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HedgeyeRetail (1/11) | KSS - More Likely to Shrink Than Be Sold

Takeaway: KSS hiring a banker because it has to - not because it needs help with all the inbound requests. Selling KSS one of the hardest jobs around.

KSS - Kohl’s More Likely to Shrink Than be Sold

(http://www.wsj.com/articles/kohls-weighs-next-steps-as-woes-mount-1452471600)

 

First of all, if anybody was wondering why KSS outperformed its peer group by 9% for the year-to-date, now you know. Presumably, the Board and the potential Bankers are the only ones who knew about this (as it should be), but it appears that someone leaked something. A lot of something.

 

Nonetheless, we should be clear about something. KSS is not looking for strategic alternatives because its 'Greatness Agenda' is over-delivering on value creation. Quite the opposite. We think that this business model is terminal, and just maybe management is starting to catch wind.

 

If KSS were to close half of its stores, and cut the size of the remaining stores in half -- we don't think that the consumer would really care. This is a business that was built upon shopping by convenience -- i.e. going to a local strip mall for mediocre brands (10-15 min drive) instead of driving to a regional mall (20-30 min drive). Unfortunately, there's a new alternative to the regional mall -- it's called the Internet. KSS can't win that battle.

 

This strategy, which actually worked well for about 20 years (1) is also part of the structural reason why KSS does not have real-estate optionality like Macy's or Dillard's. KSS is almost entirely based in strip malls, and they are simply a dime a dozen. 20 years ago, there were about 2,500 such strip malls. Now there's closer to 7,100. But the regional mall count, on the flip side, has remained fairly constant over time at 1,100. That means that the value per square foot of Regional Mall space has gone higher, while strip malls has been flat to lower as more properties were built. Too many people who claim that KSS has real-estate optionality simply don't understand this dynamic.

 

We're at $3.70 in the coming year vs the Street at $4.60, and we think that the company will never earn over $4.00 again. Ultimately, our numbers head below $3.00, while the Street's are headed above $6.00.

 

The biggest delta in our thesis from consensus is our view that the company has literally run out of customers (our math suggests that KSS already landed 75% of people that could be KSS customers). This is manifesting itself in declining traffic, risky promotional strategies that meaningfully put at risk the company's credit income . The key there is that this risk holds even if we don't see the credit environment roll over. If the credit environment goes bad, then we think that KSS earnings goes closer to a buck -- again, the Street is at $6.00+. For our full thesis see note link here: KSS | Here’s Why KSS Is Expensive

 

This company is hiring a banker because it has to -- not because it needs help with all the inbound requests. Selling this company is one of the hardest jobs around.

HedgeyeRetail (1/11)  |  KSS - More Likely to Shrink Than Be Sold - kss chart5 11 10

 

M - Activist Investor Starboard Urges Macy’s to Strike Real-Estate Deals

(http://www.wsj.com/articles/activist-investor-starboard-urges-macys-to-strike-real-estate-deals-letter-1452485020)

 

AMZN - Amazon’s full acquisition of a French package-delivery company, expected soon, would make it a direct competitor of delivery titans such as UPS and FedEx

(http://www.seattletimes.com/business/amazon/amazons-delivery-ambitions-take-on-industry-giants/)

 

DLTR - Family Dollar CEO Howard R. Levine is stepping down as an officer of the company following the integration of Family Dollar

(http://www.dollartreeinfo.com/investors/global/releasedetail.cfm?ReleaseID=949502)

 

UA - Under Armour is undertaking an ambitious effort to provide extremely personalized health and fitness coaching, assisted by IBM

(http://www.retailingtoday.com/article/under-armour-seeks-deep-understanding-consumer-fitness)

 

ANF - Abercrombie & Fitch Enters Dubai With Massive Flagship Store

(http://wwd.com/retail-news/specialty-stores/abercrombie-fitch-dubai-flagship-10307774/)

 

NKE, Adibok - The 25 Most Resold Sneakers of 2015

HedgeyeRetail (1/11)  |  KSS - More Likely to Shrink Than Be Sold - 1 11 2016 chart1

(http://solecollector.com/news/most-resold-sneakers-2015/)

 

WMT - Wal-Mart’s Mexican Subsidiary Sees Sales Jump

(http://wwd.com/retail-news/mass-off-price/wal-marts-mexican-subsidiary-sees-sales-jump-10308443/)

 


INSTANT INSIGHT | Russell 2000, China & Financials

INSTANT INSIGHT | Russell 2000, China & Financials   - China cartoon 01.07.2016

 

So, Chinese stocks made lower-lows overnight, closing down another -5.3%. Meanwhile, the Russell 2000 is down -19.2% since July.

