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KSS | The Kohl's Recession

Takeaway: Two distinct earnings streams -- one is at peak. One is at trough. Both are hopeless.

In typical KSS’ fashion, the company released its 10K after the close on a Friday. The biggest item that caught our eye was – you guessed it – credit income. The precise numbers are disclosed once a year, despite the fact that it has grown in to KSS’ single largest profit center.  A few points…

 

1) KSS’ share of income from its partnership with CapitalOne clocked in at $456mm. That’s now 29% of EBIT a level that we think is flat-out unhealthy for a company like KSS at this point in the economic cycle.

2) Consider this…KSS’ EPS was down 5.2% for the year to $4.04 (which includes credit income), but EPS from the operating business was down by 13% -- not good.

3) KSS core business earned $2.54 last year. As a frame of reference, that’s right where earnings came in circa 2008-2009.  In other words, right now its earnings are spot-on with where we were in the Great Recession. But…we’re clearly not in such a climate.  That begs the question – what if we actually enter a severe downturn (or even a moderate one) again?

4) Note that Macy’s delinquency rate ticked up materially in the fourth quarter. We also see CapitalOne’s charge-off rate ticking steadily higher.  We’re not making the call for a collapse in the credit cycle, but it’s pretty irrefutable that it is eroding rather than improving.

 

We still think that KSS is a 3-Stage Short Call. Stage 1) Starting with the weakness we see today by being such a bad retailer with poor competitive and geographic positioning, then Stage 2) morphing into a story where it jeopardizes its own credit income due to its own cannibalistic rewards program – without a roll in the broader credit cycle, and then Stage 3) a weakening economy having an outsized negative impact  on KSS’ consumer, its’ top line, margins, and credit income. 

 

KSS | The Kohl's Recession - 3 21 2016 KSS Credit EPS

KSS | The Kohl's Recession - 3 21 2016 KSS Credit EPS   of Total


MONDAY MORNING RISK MONITOR | GLOBAL ANXIETY VS DOMESTIC OPTIMISM

Takeaway: The US market, especially HY credit, reacted positively to the Fed's dovish tone, but negative readings outweighed the positive short-term.

MONDAY MORNING RISK MONITOR | GLOBAL ANXIETY VS DOMESTIC OPTIMISM - RM11

 

Key Takeaway:

The U.S. market reacted positively to the Federal Reserve's dovish announcement last week, especially with high yield YTM coming in -17 bps to 7.67%. However, more risk measures flashed red than green; European CDS widened by 5 bps week over week, retracing some of the prior week's tightening, the TED spread (an indicator of contagion risk) rose by +2 bps to 33, and the price for Chinese steel dropped by -3.8%.

Current Ideas:

MONDAY MORNING RISK MONITOR | GLOBAL ANXIETY VS DOMESTIC OPTIMISM - RM19

 

Financial Risk Monitor Summary

• Short-term(WoW): Negative / 3 of 13 improved / 4 out of 13 worsened / 6 of 13 unchanged
• Intermediate-term(WoW): Positive / 8 of 13 improved / 1 out of 13 worsened / 4 of 13 unchanged
• Long-term(WoW): Negative / 1 of 13 improved / 4 out of 13 worsened / 8 of 13 unchanged

MONDAY MORNING RISK MONITOR | GLOBAL ANXIETY VS DOMESTIC OPTIMISM - RM15

 

 

1. U.S. Financial CDS – Swaps were mixed among US Financials. The banks  specialty lenders saw nominal tightening, while the insurers saw large tightening.

Tightened the most WoW: AIG, LNC, AXP
Widened the most WoW: JPM, WFC, AON
Tightened the most WoW: AIG, LNC, HIG
Widened the most MoM: AGO, RDN, MBI

MONDAY MORNING RISK MONITOR | GLOBAL ANXIETY VS DOMESTIC OPTIMISM - RM1

 

2. European Financial CDS – Swaps mostly widened across European banks last week. The median spread widened by +5 bps to 109, giving back some of the prior week's 25 bps tightening.

MONDAY MORNING RISK MONITOR | GLOBAL ANXIETY VS DOMESTIC OPTIMISM - RM2

 

3. Asian Financial CDS Swaps tightened across Financials in China and Japan last week while Indian bank swaps mostly widened.

