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Commodity Scorecard

 

We’ve been harping on commodity inflation since November – not surprisingly, so now is everyone else.  We’ll rejoin the chatter with an update on ten key commodities, their YTD price performances, their correlations with the US dollar index (over the last six weeks), and some commentary on what is driving the prices (other than correlation with the USD).  For reference, the US dollar index is down 1.06% YTD.

 

WTI Crude Oil: -5.00% YTD, +0.38 correlation w USD

  • Supply of oil at Cushing, OK (the storage hub where WTI is priced) hit an all-time high on February 2nd of 38.3MM barrels.  This glut of oil may not recede anytime soon, as the Keystone XL pipeline from Canada is expected to bring an additional 150,000 b/d into Cushing starting this month.  The result of the over-supply?  WTI has lagged other light, sweet grades that have jumped on the strife in the Middle East; the WTI-Brent differential is ~$14.

Natural Gas: -9.01% YTD, +0.14 correlation w USD

  • The blast of snow and cold across much of the US during January and early February could not resuscitate natural gas prices, which have dropped back down to $4.00/Mcf.  Associated gas production that comes with oil drilling in shale plays is keeping gas production elevated.  Furthermore, warmer-than-normal weather forecasts for the next two weeks in the eastern and central U.S. have investors worried that record inventory draws will not continue.

Coal: -10.17% YTD, +0.60 correlation w USD

  • China, the US, and India are the top three consumers of coal.  Coal consumption has a +0.94 correlation with China’s GDP and a +0.96 correlation with India’s GDP (Dhakal et al, 2007).  Growth in China and India is slowing (email us for recent reports).  Couple that with the flood waters receding in Australia (the world’s largest coal exporter), it’s not a surprise that coal prices are down 10% YTD

Gold: -4.10% YTD, +0.56 correlation w USD

  • Gold underperforms when real interest rates are positive and rising; as a result, gold had its worst January in twenty years.

Copper: +1.50% YTD, -0.49 correlation w USD

  • Dr. Copper hit an all-time high of $4.63/pound early this morning despite the fact that demand for the metal appears weak.  Inventories of copper at the London Metal Exchange are up 5% this year as orders to draw copper from stocks dropped 4% over the same time period.

Corn: +11.45% YTD, -0.87 correlation w USD

  • In yesterday’s crop report, the USDA announced that stockpiles of corn before the next harvest will be 9.4% smaller than estimated last month because of increased ethanol production.  In addition, supplies are dwindling as emerging markets increase corn imports and crop yields are weak in Argentina.  If you were short this grain, you’ve gotten corn-cobbed!

Wheat: +10.07% YTD, -0.83 correlation w USD

  • The UN warned this week that China’s northern wheat growing areas are facing an epic drought.  China is the world’s largest wheat producer and wheat noodles are a staple in the Chinese diet.  This news, on top of the Russian export ban and the cyclones ravaging Australia, powered the price of wheat to a 30-month high.

Rough Rice: +15.04% YTD, -0.87 correlation w USD

  • Yesterday Indonesia announced that it will lift its rice stockpiles by a third as it struggles to fight food inflation.  Indonesia's government met to discuss food security and chief economic minister Hatta Rajasa said it would gradually lift rice stockpiles from a current 1.5 million tonnes, underlining its fears over shortages leading to price spikes.  Rice is the number one food staple in Asia – a 15% increase in rough rice prices in six weeks has emerging markets worried.

Cotton: +29.54% YTD, -0.84 correlation w USD

  • Cotton has gone straight up in 2011 as China’s imports have reached the highest level since 2006 because adverse weather has slashed crops and Chinese producers are reportedly hoarding the crop, not selling into the market.  As a result, cotton prices are at a 140-year high and growers intend to take advantage: the American Cotton Shippers Association forecasts that global cotton output will rise 5.7% in the year starting August 1st.

