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Don't Be Intimidated

“We will not be intimidated.”

-Stephen Harper


I drove up to Maine in the rain yesterday. My ride was a metaphor for macro markets in the last six weeks. I got in the car in the late morning – equities were up, on decelerating volume. There was a faint bid to European equities and Oil. There was some low-conviction selling in the bond market too.


“So”… I did the opposite (in Real Time Alerts) – going right back to our #Quad4 playbook, sending out buy signals in Munis (MUB) and sell signals in stocks with energy price related risks (MLPs like Linn Energy, LNCO). #Bubbles that bounce to lower-highs on no volume don’t intimidate me.


As I drove through New Hampshire in the early afternoon, the US equity markets picked up on the intraday drop in oil prices – and bonds caught a bid. I flipped through a few of the manic media’s channels – they all blamed Canada.


Don't Be Intimidated - EL chart 2


Back to the Global Macro Grind


While it would be nice if we could boil down intraday, weekly, and monthly macro market moves to a single factor like ebola or Canada, that is not how a non-linear and interconnected ecosystem (the market) works.


That’s why we spend so much time grinding through both multi-factor and multi-duration analysis. We will not write to you about risks in the rear-view. We will not be whipped around by newsy headlines either. Our Global Macro risk management process will not be intimidated.


There’s a great complexity theory quote in the WWII #history book I am in the middle of reading that summarizes how the American, British, and Canadian men acted when storming the beaches of Normandy on June 6th, 1944:


“Beset by mischance, confounded by disorder, they had mostly done what they were asked to do.”

-Rick Atkinson, The Guns At Last Light (pg 53)


And while I try to not feel anything when communicating #timing decisions in markets, I do want our analytical troops to feel confident that, instead of being glued to the screens and emotions of the moment, they can do what they were trained to do. #Process


To be clear, the process is dynamic and flexible. That means that if the economic facts and/or market read-throughs change, we are both equipped and tasked to change alongside those changing factors. If they don’t change, we double down on the #process.


In asset allocation terms, here’s what we did (before the morning part of that drive!) yesterday:


  1. CASH – took it down small, deploying assets to a region of the market that likes #Quad4 (Municipal Bonds – MUB)
  2. FIXED INCOME – took it up, in kind, to a 26% allocation (which is 78% of what I consider my max, 33%, to any asset class)
  3. EQUITIES – stayed the course with the “net zero” exposure, adding to the bear side of energy related shorts like LNCO


For those of you who are new to reading my rants, the Hedgeye Asset Allocation Model is basically like my p.a. (personal account). It’s not what a long-only fund with a mandate to be fully invested has to do. It’s not a hedge fund either. It’s simply what I would do with my money - not being intimidated!


“So”, when I say “net zero” that means that if I had to be in something like US Equities, at a minimum, I’d hedge (with alpha oriented shorts) out the market risk and have a beta-adjusted net exposure to that asset class of 0%.


That’s why, on the morning of October 17th, in the Early Look you saw an asset allocation to US Equities of +3%. After a stiff selloff, I signaled “buy” in #RealTimeAlerts in 1 of the 2 S&P Sectors that are LONGS in our #Quad4 playbook – Consumer Staples (XLP). Then I took us back to net zero, on the bounce.


I know. It’s not easy trying to communicate a process that the Old Wall doesn’t use.


Commercializing how I think about risk has been as much a communication learning process for me as it has been for those of you trying to learn it alongside me. I appreciate your open-mindedness. These are still the early days of our changing parts of a profession that needs changing.


Back to what is really crushing market expectations (it’s not Canada – it’s #Quad4 deflation):


  1. Oil prices got smoked for another -2.8% loss yesterday, taking WTI to down -18.2% YTD
  2. Bullish to Bearish Phase Transitions in both Energy prices and their related stocks/bonds is #on because Oil is crashing
  3. Alongside a -25% drop in WTI Crude since June, the Russian stock market has crashed (-25.8% YTD)


That’s also why the Canadian Stock Market (TSX) went from bullish to bearish TREND @Hedgeye. Not because some whacko loser started killing people in Ottawa yesterday. In chaos (or complexity theory) speak, that was simply the grain of sand that knocked over the interconnected sand-pile.


In our playbook, terrorism doesn’t have a quadrant; #deflation does. If our quantitative signal is right, and the price of oil remains in an intermediate-term TREND risk range of $64.67-86.11:


  1. Both Oil & Gas (XOP) and Energy (XLE) related equities are going to be bearish TREND
  2. MLP related stocks and bonds are going to start discounting distribution (dividend) cuts
  3. Kevin “The Bear” Kaiser is going to look really right on his Best Short Ideas!


