Daily Market Data Dump: Friday

Editor's Note: Below are complimentary charts highlighting global equity market developments, S&P 500 sector performance, volume on U.S. stock exchanges, and rates and bond spreads. It's on the house. For more information on how Hedgeye can help you better understand the markets and economy (and stay ahead of consensus) check out our array of investing products




Daily Market Data Dump: Friday - equity markets 5 13


Daily Market Data Dump: Friday - sector performance 5 13


Daily Market Data Dump: Friday - volume 5 13


Daily Market Data Dump: Friday - rates and spreads 5 13

CHART OF THE DAY: Trump Beating Clinton? Not As Challenging As Once Thought

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye Director of Research Daryl Jones. Click here to learn more.


"... Admittedly it is somewhat ironic to have a quote about losing from Donald Trump. To the chagrin of many, Trump has literally done nothing but win over the last year. He has won primary after primary and, if the most recent polls are any indication, beating Hillary Clinton might not be as challenging as pundits once thought either. In the Chart of the Day, we highlight this narrowing gap between the two."


CHART OF THE DAY: Trump Beating Clinton? Not As Challenging As Once Thought - 5 13 16 CoD

Winning the War

"Sometimes by losing a battle you find a new way to win the war."

-Donald Trump


Admittedly it is somewhat ironic to have a quote about losing from Donald Trump. To the chagrin of many, Trump has literally done nothing but win over the last year. He has won primary after primary and, if the most recent polls are any indication, beating Hilary Clinton might not be as challenging as pundits once thought either. In the Chart of the Day, we highlight this narrowing gap between the two.


On the topic of winning and losing, we've recently been reading Richard Thaler's book, "Misbehaving", which is the history and development of behavioral economics. In the not so distant past, the idea of psychology impacting economic decision making was largely ridiculed. Now, of course, the impact of human irrationality (or rationality for that matter) on decision making is broadly accepted. 


In the book, Thaler describes a classic article by MIT economist Paul Samuelson in which Samuelson describes a lunchtime conversation with a colleague at MIT. In the conversation, Samuelson notes to the colleague that he's heard the definition of a coward is someone that won't take a bet with 2:1 odds. To emphasize his point, Samuelson then offers the following bet (converted to today's dollars) to that same colleague: heads he wins $1,500 and tails he loses $750. 


Now if the colleague were acting based on economic rationality, he would accept that bet hand over first. But Samuelson’s colleague did not accept the bet. When asked to explain, the colleague simply said the negativity of losing $750 was much more significant to him than the positive impact of winning $1,500. In effect, the colleague, like many people (if not most), was loss averse.


In isolation, this example doesn’t mean much, but when repeated many times over and over in an economy the influence on markets and prices is staggering. As Peter Diamandis wrote:


“He fingers loss aversion—a tendency for people to regret a loss more than a similar gain—as the bias with the most impact on abundance. Loss aversion is often what keeps people stuck in ruts.” 




Winning the War - middle graphic chart


Back to the Global Macro Grind


Speaking of losing, President Obama was handed a major loss yesterday when a federal judge ruled the Obama administration has been improperly funding an Obamacare subsidy program. In effect, the ruling indicated that the Department of Health and Human Services (HHS) was spending about $180 billion that was not appropriated by Congress. 


While the ruling was voluntarily placed on injunction pending appeal, the impact on the health insurance industry could be substantial. As our new Managing Director for Healthcare policy Emily Evans (ping  if you want to be on her distribution) wrote:


“CBO projected that these cost-sharing subsidy payments to health insurers will total $180 billion over the next decade - including $3 billion in 2014, $7 billion in 2015, and $13 billion in 2016. 


The issue cited by the lawsuit is akin to the challenges made to the risk corridors program - i.e. that there is no legal mechanism in the bill that actually appropriates the money to the Administration to make the payments. The absence of promised payments to insurers under the risk corridor program is responsible, in part, for sinking a number of non-profit COOPs.


Insurers are required to reduce the out-of-pocket cost limits for eligible enrollees - regardless of whether the government reimburses them for doing so. In the absence of reimbursements, insurers would shift the cost of required out-of-pocket limits to higher premiums for silver plans.”


So heads and the health insurance industry loses $180 billion... yikes.


Also in the news yesterday was the bankruptcy of a company called Linn Energy. Our Energy Sector Head Kevin Kaiser was on this name very early and believed its equity was worth close to zero despite its high “dividend”. Kaiser was denigrated by all sides: the Company, the almighty Jim Cramer and his cabal at CNBC, and even a few billionaire hedge fund managers who owned stock in the company. 


In hindsight, despite all of the financial analysis Kaiser did to prove his case, the most significant red flag was probably a wedding. You read that correct: a wedding. You see at the height of the price of oil, the CFO of Linn decided to have one of the more extravagant weddings Houston has ever seen. As seen in the middle graphic above, the wedding included a performance of Cirque de Soleil with the happy couple. Oh, and there was also a Phantom Rolls Royce at the wedding . . . the “Phantom” of course representing Linn’s cash flow.


