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The Reflation Trade Unwind

The Reflation Trade Unwind - z defla

 

The “reflation-trade,” “global growth is back” crowd is getting smoked again as everything levered to inflation expectations underperforms.

 

The Energy (XLE), Materials (XLB), and Industrials (XLI) sectors are down -9%, -8%, and -3% in July vs. a flat S&P 500 as widening risk ranges and heightened volatility premiums manifest in commodities markets. These markets may look oversold, but given the awful Q1 Q/Q SAAR GDP print, Q2 may look like a notable acceleration on Thursday for the Q/Q SAAR navel-gazers.

 

If rate hike expectations are pulled forward, strap your seatbelts and look out below (again) in the short-term for commodities and their related sectors.

 

The Reflation Trade Unwind - Z 07.27.15 chart 


KMI | 2Q15 10-Q Review (Hiland, G&P, S&T, Coal)

Kinder Morgan, Inc. (KMI) published its 2Q15 10-Q on 7/24.  We didn't find anything earth-shattering in the filing, and a boring 10-Q is a good 10-Q...  That said, there were some interesting segment / asset-level data points that deserve mention.

 

Detail on Shell Acquisition......“On July 15, 2015, we purchased from Shell US Gas & Power LLC (Shell) for $200 million its 49% interest in a joint venture, ELC, that was formed to develop liquefaction facilities at Elba Island, Georgia. The purchase gives us full ownership and control of ELC. Shell continues to subscribe to 100% of the liquefaction capacity.” 

 

Hiland EBDA Contribution Disclosed......KMI disclosed that the Hiland G&P assets contributed $36MM of EBDA to Natural Gas Pipelines and the Hiland Double-H crude pipeline contributed $12MM of EBDA to Products Pipelines in 2Q.  Assuming $20MM of annual G&A, that puts the acquisition multiple at 18x current EBITDA.

 

G&P Weakness Hits Natural Gas Pipelines......Natural Gas Pipelines EBDA was down YoY on an organic basis (ex. Hiland), with the commodity-sensitive G&P assets weighing on the segment:

 

KMI | 2Q15 10-Q Review (Hiland, G&P, S&T, Coal) - kmi natgas

 

CO2 S&T EBDA Down 32% YoY......In our view, the market under-appreciates KMI's oil price exposure in its CO2 S&T business.  In 2Q15, S&T EBDA was down 32% to an implied $79MM (~$320MM annualized):

 

KMI | 2Q15 10-Q Review (Hiland, G&P, S&T, Coal) - kmi S T

 

Weak Bulk Terminals Volumes Bodes Poorly for Future EBDA......Bulk transload volumes were down 22% YoY, while Gulf Bulk EBDA was actually up $6MM (+32%) due to "increased shortfall revenue from take-or-pay coal contracts.”  MVCs for KMI's major coal export customers, BTU and ACI, likely expire around 2020 - 2021 (see KMI's 2012 10-K), though with those coal companies' unsecured bonds currently trading ~10 - 30 cents on the dollar, those contracts could be at risk of default / renegotiation.  See this presentation for more on KMI's coal exposure

 

Commodity Hedges......KMI's commodity derivatives disclosure is poor, though it looks as though the significant QoQ change was a ~30MMbbls increase in NGL fixed price swaps.  KMI also added some natural gas basis swaps.  As of 6/30/15, KMI's commodity derivatives were marked on the balance sheet at $317MM, net.

 

KMI | 2Q15 10-Q Review (Hiland, G&P, S&T, Coal) - KMI hedge

 

YTD Equity Issuance......"During the six months ended June 30, 2015, we issued and sold 62,079,878 shares of our Class P common stock pursuant to the equity distribution agreement, and issued an additional 968,900 shares after June 30, 2015 to settle sales made on or before June 30, 2015, resulting in net proceeds of $2,599 million."

 

2015 CapEx Guidance Revised Slightly Lower......"Sustaining" CapEx: $603MM, down from $614MM prior; "discretionary" CapEx: $4,098MM, down from $4,179MM prior.

 

Link to 7/16 Note: KMI 2Q15 Recap & Valuation Update

Link to Updated Valuation Sheet: KMI Valuation Tear Sheet (Excel)  

 

Kevin Kaiser

Managing Director


Cartoon of the Day: Long China?

