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Corn: A Hedgeye Staple

Position: Long corn via the etf CORN


We added a long position in corn yesterday in the Hedgeye Virtual Portfolio via the etf CORNWe entered this position on yesterday’s sell off at $44.38. Keith aptly summarized the opportunity, “Corn is getting smoked today, so we’ll buy back our longstanding intermediate-term bullish TREND case while it’s on sale. KM.”

 

With the US Dollar making lower-lows, corn continues to ride this currency crash higher, posting an inverse correlation to the dollar of -0.53 over the past three months and -0.88 over a twelve month span. While the US Dollar has fallen -7.5% year-to-date and -11.3% over the past twelve months, corn futures have risen +13.9% and +79.8% over the same durations. Along with a tight supply and demand situation, a major factor behind our bullish corn call continues to be US Dollar weakness and the subsequent run-up in commodity prices; the CRB commodity index has a -0.87 correlation to the greenback and is up +9.2% over the intermediate-term (3M) duration.

 

Global corn supply remains tight, particularly in North America, where cold and wet weather in the first half of April halted fieldwork and corn plantings in the US and Canada. According to the USDA, as of April 17th, only 7% of the US corn crop was planted, down from 16% at this time a year ago. The USDA has also reported that China is only expected to export 100,000 tons of corn in the 2010/11 season, down from 150,000 tons the prior year; and there is growing concern that China’s surging demand for corn may soon lead them to completely cut exports. Meanwhile, South Korea, the world’s third largest importer of corn, has initiated a grain trading venture in the United States which will boost corn and soybean exports to Korea to 2.15 million tons by 2015.

 

The big story on the demand side continues to be China’s surging appetite for corn and corn-related products, which, according to Shang Qiangmin, director of the China National Grain & Oils Information Center, “will grow faster than supply in the next 10 years on rising production of livestock feed and biochemicals.”  Corn used to produce biochemical products this year will increase to 50 million tons, up ten-fold from a year ago. Further, Oil World has reported that Argentina will export 1-2 million tons of corn to China in June and July, signaling China’s effort to diversify their imports. On a global picture—a bullish one indeed—corn demand is projected to outpace supply in the current season by 7 million metric tons.

 

On our quantitative set-up, CORN is bullish on the TREND duration, with intermediate-term support at $42.13 and no upside resistance.

 

Corn: A Hedgeye Staple - corn

 

Kevin Kaiser

Analyst


FRIDAY MACRO MIXER - WHAT A WEEK IT HAS BEEN

Don’t look to the data points on the consumer to support the S&P 500 being at a three year high.  At best the numbers on the consumer this week point to sluggish underlying trends, but the reality is that government continues to prop up the overall consumer picture.  This has been the case for some time, and may continue, but potent cocktail of slowing growth and accelerating inflation – we call it Jobless Stagflation – is starting to muddle the thoughts of the Central Planners in Washington, D.C.  

 

THE JOBS PICTURE IS PUNK - Yesterday, Initial claims rose by 25,000 to 429,000 for the week ending April 23. The increase was noticeably above consensus expectations and follows the previous week’s 12,000 decline.  As our Financials team noted yesterday, reported claims are now at the same level they were in January 2010.  The consensus that “the jobs picture is getting better” may need to be revised back to “the jobs picture is not getting any worse”.   On the margin, this is a potentially bearish change in general expectations.  That being said, a number of temporary factors may have contributed to the rise in initial claims, including auto plant shutdowns because of Japanese supply-chain disruptions and the shift in Easter.  Initial claims have been above 400,000 for three consecutive weeks; the latest gain raised the four-week moving average from 399,250 to 408,500 (the highest since mid-February).  In terms of employment, the recovery story is on ice for now.

 

INCOME FOM UNCLE SAM - Income growth accelerated to 0.5% before adjustment for inflation from 0.4% in February.  The source of the improvement was the government as transfer payments grew far more rapidly than in recent months, led by increased unemployment compensation.  This situation is temporary and without an improvement in core fundamentals, like employment, there will be an increasing case for a pullback in spending – particularly as the buck continues to burn.

 

SPENDING WHAT WE DON’T HAVE - Consumers clearly have the income to spend and as I said the questions of where the income is coming from and how long it can be sustained are front and centre for investors today.  The High-Low society dominated 2010; consumer confidence by income is one chart that illustrates that idea vividly.  A chart of the total enrollment in the Foodstamps program is another image that hits home when one considers the broader economic picture in America today.  Overall, consumer spending moderated in March, despite a slight acceleration in income. Nominal spending rose 0.6%, down from 0.9% in February, while real spending growth slowed from 0.5% to 0.2%.