 

No worries. Right?

 

Earnings season starts this week with JPMorgan (JPM) reporting this Thursday. There’s no irony that the Financials (XLF) -7.3% were one of the worst S&P Sector exposures last week; with both #Deflation and a #Recession in Industrial/Cyclical terms, long-term yields fall, no matter what the omnipotent central planners at the Fed think they can do.

 

INSTANT INSIGHT | Russell 2000, China & Financials   - xlf

 

If you thought that cyclical "PMIs bottomed" when the employment/consumption/profit cycle peaked (at the end of Q2 2015), and you bought the Financials on that, you’re down -13.6% since the July high.

 

 

Beats being long Apple from there (down -26.5% since S&P 500 top)!


MONDAY MORNING RISK MONITOR | THE RED FLAG OF CHINA

Takeaway: China raised red flags for investors, driving the risk environment last week. Beyond China, however, the US is softening on the margin.

 

MONDAY MORNING RISK MONITOR | THE RED FLAG OF CHINA - RM11

 

Key Takeaway:

With concern rising over both domestic growth slowing and economic weakness in China rising, global markets began the year with a bang. Even Friday's better than expected U.S. employment report was not enough to prop up markets. Notably, CDS spreads rose significantly last week across companies and sovereigns, while the TED Spread remains elevated and Euribor-OIS rose by +4 bps to 12 bps. 

 

Our heatmap below is mostly negative across all durations.


Current Ideas:


MONDAY MORNING RISK MONITOR | THE RED FLAG OF CHINA - Ideas V2

 

Financial Risk Monitor Summary

 • Short-term(WoW): Negative / 4 of 12 improved / 5 out of 12 worsened / 3 of 12 unchanged

 • Intermediate-term(WoW): Negative / 3 of 12 improved / 7 out of 12 worsened / 2 of 12 unchanged

 • Long-term(WoW): Negative / 1 of 12 improved / 4 out of 12 worsened / 7 of 12 unchanged

 

MONDAY MORNING RISK MONITOR | THE RED FLAG OF CHINA - RM15 2

 

1. U.S. Financial CDS – Swaps widened for 16 out of 27 domestic financial institutions. With fears over weakness in China shaking markets, the median spread rose from 54 to 60 last week.

Widened the least/ tightened the most WoW: SLM, SLM, SLM
Widened the most WoW: AXP, ALL, MMC
Tightened the most WoW: AIG, JPM, CB
Widened the most MoM: ALL, COF, AXP

MONDAY MORNING RISK MONITOR | THE RED FLAG OF CHINA - RM1

 

2. European Financial CDS – Swaps mostly widened in Europe last week. The median spread rose from 85 bps to 90 bps.

MONDAY MORNING RISK MONITOR | THE RED FLAG OF CHINA - RM2

 

3. Asian Financial CDS – Worry over China dominated the risk environment last week and shook markets globally. Bank CDS in China rose between 4 bps and 20 bps.

MONDAY MORNING RISK MONITOR | THE RED FLAG OF CHINA - RM17

 

4. Sovereign CDS – Sovereign swaps mostly widened over last week, led by Portuguese CDS, which widened by 11 bps to 182.

MONDAY MORNING RISK MONITOR | THE RED FLAG OF CHINA - RM18

 

MONDAY MORNING RISK MONITOR | THE RED FLAG OF CHINA - RM3

 

MONDAY MORNING RISK MONITOR | THE RED FLAG OF CHINA - RM4


5. Emerging Market Sovereign CDS – Swaps in emerging markets reacted to the risk of waning Chinese demand, widening by 10 bps on average last week. Russian swaps widened by a significant 26 bps to 335 as oil prices continued to slide. Turkish sovereign swaps widened the most, by 29 bps to 302.

MONDAY MORNING RISK MONITOR | THE RED FLAG OF CHINA - RM16

MONDAY MORNING RISK MONITOR | THE RED FLAG OF CHINA - RM20

6. High Yield (YTM) Monitor – High Yield rates fell 61 bps last week, ending the week at 8.45% versus 9.06% the prior week.

MONDAY MORNING RISK MONITOR | THE RED FLAG OF CHINA - RM5

7. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 3.0 points last week, ending at 1808.

MONDAY MORNING RISK MONITOR | THE RED FLAG OF CHINA - RM6

8. TED Spread Monitor – The TED spread fell 3 basis points last week, ending the week at 42 bps this week versus last week’s print of 45 bps.

