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CRAZY FOR CORN

Conclusion: We remain bullish on corn for the intermediate-term TREND duration as the confluence of perpetuating inflation, spiraling demand, and supply shortage indicate that corn prices will continue to rise.

 

Position: Long corn via the etf CORN

 

We added our on and off again long position in corn yesterday via the etf CORN in the Hedgeye Virtual Portfolio. As a reminder, we have been bullish on corn on an intermediate-term TREND basis since August of last year, when we initiated our first long position at $26.27. With the US dollar making lower lows, it is necessary to point out that corn has a -0.52 correlation to the US Dollar over the last three weeks. As a food crop with inverse correlation to a sinking US Dollar, investors would be remiss not to notice that inflation is present and will persist. Corn futures are up +10.8% YTD and up +67.9% over the last twelve months.

 

According to the United Nations Food & Agriculture Organization, record food prices will be sustained this year due to high oil prices and smaller crops. Corn is facing a serious supply shortage in the year 2010-2011 as corn output is estimated at 814.3 million tons while corn demand will flirt with 836 million tons. Looking thoroughly at supply and demand fundamentals, we have good reason to be bullish on corn. Here’s why:

 

On the supply side, corn is facing a shortage as climate change and natural disasters have decreased production. Moreover, cold weather continues to delay planting in the world’s largest supplying country. The US harvest represents nearly 55% of world exports and 39% of the global corn output in the 2010-2011 year. Unfortunately, the US has a lot of uncertainty surrounding its corn output due mainly to a legitimate concern that La Nina is forecast to cause heavy rainfall in the northern US plains as well as Canadian prairies. Though La Nina is expected to strike in the US, you can bet your buck on it that this will threaten the global harvest of corn and result in tightening global supplies. It is certainly a stark reality that the US could see a third yearly deficit for corn.

 

Despite the potential decrease in the global supply of corn, the demand for the crop continues to trend higher. When the US Department of Agriculture reports tomorrow, we expect to see a reduction in their estimates for the world stockpile, as demand increases in part due to the recent political turmoil in North Africa and the Middle East. Rising demand is corroding US corn stocks and a recent surge in ethanol demand—due to runaway crude oil prices—isn’t quite helping. Dating back to January, the Environmental Protection Agency agreed to let refiners increase their corn-based fuel additive in gasoline from 10% up to 15% for automobiles made in 2001 or later. Ethanol continues to eat away at the US supply of corn. According to a Feb. 9th USDA estimate, approximately 43% (4.95B out of the 11.6B bushels) of corn demand in the US is for ethanol use. With rising demand and an insufficient corn supply, there is plenty reason to be bullish on corn.

 

CORN was added into the portfolio at $42.74. From a quantitative setup, CORN is bullish on both a TRADE and TREND duration with no upside resistance, TRADE line support at $42.16, and TREND line support at $39.02.

 

Daryl G. Jones

Managing Director

 

CRAZY FOR CORN - corn fred


SAM – DEPLETING EXPECTATIONS

SAM is trading lower today on lower-than-expected FY11 earnings guidance.

 

On February 4th, we outlined our reasons for being cautious on the Boston Beer Company in 2011 in a post titled “SAM – HEADING FOR A HANGOVER.”  Specifically, we cited the potential for slowing top-line trends and rising costs.  Yesterday, SAM reported 4Q10 earnings of $0.87 per share, which fell short of the street’s $0.90 per share estimate.   Revenues came in light relative to consensus estimates with FY10 depletions up 11.5%, at the low end of management’s upwardly revised guidance range of +11-13% that was provided in December.  That being said, with depletions up 12% during the quarter, top-line trends continued to be solid and gross margins increased by more than 500 bps YOY.

 

Looking into 2011, the top-line comparisons will be difficult but the company guided to 9% depletion growth, which is slightly improved from its prior guidance of up mid-to-high single digits provided during its 3Q10 earnings release.  SAM maintained its FY11 gross margin guidance of 54-56% and stated, “From a cost perspective, I think we indicated the biggest cost exposure we have is energy, sort of linked to freight sort of outbound primarily, little bit of inbound.  I know there have been observations of cost increases on some of the agricultural materials that we use, but we were in actual [sic] good position when we made our arrangements for our 2011 purchases so we think we’re actually covered there in the guidance that we had given previously. So, that hasn’t really changed since we last gave that guidance. And on the other packaging material items, we haven’t seen too much movement and certain nothing that it would just put as noise at least to date.”

