CHART OF THE DAY: The Comp Table $KMI Didn't Publish

CHART OF THE DAY: The Comp Table $KMI Didn't Publish - COD KMI Comp Table


Far be it from us to question someone who yesterday made more money then we will perhaps ever make, but we do think it is important to consider KMI’s risk profile in the context of some basic financial metrics.

The Portals of Discovery

"Mistakes are the portals of discovery."

- James Joyce


There is nothing like a mistake to enhance our learning.  At times, defining a mistake can be a nuanced exercise.  For stock market operators, though, a mistake is very easy to define.  Simply: if a stock price goes against you meaningfully and over a sustainable period, you are wrong.


The most successful investors are often those investors that are effective at both learning from and minimizing their mistakes.  Many successful portfolio managers implement a stop loss so as to ensure that their mistakes are minimized. Others buy value plays with little perceived downside to minimize mistakes.


About a year ago, we introduced Hedgeye’s Best Idea list.  The idea of the list was to focus our research team on developing deep dive investment ideas with asymmetric reward characteristics. Overall, the list has had some really strong performers.  Not surprisingly we’ve also had some stocks that have not performed very well.  Due to a light global macro calendar this morning, we are going to do a deep dive on one of our very public “mistakes”.


Back to the Global Macro Grind . . .


Yesterday, one of our Best Ideas, Short Kinder Morgan Energy Partners (KMP), went against us and decidedly so.   Rich Kinder, the CEO and Company’s namesake, decided to consolidate the group of companies that existed under the Kinder Morgan umbrella.  In the announced deal, KMI, the C-Corp GP, will acquired its two MLPs, KMP/KMR and EPB in a ~$71B transaction comprised of 56% KMI equity, 38% assumed debt, and 6% cash.  


On one hand, it is worth applauding Kinder for this move.  After a long and successful run, we thought he was out of tricks, but he wasn’t. On the other hand, in implementing this dramatic corporate restructuring, Kinder readily acknowledged our thesis, which was that transparency was limited, cost of capital was very high, and growth options were limited for the Kinder Morgan complex.  And by bidding for our favored short of the group, KMP, at premium, he also marked the idea against us by about 15%.


It doesn’t matter that we’ve had some great calls on other MLPS, such as Linn Energy (LNCO) and Boardwalk Partners (BWP), on KMP we are now seriously in the red.  As always though, the question is what to do with the stock from here (even if you have been long and taking the other side of our trade it is worth considering).  As my colleague Kevin Kaiser writes:


“On 2014 Pro Forma (“PF”) metrics, we have PF KMI valued at 17x EV/EBITDA, 24x EV/EBIT, 27x market cap/pre-tax earnings. If we strip out the E&P segment at a $5.5B valuation ($1.0B of EBITDA x 5.5x multiple), PF KMI Midstream is valued at 19x EV/EBITDA. On an absolute basis, the valuation multiples are very high, in our opinion (19x EBITDA for a capital intensive, fully-taxable, highly-leveraged business), but even relative to peers, PF KMI seems mispriced here. EPD – which is not subject to federal income taxes – is valued at 17x EV/EBITDA, two EBITDA turns below PF KMI Midstream”


Combined with this egregious valuation is the more interesting point of KMI’s ability (or inability) to pay out its massive distribution going forward.  As Kevin also writes:


“On a cash flow basis, assuming a full tax shield, PF KMI will generate ~$5.3B/year in operating cash flow. Run-rate total CapEx is ~$4.1B/year (excluding Trans Mountain), putting run-rate, pre-tax Free Cash Flow at $1.2B, or $0.56 per PF KMI share. PF KMI is trading at a 1.4% pre-tax FCF yield. Its annual distribution burden will be $4.3B starting in 2015, putting its annual funding gap around $3.1B. These are rough metrics, but a good guide for how much capital PF KMI will need to raise on a go-forward basis.”


In the Early Look today, we’ve included two charts.  The first chart is a comp table that Kinder Morgan showed in their presentation yesterday comparing KMI against blue chip companies with growing dividends.  Included in the table are companies like McDonald’s, Cisco, Altria and so on.  The title of the table is quite explicit, “KMI Compares Favorable to its Mid-Stream Energy Peers and S&P 500 High Dividend Companies.”  Since the Company is guiding us to 10% dividend growth and a yield of 4.5%, on these basic metrics, KMI does look great!  But beauty, as always, is in the eye of the beholder. 

