During this dark period of global uncertainty, Gold is shining bright. It's up +25% YTD. We continue to like it.
In this clip from The Macro Show, Hedgeye Retail analyst Brian McGough explains why this particular American clothing company is his favorite short idea in his sector.
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Takeaway: The last thing OPEC wants to do is freeze which would goose prices and send price signals to the U.S. to increase production.
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Takeaway: Despite reports, the KSS story isn’t improving. Paths lead to a dividend cut in 24 months, and cessation of its existence within a decade.
We had 3 people in as many days ask us about our current thinking on KSS. The impetus is that there’s the perception – and it’s partially correct – that inventories are in a position across retail that is forcing/allowing retailers to restock inventory. A rare occurrence unless business trends are generally healthy on the margin. Here’s out TRADE, TREND and TAIL view on KSS.
TAIL: Same call here. 1100 stores should be 700 to sustain returns over the next 5 years – but at a much lower earnings base. Existing box should be 30% smaller. Mgmt won’t do this. Kohl’s likely won’t exist as either a retail banner or a public equity in a decade. It will be a distant memory for millennials. No take-out play here – no real estate optionality whatsoever. KSS has a lease duration of over 20 years (23 to be exact). That means that management made an egregious bet that the stores will be relevant 20+years down the road in order to secure low rent expense. These liabilities should be half that amount. Due to the pushing out of real estate expenses (this is inarguable), this is a company that needs a 1%-1.5% comp to leverage occupancy. That’s so low bc of aggressive leases. And yet it’s only comped that rate 1 time in four years at the store level. For real? This is the worst management in the industry, but we’d argue that the story so terminal that it can’t even be fixed by good management.
TREND: I’m always concerned about the volatility by quarter – this is KSS, afterall. We’ve got a back-half EPS miss by 3%, which is not tremendous. Next year, however, Richards is modeling a miss of almost 15%. We’re at $3.39 vs the Street at $4.13. Street is marching well above $5 over next two years. We don’t think it will ever see $4 again. KSS actually put up a respectable (for KSS) 1% in 3Q last year, and 0.4% in 4Q. That 0.4% includes a 30% e-comm comp. Golf clap there. But check out the YY e-comm site rank below. Really abysmal. Decelerating on the margin at a time when overall online retail is accelerating.
TRADE: Stock looking cheapish at 10.6x ’17 consensus. But on our numbers it’s 13x. This thing can trade as low as 8x earnings. That sounds low, but 1) it’s been there before, and b) we’ve got EPS coming down to $3 the following year vs Street at $4.21. 8x our 2017 numbers or 10x a normalized 2018 is closer to $30 vs $44 today. At that level it is at a 14-15% FCF yield. Again, sounds cheap, but a) it’s been above 20% before, and b) this company is likely to cut its dividend at the turn of the eco cycle. FCF yield valuation goes away with a dividend cut.
Below we highlight a must-read thought piece from Neil Howe, who recently joined Hedgeye as Sector Head of Demography. For those unfamiliar, Neil is arguably the world’s preeminent demographer and his work has been invaluable to a wide range of industries and policy organizations. Email to the extent you’d like to learn more about how Neil can help your team generate alpha over the long term.
Neil and Darius Dale hosted a Q&A session and discussed his thesis, catch the replay below.
- In the coming decades, Boomers will swell the nation’s oldest age brackets. But what often goes unmentioned is the generational aspect: Boomers will bring their own distinct personality into senior age brackets, creating a whole new set of opportunities.
- Due both to this generation’s sheer size and the new characteristics that it will take into old age, Boomers will fuel new demands in a variety of industries. Among those that stand to gain the most are healthcare, wellness, home improvement, and travel and hospitality.
The Baby Boom is moving into its senior years.
Over the coming decades, massive cohorts of aging Boomers will swell the nation’s elder population. Last year, 14.9% of Americans were age 65+. By 2035, that share is projected to jump to 21.4%. Over that same time period, the share of the population age 75+ is projected to nearly double, from 6.4% to 11.1%.
Sure, this looming senior wave is hardly a secret. But few analysts go much beyond the raw numbers. In fact, thanks to generational change, we’re looking not just at a quantitative shift, but a qualitative shift—dramatic changes in the attitudes and behaviors of these new seniors.
