prev

Shorting Religion: GLD Trade Update

Earlier this afternoon, Keith shorted the SPDR Gold Shares ETF in our Virtual Portfolio. This is on the heels of us booking a near 2% gain (vs. our Dec 14th cost basis) in the security last week.

 

The bull case for gold is both well-known and well-understood, as there are a great number of investors – both institutional and retail alike – who religiously believe in and consistently preach the fundamental thesis behind owning the shiny rock that is gold.

 

Price, however, is set at the margin – not at the absolute levels of supply and demand. To the marginal buyer or seller of this asset, the case for gold as a haven away from world reserve currency debauchery is becoming less supportive. In short, we’ve been saying that Bernake’s Box + Eurocrat Bazooka (or lack thereof in some respects) = a King Dollar breakout.

 

Statistically speaking, the underlying commodity itself carries an inverse correlation to the U.S. Dollar Index of r² = 0.92% on our immediate-term TRADE duration. Correlations are neither causal nor perpetual; that said, however, r-squareds in this area code do signal to us that a singular trade or set of fundamentals is driving the bulk of the price action. It is our task as risk managers to: a) have a view on the expected duration of that trade, and b) have an outlook for the slope(s) of those fundamentals.

 

While the long-term story behind owning gold is still very much intact (for now), our research and our multi-factor, multi-duration quantitative analysis suggested to us that the short term price outlook carries asymmetric risk to the downside. Throw in the behavioral aspect of continued investor liquidations into and through year-end and we have ourselves a short idea.

 

Where could we be wrong? Simple – Bernanke coming out of left field and doing more of what he’s spent his entire life learning to do and defending. As my colleague Kevin Kaiser summarizes in his recent Early Look note, economics itself is soft science that functions as an ideology for central bankers – very much akin to partisan belief system that is behind the gridlock we’ve come to expect out of Capitol Hill. We must never forget the ever-present risk that is ideology-based policy-making and the impact that has on our P&Ls.

 

In short, QE3 could make us very wrong on King Dollar and gold. Thankfully, we in this industry get paid a lot of money to do the work, Embrace Uncertainty, and make tough decisions every day so that our clients don’t have to.

 

Darius Dale

Senior Analyst

 

Shorting Religion: GLD Trade Update - 1


Dear Santa: SP500 Levels, Refreshed

POSITION: Long Consumer Discretionary (XLY)

 

So, I’m long now – waiting for Santa like a good boy – and what do I get? Another one of these 1-day rallies? C’mon Man!

 

Hearing from my contacts in Europe that Santa has been run over by a reindeer…

 

Not cool.

 

Across all 3 of my risk management durations, here are the lines that matter: 

  1. TAIL resistance = 1269
  2. TRADE resistance = 1251
  3. TRADE support = 1227 

In other words, 1 is now my range. It’s tighter, primarily because volatility and volume signals have retreated to the Northern Pole of risk management civilization.

 

Rather than whine about it, I’ll just deal with it – covering shorts down toward 1227, re-shorting rallies back up to 1251.

 

Dear Santa, will you get me paid if I rinse and repeat?

KM

 

Keith R. McCullough
Chief Executive Officer

 

Dear Santa: SP500 Levels, Refreshed - SPX



GET THE HEDGEYE MARKET BRIEF FREE

Enter your email address to receive our newsletter of 5 trending market topics. VIEW SAMPLE

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.


CNBC VIDEO: Global Markets Update: Draghi Says Analysis of Euro Zone Breakup Cost Due


WEEKLY COMMODITY CHARTBOOK

Commodities, in general, went higher over the last week as the dollar weakened slightly.  Corn and chicken wing prices posted the largest week-over-week gains while cheese and pork prices were the decliners.

 

 

STOCK THOUGHTS

 

Chicken Wings – BWLD

 

Buffalo Wild Wings’ stock has been volatile of late, trading below $60 as recently as one week ago and now trading at $66.  Wing prices remain a concern for the stock in 1Q12.  Following comments from Sanderson Farm’s earnings call yesterday, we are confident that the first half of 2012 will represent a difficult commodity environment for BWLD.  Corn prices are likely to remain elevated for 2012 and food processors like SAFM are being forced to cut production in order to turn profit margins positive.  SAFM assured listeners to its earnings call that the industry would cut production by however much is necessary in order to turn a profit.  The food service industry seeking to shift mix away from beef products may also provide some support for chicken prices.

 

 

Beef – WEN, TXRH, JACK, CMG

 

Beef prices gained week-over-week as incremental data points pertaining to the price of beef support high prices.  On the demand side, exports of US beef were up a record 27% year-over-year at the end of September.  Japan and Korea were responsible for most of this growth.  There could be further growth from Japan as the country looks to ease age restrictions on U.S. beef imports to the country that were implemented in 2003 due to BSE.  Supply side dynamics are equally bullish in that a shrinking U.S. herd and elevated feed costs point to tighter supplies in 2012.  It is estimated that cattle numbers in Texas have decreased by 600,000 or 12% of the state’s roughly 5 million cows. 

 

 

Coffee – SBUX, DNKN, GMCR, PEET, THI, CBOU

 

Coffee costs are dropping below last year’s line for the first time all year.  2011 has been difficult for coffee retailers from a cost perspective; Starbucks and others increased prices during the year, but the stronger brands like Starbucks did so successfully.  Economic concerns have kept a lid on prices recently and retailers will be hoping that Brazil, the world’s largest coffee producer, is heading for an increase in its harvest size next year.  Spot market prices heading lower would not pass on to the consumer immediately, however, as contracts and inventories are worked through, but will provide a boost to the coffee stocks.

 

 

Dairy – CAKE, TXRH

 

Cheese prices moved lower over the past week despite beef prices and milk prices increasing.   Cheese remains up 18%

year-over-year but that number has moderated throughout the quarter, providing some relief to The Cheesecake Factory.  Dairy will likely have a negative impact on CAKE’s gross margins in 4Q11.

 

WEEKLY COMMODITY CHARTBOOK - commod

 

 

CORRELATION TABLE

 

WEEKLY COMMODITY CHARTBOOK - correl

 

 

CHARTS

 

Coffee

 

WEEKLY COMMODITY CHARTBOOK - coffee

 

 

Corn

 

WEEKLY COMMODITY CHARTBOOK - corn 1221

 

 

Wheat

 

WEEKLY COMMODITY CHARTBOOK - wheat 1221

 

 

Beef

 

WEEKLY COMMODITY CHARTBOOK - live cattle

 

 

Chicken – Whole Breast

 

WEEKLY COMMODITY CHARTBOOK - chicken whole breast

 

 

Chicken Wings

 

WEEKLY COMMODITY CHARTBOOK - chicken wings

 

 

Cheese

 

WEEKLY COMMODITY CHARTBOOK - cheese

 

 

Milk

 

WEEKLY COMMODITY CHARTBOOK - milk

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst


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.

next