Corn - We Still Think Prices Can go Lower

Worse Start to Year versus 2012

Current moisture conditions in crop regions (in particular west of the Mississippi) are no doubt much worse than a year ago (see progression below).  However, conditions have improved since the start of the year and with some projected moisture events coming up, we continue to think the bias is downward in terms of corn prices.  The futures curve would seem to agree with us.  Further, the set-up on the futures curve appears identical to this year versus 2012.


Corn - We Still Think Prices Can go Lower - Drought Monitor 2.21.12


Corn - We Still Think Prices Can go Lower - Drought Monitor 1.1.13


Corn - We Still Think Prices Can go Lower - Drought Monitor 2.19.13

We think it’s very difficult to be long corn at this point (as supported by recent CFTC data that shows non-commercial buyers becoming less long corn), with significant time (and weather) remaining until the crop goes in the ground.  As it currently stands, we would not be surprised to see 97 million acres of corn planted in the U.S this year – the USDA’s current estimate stands at 96.5 million acres.  The incentive certainly exists for farmers to plant as much corn as possible.


Corn - We Still Think Prices Can go Lower - Corn Cost Curve


Corn - We Still Think Prices Can go Lower - CFTC Corn


We aren't in the habit of making bets on Mother Nature, but we do try to estimate what is currently priced in with respect to various assets and it appears to us that ADM at current levels remains a reasonably priced option with respect to the quantity and cost of the upcoming corn crop.

After a very nice run post EPS and with the news that Berkshire Hathaway is an investor, ADM has traded off its highs as the balance of the agricultural complex (fertilizer stocks) have languished in the face of broadly weaker commodity prices.  To be clear, ADM is not a play on higher corn prices – lower corn prices benefit ethanol margins and a larger crop benefits merchandise and handling margins – think big crop with no price spikes, and ADM can continue to work from its current level.


Lower corn prices would also be constructive for protein stocks (SFD, TSN, PPC, SAFM) - though at current levels, only SFD interests us on the long side.


Have a good week,




Robert  Campagnino

Managing Director




Matt Hedrick

Senior Analyst

Final Thoughts post-CAGNY

We would characterize CAGNY 2013 as largely uneventful and in some cases downright boring.  We didn’t hear much that changed our thinking relative to how we came into the year or how we left Q1 earnings season.  Briefly, the key themes running through the presentations were:

  1. Innovation – it’s the cost of doing business in the “new normal”.  Consumers will pay a premium for value, perceived or real.  Given the prominence of this topic, we wonder if companies are finding it necessary to spend more to stay in place?
  2. Advertising – companies have to communicate the benefits and differences of product offerings, old and new, to both consumers and retail partners
  3. Emerging markets – characterized as a “once in a generation” opportunity, the potential represented by an expanding global middle class was consistently referenced
  4. Productivity – doing more with less is necessary in a world where pricing is elusive, consumers are fickle, private label is growing and commodities are a wild card
  5. M&A – not a presentation topic, but certainly a topic of cocktail conversation – who’s next?  We don’t see the Heinz deal as a catalyst for wide spread M&A across staples.  However, some names make sense as potential targets – HSH, for one.

Where did our thinking change?

We won’t rehash the presentations, but as a quick summary:


CPB – less likely to want to short as core soup business potentially stabilizes


KRFT – one of our favorite presentations, would be a buyer lower – upside to low $50s


HSH – again, one of our favorite presentations, more constructive


BG – doing more work here on the long side after an awful quarter, good long-term theme


PG – less impressed with potential progress on top-line, but cost-savings likely preserve EPS


CLX – can’t abide by the multiple, but with good visibility on margins and innovation, tougher short


MDLZ – feels earlier, but risk/reward profile strikes us as very favorable over longer duration


NWL – we liked the story going in, presentation reinforced our belief that the stock can continue to rerate.


KO – interesting commentary on incremental bottler consolidation.  Does Iberia represent a new potential acquirer for German assets?


We are, of course, happy to discuss any and all names in greater detail.


Enjoy your Sunday,





The Economic Data calendar for the week of the 25th of February through the 1st of March is full of critical releases and events. Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.




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In preparation for CZR's F4Q earnings release Monday, we’ve put together the recent pertinent forward looking company commentary.




  • "When we announced the sale of Harrah's St. Louis to Penn, we said we'd redeploy capital into projects and regions that present the best opportunities for higher returns. In 2013, we plan to use a portion of these proceeds and the capital we obtain through it to update many properties across our Las Vegas footprint."
  • [Linq] "We're on pace to open the dining and retail offerings in phases beginning in the second half of next year and we plan to open the High Roller early in 2014."
  • "We also plan to open the Thistledown VLT facility near Cleveland in the first half of 2013. In Baltimore, the investment group that we are leading is in the process of refining and completing our detailed construction drawings and is in the process of seeking construction permits. We expect to begin construction in the second quarter of next year with a targeted opening in the middle of 2014."
  • [Las Vegas] "I don't think you're going to see a big difference in the fourth quarter versus the third, recognizing there are large portions of the fourth quarter that are seasonally low anyway. I understand Jim was a bit more optimistic about convention and meeting business trends in 2013 and 2014 and I think we're encouraged by those trends in 2013 and 2014 as well, but I don't see anything in the fourth quarter that's especially notable."
  • [Capex 2012 guidance] "For CEC, it's between $520 million and $560 million, primarily that would be spend in the CEOC entity, which is $480 million to $510 million, and then the balance will be in CMBS of $40 million to $50 million....Regarding 2013, generally you're correct, we have mentioned how our focus is going to be on continuing to reinvest in the business, in particular allocating the funds that are going to be generated from the sale of the St. Louis property into areas, where we identify higher return potential, a lot of that is going to be in Las Vegas next year, and we'll be targeting some specific room renovations at properties around the city."
  • "In the quarter, we experienced about $50.8 million of cost savings and have identified yet-to-be achieved savings that we will expect to materialize over the next six quarters or so of $204.3 million."
  • "You've seen a lot of political debate among the parties about online gaming and the potential for its moving in the lame duck. I'm not terribly optimistic, I think it's possible. But I think there are some very pressing issues for the country's finances that remain in front of the Congress in the lame duck session, and surely we all hope that they get attention. It's possible that the online gaming question will be called in that period, but I think it's probably less likely rather than more likely."
  •  [Vegas] "We do anticipate we will enjoy a meaningful ADR improvement once the renovations are complete. So, if you take, for example, one of our towers at Bally's which has rooms that are in need of renovation, we sell those at a discount as a result of their current circumstances. And once they're renovated, I think we'll see a meaningful improvement in ADR as we have with some of the other older buildings like the Flamingo where we've done some very I think innovative renovations of those rooms and we've enjoyed an almost immediate improvement in ADR."


