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Short Kinder Morgan Thesis Update - Slides and Dial-In

***CALL TODAY AT 1PM EST.  SLIDE DECK BELOW***

 

Short Kinder Morgan Energy Partners (KMP) remains a Hedgeye “Best Idea.”  Our conviction has increased since first making the call in September 2013.  Recent events, results, guidance, and new information continues to indicate that our analysis is correct.

 

“Cheap” is a LONG WAY DOWN.  We believe Fair Values are:

  • KMI: $13 - $17/share, ~57% Downside 
  • KMP: $31 - 47/unit, 51% Downside  (Preferred Short)
  • EPB: $16 - 24/unit, 39% Downside 
  • This puts Complex EV/2014 EBITDA at ~10-11x

CLICK FOR FULL SLIDE DECK: Short Kinder Morgan Thesis Update 1/31/14

 

CONFERENCE CALL TODAY AT 1PM EST.

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Kevin Kaiser

Managing Director

O:


$XLF Breakdown Doesn’t Bode Well

Takeaway: As the Financials (XLF) go, so goes the market.

Editor's note: The post below is a complimentary excerpt from CEO Keith McCullough's pre-market morning research. For more information on how you can become a Hedgeye subscriber click here.

$XLF Breakdown Doesn’t Bode Well - yaya 

As the Financials (XLF) go, so goes the market.

 

In other words, if Financials break, that’s a very bearish signal for the market’s beta. Yes, beta matters.

 

The XLF snapped Hedgeye’s TREND line ($21.21) this week, and barely closed above it yesterday. This is the single most important sector signal for me today.

$XLF Breakdown Doesn’t Bode Well - Beta

Why are Financials broken?

 

Because bond yields are falling. When bond yields fall, the yield spread compresses. The 10-year yield remains below our TREND of 2.80%. This of course is a negative for Financials on the margin.

 

So, whatever yesterday’s low-volume U.S. stock pop was (month-end?), it’s not popping this morning. In all likelihood, Mr. Market breaches 1,779 support on the S&P 500 if indeed the Financials are broken. 

Join the Revolution. 


INCOME, SPENDING & CONFIDENCE: QUICK THOUGHTS

Takeaway: Spending outpaced Income as the decline in Saving supported services and nondurables consumption. Gov't sourced income inflecting positively

 

SPENDING:  Spending grew at a premium to incomes for a third consecutive month as the savings rate fell -40bps sequentially to 3.9%, the lowest level in a year.  

 

With the savings rate now back to the low end of the historical range, the capacity for Incremental savings depletion to support further improvements in consumption growth appears largely constrained. 

 

Household expenditure growth on Services and NonDurables accelerated, while spending on Durables – the 2013 leader as sales on higher ticket items improved – decelerated 300bps and 120bps on a 1Y and 2Y basis, respectively.  Whether the nascent deceleration in Durables represents a pull-back in spending across the higher income brackets remains TBD.    

 

INCOME:  Personal income growth, Disposable Personal Income (DPI) Growth, and Real DPI per capita all decelerated on both a 1Y and 2Y basis. 

 

Note that the December comp dynamics were impacted by the conspicuous pull-forward in compensation that occurred at year-end last year ahead of the fiscal cliff resolution and impending tax law changes.  Given the comp distortion, the 2Y comp offers the cleanest read for December and on that basis growth decelerated a moderate 20bps sequentially from +3.8% to +3.6% (vs. the reported -0.8% on a YoY basis).

 

Salaries & Wages:  Private sector salaries & wages slowed modestly in December while the slope of the broader trend remains positive at ~5% YoY on a 2Y basis.   

 

The other notable dynamic is that government sourced salary and wage income is inflecting positive for the first time in years. 

 

State & local government employment was positive for the 5th consecutive month in December (after 4 years of negative growth) and the ebbing of the fiscal drag alongside the spending friendly budget deal has aggregate incomes for government workers - which represent ~17% of labor force and ~17% of aggregate wage/salary income – beginning to show some positive mojo.

 

INFLATION:  PCE and Core PCE inflation both a little firmer sequentially, but still well below target.   The longer we mark time sub-target the more worrying it becomes for policy makers.  Expect speculation around an “inflation floor” to pick up as the Yellen transition matures.

 

INCOME, SPENDING & CONFIDENCE: QUICK THOUGHTS - Personal Income 2

 

INCOME, SPENDING & CONFIDENCE: QUICK THOUGHTS - Income   Spending Table Dec

 

 

CONFIDENCE:  This morning’s final estimate of confidence from the Univ. of Michigan capped the January data on consumer sentiment.  Across the primary survey’s, the results were mixed on a Mom basis with the Conference Board estimate advancing 3.2 pts while the Univ. of Michigan and Bloomberg readings declined a modest 1.3 and 1.1 points, respectively. 

 

The middling confidence numbers make sense in the context of the quantitative setup for the $USD and the TTM relationship between sentiment and the currency.  The dollar is currently neutral on a TRADE basis from a quant perspective and searching for some direction as it flirts with a breakout above the 81.12 TREND line.

