Today we bought Och-Ziff Capital Management (OZM) at $9.29 a share at 3:42 PM EDT in our Real-Time Alerts. The stock remains one of our top long ideas in financials. We're buying it back ahead of the financials earnings season.
Downside to Yields and Acreage in the US
Friday’s WASDE (World Agricultural Supply and Demand Estimates) maybe a positive catalyst for corn prices, albeit a short lived one. The first report of the year tends to have some volatility associated with it. It is a look in the rearview mirror, however, and the game is on when the new corn crop gets into the ground.
Current consensus looks for a slight increase in ending corn stocks (652 million metric tons, or MMT versus the December WASDE report of 647 MMT). We think there may be some risk to that number as both harvested acres (87.7 million, December WASDE) and yield (122.3 bushels per acre, December WASDE) may have to come down, lowering the production number beyond the decline contemplated by consensus (consensus of 10,675 million bushels versus a December number of 10,725 million). We don’t have a feel for any potential changes in the “use” estimates, so stocks to use (ending corn stocks as a percent of total corn use) should finish right around the 5.7% estimate we saw in December, but there is downside risk to that number, in our view.
Downside risk to South American Corn Production
Last month’s WASDE estimated corn production in Argentina and Brazil at 27.5 MMT and 70.0 MMT, respectively. Our consultant is well below consensus for Argentina at 22.5 million MMT, with consensus looking for a reduction of closer to 2.0 MMT. Our consultant’s primary concerns are the lateness of the crop and the amount of acreage that remains to be planted.
There may be some modest upside to the estimated production in Brazil, but almost certainly not enough to offset the weakness in Argentina. More likely is a stable estimate for Brazil. The net impact is obviously bullish for corn.
We remain bearish on corn
Despite what might be a noisy report this Friday, we retain our fundamental and quantitative bearish views on corn. With planting intentions likely to reflect still elevated corn prices and likely bounce back in yields (weather dependent, of course) we anticipate a continued decline in the price of corn (as already partially reflected in the futures curve).
HEDGEYE RISK MANAGEMENT, LLC
Each quarter, Hedgeye's Macro Team, led by CEO Keith McCullough and DOR Daryl Jones, hosts a Quarterly Macro Themes conference call with a presentation and a live Q&A session for participants. The call will highlight three themes representing significant developing sectors or macro trends for the quarter, analyzing potential impacts across various scenarios and identifying investment opportunities. The Q1 2013 Macro Themes Call will be held Tuesday, January 15th at 1:00pm EST.
Q1 THEMES INCLUDE:
Both our research and risk management indicators are signaling a shift away from #GrowthSlowing and have a bullish read-through for equities as fund flows move out of bonds. The risk of the U.S. Debt Ceiling remains a factor; however, we expect a rebound from the consumer as Bernanke's Commodity Bubble continues to deflate.
Housing market fundamentals continue to strengthen and are expected to maintain and possibly accelerate their momentum through 2013. We see changes in key housing metrics driving further upside that includes inventory levels, pricing and household formation.
With the recent election of prime minster Shinzo Abe and his appointment of Taro Aso as finance minster, Japan looks to dominate the macroeconomic news flow out of Asia in Q1 as it pursues a variety of unconventional monetary and fiscal policies. Still our favorite short in all of Global Macro, we believe the yen will continue its descent vis-a-vis the U.S. dollar and the euro, imposing a variety of spillover risks for Japanese and international financial markets.
Please dial in 5-10 minutes prior to the 1:00pm EST start time using the number provided below. A link to the presentation will be distributed before the call, if you have any further questions email .
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#EarningsSlowing is one of the themes we closed 2012 out with, coinciding with #GrowthSlowing. With growth now stabilizing and several facets of the economy recovering, we’re taking a look at how 2013 is shaping up from an earnings perspective. Right now, the consensus is that the next four quarters should show modest top-line comp acceleration on a year-over-year basis through 2013; there is headroom for revenue beats should economic activity & real growth accelerate. EPS comps should mirror that of top-line comps with the exception that on a two-year basis, consensus expects flat growth thru 3Q13.
One should consider that management using the fiscal cliff and Hurricane Sandy as an excuse if results disappoint for 4Q12. With the February debt ceiling negotiations adding an air of uncertainty to the earnings season, management will also be able to low-ball estimates and offer conservative guidance. The first quarter of 2013 faces a particularly tough comp stemming from favorable weather in 1Q12 and in terms of working days due to Leap Year & the Easter shift. For those companies levered to weekday traffic/volume, working days shift to a small tailwind in 2Q/3Q13.