 

MONDAY MORNING RISK MONITOR | GLOBAL ANXIETY VS DOMESTIC OPTIMISM - RM17

 

4. Sovereign CDS – Sovereign Swaps mostly tightened over last week. Portuguese sovereign swaps tightened the most, by -9 bps to 242.

MONDAY MORNING RISK MONITOR | GLOBAL ANXIETY VS DOMESTIC OPTIMISM - RM18

 

MONDAY MORNING RISK MONITOR | GLOBAL ANXIETY VS DOMESTIC OPTIMISM - RM3

 

MONDAY MORNING RISK MONITOR | GLOBAL ANXIETY VS DOMESTIC OPTIMISM - RM4


5. Emerging Market Sovereign CDS – Emerging markets swaps mostly tightened last week as the dovish Fed announcement allowed for a more positive outlook on EM currencies; a weaker dollar makes it easier for emerging markets to pay back dollar-denominated debt. Brazilian swaps tightened the most, by -25 bps to 366. Meanwhile, on the other end of the spectrum, Indian sovereign swaps widened by 10 bps to 156. 

MONDAY MORNING RISK MONITOR | GLOBAL ANXIETY VS DOMESTIC OPTIMISM - RM16

MONDAY MORNING RISK MONITOR | GLOBAL ANXIETY VS DOMESTIC OPTIMISM - RM20

6. High Yield (YTM) Monitor – High Yield rates fell 17 bps last week, ending the week at 7.67% versus 7.84% the prior week.

MONDAY MORNING RISK MONITOR | GLOBAL ANXIETY VS DOMESTIC OPTIMISM - RM5

7. Leveraged Loan Index Monitor  – The Leveraged Loan Index rose 15.0 points last week, ending at 1848.

MONDAY MORNING RISK MONITOR | GLOBAL ANXIETY VS DOMESTIC OPTIMISM - RM6

8. TED Spread Monitor  – The TED spread rose 2 basis points last week, ending the week at 33 bps this week versus last week’s print of 32 bps.

MONDAY MORNING RISK MONITOR | GLOBAL ANXIETY VS DOMESTIC OPTIMISM - RM7

9. CRB Commodity Price Index – The CRB index rose 2.4%, ending the week at 176 versus 172 the prior week. As compared with the prior month, commodity prices have increased 10.5%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

MONDAY MORNING RISK MONITOR | GLOBAL ANXIETY VS DOMESTIC OPTIMISM - 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 was unchanged at 11 bps.

MONDAY MORNING RISK MONITOR | GLOBAL ANXIETY VS DOMESTIC OPTIMISM - RM9

11. Chinese Interbank Rate (Shifon Index) – The Shifon Index rose 4 basis points last week, ending the week at 1.99% versus last week’s print of 1.95%. 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 | GLOBAL ANXIETY VS DOMESTIC OPTIMISM - RM10

12. Chinese Steel – Steel prices in China fell 3.8% last week, or 93 yuan/ton, to 2365 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 | GLOBAL ANXIETY VS DOMESTIC OPTIMISM - RM12

13. 2-10 Spread – Last week the 2-10 spread widened to 104 bps, 1 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

MONDAY MORNING RISK MONITOR | GLOBAL ANXIETY VS DOMESTIC OPTIMISM - RM13

14. CDOR-OIS Spread – The CDOR-OIS spread is the Canadian equivalent of the Euribor-OIS spread. It is the difference between the Canadian interbank lending rate and overnight indexed swaps, and it measures bank counterparty risk in Canada. The CDOR-OIS spread was unchanged at 40 bps.


MONDAY MORNING RISK MONITOR | GLOBAL ANXIETY VS DOMESTIC OPTIMISM - RM14


Joshua Steiner, CFA



Jonathan Casteleyn, CFA, CMT


USD, Oil and Equities

Client Talking Points

USD

Dollar Up, Rates Down this morning – as opposed to the reflation trade (many head-fakes in the last 18 months), that’s the #Deflation risk on move. We will be watching that closely this week with the USD signaling immediate-term oversold on Friday.

OIL

WTI Oil is down -2% this morning (it has a -0.8 inverse 15-day correlation to USD) after a +2.4% week with an immediate-term risk range of $34.65-41.53 and OVX (Oil Volatility) holding @Hedgeye TREND support with a risk range of 42-56.