The Portals of Discovery - KMI Table


In the second chart in today’s note, we’ve included, “The Comp Table KMI Didn’t Publish.”  In this table we look at payout ratios, valuation metrics, and leverage ratios.  Far be it from us to question someone who yesterday made more money then we will perhaps every make, but we do think it is important to consider KMI’s risk profile in the context of some basic financial metrics.


The Portals of Discovery - COD KMI Comp Table


Now perhaps we’ve lost all credibility because we didn’t see this corporate restructuring coming (we thought Kinder Morgan was in a proverbial box), but if you are contemplating owning KMI here, you do need to take the Company’s advice and look at your options, like S&P 500 high dividend companies. 


On a basic level, would you rather own a company like Cisco that grows its dividend at ~7.9%, trades at ~6.0x EBITDA, and has $30 billion in net cash, or a company with the financial profile of KMI that trades ~19.0x EV/EBITDA, has debt/EBITDA at 5.5x, and has a dividend payout ratio of 130 – 200%.  Perhaps we are just simpletons, but to us the answer is obvious.


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research

Retail Callouts (8/12): ICSC Sales, AMZN, WMT, TGT, BBY

Takeaway: ICSC Sales decelerate, but setup through Oct is good as compares ease – IF consumer holds up. AMZN picking the wrong fight w the wrong guy.



Tuesday (8/5)

KATE - Earnings Call: 10:00am

FOSL - Earnings Call: 4:30pm


Wednesday (8/6)

M - Earnings Call: 10:30am


Thursday (8/7)

WMT - Earnings Call: 7:00am

KSS - Earnings Call: 8:30am

JCP - Earnings Call: 4:30pm

JWN - Earnings Call 4:45pm





Takeaway: This week's 3.2% is a respectable number in its own right. Unfortunately we're coming off a seven-week run of stellar growth -- with most weeks coming in above 4%. Important to keep in mind that sales growth last year took a notable dive in the back half of August and remained weak through most of October. The point is that assuming all else is equal with the consumer (which might not be a safe bet) we should see respectable readings in this index for the next 10 weeks. If they're not, it won't be a good indicator of the consumer's health.


Retail Callouts (8/12): ICSC Sales, AMZN, WMT, TGT, BBY - chart1 8 12 2014


Retail Callouts (8/12): ICSC Sales, AMZN, WMT, TGT, BBY - chart2 8 12 2014





AMZN, WMT, BBY - Disney-Amazon Dispute Concerns More Than Pricing



  • "A particular concern of Amazon, those people noted, is that Wal-Mart Stores Inc., Best Buy Co. and other brick-and-mortar retailers sometimes charge less than the wholesale price for a new disc to lure people into stores so that they will purchase other, more profitable items. Amazon often tries to match those prices, but doesn't reap the benefits of drawing customers into a physical showroom."
  • "As a result, the online retailer has asked studios to help make up for losses in those situations, the people said."
  • "Amazon has engaged in tough negotiations with Hollywood studios in the past, but until the Warner Bros. dust-up, it doesn't appear to have previously impeded consumers' ability to preorder discs."


Takeaway: We respect the power of the Amazon business model as much as even the biggest Bull.  But is Bezos serious on this one? He wants margin support (basically markdown money) from studios and publishers simply to offset the fact that WalMart, Target and Best Buy use media as a loss leader to driver traffic into the store, and capitalize on purchases in other categories?  Sorry Jeff, but that's where a brick and mortar business model actually has an advantage versus being 100% virtual. This is like if WalMart were to complain that it has to pay Associate Comp, Rent, and Utilities. Something tells us that AMZN is just going to have to suck it up and live with this one.  




WWW - Two Million Moms Love Stride Rite®



  •  "Stride Rite®, the best place to shop for kid's shoes, today announced a significant milestone for Stride Rite® Rewards, hitting the two million member mark in just 18 months."
  • "The latest enhancement to the program is the introduction of the new Stride Rite Rewards App. The app enables customers to better manage their account and leverage all the benefits of the program whether they are in-store or online, just in time for the back-to-school season. The app is now available for download on iTunes and Google play."


