Cartoon of the Day: When Doves Cry

Takeaway: All eyes on Janet Yellen in Jackson Hole later this week.

Cartoon of the Day: When Doves Cry - Yellen cartoon 08.18.2014

Hedgeye In the News: Kinder Morgan, MLPs and the Sell Case

Takeaway: Take a few minutes to read Izabella Kaminska's article on Kinder Morgan and MLPs.

An excellent, must-read piece on Kinder Morgan (KMI) by Izabella Kaminska on FT Alphaville today. She writes:


The $44bn self-acquisition of Kinder Morgan has been heralded by some as a great deal for shareholders.

But is it? Is it really? At least for the ordinary investors?

We’ve already wondered about the motivation for the deal.


Hedgeye In the News: Kinder Morgan, MLPs and the Sell Case - km9


Kaminska goes granular questioning the ongoing spectacle with MLPs, CEO Rich Kinder’s financial alchemy and more.


As you may have already guessed, Hedgeye energy analyst Kevin Kaiser figures prominently in the story.


Hedgeye In the News: Kinder Morgan, MLPs and the Sell Case - kaiser


Click here to read on FT.

Early Look

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Takeaway: Builder confidence hits its highest level in 7 months with "optimism" and the largest MoM increase ever in the Midwest driving the upside.

Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume.




Today's Focus: August NAHB HMI (Builder Confidence Survey)

This month (August), the NAHB’s HMI, which measures builder confidence, rose to 55, a gain of two points from July’s print of 53 (which was not subject to any revision), marking the highest reading in seven months and the second month above the improvement demarcation line of 50 on the Index.

  • Sub-Indices:  All 3 sub-indices increased MoM for a 3rd consecutive month with balanced gains across Current Sales (+2pts), 6M expectations (+2pts) and Current Traffic (+3pts)  
  • Mid-West Mojo: Builder Confidence declined modestly in the West and South while rising modestly in the Northeast.  Notably, the Midwest region saw its largest MoM increase ever, increasing +13 pts from July to August


Prognostic or Pollyanna? Last month’s gain in Builder Confidence was led by rising optimism with the forward expectations component registering a disproportionate increase.  This month saw a commensurate increase in current sales and forward expectations, leaving the “optimism spread” at its highest level since 3Q12.   


Perhaps the modest, ongoing improvement in the labor market is buoying stakeholder confidence in the housing market but, in relation to the preponderance of demand and HPI data (purchase apps, new home sales/start, pending home sales), builder confidence continues to decouple from the reality of actual new construction activity.  


We’ll get the housing starts/permits data for July tomorrow, but with permits running largely flat with flagging Starts figures YTD (& declining in the latest month) the upside for single family construction over 2H appears somewhat constrained.


COMMENTARY:  After recurrent flip-flopping on the chosen spin the last few months, the August commentary was expectedly balanced and largely canned:


NAHB Chairman Kevin Kelly had this to say on the August reading: 


“As the employment picture brightens, builders are seeing a noticeable increase in the number of serious buyers entering the market...However, builders still face a number of challenges, including tight credit conditions for borrowers and shortages of finished lots and labor.”


NAHB's Chief Economist, David Crowe, added this:  


“Each of the three components of the HMI registered consecutive gains for the past three months, which is a positive sign that builder confidence appears to be firming following an uneven spring…Factors contributing to this rise include sustained job growth, historically low mortgage rates and affordable home prices, which are helping to unleash pent-up demand.”

















About the NAHB HMI:

The Housing Market Index (HMI) is based on a monthly survey of NAHB members designed to take the pulse of the single-family housing market. The monthly survey has been conducted for 30 years. The survey asks respondents to rate market conditions for the sale of new homes at the present time and in the next 6 months as well as the traffic of prospective buyers of new homes. The HMI is a weighted average of separate diffusion indices for these three key single-family series. The HMI can range from 0 to 100, where a value over 50 implies conditions are, on average, improving, a value below 50 implies conditions are worsening, and an index value of 50 indicates that the housing market is neither improving nor worsening.



Joshua Steiner, CFA


Christian B. Drake


Retail Callouts (8/18): FDO, DG, DLTR, TGT, WMT

Takeaway: DG will ‘win’ FDO. But at much higher price. Good for FDO. Bad for DG. Neutral for DLTR. Horrible sign for quality of growth in US retail.



Monday (8/18)

  • URBN - Earnings Call: 5:00pm


Tuesday (8/19)

  • HD - Earnings Call: 9:00am
  • DKS - Earnings Call: 10:00am
  • TJX - Earnings Call: 11:00am


Wednesday (8/20)

  • SPLS - Earnings Call: 8:00am
  • LOW - Earnings Call: 9:00am
  • PETM - Earnings Call: 10:00am
  • TGT - Earnings Call: 10:30am
  • AEO - Earnings Call: 11:00am


Thursday (8/21)

  • DLTR - Earnings Call: 9:00am
  • BONT - Earnings Call: 10:00am
  • GPS - Earnings Call: 4:00pm
  • GME - Earnings Call: 9:00am


Friday (8/22)

  • ANN - Earnings Call: 8:30am
  • FL - Earnings Call: 9:00am
  • HIBB - Earnings Call: 10:00am




DG, FDO, DLTR - Dollar General Makes Proposal to Acquire Family Dollar for $78.50 Per Share



  • "Dollar General today announced it has made a proposal to acquire Family Dollar Stores, Inc. for $78.50 per share in cash, in a transaction valued at $9.7 billion. The proposal was conveyed this morning in a letter to Family Dollar's Board of Directors. This transaction would deliver increased consideration and immediate liquidity to Family Dollar's shareholders and represents a compelling opportunity to create value for Dollar General shareholders."


