held stable as August 2012, at 1.3 nights.



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