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Corn Supplies Get Tighter

Not a lot of corn out there right now

Today’s WASDE (World Agricultural Supply and Demand Estimates) didn’t tell us anything that we didn’t already know – yields ticked up a bit from December (123.4 versus 122.3 bushel per acre) and ending stocks were down at 602 MMT versus 647 MMT in the prior report and expectations of 652 MMT.  The 602 MMT is a historically tight number as we head into the planting season.  I wouldn't read too much into the yield increases, as that number tends to get fudged a bit.


In a bit of a surprise, both Argentinean and Brazilian corn production estimates were raised – we only saw half of that coming and expected a move in the other direction in Argentina.

The bottom line is that there is not a heck of a lot of corn out there versus historically levels, and the snow situation in the Midwest remains unhelpful – average snow depth across the Midwest for the first 11 days of January was 0.3 inches and that was covering only about 10.4% of the area.  We need to start getting some snow.


Corn Supplies Get Tighter - Drought 1.8.13


Have a good weekend,




Robert  Campagnino

Managing Director




Overbought: SP500 Levels, Refreshed

Takeaway: This is the first day in the last 7 trading days that my intraday SPY signal gave me a lower-high.



Today, both the fundamental research and quantitative risk management signals said the same thing – time for a breather. This is the first day in the last 7 trading days that my intraday SPY signal gave me a lower-high.


Lower-high versus the 1494 I registered on the close last night, that is. We are obviously seeing higher-lows and higher-highs across longer-term durations, and that’s bullish, until it isn’t.


Across our core risk management durations, here are the lines that matter to me most:


  1. Immediate-term TRADE overbought = 1485
  2. Immediate-term TRADE support = 1459
  3. Intermediate-term TREND support = 1419


In other words, overbought is as overbought does. If all the Financials act the way WFC just did on the “news”, I’ll be surprised; especially if we go into the prints from a lower price. But then again, everyone else would probably be surprised too.


Keep moving out there,



Keith R. McCullough
Chief Executive Officer


Overbought: SP500 Levels, Refreshed - SPX

JCP: Be Careful

Takeaway: The 'short Ackman' trade might be the best angle here. But as we noted, there are definite factors to consider in a short here.

There's a lot of reasons to get on the 'short Ackman' train and be negative on JCP. In light of today's downgrade by one of the big brokers, we want to make our current position clear. Specifically, there are a lot of reasons to eliminate the thought of going long JCP for someone that cares about fundamentals. But we think that a short beyond a near-term trade could prove outright reckless -- at least without considering the factors we outlined in our 12/13/12 note (JCP: Reasons To Reconsider Your JCP Short).


An added factor is our Sentiment Monitor. Currently, JCP is the only retailer that has a Sentiment Score below 10 (on a scale of 100). Mind you, this was calculated before today's downgrade, so the real score is likely 1-2 points lower. The point is that this extreme bearish sentiment is a very bullish signal -- as proven statistically by our models. It's important to note that this sentiment is present as the stock is en route to retesting 12-month lows of $16.28. Mind you, that's also the level where we started to see the largest inside Buy cluster in years.


JCP: Be Careful - jcp7



JCP: Reasons To Reconsider Your Short (12/13/12)


We’ve thought from Day 1 that there’s no shortage of reasons to be bearish on JCP. Structurally, we still think that’s the case. But stocks don’t trade in a vacuum, and on the short side, we would not touch this one with a 20-foot pole in the high teens. Our purpose here is not to convince anyone to buy JCP. But rather to explore as many factors as possible that could prove a short position painfully wrong.



We recently spent two weeks on the road, and JCP name was a topic of discussion in 8 out of 10 meetings. The only one that rivals it in terms of controversy is Nike. The irony here is that despite the overwhelming bearishness – 40% of float short and bulls capitulating with less than 30% recommending JCP as a Buy – the topic we encountered most on the road was “why not buy JCP here, as it seemingly has all the bad news we’re likely to see in the stock, and is discounting zero positive developments?” Out of all the people who raised that question, we could find maybe one who followed through and actually bought the stock here.


We think the reason is that if you buy it here and you’re wrong, it’s an offense that probably poses career risk for some. Buying JCP here is really taking a flier on Johnson getting ANYTHING right next year – even if by accident. Let’s face it, after so many self inflicted black eyes, the guy is due for a win. That blind assumption is hardly a sound investment process in our book.  But if you want  to stay bearish in the high teens, you should remember the following.