Another company that is currently on Kaiser’s radar screen, that he believes has the potential to lose all of its equity value, is Summit Midstream Partners, LP (ticker: SMLP). As Kaiser wrote a week ago:


“Our base case valuation for SMLP is $0 based on our DCF and SOTP models (see figure below). Our bull case valuation is $2 - $7/unit, an increase from March on account of the decline in SMLP’s cost of capital (unsecured bonds rallied from ~18% YTM to ~10% YTM)."


So if you are following, heads you win $2 - $7 / unit and tails you lose everything. But since the current unit price is $22, it is really heads you lose and tails you lose. Anyone irrational enough to take that bet?


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.69-1.78%

SPX 2039-2086

VIX 13.44-17.59
USD 92.54-95.07
Oil (WTI) 42.50-46.86

Gold 1


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research 


Winning the War - 5 13 16 CoD

the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

The Macro Show with Brian McGough Replay | May 13, 2016

CLICK HERE to access the associated slides.


An audio-only replay is available here.

Retail = Focus On Today's Macro Show | WATCH LIVE at 9AM

Takeaway: Today's Macro Show (9am EST) will focus on the Retail Sector -- current trends and pitfalls to avoid. Link attached to watch live.

This morning at 9am EST Brian McGough will be anchoring Hedgeye's The Macro Show to talk about how recent datapoints in the Retail space are intersecting with Hedgeye's Broader Macro Call. He'll also discuss top ideas -- both Long and Short.



WAtch THE REplay below

CLICK HERE to access the associated slides.



Kohl's: The Ugly Path To The Inevitable Dividend Cut

Takeaway: In the path to the inevitable dividend cut, all that concerns us is an activist that does not know how to do research.

Editor's Note: Today's lackluster earnings release from Kohl's (KSS) sent the shares tumbling -9%, as the company missed on just about every important metric. The stock is off almost -15% on the week, handicapped by the broader economic malaise that hit other retailers like Macy's (M).


Meanwhile, Retail analysts Brian McGough and Alexander Richards have been bearish on the stock for some time now. In a note to clients today, McGough and Richards wrote:


"One thing we want to remind everybody of, however, is our thesis that the erosion in Credit income at KSS (30% of EBIT) will take up SG&A, pressure cash flow, and cause KSS to cut its dividend.”


In other words, the worst is yet to come.


Below is an excerpt from a research note published on February 3, 2016, in which they detail the troubles ahead for KSS. To read our Retail team's institutional research email 


Kohl's: The Ugly Path To The Inevitable Dividend Cut - kss images

KSS | …And This Is Only Stage 1 of 3


This is the 1st Stage of KSS EPS permanently being held below $4.00. Stage 2 goes to $3.25. Stage 3 = $2.50 and dividend cut.


All along we’ve been saying that KSS would never earn $4.00 again. While today’s rather dramatic guide-down will make this premise seem a reality for some doubters, what we find most interesting is that this is only midway through Stage 1 of what we think is a Three Stage process to KSS cutting its dividend. Here’s our thinking…


Stage 1: 

Weak sales results as a result of the fact that KSS sells less and less of what consumers want to buy. Sounds overly simple – but it’s reality. That flows through to the gross margin line as online sales cannibalize brick and mortar, and come at a gross margin 1000bps below the company average. True SG&A growth becomes apparent as credit income stops going up as newly emphasized non-credit/loyalty shoppers become a bigger mix of the pie due to launch of Yes2You rewards program.


Stage 2: 

Here’s where credit income (currently about 25% of EBIT) erodes WITHOUT a rollover in the broader credit cycle. The company’s much-touted (but ultimately fatally flawed) Yes2You rewards plan cannibalizes credit income as shoppers can move to a loyalty program that offers similar rewards to the branded credit card but gives the consumers the opportunity to get 2x the points. Once at KSS and once on a National Credit card. That takes SG&A growth, which has been artificially suppressed as credit sales grew from 50% to 60%+ of total sales over a 5 year time period, from a run rate of 1% to 3%-4%. For a company that comps 1% in a good quarter, this is incredibly meaningful.


Stage 3: 

This is the doomsday scenario, and within the realm of possibility as the credit cycle rolls. On top of the self-inflicted pain we see in Stage 2, we see consumer spending dry up (sales weaken – down 5-10%), gross profit margins are down 2-3 points due to excess inventory, SG&A grows in the high single digits due to credit income (which is booked as an offset to SG&A) eroding, and EPS falls to $2.00-$2.50.


Look at any data stream on the credit cycle and you will see that delinquencies and charge-offs are at pre-recession levels. Translate that to KSS, and it means that the credit portfolio is currently at its most profitable rate. Because the company shares in the risk/reward with its partner COF, any weakening in the consumer credit cycle exacerbates the problems brought on by Yes2You cannibalization and puts 25% of EBIT and half of the current FCF at risk. The result, cash flow dries up and by our math, cuts its dividend within 12-months.

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