 

This current margin guidance continues to assume a 1% revenue per barrel increase which may not be easily passed on to consumers in light of the continuing tough economic environment and could put pressure on the company’s 9% depletion target.  Management alluded to the tough competitive environment in its comments yesterday, saying that it in 2011, “we expect to augment our sales force and brand support levels further to address the increasing competitive activity and to grow our brands appropriately given the opportunities we see. It is possible that these decisions might result in slower earnings growth in 2011, as we may forsake some earnings in the short term in order to build our organizational capabilities and support our brands at appropriate levels.” 

 

Specifically, the company is going to increase its investment in its brands by $12 to $18 million in 2011.  Although management had stated its intention to increase the level of investment behind its brands in 2011 prior to yesterday, they had not quantified the magnitude of the increase.  This is important because the company widened the range of its FY11 EPS guidance yesterday to $3.45 to $3.95 from its prior guidance of $3.95, which it provided in December.  Management stated that the new guidance reflects the negative impact of rolling out its new Freshest Beer Program, which it expects to reduce EPS by $0.20-$0.30 as it will cause core shipment growth to lag depletion growth during the year.  Although this was the only explanation provided by management, a $0.30 impact would imply a full-year earnings range of $3.65-$3.95, rather than the $3.45-$3.95 range provided.

 

Given that the full-year margin guidance did not change, which was surprising to me, management must think that shipments could actually lag depletions more than the initial 2%+ estimate as a result of the new Freshest Beer Program and is providing a cushion on the downside or the company increased its planned level of spending behind its brands in 2011 in order to defend its share position in what it expects will be an increasingly competitive market.  If the latter reason is correct, it puts the company’s 9% depletion target at risk, particularly when you combine that more competitive market with the company’s trying to pass on a 1% price increase.  Either way, shipment growth would be negatively impacted.

 

Howard Penney

Managing Director


Price Volatility: VIX Levels, Refreshed

I fundamentally believe that Big Government Intervention in our markets perpetuates the opposite of what the Big Central Planners at the Fed are marketing. This is not “price stability” – this is Price Volatility. And our industry is levering up (net leverage in the hedge fund industry hit its October 2007 high this month) on it again as it accelerates. That’s scary.

 

Obviously there was a 2008 market crash that Bernanke didn’t see coming, but his being ignorant of the risks embedded in fueling $150/oil with a US Dollar Debauchery policy doesn’t give him a hall pass on blaming the highest levels of price volatility that our markets have ever seen on the “market.” He is the market – at least in terms of establishing the cornerstones of rate cut and QE expectations.

 

Since the US stock market put in another lower long-term high at 1343 on February 18th (see the red circle in the chart below), volatility (VIX) is up +32%. That’s not price stability. That shows you what happens when the easy money music stops (fund flows into US, Japanese, and Western European equity markets peaked in the same week). And unless he opts for QG3 in May/June, it will stop.

 

One of the hallmarks of our risk management strategy is that real-time prices rule. Currently, we are seeing the confluence of a TREND line breakout in the VIX (> 17.88) and a TRADE line breakdown in the SP500 (1319). This continues to have me thinking that the SP500 is going to continue to make a series of lower immediate-term and long-term highs on rallies.

 

The VIX won’t be immediate-term TRADE overbought until it tests 21.70 again on the upside.

KM

 

Keith R. McCullough
Chief Executive Officer

 

Price Volatility: VIX Levels, Refreshed - VIX


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.

TALES OF THE TAPE: SBUX, CBRL, SONC, DIN, EAT, BJRI, CAKE, RT, YUM

Notable news items/price action from the past twenty-four hours.

  • SBUX is rated neutral at Janney, according to a report this morning that highlights coffee prices as the primary risk to EPS over the next twelve months.  Given SBUX’s customer loyalty, control over its supply chain, and – most importantly – the fact that they have locked in their coffee prices for the year, I am maintaining a positive view on SBUX.
  • SBUX’s managing director for the U.K. has spoken of a difficult sales climate in which fewer people are out on the streets shopping.  The U.K.’s 736 Starbucks stores saw a drop in sales since early January.
  • SBUX turned 40 yesterday and unveiled its new logo.
  • CBRL’s soft performance over the last month has coincided with a spike in gasoline prices.   MasterCard Advisors’ SpendingPulse report showed yesterday that average gasoline demand fell 1.8% to 8.953 million barrels-per-day in the week to March 4th.  Year-over-year, demand slipped 1%.  Retail gasoline prices rose 19 cents last week to $3.43 per gallon, 27% higher than a year ago, after crude oil rose to a 29-month high on unrest in the Middle East, the report said.
  • SONC gained almost 4% on accelerating volume following an upgrade yesterday.  This name is not out of the woods and, as I wrote in a note yesterday, I believe that the preannounced comps for 2QFY11 flattered to deceive.
  • DIN continues to underperform, declining on strong volume yesterday.  EAT, BJRI, CAKE, and RT all gained (with EAT trading on strong volume).
  • YUM traded higher on accelerating volume.  