Instead of listening to more than 3 minutes of market spew on the radio yesterday, on that same drive up to Maine’s coast, I smoked  a cigar (don’t tell my wife!) and listened to Kaiser’s Institutional Research call on MLPs from 1-2PM. It was awesome.


And I’m not just saying that because the man is on my team. I am telling you what it is to hear a world class analyst not be intimidated by institutional group-think and stay with a fundamental call that companies who don’t have the cash flow to pay out future promises are shorts.


Stocks that he doesn’t like (VNR, LNCO, etc.) got hammered intraday. If you’d like access to the replay of his call and 40 slide deck, please ping .


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.09-2.34%


RUT 1037-1119

VIX 15.09-28.26

WTI Oil 79.43-82.63

Natural Gas 3.59-3.79


Best of luck out there today,



Don't Be Intimidated - Chart of the Day


Takeaway: Our Macro Playbook is a daily 1-page summary of our core ETF recommendations, investment themes and proprietary quantitative market context.

CLICK HERE to view the document. In today’s edition, we highlight:


  1. How our Tactical Asset Class Rotation Model (TACRM) quantitatively combines Complexity Theory,  technical analysis and Behavioral Economics into unparalleled global financial market color and how we use that color to make informed risk management decisions
  2. How today's broad-based, global asset price deflation is similar to the setup that precipitated QE3 and why QE4 has be the bull case for anyone grossing up their exposure to risk assets here
  3. Why we think the bounce is Homebuilder stocks (via the ITB) is very shortable


Best of luck out there,


Darius Dale

Associate: Macro Team

Biting the Hand That Feeds

This note was originally published at 8am on October 09, 2014 for Hedgeye subscribers.

“If I were investing in oil and gas stocks, there is one question I would ask CEO’s: what portion of your capital is going to have to go in to stay even?”

-Gwyn Morgan, Former CEO of EnCana, 2002


Shale Gas now accounts for 40% of all U.S. natural gas produced, with its share expected to increase to 53% by 2040 according to EIA estimates. The U.S. has approximately 31 years of current aggregate domestic natural gas production in technically recoverable shale reserves (assuming all natural gas produced is from shale: ~60 years of recoverable reserves at peak estimated production levels).


The Bureau of Labor Statistics (BLS) recently reported that the largest employment increases since the shale revolution commenced circa 2006 have occurred in the four U.S. states which just so happened to have engaged in the heaviest amount of hydraulic fracturing: North Dakota, Louisiana, Oklahoma, and Texas.

Although an increase in overall drilling has ceased, the production of natural gas has increased dramatically. Companies can produce 6x the amount of natural gas they could from the same well in 2010. Smarter, more efficient drilling and better technology have contributed to the increase in well productivity in the last few years.


Many domestic industries benefit from the increase in U.S. natural gas production from the petrochemicals and fertilizers space to the iron, steel, and glass manufacturing players. With an abundance of this resource seemingly available at what should be cheap prices for years to come, why not take advantage?

  • Collectively embrace new projects
  • Quickly approve LNG Export terminals to help both domestic producers and the trade balance
  • Build an interconnected domestic network of pipelines

Biting the Hand That Feeds - 16


Why bite the hand that feeds?

Back to the Global Macro Grind…

Just to (again) re-iterate our preferred #QUAD4 positioning (GROWTH SLOWING, INFLATION DECELERATING):

  • We still like bonds (treasuries and munis)
  • We still think growth and inflation are slowing in the U.S.
  • We still have no evidence to suggest the monetary policy response in #Quad4 is anything but dovish

We outlined the outlook for the domestic economy in a #QUAD4 scenario in our macro themes call last week (ping sales@hedgeye.com for replay access).


If there was any question about the Fed-fueled leverage embedded in overall market levels, Janet Yellen’s dovish commentary that lifted the S&P 500 44 handles off the lows to close on the highs of the day should give some insight as to why the economy and the stock market become diverged (even for long periods of time)… UNTIL IT ENDS.


The global economy was cited as “weaker than anticipated” yesterday and the stock market rallied +2.3% off the lows.


