- Longer term, South American academics warn of potential production declines as rising fertilizer costs have seen independent farmers skimping in recent cycle. Agricultural experts say that the full consequences could be felt in crop yields in 2010 and 2011. In Brazil a report from the Cooperaiso coffee cooperative suggests that fertilizer sales are likely to fall by 20% over this crop year because of price levels, while the Columbian Government has earmarked subsidy funds to try and prevent declines in use by farmers there.
- Andrew Barber
A data point on coffee this morning had traders taking note: the National Federation of Coffee Growers of Columbia is predicting a cyclical decline in Brazilian Coffee production will cause a global deficit as supply falls below demand that has grown dramatically in recent years.
- To put in context, the grade of coffee produced in South America is the premium Arabica grade. Starbucks and other retailers have re-introduced premium South American blends to new audiences from the less urban parts of the US to developing Asian and Eastern European markets in recent years and Columbian Growers are betting that despite slowing growth one of the last sacrifices that people in those markets will make is their premium coffee in the morning.
- Coffee Futures felt the same pressure as other softs in recent months as the great deleveraging process saw a tremendous amount of capital flow away from static log index investments which were based on rolling front month positions. Unlike Oil or Gold, Coffee does not enjoy the same following among institutional investors as a standalone investment and so the absence of index investors will significantly impact open interest and Volume. JO is an Ipath ETN based on the Dow Jones AIG Coffee sub index –which consists solely of front month NYMEX Coffee Futures on premium South American Arabica.
- Andrew Barber
Below is a 3 year chart of Chinese GDP. Notice the seasonal pickup in the January period for each of the last 2 years. It could very well happen again. Anything can...
We wrote this morning that we see a Chinese recovery in 6-9 months. We question all of our positions, all day, every day... the question on this seasonality point is, are we bullish enough?
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- Second, the most recent data from WMT signaled that its sales trends have slowed. We have not heard from MCD since WMT reported its sales for September.
- Third, we have posted in the past that MCD is getting more aggressive with coupons, which is another sign that MCD is struggling to generate traffic trends!
- Fourth, we recently posted some data on industry discounting (please refer to my October 18 post titled “Deal or No Deal”). The data pointed to a significant increase in discounting. The combination of slowing sales trends and increased discounting will lead to lower levels of profitability.
- Fifth, nobody is immune!
- There are a number of reasons to be bullish on MCD, but I’m not in that camp. I have posted about franchise anxiety, which is at levels we have not seen in years. The currency benefit the company has enjoyed for the past years slowed significantly in 3Q08 and will be a drag to EPS in 4Q08. The bulls point to the new coffee program as being the savior for top line sales over the next 18-months. I believe that there are clear signs that MCD will need to adjust expectations down for that program as we enter 2009.
One of the biggest issues for the stock is that the street is hiding in MCD as a “safe haven.”
This is the same group that was very publicly positive on global tourism as recently as April. At the same time my partner, Keith McCullough was taking the exact opposite macro view.
Macau supply growth is slowing down. That is good for Macau operators. Despite its inability to pull in the financing, this is good news for LVS as well. They still have their covenant issues in Q4 but one step at a time. WYNN looks to be in the driver seat here. All we need is for Beijing to loosen the reins in visitation and/or the Macau government to tighten the reins on junket commissions. Following my trip to Macau, I believe both will happen.
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