Remember: These are Boomers we’re talking about, not the G.I. and Silent Generation who raised them and against whom Boomers protested raucously in their youth. What kind of collective temperament will begin to emerge among older age brackets in the coming years? Think about their life story.
The oldest Boomers began entering America’s college campuses in the mid-1960s, helping to ignite countercultural passions and pushing the nation into an era of political idealism, cultural awakening, and social upheaval. In the years that followed—from LBJ to Reagan, from hippie to yuppie—Boomers shook the windows and rattled the walls (to paraphrase Bob Dylan) of everything their parents had built. In so doing, this generation began to manifest so many of the collective attitudes and behaviors for which they have since become famous: their individualism, their attraction to personal risk, their distrust of big institutions, their carelessness about material wealth, their cultivation of self, their die-hard moralism.
None of that will change as they move into their 70s. So when you speculate on the hottest senior brands three or five years from now, keep in mind that lifelong obsession with values, extended family, spirituality, and personal transformation (“experiences”)—something you would never associate with today’s seniors.
Pay attention as well to the sobering socioeconomic shifts within this generation as you move from its first wave (born in the mid-1940s) to its last wave (born in the late 1950s).
Compared to first wavers, last-wave Boomers are more likely to live alone, be never married or childless, and be immigrant or minority. Among Boomer males, college completion actually declines from first wave to last. Also in decline, holding age constant, are most living standard and health indicators. Reaching age 70 over the next two decades, each successive Boomer birth cohort will (on average) experience declining median household net worth, declining median income, less DB pension coverage, greater inequality, and higher rates of disability and chronic disease. Among noncollege whites in their 60s, we are already seeing a remarkable decline in life expectancy as younger Boomer cohorts move into this age bracket.
In other words, we need to be realistic. Even as they usher in a new set of life priorities as consumers, this generation—first wave to last—will face growing wealth and health challenges and will cope with more fragmented living arrangements. They will also bring a more hourglass-shaped income distribution to a “golden-years” age bracket that has in recent decades been known for its strong middle class.
The sheer size and unique generational preferences of aging Boomers will be a boon to many industries.
“Traditional” healthcare. Here is a bankable prediction: Boomers will touch off a relentless rise in healthcare spending. The basic reason is that healthcare spending per capita is a very strong function of chronological age—with the cost rising exponentially from age 20 on. The per-capita cost of a 60-year-old is about double that of 40-year-old. The cost of 80-year-old is roughly double that of a 60-year-old. And so on. Per-capita Medicare spending peaks at age 96, which is really the highest age for which CMS has good data. As the U.S. population becomes top-heavy with seniors, the healthcare expenses associated with older age brackets will skyrocket.
This cost boom will be further multiplied by adverse health trends (obesity and diabetes, most importantly, but also a growing cohort-linked rise in homelessness, alcoholism, and drug use).
One program where we’re already seeing the Boomer health cost wave is Medicare Advantage (MA). This will continue to accelerate. Over the last decade, spending on MA enrollees has surged by a remarkable compounded annual growth rate of nearly 14%. It’s not just that a lot more Boomers are consuming a lot more healthcare—but also that MA is a delivery mode that they strongly prefer. The share of senior Medicare beneficiaries enrolled in MA has more than doubled over the last ten years (from 18% to 36%). The CBO projects that this growth will continue in future years.
Why is MA so popular? These plans offer a more comprehensive set of benefits than traditional fee-for-service Medicare. Members are guaranteed access to an integrated network of doctors, out-of-pocket limits on healthcare services, and additional benefits like dental and vision programs. These qualities make it popular among both high-income and low-income seniors.
In the near term, first-wave Boomers will tax the healthcare sector with their demands for extra services (at higher premiums). In the longer term, for last-wave Boomers, the policy debates over Medicare, Medigap, and Medicaid will be mostly about delivering basic services at lower cost. Eventually, this will lead to a decisive shift away from fee-for-service medicine. MA began with a reputation as a frills-filled program for the affluent. In time, I expect, it will morph into a vehicle for capitated cost savings.
“Nontraditional” healthcare. Holistic Boomers will fuel a novel demand for New Age products and services in the 65+ age bracket. They will augment traditional medicine with alternative remedies—including supplements, coaches, traditional Chinese medicine, and other “wellness” solutions. Rock gardens, ministers, mindfulness sessions, and even psychotropic drugs are already becoming a staple of oncology units and hospices.