Cartoon of the Day: Long China? - China cartoon 07.28.2015

 

From Hedgeye research this morning:

 

Following yesterday’s -8.5% plunge, the Shanghai Composite failed to take advantage of several pledges of continued support out of the Chinese brass to close down -1.7% on the day. After rallying +17.6% off the lows on the back of heavy-handed policy intervention, the mainland’s benchmark equity bourse has dropped -11.2% over the past three days. Looking eerily similar to the chart of the NASDAQ in 2000, we continue to think the A-Shares have a healthy degree of downside from here amid margin calls and asset class re-rotation risk.


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HH Formation vs HPI = Momo vs. So-So

Takeaway: HVS Household formation trends mark their third consecutive quarter of bullish breakout. Case-Shiller HPI trends, meanwhile, remain subdued.

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.

 

HH Formation vs HPI = Momo vs. So-So - Compendium 072815

 

Today’s Focus:  2Q15 Homeownership and Vacancy Survey & May Case-Shiller HPI

 

Homeownership and Vacancy Survey: 2Q15

The Census Bureau released the Homeownership and Vacancy Survey (HVS) for 2Q15 this morning.

 

First, the caveats.  The HVS survey is timely and widely cited, but it’s volatile and doesn’t always comport cleanly with the more comprehensive annual Census/CPS housing surveys or a common sense reading of reality. 

 

We take the data with a grain of salt and, while we view the magnitude of change as a distorted reflection of the underlying reality, we view directional changes in the data as a largely accurate depiction of the underlying trend.  

 

Household Formation:  Household formation in 4Q of last year saw a big step function move higher with the yearly net change in households jumping to 1.6 MM – the largest increase in a decade. Those gains saw follow through strength in the 1st quarter of 2015 with household formation up approximately 1.5 MM year-over-year.   The update for 2Q shows net HH formation up +2.16 MM YoY  (+1.05 MM QoQ) – with the gains, again, singularly a result of rising rental demand as the rental vacancy rate declined to a new multi-decade low of 6.8%, pushing excess for-rent inventory further into deficit. 

 

Homeownership:  The National Homeownership rate dropped to 63.4% in 2Q from 63.7% prior, marking a new 48-year low.  Homeownership rates declined across age groups with the notable exception of 18-34 year-olds where the rate improved to 34.8% from 34.6% prior. 

 

In light of the marked improvement in household formation in recent quarters it's worth re-remembering the fundamental short-comings of the Homeownership Rate. 

 

Households can either be Renters or Owners and the Homeownership Rate represents Owners/(Owners + Renters).  Thus, if the number of households is increasing but the number or renters is rising faster than the number of owners (as is the case currently), then the Homeownership Rate will decline. 

 

It’s hard to characterize strong household formation growth – regardless of type - as a fundamentally negative development for the housing market, particularly with the propensity for strong rental market demand and rising rental prices to serve as a conduit to rising single-family purchase demand.

 

Bottom Line:  The magnitude of increase in HH formation reported by the Census Bureau is likely overstated but the trend towards improving formation rates is probably correct.   The maturation of the employment recovery broadly and accelerating employment growth across the 25-34 YOA group specifically (where positive employment growth is just now reaching the 2.5yr mark) supports the trend in the HH formation data and the reported rise in homeownership rates among young buyers.   We expect headship rates, which = households/population and represents a more comprehensive measure of participation, to improve alongside labor/income fundamentals.  We’ll get the official data for 2014 from the Census bureau in September.  

 

 

Case-Shiller HPI (May)

The Case-Shiller 20-City HPI for May released this morning – which represents average price data over the March-May period – showed home prices declining -0.2% MoM and decelerating to +4.9% year-over-year (vs +5.0% prior). 

 

On an NSA basis, all 20 cities reported sequential increases in May while on an SA basis, 10-cities reported declines.   Notably, Index heavyweights New York, Boston, Chicago, San Francisco and D.C, which collectively carry a 45% weight in the 20-city index, all showed sequential declines.  Moreover, Los Angeles, which alone carries a 15% weighting managed just a 0.1% gain on the month.   Performance by City is illustrated in the scatterplots below. 

