Shorting JCP

Once again, Keith is short JCP in the virtual portfolio, managing near-term risk around our highest conviction TREND and TAIL short idea that is immediate-term TRADE overbought.


There is no change to our thesis on the name.

For more info on our thesis, see our Black Book, “JCP: What Ackmanists Are Missing.”


Shorting JCP - JCP Levels 9 14 11


The most recent supply and demand data points on corn do not augur well for consumer budgets going forward.


Inflation in the grocery aisle has been outstripping price increases at restaurants.  This trend has been holding for some time and the most recent CPI data, for July, highlighted that.  See the chart, below, that we are republishing from our 8/19/11 post, “CPI: GROCERY BILLS STILL OUT-INFLATING RESTAURANT CHECKS”.   It will be interesting to learn whether or not the August data shows a continuation of this trend.  August Consumer Price Index data is due to be released by the Bureau of Labor Statistics later this morning. 





A report published by the USDA (link here) yesterday saw the official U.S. corn yield forecast for 2011/12 drop 4.9 bushels per acre this month to 148.1 bushels.  The drop in U.S. production is expected to lead the U.S. to produce less than 50% of world corn trade for the first time in 30 years.  Increased foreign coarse grain production will partly offset the U.S. drop but, overall, the price prospects for corn are higher following this report.   The net 2011/12 market year ending stocks of corn are expected to dwindle to 672 million bushels versus 920 million at the end of 2010/11 and 1,708 million at the end of 2009/10. 


This is supportive of continued high protein prices for consumers.  Government forecasts now call for 3.5% to 4.5% grocery food inflation for 2011 which would be among the four largest annual increases over the past two decades. 



Howard Penney

Managing Director


Rory Green


China to the Rescue?

Conclusion: Recent rhetoric suggests China continues to stand ready and willing to step up its aid to ailing European nations. Only this time, it expects a great deal more in return.


Rhetoric around the next great bailout out of China has been swirling about the wires over the past 24-48 hours. We think it’s important to highlight China’s official stance by filtering through what’s been said thus far. Perhaps the largest takeaway is that Beijing wants favors in return and any further large-scale assistance is likely to come alongside some nice perks for the Chinese economy.


Regarding the need to extend additional help:

“What is most important now is to prevent the further spread of the sovereign debt crisis in Europe.” – Premier Wen Jiabao


“Chinese policymakers are thinking in a global context and about the need to prevent a domino effect in the European debt crisis.” – Zhang Yansheng, a researcher affiliated with China’s National Development and Reform Commission


Regarding what incremental actions China plans to pursue, if any:

“China is willing to buy [additional] bonds from nations involved in the sovereign debt crisis.” – NDRC Vice Chairman Zhang Xiaoqiang


“China can best contribute to the global economic recovery by ensuring steady growth at home.” – Premier Wen Jiabao


What China wants to see in return for such aid:

“Developed countries must take responsible fiscal and monetary policies.” – Premier Wen Jiabao


“If the U.S. introduces a third round of quantitative easing, this will further increase the global inflation pressure.” – NDRC Vice Chairman Zhang Xiaoqiang


“The nation wants countries including the U.S. [and E.U.] to become more open to investment by Chinese companies, which will create local jobs.” – NDRC Vice Chairman Zhang Xiaoqiang


“China is also actively allocating foreign reserves via commercial banks to support domestic companies going abroad. China will also use foreign reserves to secure important commodities or find resource assets overseas.” – NDRC Vice Chairman Zhang Xiaoqiang


“[The U.S. and E.U.] should recognize China’s full market economy status before the 2016 deadline set by the World Trade Organization. To show one’s sincerity on this issue a few years ahead of that time is the way a friend treats another friend.” – Premier Wen Jiabao


Lastly, what China has done thus far:

“We have on many occasions expressed our readiness to extend a helping hand, and our readiness to increase our investment in Europe.” – Premier Wen Jiabao: 

  • In October ’10, Premier Wen Jiabao pledged to purchase Greek sovereign debt and Beijing also authorized $267.8 million in Chinese bank loans to three Greek shippers;
  • In a November ’10 visit to Portugal, President Hu Jintao stated that China was available to support the country;
  • In April ‘11, China pledged to support Spanish sovereign debt after Spanish Prime Minister Jose Luis Zapatero visited Beijing; and
  • In June ‘11, Premier Wen Jiabao pledged step up China’s support of European sovereign debt by funding a “limited volume” of new issues, immediately putting $1 billion on the tape for Hungarian bonds. 

Net-net, recent rhetoric out of China suggests Chinese officials believe firmly that they are negotiating from a position of strength, and, thus, are expecting to dictate policy perhaps a bit more than they have in the past – i.e. “no QE3”. Like the shrewd investor the country has proven itself to be over the years, China appears to favorably view European (and some U.S.) corporate assets with an eye for “blood in the streets”. To the extent foreign policymakers are ready to allow China greater access to more sensitive assets, will go a long way in determining how much more participation we are to expect from China on the bailout front.


Darius Dale



A weekly look at commodity trends pertaining to our space.  Over the last week, dollar strength and concerns surrounding economic growth have helped drive overall commodity prices lower.