This trend extends to food. While previous generations of seniors were happy with their favorite CPG brands, Boomer seniors will go “all natural” by visiting Whole Foods (WFM)—or cheaper alternatives now offered by Walmart (WMT) and others. In fact, they’ll probably go online at GNC or the Vitamin Shoppe (VSI) to make sure they’ve got complementary medicines fully covered.
Perhaps the largest healthcare expansion of all will occur outside the realm of medicine. With more seniors living alone at times or on the move, Boomers (and their children) will increasingly hire professionals to handle everyday tasks like household chores and transportation. (Since these services fall outside the CMS’s strictly medical “home health care” category, these custodial costs will be largely out of pocket.)
One very promising growth area is telehealth. Although just 15% of family physicians used telehealth services in their practices last year, that share is sure to expand rapidly in future years. The acceleration will begin in rural areas where access to specialists (or even internists) is limited. Third-party private firms like American Well and Healthsense—as well as public firms like Teladoc (TDOC)—offer remote health monitoring services and telephone consultations.
Telehealth is in its infancy, to be sure, and Medicare has yet to expand its payment rules to accommodate diagnosis and care over broadband. But that will soon change. Earlier generations of seniors could hardly conceive of a doctor who didn’t live in the community and meet with them personally. Boomers have always prized independence and choice—and will want a healthcare option that fits into their more independent lifestyle.
Home improvement. When the G.I. and Silent Generations retired, they wanted to be close to their peers and their spouses—and to be distant from their kids. (Witness the rise of senior communities with age-restricted covenants located in the Arizona desert.) Boomers are the opposite. They don’t want to be near their peers and a growing share of them don’t have spouses. But they are far more likely to live near or even with their children and grandchildren.
Already, over the last decade, the share of seniors living in multigenerational families has swelled—and the share living in formal senior communities and nursing homes has shrunk. Yes, a growing minority (the spouseless and the childless) may be living alone, but even they will be drawn to so-called “intentional communities.” Besides, today’s affluent seniors are much more likely to still be working. Net result: Boomers will be aging in place rather than packing a Beacon 18-wheeler for the Sun Belt.
All of this means the Boomer family home is likely to remain a timeless and rooted family manse. And that in turn means big money for the home improvement industry. Boomers have already become the nation’s biggest spenders on McMansion upgrades. As they continue to age, even more of them will upgrade their homes to better accommodate themselves, their adult children, and their grandchildren.
Travel and hospitality. Boomer seniors will be on the lookout for meaningful getaways for their entire family. They will gravitate toward accommodations that allow the entire gang to share the same space instead of being divided into separate rooms—like the bungalows and villas offered by Walt Disney World Resorts (DIS).
When they aren’t spending time with their families, Boomers will want to go on their own adventures of self-discovery. Unlike the last two generations of seniors who traveled together in large groups to bland attractions, Boomers will seek out the high-brow, the edgy, and the serious—cultural tourism, “voluntourism,” ecotourism, or food tourism. Expect theme parks at Disney and Universal (CMCSA) to add an immersive personal transformation curriculum for these outward-bound seniors.
Plenty of industries that have grown disproportionately reliant on Boomer consumers are in for a culture shock in the decades ahead.
In the auto industry, for example, Boomers have recently been a lot more likely to buy cars than younger generations. (In 2011, one vehicle was purchased for every 14.6 drivers ages 55 to 64—compared to one for every 34.9 drivers ages 25 to 34.) Boomers have also been the disproportionate buyers of high-margin cars, like super-HP Mustangs or super-lux pickup trucks. The auto industry, having already sucked consumption out of future years with near-zero interest rates, is definitely worried about the aging of Boomers and their car culture.
Many parts of the entertainment and leisure industry are graying quickly as well. At the movies, attendance among younger audiences is falling, while attendance among older audiences is on the rise.
And what about pro sports? According to a 2013 Nielsen report, NASCAR, MLB, and the PGA had the oldest audiences of any sport—with 49%, 50%, and 63% of viewers over age 55, respectively. Sports have always been vulnerable to generational turnover. Boomers themselves recall as children an era when boxing and horseracing dominated the sports-page headlines. Wonder what happened to that?
Invest in sharing-economy technologies that cater to aging Boomers. A growing number of startups are doubling down on Boomers. Whether it’s meal delivery kits or Uber rides for seniors, the possibilities are endless. And with more Boomers living independently, the demand for these sharing-economy services is sure to grow.
