Position: We are long livestock via the etf COW in the Hedgeye Virtual Portfolio.
This morning Keith went long the etf COW at $31.02 as “cattle correlations and supplies look better than most things in the commodities complex.”
The largest (63%) component of COW is live cattle futures. Cattle futures and wholesale beef prices have launched higher in recent months as a combination of drought and high feed costs has led to the smallest calf crop in more than fifty years, with a smaller crop expected in 2012 (Cattle Network). This result has had an obvious impact on beef production: the USDA reported that production in November was 25,070 MM lbs – down 2% YoY and the lowest since 2004.
While domestic consumption comprises 80% of total demand for US-produced beef (Cattle Network), strength in the export market has been a tailwind to price, which shows no sign of abating as emerging market economies increase their per capita beef consumption. The US exported 2,775 MM lbs of beef in November, +22% YoY.
The minority component (37%) in the COW etf is lean hog futures; both cattle and hogs are flashing positive correlations with the US Dollar on the immediate-term TRADE and intermediate-term TREND durations. With the USD in a Bullish Formation we are encouraged by the positive relationship developing between the dollar and livestock.
Correlations with USD Index
From a quantitative view, COW is bullish on the TREND duration with support at $30.22; and the underlying live cattle futures contract is entering a seasonally bullish season.
November sales coupled with several retail earnings reports out after yesterday’s close add a dose of reality to recent Black Friday bullishness. We expected fewer misses (9 companies missed to 11 beats) given the strength at month’s end, which suggests the first 80% of November was not nearly as impressive. We chalk this up to a large extent to consumers becoming increasingly conditioned to wait for the deep discounts associated with Black Friday despite some retailers getting an earlier start this year.
The takeaway here is consistent with last week’s post “Key 4Q Themes,” expect underperformance in the domestic mid-tier market as retailers get increasingly more competitive on pricing in an attempt to manage inventories. This was reflected in results at both JCP (-2%) and KSS (-6%), which came in below expectations. Not surprisingly, the few retailers that highlighted favorable inventory positions headed into the holidays (ROST & TGT) posted positive sales while KSS – expecting inventories up +LSD – did not. Volatility is picking up in retail and is starting to reveal a bifurcation between upward and downward revisions that we expect will continue through this quarter and into next year.
A few additional callouts in November:
- The High/Low-end performance spread has widened once again. Within department stores, SKS +9.3%, JWN +5.6%, M +4.8% were solid while JCP -2% and KSS -6.2% both came in lower than expectations in addition to continued underperformance at BONT -4.9%.
- Food/Grocery continues to outperform driving results at discounters. Retailers with exposure there (TGT up mid-teen and COST up LDD) fared better than most with similar results to last month i.e. COST betting expectations and TGT coming in light, though still up +1.8% and up +1.2% seq on 2yr basis.
- JCP missed expectations again just 2-weeks after reporting disappointing Q3 results. The company’s e-commerce sales were down -6.9% for the fourth consecutive month though it resulted in an improvement in the 2yr trend on top of tougher compares (+12% ly). With others like Macy’s Bloomingdales.com posting sales up +50%, JCP.com continues to grossly underperform. In addition, despite citing a competitive disadvantage to not opening until 4am on Black Friday, the company noted sales remained weak through the weekend. The reality is that it wouldn’t have made much of a difference.
- KSS posted the biggest miss of the month relative to expectations coming in -6% vs. +2%E with all categories coming in negative.
- From a regional perspective, it’s hard not to highlight the fact that virtually every single retailer flagged California or the west coast among the best performing regions. I can’t recall the last time I saw that much consistency.
- At a category level, footwear outperformed apparel by and large. This could indicate consumer’s response to higher prices at retail, but will be worth watching through the key holiday season as it could precipitate an acceleration in discounting.
- The magnitude of downward revisions out of several apparel companies reporting quarterly results after the close yesterday is also worth noting. GES & ARO kicked it off taking numbers down next quarter to $0.35-$0.38 from $0.45E and $1.03-$1.09 from $1.22E respectively. This morning GIL took next quarter down to a loss of -$0.40 from $0.28E and guided F12 EPS 40% below consensus expectations to $1.30 from $2.26E.
Shorts: HBI, GIL, CRI, JCP, SHLD
Longs: LIZ, NKE, RL, WMT
Positions in Europe: Short France (EWQ)
Below we show a table of European Manufacturing PMI figures as reported from Markit/Reuters for November. The call-out here is that month-over-month the majority of reporting countries contracted, and are now firmly under the 50 line that divides contraction (below 50) and expansion (above). Russia and Italy saw a gain M/M, however Italy is decidedly in negative territory at 44. In an environment of elevated and inflationary commodity prices, we expect Russia to benefit. Oil and gas contribute to low 20% of GDP at these prices.
Our read-through on PMI figures is that they have further room to run on the downside and provide further evidence that growth expectations will need to come in even further over the next months. We think the performance of European capital markets will move based on the political decisions of Eurocrats; within the last months we attribute the negative trend to the inability of Eurocrats to present a credible plan on the key topics of expanding/leveraging the EFSF; a bank recapitalization contingency program; and Greek haircuts. Enhancing the downside risk is the Germany and ECB stance that the ECB will only be a lender of last resorts.
Below we show French Manufacturing and Services PMI (note: Nov. French Services will be released on 12/5). An interesting contribution from our internal meeting today came from our Financials sector head Josh Steiner. He noted that the assets of France’s three largest banks (SocGen, Credit Agricole, and BNP Paribas) represented 240% of French GDP, versus 57% for the US’s top three banks as a % of US GDP. This data point adds one more layer to our short position in France, which we’re currently playing in the Hedgeye Virtual Portfolio via EWQ.
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