We added Coach (COH) to our Real-Time Alerts this week on the short side. The intermediate-term outlook remains bearish for us and for several reasons. Revenue is decelerating and the cost of growth is rising at Coach. Growth is dependent on the new ‘Legacy’ launch, its new men’s line and China. With the sell-side becoming increasingly bearish on the stock over the last five months, it’s hard to find positives in a room full of negatives with COH.
Our 9-point duration screen posted below shows what we think of Coach from a revenue, margin and cash flow perspective over our three durations: TRADE, TREND and TAIL. While COH looks cheap relative to history at current levels – the reality is that valuation is not a catalyst.
Takeaway: Both our fundamental RESEARCH and quantitative RISK MANAGEMENT signals support our #GrowthStabilizing theme.
As part of our rigorous fundamental RESEARCH process, we track literally hundreds of economic and financial market indicators across four key economic blocs globally: US/Canada, Europe, Asia Pacific and Latin America. Moreover, we model the GROWTH and INFLATION statistics from dozens of countries with a predictive tracking algorithm that backtests in the 82-89% range, depending on the data set.
The vast majority of the time, nothing really jumps off the pages of our notebooks, nor is it actionable or critical enough to write a research note about. Over time however, we are able to form a unique perspective of broader trends – particularly as it relates to global GROWTH, INFLATION and POLICY, which we find the confluence of the three to be the key driver of asset class rotations. Right now, that process continues to confirm our overarching conclusion of #GrowthStabilizing.
Turning to some key economic indicators, we’re seeing this GROWTH pickup confirmed across a large swath of PMI readings (we track 31 in total across both the Services and Manufacturing sectors). For the month of DEC, the median PMI reading came in at 50.7; while down from the 51.4 reading we saw in NOV, this amalgamated metric still falls above the 50 level designed to diffuse sequential expansions from contractions.
Broadly speaking, the service sector continues to outperform manufacturing, as it has done since mid-2011. We hold the view that this is largely a function of the decline in commodity prices over that period (commodity-related CapEx declines layered on top of a consumption tailwind). Still we are encouraged to see the global Manufacturing PMI resurface above 50 for the first time since MAY ’12.
Recall that our 12/7 note titled, “AMID RECESSION FEARS, COULD GLOBAL GROWTH SURPRISE TO THE UPSIDE OVER THE INTERMEDIATE TERM?” introduced a lot of these same fundamental RESEARCH signals. Flagging critical deltas – large or small – in real-time is something we always strive to do as part of our process.
Moving along, financial market indicators are singling #GrowthStabilizing as well. In recent Early Looks, Keith has been vocal about the multitude of bullish quantitative RISK MANAGEMENT signals he’s been receiving from various asset classes – particularly Bullish Formations across a variety of global equity indices and bearish breakdowns in assets like Gold and US Treasury bonds.
Additional financial market indicators, like sovereign 10YR-2YR spreads – which we view as key leading indicators for GROWTH across most developed markets – confirm the fundamental signals as well. US, German, Chinese and Japanese nominal yield curves are all widening relative to their late-NOV/early-DEC lows.
Note that each spread is well shy of prior peaks – a clear signal in our model that global GROWTH is indeed on the mend, but not necessarily returning to prior peak rates of economic activity that we’ve seen on a trailing three-to-five year basis – at least not in the near term. This signal is being confirmed by similar moves and relative levels across other financial market indicators from around the world, such as China’s rebar and iron ore markets.
Moreover, measures of implied volatility are indeed signaling broad-based investor complacency, suggesting that spot prices of downside protection are at dangerous levels from a forward-looking perspective as it relates to various macro markets. Recall that the last time we were getting loud about this was back on MAR 29th (“DEFINING ASYMMETRY: INVESTOR COMPLACENCY AT MULTI-YEAR LOWS”); the S&P 500 Index (as a rough proxy for “risk assets” – whatever that implies) corrected almost -10% from its APR 2nd cycle peak to its JUN 1st cycle lows shortly after the publication of our note.
Additionally, global economic data is likely to have an increasingly difficult time surprising to the upside as it has in recent weeks.
So what does one do with all of this? Quite simply, we find it prudent for investors to continue to fight the urge to sell and/or get short for contrarian’s sake at the current juncture. As we mentioned before, the data isn’t great, but data that’s better-than-bad should continue to provide a floor under market prices of various “risk assets” – for now.
At a different TIME and PRICE from today, however, that will certainly change – most likely ahead of the late-FEB debt ceiling showdown. There’s a lot SPACE between now and then for investors to underperform, however. The last thing you’d want to do here is ignore the fundamental RESEARCH and quantitative RISK MANAGEMENT signals by shorting this market – which could conceivably force people to cover higher, potentially just shy of all-time highs (US equities).
Alas, timing remains a critical input is this game we play – especially when all of the signals aren’t necessarily singing the same song at the same time.
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