SHLD, Kmart - Sears Holdings Names Alasdair James As Kmart's President And Chief Member Officer



  • "Sears Holdings announced today that Alasdair James has joined the company as President and Chief Member Officer for the Kmart business. In this role, Mr. James will be responsible for driving the Kmart format strategy, managing the Kmart P&L and aligning merchandise, marketing, pricing and selling with the needs and wants of Shop Your Way® members."
  • "Since 2007, Mr. James held roles of increasing responsibility with Tesco, where he most recently served as the commercial director for the company's global business unit."


Record imports expected in August



  • "Import volume at major U.S. container ports is expected to hit an all-time record in August as retailers concerned about the lack of a West Coast longshoremen’s contract rush to bring holiday season merchandise into the country, according to the monthly Global Port Tracker report released today by the National Retail Federation and Hackett Associates."


NYC’s first enclosed mall in 40 years officially opens



  • "The Mall at Bay Plaza, New York City’s first enclosed fashion mall in over 40 years, officially opens on Aug. 14."
  • "Located on Baychester Avenue in the Bronx, the 780,000-sq.-ft., three-level center will be the largest shopping mall in the city. It will include a new, ground-up Macy’s and an existing J.C. Penney as the anchor tenants. Over 100 retail shops have been constructed, many of which will operate in the Bronx for the first time such as H&M, Michael Kors, Ulta, Victoria Secret, and Kay Jewelers. Four new restaurants, a new gym and AMC Theater will be featured tenants as well."


DEST - Anthony Romano Appointed As Destination Maternity's Chief Executive Officer



  • "Destination Maternity Corporation, the world's leading maternity apparel retailer, today announced that Ed Krell is stepping down as the Company's chief executive officer and a member of its board of directors. Anthony M. Romano will become the Company's chief executive officer and be appointed to its Board of Directors, effective immediately."


GME - GameStop streamlines trade-in pricing policy



  • "GameStop plans to offer customers more for their pre-owned video games with a new, streamlined trade-in program that will launch nationwide August 18."
  • "The program will feature four price-points depending on whether a customer chooses cash or in-store credit for their items and whether they are a PowerUp Rewards Pro member."

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 80.43%
  • SHORT SIGNALS 78.34%

Macro Is The News

This note was originally published at 8am on July 29, 2014 for Hedgeye subscribers.

“You see, I’m the event. I am the news.”

-Brad Katsuyama


That’s a beauty quote from a book that finally made it to the top of my reading pile this summer – Flash Boys, by Michael Lewis. Brad Katsuyama and I have a few things in common. Well, sort of. We’re both Canadian – but I’m more of a High-Frequency-Tweeter than a trader.


The context of Brad realizing that his Old Wall order-flow from the Royal Bank of Canada was “news” to the machines front-running his (lack of) technology may have been enlightening to him at the time, but so were late 17th century concepts like the sun rising in the East.


The better one-liner came before the aforementioned one when Katsuyama’s IT guys reminded him that “you aren’t the only one trying to do what you’re trying to do” (pg 33). Everyone and their brother who is trying to short spoos (SPY), at the same time, should always remember that.


Macro Is The News - the dark pool high frequency trading


Back to the Global Macro Grind


On the “news” at 10AM yesterday that US Pending Home Sales “missed” (again), the Housing stocks (ITB) dropped to -1.6% on the day, and Consensus Macro hedgies started shorting SPY, feverishly. If you want to beat your competition in this game, don’t do that.


The time to short Housing (ITB) and the Russell 2000 (IWM) was last week (Tue-Wed) when:


  1. Existing Home Sales were hoped to be a new bullish TREND
  2. The Russell bounced to lower-highs of 1158, and the SP500 hit an all-time high of 1987
  3. Facebook (FB) beat big and every social media’s profitless cow was going to jump over the moon


Hope, obviously, is not a risk management process. And, despite my addiction to tweeting, Twitter is not Facebook. We call selling/shorting on green and buying/covering on red Fading Beta because that’s what it is – fading the machines. You see, consensus capitulating on both the upside and downside is the event. In an oversupplied industry of short-term performance chasers, it is the news.