1)      The ‘JCP is a Zero’ argument has been made about SHLD since that marriage was formed in the fall of 2004. And since then, the stock has underperformed with a -10% CAGR, but it has been flat for the better part of five years, and has been far from insolvent. We could make a good TAIL call about how JCP will prove to be a failure in 8 years – even sooner than that. But it has no bearing on how the stock trades next year. Initially we feel short sighted in saying that, but the facts are what they are, and we won’t ignore them.


2)      Let’s look at the specific stock trading patterns from the week before the Sears/K-Mart deal was announced vs the week before Ron Johnson’s appointment as JCP CEO. They’re different types of events, but we put them both in the ‘hail Mary’ category and therefore comparable. For 10 months, the stocks followed almost the same EXACT trading pattern, until JCP’s egregiously low comp level pushed it down to new cyclical lows. JCP is now down 45% from the announcement, while SHLD was UP 45% at the same corresponding point in time (i.e. 1.5 yrs after announcement). The point is that there was ‘reason to believe’ 2-3 years into the SHLD story. It turned out to be unjustified, as SHLD is sitting at a mere $42 today, down 56% from the announcement of the deal. But if you were a ‘perma-short’ throughout the past 8 years, the early part of it was probably less than comforting. The chart below is self explanatory.

(note: This was published before by Lampert's subsequent decision to push out his CEO and assume the role himself)


JCP: Be Careful - jcp1


3)      Why does this ultra-long duration matter? Because that’s how Ron Johnson gets paid. Keep in mind that his warrants don’t vest until 2017. We can’t imagine that he did not get the Board’s full support before accepting the job to live through major jolts to the company’s financial nerve center. Without that, there’s no way he’d have taken the risk. Currently, his 50mm warrants are worthless. Above $29, he starts to see the fruits of his labor. His big mistake was not in trying to radically change the store. It was bowing to storytellers in the investment community and issuing near-term guidance around a story that would not play out until the intermediate-term had long passed.


4)      One thing to keep in mind is that Johnson is not afraid to miss near-term targets for long-term value creation. That’s painfully apparent to the bulls who suffered through the past three quarters of financial results. But his investments ultimately paid off. We’re the first to highlight how his toolbox at JCP pales in comparison to what he had at Apple. But the guy is not used to losing, and likely won’t go another year wearing that tattoo.  Check out his performance at Apple.  The retail business missed its guidance to hit break-even target twice in the early days. We’re currently seeing the miss, though obviously on a much greater scale. But he will likely tweak the equation in whatever way he needs in order to keep morale heading higher and fend off share loss. 

JCP: Be Careful - jcp2


5)      Speaking of share loss, we don’t think its clear exactly how much share JCP has hemorrhaged in year 1. For the first three quarters of this year we’re talking over $2.7bn in share. When 4Q – the seasonally strongest quarter – comes out, we’ll be looking at something closer to $4bn in annual share. This is coming off a base of only $17bn in revenue.  Our sense is that the M’s, GPS’, KSS’ and TJX’s of the world are underestimating how much share JCP is handing them. This is not a permanent share shift by any stretch. And given that these other retailers pretty much don’t have a clue as to how much share they are gaining, it’s tough for them to have a clear plan as to how to avoid giving it back. 

JCP: Be Careful - jcp3


6)      The argument for comp improvement is tough to refute mathematically. Not only is JCP coming off –mid20% comp declines, but it is happening at the same time that an incremental 2-3% of its store base is being remodeled every month. With current sales per square foot sitting at a paltry $112 – yes, you read that right, $112 – and the new stores likely to clock in 30-40% above that level, it is tough for us to not get to a 20%+ positive swing in comps next year. One may wonder (as we do) how much the comp will cost them in terms of higher technology and deferred maintenance costs, we think that it will trade with the comp, not necessarily with profitability. We don’t think that’s appropriate, but we think it’s reality. 

JCP: Be Careful - jcp4


7)      We think that the big risk here on the long side is simply cash flow. In other words, to be short the stock here, we think that you have to prove the company will run out of cash to fund its growth. That might happen, but not until 2-3 years down the road at the earliest. Before that, we’ll see the comp delta improve. 