 

INCOME, SPENDING & CONFIDENCE: QUICK THOUGHTS - Dollar vs Confidence

 

INCOME, SPENDING & CONFIDENCE: QUICK THOUGHTS - Confidence Table Jan 

 

 

Christian B. Drake

c

@HedgeyeUSA


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 80.28%
  • SHORT SIGNALS 78.51%

[video] Keith's Macro Notebook 1/31: FINANCIALS JAPAN COPPER


MTW: Exiting Following Solid Beat

 

                             

Summary

 

Our MTW thesis based on its exposure to a recovery in construction and break-up value (see 10/28/13 “MTW: Next Activist Value Target?”) has played out well.  Given current market prices, the shares have entered our fair value range in a softer equity market and potentially less attractive macro environment.  We also would prefer to own OC (and potentially other building products names) at current levels for construction exposure, rather than MTW at ~$27.60.  We are not signaling an MTW problem/short/sell, but rather responding to our repricing thesis working out in a market offering some better construction-exposed opportunities.  If MTW shares retreat, we would look to re-enter, with our thesis put forth in our March 2013 Mining & Construction Equipment black book.

 

 

Quick Take

 

  • Solid Beat:  MTW readily exceeded expectations for the quarter, principally on 10% revenue growth in Foodservice Equipment amid solid margin gains.
  • Both Segments Grow: Excluding $120 million shift in 2012 Crane revenues between quarters, the Crane segment showed 4Q growth of 9.3% - consistent with other strong construction equipment sales readings.
  • Less Under Recognized:  MTW is better recognized today, with several of our catalysts having occured (e.g. the redemption of a high cost/problematic covenant tranche of debt has now been announced.)
  • Better Options:  We see OC as a better exposure for 2014 from current levels to a construction rebound following MTW’s ~35% total return since late October (vs. a roughly flat S&P 500).

MTW: Exiting Following Solid Beat - lkj

 


Snap, Crackle, Pop?

Client Talking Points

FINANCIALS (XLF)

Financials snapped our Hedgeye TREND line this week and closed just above it yesterday (TREND = 21.21). This is the single most important sector signal for me today. Right now the Yield Spread is compressing -- fast -- as the 10-year yield remains below our TREND  of 2.80%. Meanwhile, whatever yesterday’s low-volume U.S. stock pop was (month-end?), it’s not popping this morning.

JAPAN

Most of Asia was closed last night (Happy New Year!) but I found it very interesting (revealing) to see them sell the Nikkei in the face of a U.S. bounce. The Nikkei is now confirming bearish TREND at -8.4% year-to-date. 

COPPER

Copper is diverging negatively versus the CRB Index (commodities) as it slices back through our Hedgeye TREND support of 3.31/lb. Not all commodities are the same obviously – copper’s long-term supply (mining) bubble remains very relevant.

Asset Allocation

CASH 48% US EQUITIES 6%
INTL EQUITIES 10% COMMODITIES 10%
FIXED INCOME 6% INTL CURRENCIES 20%

Top Long Ideas

Company Ticker Sector Duration
JPM

JPMorgan shares are currently trading with the most implied upside to fair value in our fair value model for money-center, super-regional and regional bank stocks. By our estimates, JPM shares have upside of 33% based on our regression of EVA (economic value added) – which looks at the spread between return on capital and cost of capital – and the current multiple to tangible book value. Over time, we have found that sizeable discounts and premiums mean revert toward fair value giving JPMorgan an embedded tailwind in 2014.

FXB

We remain bullish on the British Pound versus the US Dollar, a position supported over the intermediate term TREND by prudent management of interest rate policy from Mark Carney at the BOE (oriented towards hiking rather than cutting as conditions improve) and the Bank maintaining its existing asset purchase program (QE). UK high frequency data continues to offer evidence of emergent strength in the economy, and in many cases the data is outperforming that of its western European peers, which should provide further strength to the currency. In short, we believe a strengthening UK economy coupled with the comparative hawkishness of the BOE (vs. Yellen et al.) will further perpetuate #StrongPound over the intermediate term.

DRI

Darden is the world’s largest full service restaurant company. The company operates +2000 restaurants in the U.S. and Canada, including Olive Garden, Red Lobster, LongHorn and Capital Grille. Management has been under a firestorm of criticism for poor performance. Hedgeye's Howard Penney has been at the forefront of this activist movement since early 2013, when he first identified the potential for unleashing significant value creation for Darden shareholders. Less than a year later, it looks like Penney’s plan is coming to fruition. Penney (who thinks DRI is grossly mismanaged and in need of a major overhaul) believes activists will drive material change at Darden. This would obviously be extremely bullish for shareholders and could happen fairly soon driving shares materially higher.

Three for the Road

TWEET OF THE DAY

Amazon now bigger than Target on revenues, 5x larger mkt cap, 1/5th as much income @JeffMacke

QUOTE OF THE DAY

"The world ain't all sunshine and rainbows. It is a very mean and nasty place and it will beat you to your knees and keep you there permanently if you let it. You, me, or nobody is gonna hit as hard as life. But it ain't how hard you're hit; it's about how hard you can get hit, and keep moving forward. How much you can take, and keep moving forward." - Rocky Balboa

STAT OF THE DAY

It’s been 835 days without a 10% correction. That’s the 5th longest streak of its kind, and the third in the past 25 years. Of course, it still has a long way to go to compete with the mystifying seven-year stretch starting in 1990, when we had 2,553 correction-free days. (Bespoke)


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