Don’t get me wrong, for longer-term investors, recent US #HousingSlowdown (see our Q2 Macro Theme Deck for details on why) data is downright frightening. To put some meat on that bone, today’s Chart of The Day  shows what our Housing team calls the Hedgeye Housing Compendium – it rolls Hedgeye-style, in rate of change terms. And it’s color coded (red/green) so that even a Mucker can understand it.


USA’s Pending Home Sales are now trending down -7.2% year-over-year (versus growing at +12% year-over-year when we were bullish on US Housing last year). At the same time, the mother of all behavioral factors (last price) in US Housing has seen US Home Price Inflation (HPI) slow from its CoreLogic data peak of +11.8% last year to a preliminary estimate for June of +7.7%.


Now, if you think in absolutes (instead of rate of change), you might say that Housing is still “good.” Even if I gave you that, in my risk management model going from great to good is bad – and the stocks agree.


It’s not just the Housing stocks that aren’t horning people up YTD – it’s a lot of things US domestic consumer:


  1. Housing Stocks (ITB) -1.3% yesterday to -8.0% YTD
  2. Russell 2000 (IWM) down another -0.6% yesterday to -2.1% YTD
  3. US Consumer Discretionary stocks (XLY) +0.19% yesterday to +0.18% YTD


So why would you be long any of that stuff when you could be long the following:


  1. Utilities (XLU) up another +1.3% yesterday to +13.3% YTD
  2. Energy (XLE) -0.2% yesterday to +12.5% YTD
  3. Healthcare (XLV) +0.1% yesterday to +11.6% YTD


Those are the Top 3 performing sectors in the SP500 and they are clean cut ways to be long of either A) #InflationAccelerating and/or B) the slow-growth #YieldChasing born out of it. One of our favorite ways to be long Healthcare inflation is being long the hospitals (HCA).


If you’re not into the US stock market naval gazing thing and want to diversify, across asset classes, you could also be long things like:


  1. Commodities – Nickel and Coffee were up another +0.2-1.1% yesterday to +39.4% and +63.6% YTD, respectively
  2. Emerging Market Equities – MSCI EM and LATAM indices are +8% and +11% YTD, respectively
  3. Long-term Treasury Bonds – our in-house fav (alongside TIP), the TLT is +13.4% YTD


Remember, “you aren’t the only one trying to do what you’re trying to do.” So try to stop guessing what the spoos or Dow are going to do next, and line up your investable Macro Themes with the asset allocations that will help you front-run your performance chasing competition.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.45-2.54%

SPX 1961-1987

RUT 1131-1155

VIX 11.94-14.29

Gold 1299-1323

Copper 3.20-3.27


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Macro Is The News - Chart of the Day

TODAY @ 1PM, Slides | Inside the Organic Food Industry Call

Takeaway: Expert call today @ 1pm. New Best Idea (short HAIN) call Thursday @ 1pm.


Toll Free Number:

Direct Dial Number:

Conference Code: 515973#




TODAY, August 12th @ 1PM


This call will feature guest speaker Bob Burke, Principal at Natural Products Consulting Group.  


Since 1998, Bob Burke has provided assistance in bringing natural, organic and specialty products to market across most classes of trade. This includes work in strategic planning, writing sales, marketing and business plans, building distribution, broker selection and management, organizational development and compensation, strategic options, financing, branding, trade spending and assistance around M&A, due diligence and venture strategy groups.  He is also the co-author of the Natural Products Field Manual, 6th Edition and The Sales Manager’s Handbook. Prior to consulting, Bob was with Stonyfield Farm Yogurt for 11 years as Vice President, Sales & Corporate Development.