The release of the Fed minutes from the September 16-17 meeting revealed that committee members were worried that:


“further gains in the dollar could hurt exports and damp inflation”

  • The S&P 500 airlifted off the lows to close +1.7% d/d
  • The 10-Yr yield backed up for the fourth consecutive day and is now at a new YTD LOW (2.28%) with every tick
  • The USD retreated 44 bps (RED AGAIN THIS MORNING)
  • Gold is ripping this morning on the follow through (+1.6%)


Why not just buy stocks and let the Fed have their “Free Lunch” as my colleague Christian Drake explained in Tuesday’s Early Look?  Why complain? Why bite the hand that feeds?

While the Fed can admittedly talk the currency in either direction, a #QUAD4 scenario also implies the existence of deflationary headwinds in the commodity space.  


The answer to Gwyn Morgan’s aforementioned quote is difficult to answer at the beginning of a project.


Which E&P projects are NPV positive? How can we possibly know?

With so much uncertainty in energy prices years into the future, this question is often left unanswered until it’s boom or bust. Energy companies certainly don’t like the disinflation of prices since mid-summer.


As you can see in today’s chart, the Thomson Reuters Wildcatter’s Index (small and mid-cap E&Ps) has retreated -33% from its June YTD highs. If you top-ticked that move, it was the same day you shorted oil at the 2014 highs. 


The steep premiums for natural gas in some parts of the United States shed light on the capital intensive nature of investing in the re-birth of the North American energy boom fueled by evolutionary production of shale rock resources.


While the onsite production is ramping-up across the country and flooding the market with supply, refining and transportation availability is still lacking, causing large premiums in those regions where it’s difficult to distribute resources. Developing the infrastructure requires time, and the profitability of each project is at the mercy of unpredictable oil and gas prices.

Marginal production costs in the Utica and Marcellus regions in Ohio, Pennsylvania, and West Virginia are as low as anywhere in the country. Yet, natural gas futures for January delivery in New England are priced $15 (highest nationally). If a producer in Utica could produce and refine for, call it $3, the spread is $12, so why not build a pipeline? Assume a pipeline was built from Harrison, WV to Boston (656 miles) at $3M/MILE (low-end of the cost structure).  The all in cost is approximately $2Bn.


While it’s easy to field one side of the argument to produce more oil and gas, create jobs, and export the extra supply (amidst a global slowdown), lower prices are squeezing domestic producers. With the lever-up, invest now-benefit later nature of the business, the most- sound companies who have picked the best projects to undertake will be able to withstand a further sell-off in oil and gas prices.


Rankings of Marginal Production Costs of U.S. Shale Plays (Lowest to Highest):

  1. Utica
  2. Southwest Marcellus
  3. Permian
  4. Northeast Marcellus
  5. Eagle Ford
  6. Granite Wash
  7. Niobrara
  8. Barnett
  9. Haynesville

Rankings of Natural Gas Production per New Rig (Highest to Lowest):

  1. Marcellus
  2. Haynesville
  3. Utica
  4. Niobrara
  5. Eagle Ford
  6. Bakken
  7. Permian


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.30-2.45%

SPX 1930-1975

RUT 1072-1123

DAX 8938-9317

VIX 14.16-17.58

USD 85.01-85.99

EUR/USD 1.26-1.28

Pound 1.60-1.62

WTI Oil 86.82-93.17

Nat. Gas 3.81-4.05

Gold 1195-1235

Copper 2.98-3.07


Ben Ryan



Biting the Hand That Feeds - 10.09.14 Wildcatters Index



TODAY’S S&P 500 SET-UP – October 23, 2014

As we look at today's setup for the S&P 500, the range is 118 points or 5.04% downside to 1830 and 1.08% upside to 1948.                                                           













  • YIELD CURVE: 1.86 from 1.86
  • VIX closed at 17.87 1 day percent change of 11.13%


MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Chicago Fed Natl Activity, Sept., est. 0.15 (pr -0.21)
  • 8:30am: Initial Jobless Claims, Oct. 18, est. 281k (pr 264k)
  • 9am: FHFA House Price Index m/m, Aug., est. 0.3% (prior 0.1%)
  • 9:45am: Markit US Mfg PMI, Oct. prelim., est. 57 (prior 57.5)
  • 9:45am: Bloomberg Consumer Comfort, Oct. 19 (prior 36.2)
  • 10am: Freddie Mac mortgage rates
  • 10am: Leading Index, Sept., est. 0.7% (prior 0.2%)
  • 10:30am: EIA natural-gas storage change
  • 11am: Kansas City Fed Mfg Activity, Oct., est. 6 (prior 6)
  • 11am: U.S. to announce plans to auction 2Y/5Y/7Y notes, 2Y FRN
  • 1pm: U.S. to auction $7b 30Y TIPS in reopening