EQUITIES

Won’t be the way Old Wall media will characterize last week, but it wasn’t a good week where the #BeliefSystem on central-market-planning continues to break down. On the week: Italy -2.0%, Japan -1.3%, France -0.7% vs. Russia (purely reflation spec vs. USD Down) +4.7% and the Russell 2000 +1.3% to -3.0% year-to-date.

 

*Tune into The Macro Show with Hedgeye CEO Keith McCullough live in the studio at 9:00AM ET - CLICK HERE

Asset Allocation

CASH 62% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 6%
FIXED INCOME 27% INTL CURRENCIES 5%

Top Long Ideas

Company Ticker Sector Duration
XLU

Utilities (XLU) hasn’t bounced as much as leveraged , high-beta resource names, but the outperformance is greatly divergent vs. both the market, and our preferred sector short in financials (XLU +12.3% YTD, S&P -0.3% YTD, XLF -4.6% YTD).

GIS

General Mills (GIS) remains one of analyst Howard Penney's top Long ideas in the Consumer Staples space. As we have continued to say, it boasts style factors ideal during turbulent times; high market cap, low beta and liquidity. Case in point, GIS is up 7% year-to-date, versus essentially flat for the S&P 500 in 2016. We'll have an update next week after GIS reports earnings.

TLT

Long-Term Treasuries (TLT) finished +1.9% on the week. Aside from Mr. Market, the Fed downwardly revised expectations (the common lag) on Wednesday:

  • The median 2016 GDP forecast revised to +2.2% vs. +2.4% in December
  • The median 2016 PCE Inflation forecast revised to +1.2% vs. +1.6% in December
  • Median Federal Funds end-2016 rate forecast revised to 0.9% vs. +1.4% in December

From a GROWTH, INFLATION, POLICY perspective, it’s lower for longer on growth and inflation and a more dovish Fed.

Three for the Road

TWEET OF THE DAY

*VIDEO

How Slowing US Growth Impacts Sectors https://app.hedgeye.com/insights/49828-young-guns-how-slowing-u-s-growth-impacts-sectors… @HedgeyeHIT @Hedgeye_Comdty @KeithMcCullough

@Hedgeye

QUOTE OF THE DAY

The whole world is simply nothing more than a flow chart for capital.

Paul Tudor Jones

STAT OF THE DAY

According to a federal prosecutor a San Diego man who inherited a 1974 aluminum penny valued at $2 million has surrendered it to the U.S. Mint to settle a lawsuit over ownership of the rare coin.


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CHART OF THE DAY: A Closer Look At Oil's Recent "Rally"

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

 

"... Here’s what really worked last week:

 

  1. Short USD = down another -1.2% on the week to -3.6% YTD
  2. Long Euros and Yens (vs. USD) = up +1.0% and +2.0%, respectively, to +3.8% and +7.8% YTD
  3. Long Commodities = +1.6% on the week for the CRB Index to 0.1% YTD
  4. Long Oil = +2.4% on the week for WTI to +0.8% YTD
  5. Long Russia = +4.7% on the week to +16.9% YTD

 

Seriously, who isn’t levered long Russia?" 

 

CHART OF THE DAY: A Closer Look At Oil's Recent "Rally" - 03.21.16 chart


Following The Flow

“The whole world is simply nothing more than a flow chart for capital.”

-Paul Tudor Jones

 

While I’m sure some in the social science departments of academia might quibble with PTJ’s definition of the world, at this hour of the morning it’s a reasonable one for macro people like me.

 

#Charts. So many charts. They go up. They go down. Sometimes fast; sometimes slow.

 

If you look at one or two charts, you might confirm what you want (need) to see. But what if you look at all of the world’s major macro market charts, across durations, every morning of your life? What would you see?

 

Following The Flow - Bull herd cartoon 03.18.2016

 

Back to the Global Macro Grind

 

While it was another good week for us on the long side (Utilities up another +1.0% with the Long Bond Yield falling another 11 basis points to 1.87% on the UST 10yr), my High Beta, High Leverage (Style Factors) US Equity shorts sucked.