TALES OF THE TAPE: SBUX, CBRL, SONC, DIN, EAT, BJRI, CAKE, RT, YUM - stocks 39

 

Howard Penney

Managing Director


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - March 9, 2011

 

As we look at today’s set up for the S&P 500, the range is 35 points or -1.73% downside to 1299 and 0.92% upside to 1334. 

 

MACRO DATA POINTS:

  • 10 a.m.: Wholesale Inventories, est. 0.9%, prior 1.0%
  • 10:30 a.m.: DoE Inventories
  • 1 p.m.: U.S. to sell $21b 10-yr notes reopening
  • 1:30: p.m.: Geithner testifies at House appropriations subcommittee
  • 3 p.m.: USDA Broiler eggs set    

WHAT TO WATCH:

  • Senate to vote on $61b budget-cutting measure passed last month by Republican House
  • Arab League may call this week for a no-fly zone to shield civilians and rebels from further
  • Australian Prime Minister Julia Gillard to address a joint session of Congress
  • Nasdaq predicts at least 45 Chinese companies will list in U.S. this year, topping last year’s record  

PERFORMANCE:


For the third day we have 7 of 9 sectors positive on TRADE and 9 of 9 sectors positive on TREND.  The two sectors broken on TREND are Technology and Materials. 

  • One day: Dow +1.03%, S&P +0.89%, Nasdaq +0.73%, Russell 2000 +1.53%
  • Month-to-date: Dow (0.10%), S&P (0.41%), Nasdaq (0.59%), Russell +0.15%
  • Quarter/Year-to-date: Dow +5.50%, S&P +5.10%, Nasdaq +4.26%, Russell +5.23%
  • Sector Performance: Financials +2.19%, Industrials +1.56%, Materials +1.15%, Utilities +1.12%, Consumer Spls +0.88%, Consumer Disc +0.80%, Healthcare +0.55%, Tech +0.83%, Energy (0.82%)

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: 1558 (+3172)  
  • VOLUME: NYSE 1002.67 (-3.18%)
  • VIX:  19.82 -4.07% YTD PERFORMANCE: +11.66%
  • SPX PUT/CALL RATIO: 1.55 from 2.28 (-32.09%)

CREDIT/ECONOMIC MARKET LOOK:


Treasuries were weaker with the rally in stocks, supply concessions and according to the WSJ

  • TED SPREAD: 21.11 +0.609 (2.969%)
  • 3-MONTH T-BILL YIELD: 0.11%  
  • 10-Year: 3.56 from 3.51
  • YIELD CURVE: 2.83 from 2.81

COMMODITY/GROWTH EXPECTATION:

  • CRB: 361.09 -0.50% YTD: +8.50%  
  • Oil: 105.02 -0.40%; YTD: +12.98% (trading -0.08% in the AM)
  • COPPER: 433.85 +0.27%; YTD: -1.79% (trading +0.45% in the AM)  
  • GOLD: 1,427.95 -0.28%; YTD: +0.83% (trading +0.19% in the AM)  

COMMODITY HEADLINES:

  • Palm Oil Seen Advancing 12% on Shortages as Record Food Prices Roil States
  • China's Demand for New Zealand Milk Products Surges Fivefold Since 2008
  • Oil Falls a Second Day on OPEC Supply Speculation, Rising U.S. Stockpiles
  • Copper Climbs in London Before German Industrial Production
  • Wheat Climbs as Dry Weather Conditions Threaten China Crop; Soybeans Fall
  • Gold Advances to $1,431.90 an Ounce in London Trading, Erasing a Decline
  • World Soybean Surplus May Swell on South American Harvests, Analysts Say
  • K+S Raises Potash Price for a Fifth Time on Agricultural-Product Inflation
  • Asian Coking-Coal Contracts May Rise 44% to Record After Queensland Rains
  • Aluminum Fee to Japanese Buyers Halts One-Year Drop as Demand Recovers

CURRENCIES:

  • EURO: 1.3909 -0.40% (trading -0.20% in the AM)
  • DOLLAR: 76.798 +0.39% (trading +0.11% in the AM) 

EUROPEAN MARKETS:

  • FTSE 100: (0.28%); DAX: +0.44%; CAC 40: +0.10% (as of 04:58 ET)
  • European markets trade mixed initially benefiting from a modest decline in oil prices and constructive EPS results and despite disappointing results from Texas Instruments (TXN) overnight.
  • Portuguese 10-year bonds fell for a third day, pushing the yield as high as 7.70% (the most since at least 1997.)
  • The equivalent-maturity Italian yield climbed to 5% for the first time since November 2008.
  • The euro depreciated against all but two of its 16 most-traded peers.