    • Senate, House out of session
    • FEC filing deadline for congressional, some PACs, candidates for Oct. 1-15
    • 10am: Carnegie Endowment for International Peace discussion on “Disrupting ISIL’s Money Trail” w/ Treasury Undersecretary for Terrorism and Financial Intelligence David Cohen
    • 12pm: Conn. Democrats Rep. Joe Courtney, Rep. Rosa DeLauro press conf. at Daniels Energy on CFTC’s ability to rein in energy speculation tied to consumer price fluctuations
    • 1:30pm: Secretary of State John Kerry, Defense Sec. Chuck Hagel co-host Republic of Korea Foreign Minister Yun Byung-se, Minister of National Defense Han Min-Koo
    • U.S. ELECTION WRAP: ‘Coin Toss’ Whether Sen. Control Set Nov.4



  • Euro-Area Manufacturing Unexpectedly Revived in October
  • Goldman, Citigroup Said Wary of Ergen as He Mulls T-Mobile Bid
  • Ocwen Backdating Probe Draws Attention of Attorneys General
  • Alibaba’s Ma Said Headed to Hollywood in Push for Content
  • Honda Air-Bag Deaths Draw Congress Scrutiny as Recalls Widen
  • Gundlach With Pimco See Dollar Extending Best Rally Since 2008
  • Twitter’s New Developer Tools Put Company Deeper Into China
  • Tesla to Start Selling Cars Through Australian Outlets: AFR
  • AT&T Cuts 2014 Forecast, Misses Estimates Amid Price Battles
  • Parliament Attack Drags Canada Into Terror Era as Nation Reels
  • Auto Lending Puts Canada’s Banks at Risk in Slump, Moody’s Says
  • China Factory Gauge Rises as Workers Weather Slowdown
  • Publicis’s Levy Pledges Turnaround After Cutting Sales Forecast
  • Unilever 3Q Underlying Sales Growth Misses Estimates
  • Credit Suisse Profit More Than Doubles as Trading Improves



    • 3M Co (MMM) 7:30am, $1.96 - Preview
    • Airgas (ARG) 7:30am, $1.30
    • Alaska Air (ALK) 6:01am, $1.42
    • Alexion Pharmaceuticals (ALXN) 6:30am, $1.16 - Preview
    • AllianceBernstein  (AB) 7:15am, $0.44
    • American Electric Power (AEP) 6:57am, $1.01
    • Avnet (AVT) 8am, $0.97
    • BankUnited (BKU) 7:30am, $0.45
    • Bemis (BMS) 7am, $0.67
    • Brunswick (BC) 7:36am, $0.58
    • Cameron Intl (CAM) 7:30am, $1.09
    • Caterpillar (CAT) 7:30am, $1.34 - Preview
    • Celgene (CELG) 7:33am, $0.95 - Preview
    • Cenovus Energy (CN) 6am, $0.42 - Preview
    • CMS Energy (CMS) 7:30am, $0.39
    • Coca-Cola Enterprises (CCE) 7:30am, $0.88
    • Colfax (CFX) 6am, $0.61
    • Comcast (CMCSA) 7am, $0.71 - Preview
    • Corus Entertainment (CJR/B CN) 7am, C$0.42
    • Dana Holding (DAN) 7am, $0.51
    • Diamond Offshore (DO) 6am, $0.79 - Preview
    • Dr Pepper Snapple (DPS) 8am, $0.88
    • Dunkin’ Brands (DNKN) 6am, $0.47
    • Eli Lilly (LLY) 6:30am, $0.67 - Preview
    • EQT (EQT) 7am, $0.50
    • General Motors (GM) 7:30am, $0.95 - Preview
    • Hercules Offshore (HERO) 7am, ($0.06)
    • Husky Energy (HSE CN) 7am, C$0.58 - Preview
    • Janus Capital (JNS) 7am, $0.22
    • Jarden (JAH) 7:05am, $1.16
    • JetBlue Airways (JBLU) 7:30am, $0.26
    • KKR & Co (KKR) 8am, $0.45
    • Lazard (LAZ) 7am, $0.65
    • Lorillard (LO) 7am, $0.89 - Preview
    • Mead Johnson Nutrition (MJN) 7:30am, $0.90
    • Nielsen (NLSN) 7am, $0.65
    • Nucor (NUE) 9am, $0.75 - Preview
    • Occidental Petroleum (OXY) 7am, $1.59
    • Patterson-UTI Energy (PTEN) 6am, $0.47
    • Potash of Saskatchewan (POT CN) 6am, $0.42 - Preview
    • PulteGroup (PHM) 6:30am, $0.36 - Preview
    • Quest Diagnostics (DGX) 7am, $1.08
    • Raytheon (RTN) 7am, $1.60
    • Reliance Steel & Aluminum (RS) 8:50am, $1.35
    • Rogers Communications (RCI/B CN) 6:57am, C$0.88 - Preview
    • Royal Caribbean Cruises (RCL) 8:36am, $2.19
    • Shaw Communications (SJR/B CN) 8am, C$0.37
    • Sigma-Aldrich (SIAL) 8am, $1.06
    • Silicon Laboratories (SLAB) 6am, $0.48
    • Sonus Networks (SONS) 7:01am, $0.01
    • Southwest Airlines (LUV) 8:30am, $0.53 - Preview
    • TRowe Price (TROW) 7:30am, $1.15
    • Under Armour (UA) 7am, $0.40 - Preview
    • Union Pacific (UNP) 8am, $1.51 -Preview
    • United Continental (UAL) 7:30am, $2.70
    • USG (USG) 8:30am, $0.46
    • Zimmer Holdings (ZMH) 7am, $1.30



