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The increase of commodities continues to be fairly broad-based with most of the items we follow gaining significantly week-over-week.  With the exception of Chicken Wings, all of the foodstuffs in the table below show either flat or significantly positive week-over-week price changes.


Egypt is obviously front-and-center of the geopolitical picture at the moment and commodity investors obviously keep a keen eye on geopolitical proceedings.  There is speculation about food shortages due to a lack of access or movement of ships.  At Egyptian ports, an absence of customs officials is exacerbating the disruption. 


Rice gained 8% after trading flat last week, and relative to the other commodities at the top end of the table, its year-over-year price change is quite benign.  PFCB locks in rice and, as of most recent guidance on the item, management stated that the commodity was locked in slightly favorably for 2010 and the contract continues through September of 2011. 


Wheat narrowly missed out on the top spot this week, gaining 7.8% over a week ago.  There is speculation that Egypt unrest may delay shipments and that is why prices have come down.  However, it is unlikely that the recent pullback will persist if one shares Hedgeye’s bearish view of the dollar and if speculation that the cold snap in the central U.S. plains may adversely affect dormant crops is to be believed.   PNRA expects wheat costs for 2011 to be roughly flat versus 2010, as the company currently has nearly 75% of its wheat costs locked in for 2011, modestly below the 2010 price.   Looking at the chart below, it is clear that the company is hoping that the easier comps, from a wheat cost perspective, offer them some relief.  If prices go higher, wheat could cause some margin pressure for PNRA in 2H11. 




Chicken Wings continue to offer BWLD a nice boost here in 2011.  Following a decline of almost 5% on the week, prices are lagging those of a year ago by 36%.  The chart below shows clearly that this favorability is likely to continue for BWLD through the first half of the year if prices remain roughly stable.


WEEKLY COMMODITY MONITOR - chicken wing trend


WEEKLY COMMODITY MONITOR - commodity monitor Feb 1 2011


Howard Penney

Managing Director

Europe Is Offside

Position: Short Italy (EWI); Short Euro (FXE)


In a post on 1/27 titled “Playing Europe’s Mismatch on Duration” we noted that our short positions in Italy (via the etf EWI) and the EUR (FXE) were working against us as three catalysts were giving a boost to European equity markets (especially the PIIGS) over the immediate term:

  1. Japan and China buying European debt
  2. Bullish speculation on a “comprehensive package” to tackle Europe’s sovereign debt crisis
  3. Hawkish commentary from ECB President Jean-Claude Trichet on inflation

In the note we also cautioned that over the intermediate term TREND our negative outlook on Europe, especially for the countries with high fiscal imbalances (Italy, Spain, and Portugal), remains intact.


These positions remain unchanged, and due to recent uprisings in Tunisia and Egypt European markets have received the proverbial hall pass on headline risk, and its equity markets, especially from the PIIGS, have outperformed. The threat now is significant mean reversion risk!


After all, the top 3 global equity indices year-to-date are:

  1. Greece Athex = +17.7%
  2. Italy FTSE MIB = +11.7%
  3. Spain IBEX 35 = +11.2%

Also, some of the fundamental data we follow to gauge the region’s “health” is showing signs of slowing, a concern over the intermediate term. We’ve hit on the pressing threat of inflation in our work, but forward looking indicators such as PMI surveys are signaling a topping, particular Germany, THE country “supporting” the region and divergent from Europe’s sovereign debt issues.


Final January PMI Manufacturing figures were released today from Markit (see chart). Although we’ll be more focused on the services numbers (released on Thursday 2/3), both Manufacturing and Services are indicating a slowing on the margin (despite the majority of countries reporting Manufacturing PMI improving month-over-month).  Importantly there’s a heavy line of resistance at 60 that Germany is bumping up against, and increasing the mean reversion risk.   


Europe Is Offside - mh1


Although a lagging indicator, unemployment rates across many nations, but in particular in Spain and Ireland are moving in the wrong direction. Germany remains the exception, falling 10bps month-over-month to 7.4% in DEC. Beware that austerity programs throughout Europe, which include job strikes, wage reductions and freezes, and consumer tax hikes could further bolster these figures.