MONDAY MORNING RISK MONITOR | THE RED FLAG OF CHINA - RM7

9. CRB Commodity Price Index – The CRB index fell -3.6%, ending the week at 169 versus 175 the prior week. As compared with the prior month, commodity prices have decreased -3.6%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

MONDAY MORNING RISK MONITOR | THE RED FLAG OF CHINA - RM8

10. Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States. Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal. By contrast, the Euribor rate is the rate offered for unsecured interbank lending. Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread widened by 4 bps to 12 bps.

MONDAY MORNING RISK MONITOR | THE RED FLAG OF CHINA - RM9

11. Chinese Interbank Rate (Shifon Index) – The Shifon Index fell 3 basis points last week, ending the week at 1.96% versus last week’s print of 1.99%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.

MONDAY MORNING RISK MONITOR | THE RED FLAG OF CHINA - RM10

12. Chinese Steel – Steel prices in China rose 2.0% last week, or 41 yuan/ton, to 2042 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity and, by extension, the health of the Chinese economy.

MONDAY MORNING RISK MONITOR | THE RED FLAG OF CHINA - RM12

13. 2-10 Spread – Last week the 2-10 spread tightened to 118 bps, -4 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

MONDAY MORNING RISK MONITOR | THE RED FLAG OF CHINA - RM13

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 4.1% upside to TRADE resistance and 0.1% downside to TRADE support.

MONDAY MORNING RISK MONITOR | THE RED FLAG OF CHINA - RM14


Joshua Steiner, CFA



Jonathan Casteleyn, CFA, CMT


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Russia, Copper and JPM

Client Talking Points

RUSSIA

Our #Deflation call might be 18 months old, but the daily returns continue to be impressive if positioned for it. With Oil’s crash continuing this morning (down -1.5% WTI post a down -10.5% week), Russian Stocks are down -3.7% and down -10.6% in the last month.

COPPER

After deflating another -5.3% last week, copper drops another -2.0% this morning to $1.98/lb. The Doctor and 10YR Yields have been better economists than pretty much anyone you could have followed in the last 6-18 months.

JPM

Earnings season starts this week and JPM reports Thursday. There’s no irony that the Financials (XLF)down  -7.3% were one of the worst S&P Sector exposures last week; with both #Deflation and a #Recession in Industrial/Cyclical terms, long-term yields fall, no matter what the Fed thinks it can do.

 

*Tune into The Macro Show with Hedgeye Internet & Media analyst Hesham Shaaban live at 9:00AM ET - CLICK HERE

Asset Allocation

CASH 67% US EQUITIES 3%
INTL EQUITIES 0% COMMODITIES 0%
FIXED INCOME 18% INTL CURRENCIES 12%

Top Long Ideas

Company Ticker Sector Duration
MCD

McDonald's boasts style factors that are best in class for turbulent times in the market, big cap and low beta and it has handily been outperforming the market and its competitors as of late. One of the biggest aspects of competing in their space is value offering.

 

McDonald’s has ceded share in the value category primarily to Burger King over the last two years. Now that they are launching a national value platform with a full slate of media support, MCD will recover the value customer.

GIS

General Mills' business seems to be starting to pick up steam, as the company is working to improve merchandising and advertising on core business.

 

In addition they have executed a few small, but meaningful M&A deals showcasing the change in managements thinking. The divestiture of Green Giant to B&G Foods, for instance, although a profitable business, was a good move for them given their lack of focus/investment in the brand (they have more opportunities like this throughout their portfolio, in addition to SKU rationalization).

 

GIS continues to look for more sizeable acquisitions in emerging markets, but the string of pearls approach may remain most effective domestically.

TLT

After the worst start to a year literally EVER for U.S. equity markets, TLT caught a bid in the first week of trading as the centrally-planned Chinese stock markets traded limit down earlier in the week. It was the largest central bank liquidity injection from Beijing since Chinese markets crashed in September.

 

TLT remains one of our strongest long idea calls heading into 2016 as junk bond markets begin to crack.   

Three for the Road

TWEET OF THE DAY

No private buyer that knows the apparel sector would buy $KSS here. The company could lose 1/2 its sales, and the Consumer wouldn't care.

@HedgeyeRetail

QUOTE OF THE DAY

This is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.

Winston Churchill

STAT OF THE DAY

MCD has committed to sourcing 100% of all fiber-based packaging from recycled or certified sources by 2020.


CHART OF THE DAY: Contextualizing The #SuperLateCycle Jobs Report

Editor's Note: Below is a brief chart and excerpt from today's Early Look written by Hedgeye CEO Keith McCullough. Click here to learn more.