Rubber: +19.21% YTD, -0.79 correlation w USD

  • Parabolic commodity prices can have some bizarre consequences.  On February 4th, 700,000 utra-thin condoms destined for Japan were stolen, and the police suspect an “inside job.”  The Sagami Rubber Industries Company said that these top-selling polyurethane condoms are reportedly worth $1.5 million – that’s 91.9% more than they were worth one year ago!

 

Kevin Kaiser

Analyst

 

Commodity Scorecard - commmooodd


CONSUMER UNREST

Tomorrow we get the University of Michigan consumer sentiment reading for February and recent indicators, such as the ABC consumer comfort index, suggest that the consumer may be turning more UNeasy. 

 

Last month, the Thomson Reuters/University of Michigan final index of consumer sentiment decreased to 74.2 from 74.5 in December.  The median forecast calls for a reading of 73.3, up from a preliminary figure of 72.7 issued earlier this month.  As it stands now the February preliminary reading is for an increase from 75.0 up from 74.2, according to Bloomberg.  In my view, a reading below 74.0 would not be surprising.

 

The reason for our caution is premised on the following factors:

  1. Political unrest in Egypt is playing a role in consumers’ heightened concerns for political and national security issues.
  2. While the holidays are in the rear-view mirror, the holiday bills are not.
  3. On Wednesday, the ABC consumer comfort index declined from to -46 from -41.  Significantly higher gas prices were cited as the primary culprit.
  4. With average pump prices well over $3.00 per gallon, drivers are increasingly absorbing higher fuel expenses by cutting costs of other household expenses.
  5. Despite the Federal Reserve’s focus on the stock market, Main Street is still focused on making ends meet.
  6. The jobs picture is improving but needs to improve faster.  Also, with regard to the longer term picture, the prospect of higher interest rates does not bode well for job growth.
  7. The Small Business Optimism index showed an improvement, but the hesitancy to hire remains evident.
  8. The Overhand of Austerity is looming large on the American Consumer.  As more and more column inches are dedicated to the implications of cutbacks and job growth, I expect this to drag on sentiment.

At this juncture, continuing improvement in consumer confidence is critical.  Much of the inflation in input costs is expected to be passed on to consumers; if the consumer is not prepared to take on this burden, the outcome for corporate profits will likely be dire.

 

 

Howard Penney

Managing Director

 

CONSUMER UNREST - univ mich sentiment jan


CONSUMER UNREST

Tomorrow we get the University of Michigan consumer sentiment reading for February and recent indicators, such as the ABC consumer comfort index, suggest that the consumer may be turning more UNeasy. 

 

Last month, the Thomson Reuters/University of Michigan final index of consumer sentiment decreased to 74.2 from 74.5 in December.  The median forecast calls for a reading of 73.3, up from a preliminary figure of 72.7 issued earlier this month.  As it stands now the February preliminary reading is for an increase from 75.0 up from 74.2, according to Bloomberg.  In my view, a reading below 74.0 would not be surprising.

 

The reason for our caution is premised on the following factors:

  1. Political unrest in Egypt is playing a role in consumers’ heightened concerns for political and national security issues.
  2. While the holidays are in the rear-view mirror, the holiday bills are not.
  3. On Wednesday, the ABC consumer comfort index declined from to -46 from -41.  Significantly higher gas prices were cited as the primary culprit.
  4. With average pump prices well over $3.00 per gallon, drivers are increasingly absorbing higher fuel expenses by cutting costs of other household expenses.
  5. Despite the Federal Reserve’s focus on the stock market, Main Street is still focused on making ends meet.
  6. The jobs picture is improving but needs to improve faster.  Also, with regard to the longer term picture, the prospect of higher interest rates does not bode well for job growth.
  7. The Small Business Optimism index showed an improvement, but the hesitancy to hire remains evident.
  8. The Overhand of Austerity is looming large on the American Consumer.  As more and more column inches are dedicated to the implications of cutbacks and job growth, I expect this to drag on sentiment.

At this juncture, continuing improvement in consumer confidence is critical.  Much of the inflation in input costs is expected to be passed on to consumers; if the consumer is not prepared to take on this burden, the outcome for corporate profits will likely be dire.