 

In contrast to the 20-city series, the National HPI which covers all U.S. Census divisions showed a modest +10bps acceleration sequentially to +4.4% YoY.   

 

The deceleration in the 20-city series also stands in contrast to both the CoreLogic HPI and FHFA HPI series for May which showed a marked acceleration in price growth.   As it stands, we remain inclined to side with the CoreLogic data as it's more leading and accords with the rising demand, tightening supply dynamic prevailing currently.   

 

Price growth can’t sustainably accelerate at a premium to income growth in a flat rate environment and select markets like San Francisco are certainly over-stretched from an affordability perspective but, in the aggregate, affordability remains good, sitting perched right between the bottom and second-from-bottom quartile of the last ~30 years.  

 

On the HPI front, the more important release will be next week’s CoreLogic data for June along with the short-term projection for July. 

 

HH Formation vs HPI = Momo vs. So-So - CS National HPI vs 20 City HPI

 

HH Formation vs HPI = Momo vs. So-So - CS 20 City HPI NSA YOY  TTM

 

HH Formation vs HPI = Momo vs. So-So - CS SA MoM

 

HH Formation vs HPI = Momo vs. So-So - CS MoM   vs City Weight in Index

 

HH Formation vs HPI = Momo vs. So-So - CS MoM Vs YoY TTM Scatterplot

 

HH Formation vs HPI = Momo vs. So-So - HVS HH Formation by Type Cumulative chg

 

HH Formation vs HPI = Momo vs. So-So - HVS HH Formation 2Q15

 

HH Formation vs HPI = Momo vs. So-So - HVS Homeownership Rate

 

HH Formation vs HPI = Momo vs. So-So - HVS Homeownership Rate 18 34YOA

 

HH Formation vs HPI = Momo vs. So-So - HVS Rental Vacancy Rate 

 

 

About Case Shiller:

The S&P/Case-Shiller Home Price Index measures the changes in value of residential real estate by tracking single-family home re-sales in 20 metropolitan areas across the US. The index uses purchase price information obtained from county assessor and recorder offices. The Case-Shiller indexes are value-weighted, meaning price trends for more expensive homes have greater influence on estimated price changes than other homes. It is vital to note that the index’s printed number is a 3-month rolling average released on a two month delay.

 

Frequency and Release Date:

The S&P/Case-Shiller HPI is released on the last Tuesday of every month. The index is on a two month lag and therefore does not reflect the most recent month’s home prices.

 

 

 

Joshua Steiner, CFA

 

Christian B. Drake

 


Our Healthcare Analyst Thinks athenahealth Has Over 50% Upside From Here | $ATHN

This past Thursday our Healthcare Sector Head Tom Tobin held a conference call updating his team’s bullish thesis on athenahealth (ATHN) ahead of the print with institutional subscribers. ATHN continues to be one of his team’s Best Long Ideas.

 

Our Healthcare Analyst Thinks athenahealth Has Over 50% Upside From Here | $ATHN - z athn 1

 

The stock has risen over 15% since Tobin’s call.

 

According to Tobin, there was little for bears to hang onto coming out of the quarter in this battleground stock – lower revenue per physician due to higher enterprise client mix.

 

Among the many positives include record bookings, a second straight quarter with the financial component of the balanced scorecard above 100% at 115% (proxy for bookings), and Collector physician adds that beat estimates (2k vs. 1.6k), which is the product that matters.

 

In addition, while profitability is currently masked by high levels of investment to drive growth, ultimately, we think they will be a mid-70% gross margin (63% currently), high-20% operating margin business (10% currently).

 

At around +30% short interest, we think this recent move higher is just the beginning. We still think this is a $200+ stock, and have greater confidence in ATHN tracking to our long-term adoption forecast model toward 15% share of the ambulatory physician market.

*  *  *  *  *

 

(Send an email to sales@hedgeye.com if you would like access to our latest ATHN Black Book)


Retail Callouts (7/28): BTS Outlook = Weak | KER Luxury Read-throughs

Takeaway: Flat BTS forecasts, as chain store comps remain difficult. Kering luxury read-throughs to NA and Japan.