    • Align Technology (ALGN) 4:01pm, $0.43
    • Altera (ALTR) 4:15pm, $0.37
    • Amazon.com (AMZN) 4:05pm, ($0.75) - Preview
    • BioMarin Pharmaceutical (BMRN) 4:01pm, ($0.24)
    • Cerner (CERN) 4:01pm, $0.42 - Preview
    • Chicago Bridge (CBI) 4:05pm, $1.39
    • Chubb (CB) 4:01pm, $1.95
    • Compuware (CPWR) 4:10pm, $0.07
    • Deckers Outdoor (DECK) 4:05pm, $1.03 - Preview
    • DeVry Education (DV) 4:05pm, $0.29
    • Edwards Lifesciences (EW) 4:01pm, $0.72
    • Federated Investors (FII) 4:01pm, $0.35
    • Flowserve (FLS) 4:08pm, $0.99
    • Freescale Semiconductor (FSL) 4:05pm, $0.42
    • Greenhill (GHL) 4:01pm, $0.60
    • Hancock Holding (HBHC) 5pm, $0.58
    • Informatica (INFA) 4:05pm, $0.33
    • Ingram Micro (IM) 4:03pm, $0.62
    • Juniper Networks (JNPR) 4:05pm, $0.36
    • KLA-Tencor (KLAC) 4:15pm, $0.46
    • LogMeIn (LOGM) 4:08pm, $0.28
    • Maxim Integrated Products (MXIM) 4:01pm, $0.37
    • Microsoft (MSFT) 4:02pm, $0.55
    • Minerals Technologies (MTX) 5:01pm, $1.07
    • NetSuite (N) 4:08pm, $0.04
    • Olin (OLN) 4:30pm, $0.42
    • Pandora Media (P) 4:02pm, $0.08
    • Pebblebrook Hotel (PEB) 4:01pm, $0.63
    • PolyOne (POL) 4:05pm, $0.48
    • Principal Financial (PFG) 4pm, $1.06
    • Qlik Technologies (QLIK) 4:05pm, $0.00
    • ResMed (RMD) 4:05pm, $0.58
    • Riverbed Technology (RVBD) 4:05pm, $0.30
    • Simpson Manufacturing (SSD) 5pm, $0.45
    • Southwestern Energy (SWN) 4:10pm, $0.52
    • Spectranetics (SPNC) 4:01pm, $(0.30)
    • Stericycle (SRCL) 4:02pm, $1.06
    • SVB Financial (SIVB) 4:12pm, $1.23
    • Swift Transportation (SWFT) 4:11pm, $0.35
    • Synaptics (SYNA) 4:15pm, $1.20
    • Valmont Industries (VMI) 5:30pm, $2.18
    • VeriSign (VRSN) 4:05pm, $0.69
    • VeriSign (VRSN) 4:05pm, $0.69
    • Washington REIT (WRE) 5:15pm, $0.42
    • WR Berkley (WRB) 4:01pm, $0.91