 

That said, it’s a good thing I don’t have subscribers long US Healthcare, European, or Japanese stocks.

 

Post the Fed’s move to devalue the US Dollar and reflate US stocks to 5 week highs (which equates to YTD returns of: SP500 0.3%, Nasdaq -4.2%, and Russell 2000 -3.0%), here’s how the aforementioned lagged week-over-week:

 

  1. US Healthcare Stocks (XLV) -2.6% to -7.2% YTD
  2. European Stocks (EuroStoxx 600) -0.2% to -6.6% YTD
  3. Italian Stocks (MIB Index) -2.0% to -13.1% YTD
  4. French Stocks (CAC 40) -0.7% to -3.8% YTD
  5. Japanese Stocks (Nikkei 225) -1.3% to -12.1% YTD

 

Whereas if you played our #GrowthSlowing call more aggressively (into the Fed agreeing with it), here’s what really worked last week:

 

  1. Short USD = down another -1.2% on the week to -3.6% YTD
  2. Long Euros and Yens (vs. USD) = up +1.0% and +2.0%, respectively, to +3.8% and +7.8% YTD
  3. Long Commodities = +1.6% on the week for the CRB Index to 0.1% YTD
  4. Long Oil = +2.4% on the week for WTI to +0.8% YTD
  5. Long Russia = +4.7% on the week to +16.9% YTD

 

Seriously, who isn’t levered long Russia? There was a manic media headline that crossed my screens about “Egypt Now In Bull Market” too. So I checked that out and see that Egyptian stocks ramped +14.0% on the week to +6.8% YTD. #Awesome

 

*Note: if you do the multi-duration math, you better not have been long Egypt pre last week!

 

Away from not being levered-long most things that would have killed my credibility for the last 18-20 months, it was a pretty quiet week. From a rate of change research perspective most of the trending US cycle data continued to slow:

 

  1. NAHB (builder confidence) 58 FEB vs. 65 in OCT = 9 month low from Housing cycle-peak
  2. US Consumer Confidence (U of Michigan survey) 90 MAR vs 91.7 FEB = new cycle low
  3. Industrial Production -1.03% year-over-year for FEB, slowed vs. the hoped for JAN “bottom”

 

Yep. Housing Starts (see the weather?) “beat” and so did the “Philly Fed” (joy to the world), but neither US Retail Sales nor Producer Prices did (both slowed sequentially and remain bearish secular problems for US corporate profits that are currently in #recession).

 

Back to what most people in the US stare at (Dow Bro), here’s what I have definitely not been long for the last month:

 

  1. High Beta Stocks were up another +2.8% on the week = +17.2% in the last month
  2. Highly Levered Stocks (EV/EBITDA) up another +1.8% = +14.1% in the last month
  3. EPS #GrowthSlowing Stocks (bottom 25% of SP500) +1.9% on the week = +13.5% in the last month

*Mean performance of Top Quintile vs. Bottom Quintile (SP500 Companies)

 

Since all of these US Equity Style Factors are the recipient of Down Dollar, we should probably “ex” them out. Lol

 

There aren’t many long-term capital flow questions coming in these days (most emails I get have to do with super short-term March-to-date squeezes), so here’s some building Correlation Risk to noodle over (i.e. what people are chasing = 15-day inverse correlations):

 

  1. US Dollar vs. SP500 = -0.84%
  2. US Dollar vs. CRB Index = -0.96%
  3. US Dollar vs. Oil = -0.82%

 

And if you look at Consensus Macro positioning (non-commercial CFTC futures & options), post the US Dollar’s -3.6% YTD correction, the US Dollar just registered a -2.3x z-score (1yr duration).

 

What does that mean and/or “just give me the bottom line KM” on why it matters? Almost 100% of the time that something is +/- 2x (standard deviation) overbought/oversold in futures & options terms, that something mean reverts (goes the other way).

 

Sure – a USD bounce might be as super short-term as the reflation rally has been. But wouldn’t that make the flow of it all change in a hurry? Are you positioned for that? If you have been (for the last 18-20 months), you’ve been happy with your returns.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.79-1.98%

SPX 1
RUT 1055-1105

Nikkei 168
USD 94.73-97.70
Oil (WTI) 34.65-41.53

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Following The Flow - 03.21.16 chart



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