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Wavering Data

“The wavering multitude is divided into opposite factions.”



For those of you who have been following us since we called the US economic cycle top in late 2007, you know that there’s frequently an opposite faction to our most important Global Macro Themes – it’s called Wall Street consensus.


Not that we keep score or anything, but if you go back to what we thought were 3 of the most important (already in motion) Global Macro Risks 1-year ago today, they were: #Inflation Slowing, Rates Falling, and Cross Asset-Class Volatility bottoming.


All of those calls were based on forward looking indicators born out of a repeatable research and risk management #process. Today, the biggest disconnect between our indicators and consensus is #GrowthSlowing in the 2nd half of 2015 (in both the US and Europe).


Wavering Data - z cons


Back to the Global Macro Grind


But, “if you don’t want to get caught up in the data” (which is what one of my competitors wrote yesterday in his “unwavering” support for #GrowthAccelerating, despite wavering on his “reflation” call two weeks ago), #NoWorries.


Who needs data and market indicators anyway? Maybe we’ve all become so damn “smart” in this business (after consensus missed calling the last 2 US cycle tops), that we can just ignore the rate of change in the data until it fits our narrative.


This isn’t personal. This is the cycle. It bases, bottoms, accelerates, peaks, then slows. And it takes time. A lot more time, in fact, than the most dogmatic bull on “reflation” can remain solvent.


I’m not going to hammer on whoever is still long inflation expectations this morning (Energy, Metals & Mining, Materials). They had a big beta bounce yesterday (Oil & Gas stocks, XOP +3.7%, after crashing to new lows the day prior), so I’ll play nice.


Instead, I want to re-focus your attention on the Industrial sector (XLI) because:


  1. XLI bounced +1.9% yesterday (to down -5.2% YTD), providing you another selling opportunity
  2. Revenues (for Q2 to-date) for the Industrials Sector are down -3% and earnings are down -4%
  3. And the US/European Industrial cycle only peaked in Q4 of 2014


Sure, you can ignore this “data” until your boss taps you on the shoulder and/or reads you this note. Or you can objectively analyze the risks associated with a #StrongerDollarForLonger colliding with the toughest revenue and margin comps of the year (in Q4).


And you’ll end up where we continue to be on most things cyclical that have perpetual inflation expectations built into them, never mind some kind of mainstream 1990s early cycle “demand.”


I’m not trying to be a bully on this. I’m just trying to make sure you don’t get run-over (like many have in the last 6 weeks) being long “cheap” cyclicals when “cheap” is based on not only the wrong revenue and earnings assumptions, but the wrong commodity prices.


I think this is one of the key differentiators in my process and perspective vs. many of my sell-side competitors. Most of them never worked on the buy-side, traded Global Macro, and/or modeled bottom-up company risks using a top-down macro overlay.


That’s not to say I’m always right. Newsflash: no one is. But it is to remind you that I typically don’t blow you up by ignoring the big stuff like data and market signals. In rate of change terms, they matter and are crystal clear to watch.


Notwithstanding another classic #LateCycle rollover in the US #ConsumerCycle slowing yesterday (US Consumer Confidence getting hammered to 90.9 this month vs. 101.4 last – see Chart of The Day), here’s some important pending data to consider:


  1. US GDP for Q2 (it’s now Q3) will be reported on Thursday and should be a “good” headline number vs. a “bad” Q1
  2. US Employment (Jobs Report) will be reported next Friday and should be a “less great” number vs. the Q1 cycle top


You see, the way consensus looks at GDP is somewhat confusing because they look at what the government calls a “Quarter-Over-Quarter SAAR.” It’s a sequential (i.e. quarterly) read on how they think the economy is trending.


In order to see (and front-run using forward looking Hedgeye “tools”) the cycle though, you need to look at how the economy is trending on both a Year-Over-Year basis and relative to the 2-3 year trend.


I don’t model it this way for kicks and giggles. I model it this way because this is how I model companies and it made no sense to me to model it in a way that an Old Wall “economist” or strategist does. Oh, and did I mention that their way doesn’t work?


The key differentiators in our USA and Europe models (we have 86 countries in the model) are currently as follows:


  1. US GDP 1.6-1.8% for Q3 and Q4 (consensus has back-end loaded the year, we have it slowing)
  2. Eurozone GDP slowing in 2H15 to a CY15 growth rate of +0.6%


Since Bloomberg Consensus on Eurozone GDP for 2015 is still up at +1.5%, that’s the most important component of #GlobalSlowing we see that our competition doesn’t. Then again, if you ignore the last 3 months of #EuropeSlowing data, you’d miss that too.


Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND research views in brackets) are now:


UST 10yr Yield 2.21-2.34% (bearish)

SPX 2069-2098 (bearish)
RUT 1 (bearish)
Nikkei 202 (bullish)

VIX 12.53-14.58 (bullish)
USD 96.61-98.35 (bullish)
EUR/USD 1.07-1.10 (bearish)
YEN 123.03-124.49 (bearish)
Oil (WTI) 47.07-50.49 (bearish)

Nat Gas 2.71-2.92 (bearish)

Gold 1067-1117 (bearish)
Copper 2.35-2.46 (bearish)


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Wavering Data - z Confidence CoD

The Macro Show Replay | July 29, 2015


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After Buffalo Wild Wings (BWLD) earnings call last night we want to cover the short call here and move it to the short bench.


Our underlying thesis for the BWLD short was that 2015 earnings estimates were too aggressive.  While that turned out to be correct, the better than feared “miss and cut” is reason enough for the stock to rally.  We would note that management will be raising prices excessively to compensate for increasing costs, an issue that may haunt them in the future.  For the time being, consumers don’t seem to be bothered by the aggressive pricing the company has taken over the past three years. 


As we said, last night BWLD announced 2Q15 earnings, reporting EPS of $1.12 versus consensus estimate of $1.27. Restaurant sales came in under estimates at $401.9 million versus consensus of $404.4 million, a ~17% increase YoY including some newly acquired restaurants. BWLD did beat the comps; Company owned stores reported SSS of +4.2% versus consensus of +3.8%, while Franchise locations reported an increase of +2.5% versus consensus of +2.1%. The comps are largely built up by 3.8% pricing at company owned stores (franchisees price at their own discretion). Margins have been under pressure as wing prices are up 26% YoY, and wage rates have been increasing significantly in certain markets.





Margins across the board are worse sequentially. BWLD Cost of Sales increased 3.9% to 29.3%, although slightly below consensus estimates of 29.5%. Restaurant level margins are down 7.4% YoY to 18.8% versus estimates of 19.1% as labor and food costs weigh on the P&L.





Bottom line, management cannot expect to be able to raise prices at these rates to cover the accelerating costs. Furthermore, it is still unclear whether the addition of the guest experience captain is adding value and making up for the extra expense. We expect the football season may keep this stock afloat in the near term but these rising prices will take its affect in the long run, and we will revisit the short at that time.



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

Early Look

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