Proteins moved higher, week-over-week, despite strength in the dollar and a fall off in grain prices.  Coffee was the most notable mover of the week, declining -5.8%, but remain high on an absolute basis, as the chart below shows.







The CRB Foodstuffs Index is currently 9.25% above the July 2008 peak while WTI crude oil is trading 37% below its 2008 peak (Brent is down 23% from its 2008 peak).  Retail gasoline prices in the U.S., on the other hand, are down 11.5% versus the ’08 peak, despite the decline this summer.







Coffee prices declining over the last week may be rooted in speculation that demand from roasters is weakening because of higher prices and increased supply.  Despite the recent drop, coffee prices remain up 42% and 16% on a year-over-year and year-to-date basis, respectively.  Emerging market demand for coffee also remains strong.  Bloomberg reported today that emerging market and producing countries will account for more than 50% of all the coffee consumed in the world by 2020, according to P&A Marketing International. 





Below is a selection of comments from management teams pertaining to coffee prices from recent earnings calls.



PEET (8/2/11): “As we indicated, in our first quarter call, we had to buy a small amount of our calendar 2011 coffee beans at significantly higher prices and this coffee will roll into our P&L during the third and fourth quarter.”


“Higher priced coffee resulted in gross margins this quarter being 290 basis points below prior year. In our first quarter conference call, we indicated that in addition to the overall higher price coffee market, we had to buy a small amount of coffee this year at significantly higher prices. And as a result, we expected our coffee cost to be 40% higher in fiscal 2011.”


HEDGEYE:  Peet’s is a company with a very competent management team that manages coffee costs extremely well.  Its higher-end, loyal customer base makes the price elasticity of demand more inelastic than for other coffee concepts’ products.



SBUX (7/28/11):  “As I mentioned earlier, are absolutely a headwind for us in the full business and that's most acutely impactful on margins in CPG as it's a much more coffee intensive cost structure, as you know. I can tell you that the decline as I spoke about it earlier from about 30% operating margin in CPG this year down to the target 25% next year is really all explained by commodities. Absent commodity inflation we'd be at or improving our margin in the coming year.”


“As we had anticipated, in recent weeks, coffee prices have retreated significantly from a high of more than $3 per pound just a couple of months ago to levels now near $2.40 per pound. As prices have been falling we continue locking up our needs for fiscal '12 and now have virtually the full year price protected.”


HEDGEYE: Starbucks is aligning itself with the right partners to gain more control of its coffee costs to provide investors with more certainty going forward and to protect its margins as global coffee demand continues to rise.



GMCR (7/27/2011): “However, what we've said is that should coffee prices or other material costs spike, we will certainly consider price increases as necessary. We certainly hope that we do not have to cover one again next year. But our objective long-term is attempting to maintain our gross margin as we would see input costs come along.”


HEDGEYE:  GMCR hedges out 6-9 months in advance.  Strength in the dollar has helped bring coffee prices lower but whether or not dollar strength will continue or not will be a significant factor in future price action in coffee.  Growing demand, globally, is bullish for coffee prices over the long term.





Wheat and corn prices came down week-over-week.  Today, wheat futures are rebounding from a five-week low on speculation that demand will increase from livestock producers seeking an alternative to higher-prices corn as a feed grain. 







Below is a selection of comments from management teams pertaining to grain prices from recent earnings calls.



PNRA (7/27/11): “Just to note on the cost of wheat, in 2011 overall, the per-bushel cost will be about the same as 2010 due to our laddering purchasing strategy.”


“We are going to take price in the fourth quarter. This price will offset dollar for dollar the per-bushel inflation of wheat of approximately $3 a quarter that we're going to see in the fourth quarter of this year and then across next year”


“We do continue to expect significant inflationary pressures in 2012, 4% to 5% food inflation, $10 million of unfavorability on wheat costs, which means that we don't expect operating margin much better than flat to full-year 2011 in 2012.”


HEDGEYE:  Wheat costs have come down but it remains unclear whether or not the current easing of grain prices will continue.  Weak global demand and a stronger dollar are currently trumping the adverse impact on supply due to weather and fires in the U.S.  Slowing demand may also mean lower sales for PNRA, so it remains to be seen if margins improve from this effect, even if high wheat costs come down.



DPZ (7/26/11): “We're fairly locked in on our chicken, locked in on our wheat into – partway into next year.”


PZZA (8/4/11): “We're actually covered through Q1 from a contract standpoint. So from a supply chain disruption or even significant price impact we don't anticipate anything between now and the end of the year.”





Chicken wing prices are up 20% from the year-to-date low in June.  On a longer term basis, there is plenty of room for chicken wing prices to run higher, as the second chart below shows.  It is likely, unless the increase in prices escalates further from here, that chicken wing price growth will remain negative, year-over-year, until the second half of 2012.  BWLD has reaped significant rewards from declining wing prices over the last year but this tailwind could be in the process of turning around at this point.


WEEKLY COMMODITY MONITOR - chicken wings 914


WEEKLY COMMODITY MONITOR - chicken wing prices long term



Howard Penney

Managing Director


Rory Green



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