ASIAN MARKTES:

  • Nikkei +0.6%; Hang Seng +0.4%; Shanghai Composite +0.1%
  • Markets were mixed today, getting support from a pullback in oil prices.
  • Cathay Pacific Orders 25 Airbus, Boeing Planes After Annual Profit Triples
  • China May Deflect Geithner Pressure by Reporting Smaller February Surplus
  • Thailand Raises Key Rate a Second Time This Year as Asia Fights Inflation

Howard Penney

Managing Director


R3: DKS, UA, Reebok, SKX

R3: REQUIRED RETAIL READING

March 9, 2011

 

 

 

 

RESEARCH ANECDOTES

  • In a rather unexpected callout, DKS management highlighted TaylorMade’s R11 and Burner drivers among the key products fueling Q1 sales in addition to more likely candidates such as running, baseball, and lacrosse product. In fact, part of the impetus was a concerted marketing effort initiated in the 4Q – after several lackluster years, early indications suggest golf may indeed be returning to a positive contribution for sporting goods retailers.
  • After nearly tripling its media spend in each of the past two years, expect continued investment from Reebok in 2011 to be even more noticeable with new campaigns featuring the brands EasyTone and ZigTech footwear. In addition, given the success of marketing induced sales of late, expect to see the brands latest effort to be highly visible in the coming weeks in anticipation of Reebok’s new Flex platform launch stateside in April.  
  • According to the NRF, Americans planning to celebrate St. Patrick’s Day this year are expected to spend 20% more than they did in 2010.  Total St. Patrick’s Day spending is expected to reach $4.14 billion this year with a record participation rate of 52% (up from 45% LY).  Nearly 102 million people are expected to wear green to celebrate.

OUR TAKE ON OVERNIGHT NEWS

 

Skechers Sues Sears - The Manhattan Beach, Calif.-based footwear brand alleges that Sears is selling footwear that infringes on its popular product lines, which include Shape-ups, Twinkle Toes and Z-Strap. The suit, filed in the U.S. District Court for the Central District of California, asserts that Sears is selling products that look like Skechers’ own under the labels of TheraShoe, Melrose Avenue, Paris Blues and Athletech, all through Sears and Kmart retail stores and websites. Both Sears and K-Mart sell Skechers shoes. Skechers is seeking compensatory and punitive damages, as well as injunctive relief for alleged infringement on its patents, trademark and trade dress rights, for dilution and for unfair competition. In a statement, Philip Paccione, general counsel of Skechers, said Skechers has “obtained more than 150 patents and trademarks on these lines, and [has] built them into brand names universally recognized around the world as synonymous with Skechers.” <WWD>

Hedgeye Retail’s Take: Familiar territory for Skechers, but not as the prosecutor. With the company believing that it has now earned the right to be considered a real brand following the success of Shape-Ups, this case may in fact be more about perception than having solid legal merit.

 

Under Armour Secures First Premier League Presence With Tottenham - Under Armour has reached a sponsorship deal with the Tottenham Hotspur Football Club. The five-year collaboration is Under Armour's first kit supply agreement with a Barclays Premier League team and represents the Brand's largest European team sponsorship. Beginning with the 2012/2013 season, Under Armour will provide Tottenham Hotspur with performance apparel, including training wear and playing kit for the Club's First and Academy teams, together with replica product for the Club's supporters around the world. Daniel Levy, Chairman Tottenham Hotspur, said: "We are delighted that Under Armour will become our new technical partner from 2012 onwards. They are an extremely ambitious brand with global aspirations, making them ideal partners for Tottenham Hotspur." <SportsOneSource>

Hedgeye Retail’s Take: Replacing Puma in their own back yard is big win for UA. Terms of the deal haven’t been disclosed, but in looking at comparable sponsorships this deal could range from $4-$12mm a season. Our sense is that as the company looks to step up their presence in soccer and Europe, additional deals will be forthcoming.