Takeaway: First, before even considering which two companies are a better fit, we think that the most glaring observation is that we're talking about STARTING a bidding war for a company as poor quality as FDO in between 11x-12x EBITDA. Again, let's let this one digest…11.6x EBITDA for a dollar store.  Whether FDO is looking to aggressively sell itself, or DLTR and DG are finding it critical to chase after poor quality growth, it does not send a great signal about the their collective view of the US economy.


Second, this is far from over. You (DG) don't go into a bidding process only 5.5% above the prevailing bid -- even if the deal is all cash vs 80% cash/20% stock for DLTR -- expecting to win the deal outright, especially when you're going hostile against an otherwise friendly merger.


Third, this deal probably makes more strategic sense for DG even at a slightly higher multiple. The $78.50 price per share implies a 11.6x EV/EBITDA forward multiple. Given the assumed synergies  for a combined DG/FDO at $550mm-$600mm on an annualized basis compared to DLTR/FDO at $300mm. That takes the 2016 multiple down to 6.1x for FDO and 7.5x for DLTR.


Our Prediction: DG walks away with this one. But it's going to be expensive. Our bet is that FDO is bought for $85, or nearly 13x EBITDA. That's great for FDO shareholders. Bad for DG. And an even worse sign about how hard it is to find quality growth in US retail today.




TGT - Target to Keep Some Stores Open to Midnight in Push for Traffic



  • "Target Corp. TGT is keeping its doors open later at more than half of its U.S. stores, hoping to snag guests who are putting off shopping until well after dark and might have gone elsewhere."
  • "The chain's nearly 1,800 U.S. stores had typically opened at 8 a.m. and closed at 10 p.m. on weekdays and Saturdays and at 9 p.m. on Sundays. The new hours will keep stores open until 10 p.m. or 11 p.m. on Sundays and until 11 p.m. or midnight on other days."


WMT - Wal-Mart makes holiday ‘checkout promise,’ pledges to staff every register



  • "A day after announcing a disappointing second quarter, Wal-Mart Stores has made an aggressive holiday promise to its customers: the world’s largest retailer says it will staff every cash register from the day after Thanksgiving through the days just before Christmas during peak shopping times."
  • "Wal-Mart’s 'checkout promise' is aimed at addressing lengthy waits in checkout lines."


GME - NCAA Legal Controversy Leads to a Slow Summer for Video Games



  • "... industrywide revenue from new video game software was down 15 percent in July, to $178 million, compared with a year earlier. Sales of newly launched games were down almost 70 percent, which was almost entirely the result of the lack of a new version of NCAA Football, according to NPD."


Jones Group - Exclusive: Shoe retailer Stuart Weitzman to go on auction block - sources



  • "Women's shoe retailer Stuart Weitzman is preparing to launch a sale process and has tapped investment banks Goldman Sachs Group Inc and Citigroup Inc to assist with the effort, people familiar with the matter said."
  • "The New York-based retailer could fetch a price well below $1 billion, two of the people said this week. Others said the ultimate sale price could be around $800 million."
  • "Sycamore Partners, the New York-based private equity owner of Stuart Weitzman, acquired the brand as part of its $2.2 billion purchase of Jones Group Inc earlier this year."
  • ansion into Canada are shoe stores, auto parts stores, and lingerie, swim and bridal stores." Quarterly Revenue Rises 64%



  • " Inc, China's second-largest e-commerce company, reported a 64 percent rise in quarterly revenue as the number of its active customers nearly doubled."
  • "However, net loss widened to 582.5 million yuan ($93.9 million)"


AdiBok - Adidas unveils Bayern Munich 2014-15 third official jersey



  • "adidas and Bayern Munich are excited to announce the launch of the new official third jersey for the 2014/2015 season, a kit that seeks both to celebrate the club´s extraordinary legacy in the UEFA Champions League and also its unique team spirit."


Austria’s Signa buys Karstadt department store chain for just €1



  • "Karstadt, the struggling German department store chain, is being taken over by Austria’s Signa Group, ending weeks of speculation over the company’s future after the shock departure of its chief executive in July.
  • Signa, founded by Austrian investor René Benko, will pay just €1 for the lossmaking chain, whose 83 stores across Germany employ 17,000 people. The Austrian group will also take over the remainder of Karstadt Premium department stores and KarstadtSports, after buying a 75.1 per cent stake in the groups last year."