 

 

Howard Penney

Managing Director

 

 CONSUMER UNREST - univ mich sentiment jan


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Athletic Apparel Trends Stable

 

The weekly athletic apparel data reflects positive sales for the week adding to a more stable trend of positive sales observed for each of the last four weeks. The family retail channel continues to strengthen posting the only sequential improvement on the week.  It’s also worth noting that prices firmed up, with ASP’s increasing across each of the channels.  This marks a change in trend for the first time since the week before Christmas and coincides with recent anecdotes coming out of January that inventories may indeed be in healthy shape.

 

In looking at the brands, we highlight the disparity in outerwear between the growth in The North Face at up +10%, while Columbia continues to decline down -1% posting the only such loss on the week.  Lastly, the Pacific region continues to underperform all other regions for the third week in a row – a trend worth noting in our book and unfavorable for retailers over-indexed to the west coast such as BGFV. It just so happens the company cited negative comps in December as the reason for negatively preannouncing last month. A trend that may have continued so far in 2011.

 

Athletic Apparel Trends Stable - FW App App Table 2 10 11

 

Athletic Apparel Trends Stable - FW App App 1Yr 2 10 11

 

Athletic Apparel Trends Stable - App Region chrt 2 10 11

 

Casey Flavin

Director


REPLAY PODCAST & MATERIALS: MAYHEM IN MUNIS… FRAMING UP THE MUNI BOND DEBATE AND HOW TO PLAY IT

Thank you to those who joined us for Hedgeye’s conference call: “Mayhem in Munis: Framing Up the Muni Bond Debate and How to Play It” with our CEO Keith McCullough, Managing Director Daryl Jones, and Analyst Darius Dale.

 

The replay of the call is now available to Hedgeye MACRO clients. 

The prepared remarks were roughly 30 minutes with an additional 25-30 minutes of live Q&A. Topics included:

  1. Will we see "hundreds of billions" of defaults in 2011?
  2. Will or won't States go bankrupt?
  3. What will the impact of Federal, State, and local austerity measures be?
  4. Will the Federal Government backstop State level debt?
  5. What are the lessons of history?
  6. How much do fund flows matter?

Please contact us at if you have any follow up questions.

 

We thank you in advance for your continued support.

 

Warm regards,

 

The Hedgeye Macro Team


FL/Sporting Goods: More or Less Volatility?

For all you watchers of the weekly footwear and apparel data that comes from NPD and Sportscan, you may be in for more volatility on earnings reports. Why? Two days ago Foot Locker told NPD that it needs to make a choice – sell a weekly data product to Wall Street WITHOUT Foot Locker participating, or simply pull all weekly data distribution to the Street.

 

The catalyst was Ken Hicks at Foot Locker realizing that NPD was having its cake and eating it too. With an analyst taking his forecast lower two weeks ago based in part on NPD data, it led management to question why they were being subject to increased weekly volatility and speculation by the Street.  Didn’t we get out of the weekly sales reporting game years ago? At the same time, FL became more aware than ever that NPD has been servicing the Street and the trade with the same data, for which FL is a large contributor.   Ultimately something has to give here, and it’s likely that the days of weekly data feeds to the Street are over.   

 

Now there are two notable items…

 

1)      Our sense is that monthly data will still be available. Monthly numbers in this space are actually quite accurate and smooth out the weekly gyrations that can be the result of a variety of factors (weather, promos, and product launches).  Plus the monthly data offers more specificity into products, brands, and channel performance. Weekly numbers in the past only reflect the specialty athletic channel.

 

2)      People are likely to pick up the phone and call Sportscan to subscribe to SSI’s footwear data, a similar product but one with its own limitations.  SSI is less accurate. Instead of reporting only the sales data provided by the retailers, SSI includes its own estimates for retailers absent from the sample.  This is similar to the process IRI uses with estimating Wal-Mart’s sales.  While SSI may now be the only solution, we point out that even the big brands like Nike don’t even use SSI’s footwear data. They use apparel, which is more accurate.

 

Brian P. McGough
Managing Director


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