 

WITH LITTLE CONFIDENCE - While the headlines are showing an uptick in April consumer confidence the index gained back only 2.3 of the 10 points it dropped in March.  The index is up 25 points from the November ‘08 bottom and 29 points below its January ’07 high.  By contrast, the S&P 500 is a mere 4.6% off its close on 1/31/07.  The economic drivers of consumer sentiment (housing, jobs, inflation and income) remain very mixed, which are consistent with the low level of confidence.  The inflation of stock prices, a direct result of Ben Bernanke’s easy-money policy, remains the only significant positive influence on confidence at this juncture.  Below, I have a chart indexing consumer confidence by income bracket from January 2010.  I’m sure every investor could weave their own story into this chart but what I see is a sharp relative gain on the part of confidence among the $50k and above bracket following the announcement of QE2 and the stock market rip that followed.  Positive jobs data, it could be argued, bolstered other cohorts at the end of 2010/early 2011.  Even going back to our April Flowers/May Showers call, it is clear to see that the stock market was a huge driver of confidence at that point.   I believe it remains so today and, with earnings strong, many are assuming that it’s different this time.  The terrible trio of Accelerating Inflation, Slowing Growth, and Joblessness has not mattered to equity investors of late.  In our view, it is reckless to “keep dancing while the music is playing” while earnings are peaking and, like in 2Q08, the macro is not being respected.

 

 

Howard Penney

Managing Director

 

FRIDAY MACRO MIXER - WHAT A WEEK IT HAS BEEN - confidence by income

 

FRIDAY MACRO MIXER - WHAT A WEEK IT HAS BEEN - umich April

 

FRIDAY MACRO MIXER - WHAT A WEEK IT HAS BEEN - umich expct April

 

FRIDAY MACRO MIXER - WHAT A WEEK IT HAS BEEN - umich att April


European Misery Charts

With a tip of the hat to economist Arthur Okun, who created the misery index which assumes that higher rates of unemployment and worsening inflation create more miserable economic and social costs for a country, below we show the three fundamental drivers of unemployment, inflation (CPI), and government bond yields across the Eurozone’s periphery. The main take-away that we continue to hammer on is that piling debt upon debt with inflation and unemployment rising is a recipe for disaster, or misery, as it perpetuates and extends slow to negative growth and inhibits government revenues to pay off grossly imbalanced budgets, essential requiring governments to take outside assistance. Over the intermediate term we expect the red arrows in the charts to push misery higher.

 

Matthew Hedrick

Analyst

 

European Misery Charts - t1

 

European Misery Charts - t2

 

European Misery Charts - t3


Early Look

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TALES OF THE TAPE: RUTH, SONC, MCD, COSI, PNRA, BWLD, KONA

Notable news items and price action from the past twenty-four hours along with our fundamental view on select names.

  • RUTH reported EPS of $0.13 and company-owned comparable restaurant sales of +5.2% versus consensus +4.2%.
  • SONC reported system-wide same store sales of +4-6% for the first two months of Q3.
  • MCD raised prices for large soft-drinks in China by 0.5 yuan (8 cents).  PPI in China rose at the fastest pace for 30 years during March.
  • COSI reported +3% company-owned comparable sales trends for 3Q.  This number constitutes a slowdown in two-year average trends but, as I wrote in a note published this morning, the number is not as bad as it may appear at first glance.
  • PNRA declined on accelerating volume.
  • BWLD and KONA gained on accelerating volume. 

 

TALES OF THE TAPE: RUTH, SONC, MCD, COSI, PNRA, BWLD, KONA - stocks 429

 

Howard Penney

Managing Director



THE M3: MGM CHINA; SANDS CHINA REFI; S'PORE UNEMPLOYMENT

The Macau Metro Monitor, April 28, 2011

 


MGM CHINA DOESN'T PASS LISTING HEARING Bloomberg, Apple Daily

According to an unnamed source, the Hong Kong bourse on Thursday told MGM China Holdings Ltd. to submit additional documents for its plan to list its shares in the city.  The report said, "The committee has doubts on who will be the controlling shareholder, and concerns about possible shareholder disputes in the future."


SANDS CHINA SEEKS REFINANCING Reuters

Sands China is seeking a $3BN five-year debt deal that will refinance and upsize its $2.5BN Venetian Macau financing secured in May 2006.  According to banking sources, general syndication is expected in late May.  According to 3 bankers who are looking at Sands China's new deal,  the facility is expected to be priced at least 100 basis points lower than the existing $1.75 billion five-year loan the borrower completed in May 2010 (all-in 499bps; 450bps+LIBOR/HIBOR), largely as a result of the improving gaming sector outlook.

 

S'PORE JOBLESS RATE LOWEST IN THREE YEARS Channel News Asia

The overall unemployment rate fell to 1.9% in March 2011 from a seasonally adjusted 2.2% in December 2010.  The bulk of the employment gains in 1Q or 22,800 jobs came from the services sector.


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