Milk Prices and the Fiscal Cliff

An interesting and unintended consequence of the fiscal cliff is the “milk cliff” (perhaps better thought of as a "milk mountain") – lost in the budget battle is the fact that there is a Senate ratified farm bill that has yet to make it to the floor of the House.  The farm bill covers multiple billions of dollars in various agricultural programs, including dairy.


As it currently stands, the government sets a price minimum for milk that supports the supply of a very important staple product for families and also affords some stability with respect to financial planning for milk producers.  Obviously, if supply and demand dictates a higher price than the government “floor”, producers happily sell on the open market for an incremental profit.  Our understanding is that unless a new deal is put in place, the calculation mechanism for the price floor will revert to a 1949 law that reflects milk production technology that is 6 decades obsolete, adjusted for inflation. 


We have seen various sources that suggest this would put the government in a position where it is forced to support a “floor” that will be about 2x the current market price.  The potential impact to consumers is a doubling, over time, of the current average cost of $3.50 for a gallon of milk.

While milk consumption has been on a steady decline since the 1960s, per capita milk consumption is still approximately 20.6 gallons per person per year (U.S. Department of Agriculture).  And while a doubling of the price represents “only” an annual price increase of $72 per person, the total “tax” hike is a highly regressive $22.7 billion.  Again, not the end of the world, and there are certainly ways for the government to delay and or mitigate the impact, but the reality is that the potential exists for consumers and producers to see a material disruption in the dairy market.


Finally, even with declining per capita consumption as a backdrop, retailers still rely on the milk category to drive traffic, so this development represents a marginal negative for food retailers as well.


Robert  Campagnino

Managing Director






Housing: Full Steam Ahead

The housing market day-after-day continues to see positive news come out of it. The latest bit of data is November pending home sales, which came in strong with a +1.7% month-over-month increase after a +5.0% increase in October. We expect upside of +18.1% over the next 18 months. Prices are currently rising at around 0.6% a month. This comes on the heels of lower inventory, improving prices and an increase in mortgage applications; a much welcome recovery for investors and home owners.


Housing: Full Steam Ahead - Pending Home Sales ST


Takeaway: Don’t be a hero; let process, not emotions determine you next move(s).

Sadly, the US equity market and global economy remains at the perfectly frustrating whims of our central planners in Washington D.C. On the realization that a CY12 Fiscal Cliff compromise is unlikely to be agreed upon, stocks are broadly selling off. Looking to the S&P 500 Index specifically, the market is now bearish from a TRADE and TREND perspective on our quantitative factoring with no support to our TAIL line of 1,371.


Across our core risk management durations, our updated levels for the SPX are:


  • Bearish TRADE = 1430
  • Bearish TREND = 1419
  • Bullish TAIL = 1371


At Hedgeye, we remain firm believers of the reflexive relationship between PRICE and economic fundamentals. In that vein, the current quantitative setup of the US stock market tells us that:


  1. We are likely to go over the Fiscal Cliff – whatever that means (more on this later); and
  2. The underlying momentum of the US and global economy is stabilizing and poised to gather steam.


Regarding point #1: Unlike the credibility of the Old Wall’s legacy media sources, the US economy won’t run into the proverbial wall on JAN 1st, 2013. In fact, the full economic impact of tax hikes and sequestration will be lagged and cumulative throughout CY13. Consider it more like running up a steep hill, rather than falling off a cliff, per se.


Additionally, any negative impacts can be retroactively adjusted for if and when a compromise is reached – likely no later than MAR, according to our latest in-depth analysis of the debt ceiling and the implications therein for Fiscal Cliff negotiations: “DEBT CEILING UPDATE: WILL SANTA’S SACK BE FILLED WITH COAL?” (NOV 16). That could turn out to be a boon for 2Q13 GROWTH, especially if 1Q13E comes in slower than initially anticipated.


Regarding point #2: We continue to get data both domestically and internationally that supports our baseline fundamental view that global GROWTH is stabilizing, which is better than slowing and not as good as accelerating. To juxtapose:


  • The supertankers within my geographic coverage areas (i.e. China and Japan) both showed weak DEC PMI data out this morning; moreover, Japan’s NOV Industrial Production data supports our view that the country’s recession will extend into 4Q12; while
  • The little boats that tow the larger boats into and out of the docks (pardon my lack of boating jargon) within my geographic coverage areas (i.e. Singapore and Hong Kong) confirmed with their NOV Industrial Production, Trade and PMI data that the global economy is, in fact, leaving the dock – albeit at a very measured pace.
  • The latest US Housing Price and Home Sales data suggests a formerly key component of the US economy is roaring back and poised to accelerate in 2013; while
  • Yesterday’s domestic Consumer Confidence bomb and generally disappointing Retail Sales figures during the Holiday Season are major causes for concerns as it relates to the sustainability of any domestic economic recovery.


How does one balance good and bad data in their head, while at the same time remaining sane enough to make capital allocation decisions? That’s easy: tune out the noise and listen the PRICE signals. For now, those signals suggest defensive positioning is warranted. Conversely, a close above 1,419 would suggest the opposite is true. Whatever you do, don't make it any more complicated than that.


Have a great weekend,


Darius Dale

Senior Analyst



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Takeaway: Pending home sales rose further in November, which, in turn, raises our expectations for future home price appreciation.

Housing Demand Continues to Grow

November's Pending Home Sales data was surprisingly strong. While it didn't eclipse expectations by much, the 1.7% MoM increase comes on the heels of an unusually strong 5.0% MoM increase in October. Our demand model for projecting future home price changes uses pending home sales to forecast price changes 18 months out. Based on this morning's reading, we're increasing our expectation for upside to +18.1% (from +17.1%) over the next 18 months, or roughly 1%/month. Currently, prices are rising at a rate of 60 bps per months.






Joshua Steiner, CFA


Robert Belsky

FL: Bear Growls

Takeaway: FW numbers definitely look sufficiently beared-up for FL this week. The flag is still yellow – not red. But we’re watching.

Footwear numbers definitely look sufficiently beared-up for FL this week. Total footwear dollars were down 6% for the week – marking the fifth consecutive deceleration in top-line on a trailing 3-week basis. We usually delineate between performance and non-performance, but even these numbers are ugly, with the weakest Performance sales trends since April. The spread between Performance and Non-Performance is also at its lowest range since September.

These numbers matter given that December accounts for about 12% of annual sales for Foot Locker and ~50% of Q4. It’s going to take a lot more than this for us to turn the yellow flag to red, as inventories – at least for the time being – are very clean. But given the pervasive view that the ‘sneaker cycle’ is going against us, this data is hardly comforting to the bull case.



FL: Bear Growls - FW Mo SalesPerc

We think that ultimately in this space ‘the tail wags the dog’ and that that the R&D cycle will fuel earnings upside. But we need to continue to see this in weekly sales results to be proved correct.


FL: Bear Growls - FW App 1yr trends


FL: Bear Growls - FL TTT

Holiday Sales: Golf Claps?

Looking at data from ICSC, holiday sales for this year are essentially in line with last year’s numbers. A bit on the weaker side and while not terrible, it’s nothing to get excited about. In each of the past two years, we saw an increasing decline in sales 3-4 weeks before the Christmas holiday, but then ‘catch up’ in the 1-2 weeks prior to the big day. With one week left in December, retailers will need to blow their numbers out of the water in order to impress. 


Holiday Sales: Golf Claps? - ICSC


Holiday Sales: Golf Claps? - ICSC2