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How Do You Spell Denial? T-A-R-G-E-T

Takeaway: Target brass is living in denial.

Editor's Note: This is a complimentary research excerpt from Retail Sector Head Brian McGough. For more information on our services, click here.

How Do You Spell Denial? T-A-R-G-E-T - tar5


Standard & Poor's Cuts Target's Debt Rating

  • "Ratings agency Standard & Poor’s has cut the debt rating of Target Corp. by one notch to 'A' from 'A+,' and the outlook is 'stable.'”
  • "The agency said it expected a 'lingering effect' on customer traffic through the first half of 2014, adding too that expenses related to the breach are likely as well."


We rarely call out a ratings change by Standard & Poor's as newsworthy. But this is Target we're talking about here. There's nothing wrong with this downgrade as it's grounded in a real world event. (If you've been living under a rock the past 3-4 months, and don't know what we're referring to, click here.)  But here's the problem: Target still does not see it. They don't get it. Its guidance for positive comps and gross margin improvement screams 'denial.'

Learn more about Hedgeye.

Poll of the Day Recap: Rig Her Up, Flash Boys!

As most of the financial world knows by now, author Michael Lewis appeared on 60 Minutes last night to promote his new book “Flash Boys: A Wall Street Revolt.” What made the headlines was Lewis’ remarks that the U.S. stock market is rigged to hurt average investors to the benefit of high frequency traders, stock exchanges and large Wall Street banks.


“The insiders are able to move faster than you and play it against orders in ways you don't understand,” according to Lewis.


So, we asked in today’s poll:  Do you agree with Michael Lewis' assertion that "the market is rigged?"

At the time of this post, 72% responded YES the market is rigged; 28% said NO.


Besides stating that the market was clearly and obviously rigged, many who voted YES said it’s the only way to win, and can’t remember a time when the stock market wasn’t rigged. Here are some noteworthy comments

  • As someone works with HFT managers and firms I know that they are laughing all the way to the bank.
  • Just look at the action in the market for the past 2 ½ years or so, it is clear as a bell. One would have to be blind not to see it.
  • Stocks in the junior sector I own show constant signs of predatory trading, manipulative moves, naked shorting, bid stack kills, spoofing, etc.  It's endless, perverse, and aggressive.  This never used to exist like this.
  • 60 Minutes didn't even address the futures markets and how the computers are manipulating orders on those exchanges.
  • Ethics, morals and values have no place in the US system anymore (if they ever did) and the means to exploit and yes, steal are so technologically advanced that the system has 99% of us in near complete subjugation.
  • The playing field isn't on the level...  HFT isn't the problem, though... it's only a symptom.  Every leaked market moving "news" item gets to some before everyone skews the price.  Every monetary intervention or expectation of monetary intervention skews price.   This thing is so rigged, we wouldn't know a free market price if it hit us in the head.  Price isn't set by supply/'s supply/denomination/demand.
  • It’s all a big game of regulatory and representative capture.  Insider and rigged trading is alive and well.
  • It’s not the only thing that is rigged in this market!  Please, this market will eventually blow up.

On the opposite end, NO voters said the market is not “rigged” in the normal statutory definition, and that, “it is what it is. Just like Vegas.”


Another NO commenter explained, “Rigged assumes you must lose. Impact HFT doesn't not mean you lose, it simply means you should adjust your risk premium slightly, much like one would do for insider trading in other countries that allow it.  Don’t ignore the liquidity that is provided by these HFT firms and the value it has for all investors.  Should those who invested millions for a faster way not be able to benefit when they are not breaking any rules? Embrace those like IEX who provide an alternative to traditional exchanges.  Let the market solve its own problem, you just need to spread the information.”


As for Hedgeye CEO Keith McCullough, he believes Michael Lewis is merely making hay out of an old issue — five years too late — for monetary gain.


“Michael Lewis has jumped the populist topic shark,” according to McCullough. “The stock market is rigged for the average monkey who hasn't evolved. Lewis takes the side of “horse-and-buggy whip” old Wall Street traders at the advent of the car engine. Note that Lewis had 0% content on the SEC's read-through on evolution.”



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BWP: Closing Best Idea Short & Stepping to the Side

We added Short Boardwalk Pipeline Partners (BWP) to our Best Ideas list on 12/2/2013 at $26.34/unit.  After cutting its distribution by 80% in February 2014, BWP’s unit price collapsed (down ~50%), and we feel that our short thesis is largely played out.  With this note we are removing Short BWP from our Best Ideas list.


In our view, BWP neither is fixed nor cheap – thus we simply move to the sidelines instead of turning outright bullish. 


At 18.2x 2014e EV/EBIT and 10.3x 2014e EV/EBITDA, it is certainly screens as inexpensive relative to other pipeline MLPs, but not absolutely.  BWP’s re-contracting risk is significant for several years, particularly in 2018 and 2019.  2014 could be peak earnings for the core businesses, though the out years are naturally difficult to predict.  We also remain concerned with the Company’s high leverage, which looks to be stuck around 5.0x EBITDA; BWP may need to issue equity in 2015 to strengthen the balance sheet.


But from a risk/reward perspective, the setup is no longer asymmetrical to the downside.  What’s already happened (and is priced-in to some degree): narrowed basis differentials crushed BWP’s transportation business; narrowed calendar spreads crushed BWP’s storage and PAL businesses; its G&P ventures (Marcellus and Eagle Ford) have disappointed; it cut the distribution 80%; it guided 2014 below the Street;  consensus has soured on Bluegrass’s prospects; and it got kicked out of the Alerian Index.  We’re concerned that the next catalyst/announcement from BWP could be one to break the losing streak –  repurpose an under-utilized asset?  LNG export investment or deal?  A Loews tender offer?  


Staying short here is not compelling, in our view; our time and effort will be better spent looking for the next BWP.


Research Recap:

Short BWP - New Best Idea (12/02/2013)

Best Idea Short BWP December 2013 (12/10/2013)

Reducing BWP Fair Value to $10/Unit (2/10/2014)


Kevin Kaiser

Managing Director


European Banking Monitor: Risk Falls on Russia/Ukraine

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .




European Financial CDS - It was another week of broad-based tightening for EU financial swaps, consistent with the falling risk associated with the Russia/Ukraine situation. Sberbank of Russia also posted another large w/w improvement (-23 bps to 318 bps).


European Banking Monitor: Risk Falls on Russia/Ukraine - 1. banks


Sovereign CDS – Sovereign swaps mostly tightened over last week. Portuguese sovereign swaps tightened by -8.0% (-17 bps to 191 ) while Italian sovereign swaps widened by 0.5% (1 bps to 135).


European Banking Monitor: Risk Falls on Russia/Ukraine - 1 sov a


European Banking Monitor: Risk Falls on Russia/Ukraine - 1. sov b


European Banking Monitor: Risk Falls on Russia/Ukraine - 1. sov c


Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread widened by 2 bps to 15 bps.


European Banking Monitor: Risk Falls on Russia/Ukraine - 1. euribor


Matthew Hedrick