  • Copper Climbs as Chinese Manufacturing Growth Exceeds Estimates
  • Wheat Climbs as Russian Cold Spell Threatens Newly Planted Crops
  • Cocoa Falls After Decline in Asian Grind; Coffee Extends Drop
  • Manhattan’s Mr. Chocolate Proves Cost Not a Problem: Commodities
  • Gold Falls for Second Day on Economic Growth, ETP Demand Drops
  • Rio Extends CEO Tenure as Miner Builds Defenses Against Glencore
  • African Barrick Sees Potential for Big Gold Deal in 2015
  • Cocoa Processing Drops 5.9% in Asia as Higher Prices Curb Demand
  • Potash Corp. Earnings Disappoint as Nutrient Prices Decline
  • Nestle Says Ebola Outbreak Spurs Faster Africa Cocoa Shipments
  • Soybeans Extend Gains in Chicago, Erasing Earlier Decline
  • Rebar Falls to 2-Week Low as Demand Seen Weak in Rest of 2014
  • Asia’s 3Q Cocoa Grindings Drop 5.9% to 151,643 Tons
  • Libya OPEC Governor Calls for Crude Output Cut Amid Bear Market


























The Hedgeye Macro Team


















October 23, 2014

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October 23, 2014 - Slide2

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October 23, 2014 - Slide9

October 23, 2014 - Slide10

October 23, 2014 - Slide11
October 23, 2014 - Slide12

TGT - Temporary 'Free Shipping' is a Very Bad Precedent For All

Takeaway: Don’t let this ‘free shipping’ promo sneak under the radar. It ushers Retail to a place where few can be profitable. TGT is not one of them.

Conclusion: Target offering free shipping over the holidays accelerates a trend that we think will play out over two years -- which is that almost all retailers offer free shipping and free returns. Only those with the highest basket size (Nordstrom) can win at this game. Other retailers are likely to follow TGT over the near term. The math does not look good.




Every year there seems to be a new strategy the retailers embrace to gain share of wallet as the Holiday's approach.  With many stores now open all day on Thanksgiving and staying open 24/7 in the final stretch in December, there's not much more (aside from price) that the retailers can do to get more people to shop at the stores. But Target has an interesting, albeit costly, idea.


TGT is offering free shipping on all items in the store for online customers beginning yesterday, and lasting through Dec 20th. This is a huge event for retail -- at least how we see it.  And it does not result in profitability going up, unfortunately.


Common perception is that e-commerce margins are higher than brick & mortar. That might be true for content owners like Ralph Lauren, Nike and UnderArmour -- who can side step a wholesaler and capture 100% of the margin. But for retailers like Target, Macy's, Kohl's and JC Penney, e-commerce is not margin accretive.


Take KSS, for example. It's e-commerce gross margins are about 25% -- 1,200 basis points below the company average. The big culprit is the triangulation of lower-value (commodity) product, low basket size, and fixed shipping costs.


In the example below, you can see that a company like Nordstrom, which is the only retailer that offers free shipping and free returns, has a big enough basket size due to very defendable brands and price/points such that it can still print a superior e-commerce gross margin. Other retailers -- even Macy's, which is known for being a trailblazer in e-commerce (we don't particularly agree) has an extremely high threshold for free shipping ($99), and still does not have a superior e-commerce margin.

TGT - Temporary 'Free Shipping' is a Very Bad Precedent For All  - TGT 10 23 chart1



Our concern about this move by TGT is that it currently has a $50 'free shipping' threshold. Over the next two months, if you want to buy a package of q-tips for $3.89, or a package of pacifiers for $5.89, you get them delivered for free.   Unfortunately, the shipping cost on those items is about double the gross profit that Target would otherwise record.

TGT - Temporary 'Free Shipping' is a Very Bad Precedent For All  - TGT 10 23 chart2



Another angle on shipping costs is that a by-product of a 'free shipping' threshold is that it causes many consumers with a low basket size to come in to the store to pick up the product to avoid a $5-$10 shipping charge. According to Target, 14% of its digital sales are picked up in stores, and then about 20% of those customers buy additional items. What happens now that shipping is free?


We're not as concerned about this event as a negative for Target, but we are definitely concerned that (almost) all retailers are gravitating to a very unprofitable place -- that's free shipping and free returns. Free shipping is kind of like a dividend -- once you give it, you really can't take it away without severe repercussions.

TGT - Temporary 'Free Shipping' is a Very Bad Precedent For All  - TGT 10 23 chart3

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