In this brief excerpt from The Macro Show, Hedgeye CEO Keith McCullough explains what mainstream media networks missed about U.S. economic growth and the broader implications for investors.
Takeaway: Supermarket chain Kroger faces growing underfunded pension fund liabilities that are particularly at risk in a financial market downturn.
The pop in Kroger (KR) shares today isn’t sustainable. The stock is up on a Wall Street analyst report arguing that the company’s "Venture Concepts could ultimately unlock $4 to $12/share value for Kroger."
However, much like the risks embedded in Kroger’s exposure to underfunded pension plans, buying the supermarket chain’s shares up here could unwind quickly and unexpectedly.
Hedgeye Consumer Staples analyst Howard Penney has been warning about risks embedded in Kroger shares. A principle concern is Kroger’s exposure to a large number of multi-employer pension plans that the company keeps intentionally underfunded.
Kroger is one of the largest unionized employers in the United States. About 375,000 of their employees are covered by roughly 300 collective bargaining agreements. Kroger employees participate in 36 multi-employer pension plans (MPP), with a combined $70 billion in assets and $100 billion in associated liabilities.
“Kroger’s management team and industry analysts continue to ignore and understate the risks that multi-employer pension plans (MPPs) present to Kroger’s future growth prospects,” Penney wrote in a recent institutional research note.
That’s a big problem. Here’s what you need to know:
- Underfunded: A Segal Consulting survey found that 53% of the retail food MPPs surveyed were in the “red zone,” meaning they had either “immediate and significant funding problems” or would be unable “to pay benefits within 15 to 20 years.”
- Risky In Financial Market Downturn: Milliman data shows that every 4% decline in asset returns pushes MPP funding status down by 15% to 20%.
- Problem Is Getting Bigger: In 2015, Kroger’s pension liability ballooned 61% to $2.9 billion. That number will go even higher this year, hindering the company’s ability to grow and likely leading to lower equity value.
Bottom Line: Kroger’s problems run deep. Sell.
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Want to read more? Click here to check out Penney’s Investopedia article on Kroger.
Takeaway: The average U.S. economic cycle lasts 59 months before recession. We are 28 months past that.
REALITY: The U.S. economy is in its 87th month of economic expansion... an extremely long expansion by historical standards.
History is clear on this. Average U.S. economic cycle last 59 months before recession. We are now 28 months past that.
That's why this new statement from New York Fed head Bill Dudley is up there as one of the more irresponsible statements (maybe not "the most irresponsible") we've read recently.
"I think this economic expansion can last a good while longer," Dudley. The Fed, he said, is aiming for a best-case scenario in which the economy grows at a "moderate rate over the next five to 10 years" while unemployment remains around 5 percent or a bit lower "and just have a very long-lived economic expansion."
We invite and encourage Mr. Dudley to peruse some recent Hedgeye commentary.
- Slowing jobs growth = Slowing U.S. economy
- The Profit Peak Is In For S&P 500 Companies
- Worrisome updates from CEOs of multi-billion companies (here and here)
- 21 of 32 key economic indicators got worse heading into Fed's September meeting.
We wouldn't bet that economic reality ceases to exist ... just because the Fed says so.
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Takeaway: This is a brief (complimentary) excerpt from this morning's Early Look note.
What’s really dangerous are politicians, on both the left and the right, having absolutely no clue about economic cycles. What’s dangerously normal about this cycle is that GDP isn’t going to hang out around 2% forever. It’s already gone to 1%. After that is 0%.
Unlike one of my competitors (Hyman) who said (yesterday) “I think the economy has years to run and a recession is years away”, I’m here to remind you that Industrials/Cyclicals are already in a #DoubleDipRecession and a broader slowdown towards 0% is months away.
You’ll have to fact check this, but I think I’m one of the few who has proactively called the last 3 US recessions, whereas most of my Old Wall competition hasn’t called one. The establishment of consensus economics is dangerous. That’s not a new normal either.
BACK TO THE GLOBAL MACRO GRIND…
Am I concerned about this? You’re damn right I am. How many times can the “blue chip” economists who have been advising both Republican and Democrat Presidents not only miss the topping process of cycles, but their inevitable rate of change slow-downs?
Click here to continue reading (subscribe to the Early Look).
Cunning Russian President Vladimir Putin said his country would sign onto a deal with OPEC members to limit oil output on Monday:
“Russia is ready to join in joint measures to limit output and calls on other oil exporters to do the same. In the current situation, we think that a freeze or even a cut in oil production is probably the only proper decision to preserve stability in the global energy market.”
Not so fast, says our Senior Energy Policy analyst Joe McMonigle. As he points out in his interview on BNN, Russia is essentially telling OPEC "you go first" ... get the deal signed and we'll follow. Questions clearly remain.
Russia's largest oil company, Rosneft, said yesterday it would actually increase oil production above 2015 levels. Meanwhile, OPEC's "deal to agree to a deal" would likely exempt Nigeria, Lybia and Iran "creating a million per barrel day hole" in the proposed oil production freeze, McMonigle says.
Click video above to watch McMonigle dissect these developments.
more from Hedgeye:
- McMonigle: A Lot of Holes in OPEC Deal
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