During the call, Mr. Burke will focus on:

  • The state of the organic industry
  • GMO labeling and its impact on the food industry and supply chain
  • Thoughts on publicly traded organic stocks


TODAY’S S&P 500 SET-UP – August 12, 2014

As we look at today's setup for the S&P 500, the range is 51 points or 2.01% downside to 1898 and 0.62% upside to 1949.                                        













  • YIELD CURVE: 1.99 from 1.99
  • VIX closed at 14.23 1 day percent change of -9.77%


MACRO DATA POINTS (Bloomberg Estimates):

  • 7:30am: NFIB Small Business Optimism, July, est. 96 (pr 95)
  • 7:45am: ICSC weekly sales
  • 8:55am: Redbook weekly sales
  • 11:30am: U.S. to sell $50b 4W bills
  • 1:00pm: U.S. to sell $27b 3Y notes
  • 2pm: Monthly Budget Statement, July, est. -$96b (prior -$97.6b)
  • 4:30pm: API weekly oil inventories



    • Senate, House on Aug. recess; Obama on Martha’s Vineyard
    • Conn., Minn., Wis. hold primaries
    • U.S. ELECTION WRAP: Hawaii Primary; Democrats, GOP Cross Lines



  • Apple’s suppliers said to start production of new iPads
  • GM says China JV contacted by anti-monopoly regulator
  • Gross cuts govt-related debt in July amid Fed rate wagers
  • Sprint CEO plans cost cuts to compete aggressively for users
  • Caesars CEO: no qualified bidders for Revel in Atlantic City
  • Goldman, QNB said to arrange loan for Travelex acquisition
  • Tesla Model S defects emerged over time, Consumer Reports says
  • Samsung, Apple to lose global smartphone mkt share, Fitch says
  • Electronic Arts preps expanding games subscriptions worldwide
  • California smartphone anti-theft bill nears final approval
  • Barclays quant trading unit said to take employees in spinout
  • Russia sends aid convoy to Ukraine as U.S. warns on invasion
  • Maliki bid to block successor al-Abadi escalates Iraq crisis
  • Israel says no progress in Gaza talks as Egypt presses truce
  • German investor confidence slumps as Ukraine crisis worsens
  • Rio Tinto CFO questions Oyu Tolgoi mine expansion, JPM says
  • Mapp Pharma says supply of Ebola drug is exhausted



    • CST Brands (CST) 7am, $0.49
    • Flowers Foods (FLO) 6am, $0.24
    • Insys Therapeutics (INSY) 7am, $0.30
    • Kate Spade (KATE) 7:34am, break-even  - Preview
    • Towers Watson (TW) 6am, $1.25
    • Tribune Media (TRBAA) 8am, $0.62
    • Valspar (VAL) 7:30am, $1.16



    • Cree (CREE) 4:01pm, $0.41
    • Element Financial (EFN CN) 5:06pm, C$0.10
    • Fossil (FOSL) 4:01pm, $0.96
    • Jack Henry (JKHY) 4:15pm, $0.60
    • JDS Uniphase (JDSU) 4:05pm, $0.13
    • King Digital (KING) 4pm, $0.59 - Preview
    • Myriad Genetics (MYGN) 4:05pm, $0.46
    • Russel Metals (RUS CN) 5:05pm, C$0.47
    • Tahoe Resources (THO CN) 4:25pm, $0.21 - Preview
    • URS (URS) 4:05pm, $0.74
    • ViaSat (VSAT) 4:05pm, $0.14



  • Brent Crude Falls a Third Day With WTI as IEA Sees Supply Glut
  • Gold Is Little Changed Below 3-Week High in London on Ukraine
  • Nickel’s 56% Rally Spurs Mine Restarts Amid Ore Ban: Commodities
  • El Nino Signs Re-Emerge as Weakening Trade Winds Warm Pacific
  • Zinc Leads Industrial Metals Higher as Geopolitical Risks Ease
  • Wheat Extends Decline Before USDA Report on U.S. Crop Outlook
  • Palm Oil Futures Rebound From Lowest Level in More Than One-Year
  • Rubber Closes Near 4-Week Low on Concern China Demand Waning
  • China Aims to Approve Rare Earth Groups by Year-end: Sec. Daily
  • California Drought Alters Markets as Growers See Dry Future
  • Weakest Oil Demand Growth Since ’12 Allays Supply Risk, IEA Says
  • Tepco Said to Seek Spot LNG Cargoes for Delivery in Oct., Nov.
  • Dam Burst Won’t Delay Startup of New Mine, Imperial Says
  • Robusta Coffee Falls in London on Vietnam Supplies; Sugar Gains


























The Hedgeye Macro Team
















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.