In the event that cash runs dry the company can follow in the footsteps of Dillards and most recently Loblaw, a Canadian food retailer that is spinning-out 80% its of its property assets and reinvesting the $7bn into its operating business. Yes, JCP would have to pay market rent on this property that is currently largely fully amortized. But again, for the first few years this would not matter. It would have the liquidity for Johnson to evolve the store base according to his plan. 

With cash flow from operations YTD down -$655mm and net debt-to-equity at historical highs at 0.67x, the probability of JCP pursuing this option is still low, but increasing on the margin, and most importantly, the optionality is there.  

JCP currently owns approximately 39% of its real estate, or 44.6 million sq. ft. Based on current rent and cap rates, we estimate JCP’s potential REIT value at $1.85Bn-$2.55Bn, or $8.25-$11.50 per share. Since the formation of a REIT provides the greatest benefit for retailers that own a substantial percent of their real estate, we’ve looked at the likely candidates (see chart below).  Both Macy’s (55%) and Nordstrom (46%) own a greater portion of their store base compared to JCP, but even with 39% of its real estate owned, this is an option for Penney’s to consider. 

While forming a REIT is not likely, one thing to keep in mind that Steven Roth is on JCP’s board. While Loblaw’s announcement may have roused speculation in the start of a potential trend, recall that Roth was one of the first to execute such a strategy when he bought Alexander’s out of bankruptcy in 1993 and converted it to a REIT. Roth has “been there and done that” before.


JCP: Be Careful - jcp5


JCP: Be Careful - jcp6



Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.51%
  • SHORT SIGNALS 78.32%

Flu Season In Full Swing

We’ll be keeping a close eye on healthcare stocks over the next few weeks as the worst flu season in years sweeps across the United States. In addition to New York City declaring a flu epidemic, the mayor of Boston has also declared a flu emergency this week. The media is reporting that there is a widespread shortage of vaccine. More importantly, flu is a meaningful aspect of hospital admissions, particularly for the Medicare popular; Hedgeye Healthcare Sector Head Tom Tobin notes that the flu could represent an uptick in Medical Loss Ratios (MLRs) for Medicare Advantage Plans.


Flu Season In Full Swing - Hospital ER vs. Adjusted Admissions


Flu Season In Full Swing - Hospital ER vs. Flu 4Q12

OZM: Sticking To Our Guns

Och-Ziff Capital Management remains one of our top long ideas in the alternative asset management space. Tailwinds from QE3 combined with solid operational performance are a key driver for the stock. Management continues to impress with solid returns for 2012 with the OZM Master Fund (70% of AUM) up 11.18% for the year. While fund flows were negative for December by approximately $450 million, they were positive for the full-year at $300 million. We expect 2013 to offer strong inflows of capital for OZM in addition to strong performance numbers. We sold OZM this morning in our Real-Time Alerts but continue to like the stock - we're just managing the risk and the range.


OZM: Sticking To Our Guns  - image028


We have long viewed Brinker as our favorite casual dining company and, heading into the core of earnings season, we maintain that view. Our bearish view on casual dining, as a category, is intact, but Brinker remains the most compelling long at a price.


Here are some thoughts pertaining to Brinker:

  • Two casual dining companies have reported 4Q12 earnings thus far, BJRI and RT, reporting company comparable restaurant sales growth of 3% and 0.3%, respectively
  • The bulk of the BJRI stores are located in the Western region of the US, while RT is a East/South East-centric brand.  RT, a poorly managed concept, in our view, managed to eke out positive comps
  • Chili’s could produce 2% same-restaurant sales growth in 2QFY13 versus consensus of 1.6%.  Momentum continues at Chili’s, thanks to kitchen enhancements and remodels.  Channel checks and the early read in the competitive set suggest that the negative tone set on the last earnings call could have been overdone
  • Comparisons remain very difficult for the entire industry until March 2013
  • ICR should offer incremental data points to allow investors a broader idea of how the industry has been performing

EAT: CREAM SHOULD RISE TO THE TOP - chilis vs bjri comps


EAT: CREAM SHOULD RISE TO THE TOP - black box casual dining comps traffic





Howard Penney

Managing Director


Rory Green

Senior Analyst




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