Some companies have already jumped on the trend. Envoy, for example, allows people to hire stay-at-home parents to do a wide array of everyday activities—from shopping to transportation to household chores. GreatCall (the company that sells Jitterbug phones) now gives customers the ability to press a single button to contact an operator who can hail a Lyft for them—no app required!
Worried that Boomers will recoil from the tech-driven sharing economy? Don’t be: They’re no stranger to the sector, either as consumers or as workers. In fact, seniors in 2015 accounted for 16% of all workers in the sharing economy—a slightly greater share than youth age 18 to 24 (14%).
Understand that Boomer culture will be ageless. In recent postwar decades, the cultural touchstones of seniors were often shunned by younger generations. When G.I.s and Silent dominated older age brackets, Benny Goodman or Frank Sinatra were widely considered “old-people music.” Today, by contrast, Boomer icons like Led Zeppelin or Mick Jagger enjoy pan-generational appeal. Indeed, most Millennials freely concede that Boomers did most of the great creative stuff, for whatever that’s worth.
The widespread generational appeal of Boomer culture explains why it is often used in advertisements not just for older folks, but for younger audiences as well. Age itself has acquired a certain cool. (The Dos Equis man, anyone?) The cross-generational appeal of Boomer culture will further narrow the generational gaps across extended families headed by Boomers.
-The Hedgeye Macro Team
Editor's Note: This is a special Hedgeye Guest Contributor note written by Mike O'Rourke. Mike is the Chief Market Strategist at JonesTrading where he advises institutional investors on market developments. He publishes "The Closing Print" on a daily basis in which his primary focus is identifying short term catalysts that drive daily trading activity while addressing how they fit into the “big picture.”
“Forward, the Light Brigade!”
Was there a man dismayed?
Not though the soldier knew
Someone had blundered.
Theirs not to make reply,
Theirs not to reason why,
Theirs but to do and die.
Into the valley of Death
Rode the six hundred.
Alfred, Lord Tennyson
Tennyson’s poem about British troops following their leaders to tragic death in the Crimean war was the first thing that came to mind as headlines crossed the wire stating the Bank of Japan will explore expansion of its Negative Interest Rate Policy (NIRP). The hallmark of twenty first century Central Banking has been to enact an extremely accommodative and unconventional policy and then to expand it when it fails. The failures of the Central Banks becomes more and more apparent with every day that passes. The record amounts of accommodation that have flooded the global economy over the past 8 years have failed to create economic momentum. Central Bankers don’t know when to tactically retreat, cut their losses and seek a new plan of attack.
In the end, the public will pay the price.
The past few trading days have been nothing short of remarkable. Friday’s large market decline was followed by an inexplicable sharp rally which was compounded by highly misplaced expectations on a Fed governor’s speech. Most of yesterday’s rally was erased today with no clear catalyst driving the market wide reversal of momentum. After two months of recording no daily changes of 1% or more, 3 have been recorded over the 3 consecutive days. In early August, after the release of the strong July employment report, we asserted the FOMC should be on pace to resume tightening with one caveat - “Market volatility” would be another surefire event that will prevent the FOMC from carrying out its intended wishes. The irony is that if the summer continues its slow uneventful pace of the past month, the likelihood that the FOMC will resume tightening rises significantly. The best hope to prevent Fed action would be another market temper tantrum.” We have noted repeatedly that if the top Fed officials are taken at their word, the FOMC should tighten next week. But the market does not share our view. Could this behavior simply be the market’s temper tantrum to ensure the FOMC does not tighten?
Another potential explanation is the market is finally acknowledging there is no free lunch and the “lower for longer rate outlook” is accompanied by the disappointing growth outlook. Governor Brainard’s speech yesterday was a more dovish version of Chair Yellen’s Jackson Hole speech. The market’s reaction to Yellen was mild. At the time, we noted “While the market continues to celebrate a lower for longer environment, it misses the likelihood it will also be significantly tighter than the environment of the last several years. In short, the Fed has said we are going to resume tightening, but our outlook for longer run growth is weaker than any other point in the recovery. That hardly seems to be a good reason for markets to be in a volatility void.” Similar to Friday, a key aspect of today’s selloff was the bond market weakness. While Treasuries led equities lower Friday, today equities led treasuries lower (chart below).
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