ICSC - Chain Store Sales

 

The ICSC trend line is a bit noisy but what is clear is, we've seen a deceleration in the 1yr number from the mid to high 3's to the low to mid 2's since we exited May. We don't see that reaccelerating anytime soon as comps remain elevated and BTS forecasts from 3 sources now (see below) are less than optimistic.

Retail Callouts (7/28): BTS Outlook = Weak | KER Luxury Read-throughs - 7 28 chart1

Retail Callouts (7/28): BTS Outlook = Weak | KER Luxury Read-throughs - 7 28 chart2

 

 

Deloitte & Brand Keys Back To School Forecasts - Looking For Flat Growth YY

(http://www.retailingtoday.com/article/deloitte-back-school-shoppers-taking-their-time)

(http://wwd.com/retail-news/specialty-stores/b-t-s-spending-expected-to-be-flat-brand-keys-survey-10193173/)

 

Another bleak outlook for BTS this time from Deloitte and Brand Keys. While not as sour as the NRF forecast which called for a 5.8% decrease in spending per family, the flat number published by the two sources mentioned above are not overly optimistic. If we look at the ICSC numbers, comps remain difficult throughout BTS and that synchs with what we are seeing from these initial reads. We'll be interested to see what inventories look like headed out of 2Q in the face of this. Especially after inventories built across the industry headed out of the first quarter. That tells us that if the retailers put up a decent comp, it's likely going to come at the expense of gross margin. 

Retail Callouts (7/28): BTS Outlook = Weak | KER Luxury Read-throughs - 7 28 chart3

 

 

KER - Luxury Read Throughs

 

Comparable growth in NA Luxury retail segment was up 9% -- a 600bps acceleration from 1Q and ~700bps on the 2yr trend line. On the call management noted that tourist traffic remained pressured, but the underlying demand looked strong as evidenced by the acceleration in comparable growth. Japan put up a +27% against negative comps following the sales tax hike in 2Q14, that’s up from -4% in 1Q which is right in line with the number KATE printed in 1Q15. While not the exact same consumer segment as KATE, KORS, and COH -- the sales trends reported by KER's Luxury Segment look much healthier than the broader market sentiment would otherwise suggest.

 

 

OTHER NEWS

 

UA - Stephen Curry’s New Under Armour Curry One Sneakers Drop Friday

(http://footwearnews.com/2015/focus/athletic-outdoor/stephen-curry-under-armour-curry-one-sneakers-46644/)

Retail Callouts (7/28): BTS Outlook = Weak | KER Luxury Read-throughs - 7 28 chart4

 

W - Wayfair Partners with Mattress Firm to Offer Online Shoppers Same-Day Delivery and World-Class Customer Service on Top Mattress Brands

(http://investor.wayfair.com/investor-relations/press-releases/press-releases-details/2015/Wayfair-Partners-with-Mattress-Firm-to-Offer-Online-Shoppers-Same-Day-Delivery-and-World-Class-Customer-Service-on-Top-Mattress-Brands/default.aspx)

 

Shipt is giving Instacart, Deliv a run for their grocery money

(http://www.retailingtoday.com/article/shipt-giving-instacart-deliv-run-their-grocery-money)

 

WMT - Walmart takes a White House pledge

(http://www.chainstoreage.com/article/walmart-takes-white-house-pledge)

 

SVU - SUPERVALU to Explore Separating Its Save-A-Lot Business

(http://www.supervaluinvestors.com/phoenix.zhtml?c=93272&p=irol-newsArticle&ID=2071635)

 

COLM - Columbia Sportswear angling for new shoppers

(http://www.chainstoreage.com/article/columbia-sportswear-angling-new-shoppers)

 

EBAY - eBay continues to clean house

(http://www.chainstoreage.com/article/ebay-continues-clean-house)

 

Jailed Chinese Billionaire Huang Guangyu Boosts Stakes In Gome

(http://www.forbes.com/sites/ywang/2015/07/28/jailed-chinese-billionaire-huang-guangyu-boosts-stakes-in-gome/)


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 80.64%
  • SHORT SIGNALS 78.57%
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