 

Abercrombie & Fitch Sues Surf Style - Abercrombie & Fitch Co. has filed a lawsuit against Surf Style Retail Management Inc., alleging trademark infringement and unfair competition, among other claims. The suit, filed on March 1 in a federal court in Miami, named as defendants four individuals who are also executives of Surf Style: Avi Ovaknin, Doron Malinasky, Eliyahu Levy and Shaul Zislin. Court papers said a flying seagull logo on Surf Style’s apparel and beach accessories was “identical, or nearly identical, and confusingly similar to A&F’s seagull mark,” which A&F uses for its Hollister brand. <WWD>

Hedgeye Retail’s Take:  ANF remains one of the most diligent trademark enforcers although blatant copying is not likely to hold up in any court.

 

Aeropostale Expands Into Asia - Aeropostale Inc. announced plans to expand into Asia with an agreement to open about 25 stores across Singapore, Malaysia and Indonesia over the next five years.  The teen-apparel retailer said it had reached a licensing pact with Montreal PTE Ltd., a joint venture between Apparel Group LLC and Jay Gee Melwani Group, to open the stores. The first one is slated to open in Singapore later this year.  Aeropostale currently operates 906 stores in 49 states and Puerto Rico, as well as 59 stores in Canada. It also operates 47 of its P.S.-branded stores for children across 13 states. Aeropostale has posted better results of late, helped by increasing sales. Last month, the company boosted its fiscal fourth-quarter earnings guidance while reporting surprise growth in January same-store sales. <WallstreetJournal>

Hedgeye Retail’s Take:   Licensing remains the growth vehicle of choice for most domestic specialty retailers given the lower risk, lower cost nature of the partnership.  However, we note that it will take a fair amount of time for these stores to become financially meaningful to the overall company so long as the store base remains small relative to the 900+ US locations.

 

Cabela's to Pay $10.4M in FDIC Settlement - Cabela's has agreed to pay nearly $10.4 million for "alleged unfair and deceptive practices" of its credit card operation as part of a settlement with federal regulators. It also agreed to reform its credit card practices. The Federal Deposit Insurance Corporation announced the agreement with Cabela on Tuesday. According to the settlement, World's Foremost Bank, Cabela's credit card operation, will pay $10.1 million in restitution and a $250,000 civil money penalty. The retailer did not admit wrongdoing. The FDIC said it determined that WFB did not operate its credit card programs "in an appropriate manner with regards to certain overlimit fees, credit line decreases, minimum payments due, late fees, penalty interest rates, notices to customers, and collection practices. The Consent Order, in part, requires WFB to correct the violations of law, develop appropriate policies and procedures to ensure future compliance, and effectively monitor third-party agreements and activities." <SportsOneSource>

Hedgeye Retail’s Take:   While not great from a PR standpoint, we highly doubt this will impact the loyalty of the core, card holding Cabela customer.  Similar settlements and fines have been levied on many credit card issuers as the FDIC looks to clean up industry practices.

 

Payment Card Fraud Falls 10% in U.K. - The amount of card-not-present payment card fraud in the U.K. fell by an estimated 10% last year, according to Retail Decisions, a fraud prevention and payment processing firm. The company estimates the value of the fraud that took place through online, mail order and telephone channels where a payment card is not directly swiped totaled 239 million pounds ($386 million), down from 266 million pounds ($430 million) in 2009. Such fraud in the U.K. fell 15% from 2008 to 2009, the company says, making 2010 the second year in row of reduced card fraud in direct sales channels.  The firm estimates such fraud will decline 5% in 2011, but says it expects fraud to rebound in 2012, when London hosts the Olympic Games <InternetRetailer>

Hedgeye Retail’s Take:  Good news for the issuers and retailers as technology advancements are the likely driver of reductions in fraud. 

 

Mobile Marketing is on The Rise - Marketers are increasingly eager to reach consumers via their mobile devices, a new report from consultancy Forrester Research Inc. finds. More than 40% of 252 U.S. interactive marketing professionals in a recent poll by Forrester report using some form of mobile marketing. And an additional 35% plan to incorporate mobile into their marketing plans over the next year. Mobile marketing budgets, the research finds, also will climb, although mobile will still account for a small portion of total marketing spend. Forrester estimates that nearly 40% of active mobile marketers are still allocating only test budgets for mobile. Nearly 53% of marketers say they will increase their mobile budgets in 2011, and only 4% are planning on decreasing them.  However, nearly 59% of marketers say they will spend less than $1 million on mobile this year. 23% plan to spend more than $1 million and the rest don’t know what they will spend, Forrester finds. <InternetRetailer>

Hedgeye Retail’s Take: The most significant callout from the study suggests that nearly 40% of active mobile marketers are still testing the medium. This provides a significant share that may indeed ramp spend in the coming years. It can also result in a transitory base as increased use could vary initial results.

 

 


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