Europe Is Offside - mh2


The EUR and ECB Catalyst


On Thursday (2/3) the ECB announces its refi rate. We do not expect a hike from the current 1.0% rate, despite Trichet’s recent hawkish rhetoric, which could pare back recent gains in the EUR-USD. We’d be shorting the currency (again) at its current level of $1.38 and covering it at $1.35 for a TRADE.


Matthew Hedrick


Europe Is Offside - mh3

The Breakout: SP500 Levels, Refreshed

POSITION: no position in SPY


I said this when I covered my SPY position on Friday. I said this yesterday when I chose to do nothing. And I’ll say it again - provided that both The President and The Ber-nank and sign off on a complete debauchery of the US Dollar, this market can go higher before it blows up.


Anyone who has studied the unintended consequences associated with inflation and currency crashes knows that trading the inflation associated with it works, to a point. And when that point comes, very few are positioned for the fall. Friday’s mini-me fall, hopefully, was a mini-reminder of that.


Higher-highs and higher-lows in the SP500 will be bullish in both the immediate and intermediate terms until they aren’t. From a long-term TAIL perspective however, the SP500 continues to make lower-highs. That, combined with a monstrous amount of immediate and intermediate term price momentum, sets us up for some serious TAIL risk.


Almost every other day on our the Hedgeye Macro Morning Call, I say something like this: “If they debauch the dollar, every day and every week, from this day until that, the SP500 could easily get to 1340… and then blow up.”


What was immediate-term TRADE resistance yesterday is now support at 1289. This moves my immediate term TRADE resistance line up to 1305. The US Dollar is now down for 5 out of the last 6 weeks. It’s sad to watch.



Keith R. McCullough
Chief Executive Officer


The Breakout: SP500 Levels, Refreshed - 2

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.


Here are some tidbits regarding MGM's IPO and its junket business. 



We are hearing that MGM will launch its Macau IPO in late March.  There have also been a couple of recent developments related to MGM Macau.  First, while it appears that SJM and Wynn have reached agreements for Cotai land, MGM has not.  Thus, we believe a future Cotai project will be referenced during the MGM IPO process.  However, the focus will be on the growth – market and market share – and improving profitability at the existing MGM property.  More importantly, we think MGM may have secured the business of the junket operator Ocho, which is moving its room from SJM’s The Grand Lisboa (GL) to MGM after Chinese New Year.  Ocho currently provides up to 20% of GL’s Rolling Chip volume.  This is a pretty big deal for MGM which will help them keep the market share momentum going.  The willingness of junkets to move away from the Stanley Ho empire should continue, to the likely benefit of MPEL, MGM, and Galaxy.

Prices Paid = Inflation

POSITION: long inflation


There are obviously a lot of ways to be long inflation (short bonds, emerging markets, or consumer stocks) or just run on out there and buy something that’s, well, inflating in price!


I can see how a Keynesian was right depressed when the chart below (ISM Prices Paid) hit its December 2008 low. That was the other side of the printing moneys from the heavens idea that created things like $150/oil. What goes up in terms of a government supported price, eventually comes down.


What’s been going up since December 2008 are the prices that business pay for stuff (+353%). If you don’t think that a manufacturer of something with copper or corn in it is feeling this chart, ask them.


We’ve long time predicted (2007-2008) that when reflation becomes inflation, that someone gets plugged. In this case, either consumers of end product are going to get it (McDonalds says they are going to raise prices – look how the market took that idea) or the fattened corporate margin is going to get it.


There’s a reason why inflation created a very bad margin environment in the 1970’s. There’s no reason why inflation can’t force corporate margins to mean revert from all-time highs either.


So when The Ber-nank tells you there is no inflation, remember this – if he didn’t see it in this chart in 2008, he sure as heck won’t see it now.


And that, folks, is why the US Dollar or the government policies that back it no longer have any credibility in global currency markets.



Keith R. McCullough
Chief Executive Officer


Prices Paid = Inflation - 3

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