prev

JO: EYE ON COFFEE 3

We have been keeping our eye on bullish supply data points for South American Arabica recently. The demand side of the coffee equation is less clear, clouded by the impact of the economic slump on consumers as well as Asian capacity for Cheaper Robusta.

Global Coffee Prices spun into a nose dive in the late 80’s after the collapse of the International Coffee Agreement. As major US household brands like Sara Lee and Kraft shifted rapidly to lower quality Robusta and other cheaper grades, South East Asian growers began to ramp up production dramatically. Nowhere was this more pronounced than in Vietnam, which is among the largest global suppliers after less than a decade of rapidly increasing export levels.

Prices for Vietnamese exporters have fallen dramatically over the past month, with the Vietnam Coffee and Cocoa association reporting average levels of $1,700 USD per metric ton vs. $2,500 in February. Anecdotal reports suggest that there has been a pronounced decrease in buyers from Western Europe and the US combined with a sudden collapse of credit facilities for local brokers and traders. Meanwhile news reports from Indonesia, the second largest Asian producer, suggest that there has been a drop in demand felt there as well (a recent uptick in exports of Robusta is largely due to settlement of forward contracts dating back to early in the season).

The presence of low cost providers like Vietnam and Indonesia complicates the global coffee picture. Although they are primarily producing the less desired Robusta variety they have tremendous capacity and miniscule labor costs.


Andrew Barber
Director

VOLATILITY: SEEKING CLOSURE

The VIX swung sharply higher today as options buyers rushed into the market at any cost. If you read our work you know that we look for spiking VIX levels as a signal of capitulation selling, but today’s spike feels more like a fund(s) being forced to cover short volatility positions as it does a true indication of sentiment.

Andrew Barber
Director

S&P LEVELS INTO THE CLOSE

Keith’s Trade line levels today are a buy at 858.33 and a sell at 945.36.

Andrew Barber
Director

real-time alerts

real edge in real-time

This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.

INVESTNG IN THE DELTA

“Go west young man” – John Soule, 1851

Horace Greeley may not have coined this phrase but he certainly popularized it. That was in the second half of the 19th century. The first half of the 21st century is a very different time. My advice to our junior generation would be to “Go East Young PERSON” or at least look Eastward. One has to be politically correct here in the west, but not in China where capitalism is not an evil word.

So if you’re a young capitalist, go where you can be you. There is no shortage of opportunities. As reported by the China Daily there is a paucity of individuals with global financial experience, particularly in the investment arena. Shanghai banks are looking to Wall Street to fill that void.

I’m not suggesting China is actually a freer economy than the USA, yet. But on the margin, we are moving more towards socialism and China is moving the right way. Yes, China is an authoritarian regime and no, the country is not free.

But we invest in deltas here at Research Edge and the China delta is now positive. Keith was on the correct side of the China trade for most of this year and I’ve been negative on Macau, but when facts change, we change. One theme you will be hearing from us is China’s transformation from an industrial based economy to one that is based on consumption. Singapore made this transition and now generates per capita consumption 15x the rate of China. Now that is a huge potential delta.

In my narrow world of gaming, lodging, and leisure, it’s the Pearl River Delta that matters. Macau resides on this Delta and will continue to benefit from the capitalist delta sparking mainland China. One casino market, serving over a billion people with rapidly rising incomes and a cultural propensity to gamble; if there is one other gaming market with a decent growth profile, I’d like to know.

Here in the US, notwithstanding the recent government interference in our free markets, I see many signs of a leftward economic shift in our country. Not to be outdone by the free spending Bush administration and Republican congress, Democrats will have their own agenda to pursue, rather easily under Obama I might add. Get ready for a curbing of free trade, windfall taxes on profitable industries, higher overall taxes and even more spending, nationalized healthcare, government interference in mortgage contracts, equal pay legislation, onerous environmental restrictions, prescription drug controls, higher minimum wage, etc.

I’m making a purely economic argument. I’ll leave the discussion of whether there are social benefits that may accrue from some or all of those initiatives to Keith Olbermann and Bill O’Reilly to argue about. What I can say with some certainty is that a socialist agenda is bad for business, it’s bad for the economy, and it’s bad for the stock market.

Two other items I haven’t mentioned yet are more near and dear to my sectors: regulation and union power. Look, I’m all for regulation. Regulation of the government, that is. We could’ve used that earlier this decade with Fannie and Freddie but that was thwarted at every turn by Barney Frank-Lin Raines and “their” band of “ownership society” boosters, Democrats and Republicans alike.

The union issue is a big one, although I don’t know if executives and investors fully grasp it. We have written extensively on the prospects and ramifications of “The Employee Free Choice Act”. People don’t know this but the original name was “The Act To Eliminate The Cornerstone Of Our Democracy: The Secret Ballot”. That was too long so I see why they went with the shorter name.

Unions will prosper under Democratic control and “The Act” is a major tool of that newfound prosperity. The Employee Free Choice Act will be at the top of the 2009 legislative agenda. It will pass and it will affect businesses, particularly consumer businesses. In an environment with declining consumer spending, higher labor costs will deliver a near fatal blow to many companies.

The choice seems pretty clear. One can invest in a socializing market priced for capitalism or a capitalizing market priced for socialism. I think you know where we stand.
Originally posted on the Hedgeye's Early Look portal

COLM: Key Market Share Trends

Per my prior post, here are supporting charts showing key trends.

1) Total athletic apparel is hardly knocking the cover off the ball, but is at a flattish rate versus -20-30% 3 months ago.

2) Outerwear has started off the year better than last year at retail – without price point degradation.

3) Footwear (17% of sales) remains a disaster.

COLM: Risk/Reward Is Shaping Up Nicely

Here’s some irony for you… Yesterday I was in my office reviewing top line and cash flow trajectories for all the companies I track in retail. One that stood out to me as a potential positive inflection was Columbia Sportswear. No, the irony is not that I’ve been a perpetual bear on this model, but that about an hour later Keith (who has the uncanny ability to call key stock levels on a massive number of tickers) sent me an email saying ‘COLM looks like a lay-up under $30 – long side.’

Mark my words, COLM WILL miss the quarter and management WILL guide down. I’m at $1.75 for 2H08 EPS vs. the Street at $2.01. But with short interest at an all time high of 33% of the float, do you think that just MAYBE the market knows this?

Also, I like the fact that trends in the channel are picking up for COLM at a point when the company is just beginning to anniversary 4 quarters of extremely tough EBIT margin compares. It is gaining share on the margin from VFC’s The North Face, and its US Outdoor division (36% of sales and nearly 50% of cash flow) has picked up since COLM last issued guidance. The kicker for me is the P&L compares are so rough, in part, due to a meaningful increase in SG&A spend to up the ante on product and marketing – something I have long knocked this company for. SG&A ratio will have gone from 28% to 34% over 3 years. That’s the exact level that this company needs to kick start growth.

If I assume that EBITDA is down another 20% in 2009, I get to sub-7% margins and a 5.6x EBITDA multiple. That’s not cheap relative to some other names in the space (esp one with 22% of sales in Europe), but with margins having gone from 16% to 7% over 3 years as COLM repeatedly shot itself in the foot, I think that the risk/reward is starting to point higher as it relates to cash flow. Heck, at this point a simple factor like a cooler than expected winter would get the cash flowing.

Please see our COLM margin walk below for detail on the progression of key P&L components. See our follow up post for key market share trends in key categories.

get free cartoon of the day!

Start receiving Hedgeye's Cartoon of the Day, an exclusive and humourous take on the market and the economy, delivered every morning to your inbox

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.

next