 

"... That’s why stocks sold off on Friday’s #SuperLateCycle jobs “news.” In rate of change terms, fully-loaded with all the part-time hiring and construction work (yes, the weather helped in that case):

  1. December non-farm payroll growth slowed to 1.88% year-over-year growth vs.
  2. The Cycle Peak of 2.34% non-farm payroll growth in February of 2015" 

 

CHART OF THE DAY: Contextualizing The #SuperLateCycle Jobs Report - 01.11.16 EL chart


We Are A Process

“We are what we repeatedly do.”

-Aristotle

 

Yesterday Coach Doyle and I took our Mid-Fairfield Rangers Mite Hockey Team up to New Haven, CT for a tilt with Yale Youth Hockey at Ingalls Rink. Commonly known as The Whale, our kids (and parents) got the full tour of the Yale Hockey facilities after the game.

 

Yale Hockey Coach Keith Allain had the aforementioned quote painted into the legend that is becoming his men’s locker room. Reading that gave me an important pause for reflection – one that I was quite grateful for. It reminded me why we do what we do in this life.

 

What we do as parents, coaches, and professionals is what we are. What we do @Hedgeye is transparency, accountability, and trust. We are both a team and a process. We win, lose, and learn, as a team. With time, we evolve.

 

Back to the Global Macro Grind

 

Some people don’t like reading about coaching, parenting, and leadership. We do. And we don’t apologize for that. We have a macro market opinion that is born out of a rigorous rate-of-change risk management #process, and we’re very clear on that too.

 

You’re either reading this right now or Barron’s “Bear Scare – Why The Selling Might Be Almost Over.” The difference between our process and Old Wall Media’s is that we told you to sell before the Russell 2000 deflated -19.2% from its July #Bubble high.

 

We Are A Process - denial cartoon 09.28.2015 normal

 

Post the worst week 1 for a US stock market ever (which is still, by our definition, a very long time), the SP500 is -6% YTD and -10% from its all-time high of 2130 in July of 2015.

 

Nothing last week should have surprised you – what got hit the hardest has been getting hit (hard) for the last 6 months:

 

  1. High Beta Stocks lost another -8.9% week-over-week and are -17.6% in the last 6 months
  2. Small Cap Stocks lost another -6.9% week-over-week and are -17.3% in the last 6 months

*Style Factors: Mean performance of Top Quintile vs. Bottom Quintile of SP500 companies

 

What seemed to surprise some people was that the Financials (XLF) are not a good place to be during both #Deflation and an industrial/cyclical US #Recession. Hint: when you have those, long-term rates fall. Here’s how that looked last week:

 

  1. US 10yr Treasury Yield dropped another -15 basis points last week to 2.12%
  2. US Yield Spread (10yr minus 2yr) flattened to a cycle low of 118 basis points wide
  3. US Financials Stocks (XLF) lost -7.3% last week and remain bearish TREND @Hedgeye

 

If you thought that cyclical “PMIs bottomed” when the employment/consumption/profit cycle peaked (at the end of Q2 2015), and you bought the Financials on that, you’re down -13.6% since the July high. Beats being long Apple from there (down -26.5% since SP500 top)!

 

That’s the most important thing consensus Macro is missing right now – that while cyclicals peaked in late 2014 (that’s why they call them cyclicals!), classic #LateCycle things like employment and corporate profits peaked 3-9 months after that.

 

That’s why stocks sold off on Friday’s #SuperLateCycle jobs “news.” In rate of change terms, fully-loaded with all the part-time hiring and construction work (yes, the weather helped in that case):

 

  1. December non-farm payroll growth slowed to 1.88% year-over-year growth vs.
  2. The Cycle Peak of 2.34% non-farm payroll growth in February of 2015

 

I know. I know. That’s not the way that people who think in terms of “good” or “bad” thought about the jobs report. Evidently they thought wrong. We do rate-of-change (i.e. we think in terms of things getting better or worse) and contextualize data within the cycle.

 

We do it that way because Mr. Macro Market does too. By the time the “companies” and media tell you, it’s too late. How do you think JP Morgan (JPM) is going to characterize the current rates and “market environment” when they report earnings on Thursday?

 

If they’re being transparent, accountable, and trustworthy on the matter, I’m thinking they’re talking about the Yield Curve flattening, market volatility ramping, and Credit Spreads widening. Our process has been signaling these risks rising since July too.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.09-2.21%

SPX 1
RUT 1028-1090

VIX 20.22-28.14
USD 97.54-100.14
Oil (WTI) 32.05-35.68
Copper 1.96-2.09

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

We Are A Process - 01.11.16 EL chart


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