This note was originally published February 21, 2013 at 14:46 in Gaming

Both were up in Q4 but Singapore VIP volume surged while Macau grew only modestly.  Prior to Q4, the correlation was much higher.


  • Singapore 4Q VIP rolling chip (RC) volume soared 50% YoY while in Macau, 4Q VIP volume only gained 5% YoY.
  • Correlation between Singapore RC volume and Macau RC volume prior to Q4 was 0.86
  • Low hold usually drives higher volumes since people keep playing when they win.  Singapore held very low in Q4 while Macau was close to normal.  Singapore's a relatively new market so VIP business should grow faster than that in Macau.
  • Genting today was upbeat regarding VIP volume growth while Macau's VIP volume growth thus far in 2013 has been subdued
  • It remains to be seen if Singapore is taking VIP share from Macau. 




Recent Data Supports Improving Consumption

Takeaway: Housing, Labor market trends, commodity deflation and a bullish USD still have has us leaning positive on consumption.

Investor conviction remains capricious, two down days do not a bear market make, and known unknowns don’t matter until they do – as evidenced by the resurgent concerns over sequestration and sustainability of consumer demand in the face of rising gas prices and negative tax adjustments. 


Below we highlight some of the recent consumer related data points & where we shake out, on balance, from an investment positioning perspective.   


Housing:  Yesterday’s Housing Inventory & Price data was decidedly positive.  Existing Home Inventory, a primary leading indicator of future prices,  declined 24.7% y/y to 1.74M units and now sits some 50% below the 2007 peak.  Inclusive of today’s inventory data, our pricing model now points to a 13.2% increase in home prices over the next year. 


On the other side of tight supply is pricing and the NAR reported median home prices rose by 12.2% y/y in January, marking a 13th consecutive month of acceleration.  To the extent that housing price-demand dynamics are reflexive, which we believe they are, rising prices should drive demand which, in turn, should drive further pricing gains as a virtuous demand-price cycle that characterizes Giffen goods plays itself out.     


A continued rise in home prices holds the potential for stimulating a broad based wealth effect with positive impacts for consumer demand.   CBO has previously estimated the impact of a 10% decline in home prices to be $55-191B with respect to consumer spending and -0.4 to -1.4 percentage points with respect to GDP growth.   


Conversely, realized TTM home price gains and a further continuation of current pricing trends could be expected to contribute +40bps, on the low end, to end consumption over the NTM.  Increased housing wealth and the flow through to consumer spending sits as perhaps the largest potential, discrete offset to the -0.45% to -0.55% expected drag on GDP from sequestration.   


Source: Hedgeye Financials

Recent Data Supports Improving Consumption - inv lt normal


Recent Data Supports Improving Consumption - inventory px model normal


Real Earnings:  Yesterday's BLS data showed Real Weekly Earnings accelerated to +0.27% y/y in January.  While its hard to pin a bullish thesis on that level of anemic wage growth, on the margin, 3 straight months of positive growth are better than the negative growth in real wages that has characterized the better part of the last two years.  


Recent Data Supports Improving Consumption - Real Weekly Earnings 022113


Oil/Gas Prices:   Commentary around the consecutive days of rising gas prices streak has showered ubiquitously from financial media sources over the last week.  Indeed, Oil prices having been sitting as the largest remaining macro headwind to domestic and global consumption growth, in our view.  The last two days, however, have seen energy prices inflect to the downside.  From a quantitative perspective Brent Oil has is broken TRADE with immediate term downside to $112.59. 


The inverse relationship between USD appreciation and energy and commodity deflation remains pronounced across durations, and with the U.S. dollar still bullish in our model, the balance of risk remains to the downside for Oil prices and, in turn, gas prices on a short lag.  Real Earnings growth should benefit by extension as well as the inverse relationship between real earnings growth & commodity inflation over the last 5 years has been distinct.


As a reminder, our most basic US dollar based economic flow model remains: 


USD Higher --> Energy/Commodities lower --> Real Earnings/Real Growth Higher  


As simplistic as this is, it’s the factor dynamic we’d like to see perpetuate itself for us to remain constructive on sustainable, real growth from here.  


Recent Data Supports Improving Consumption - Inflation vs Real Earnings Feb


Recent Data Supports Improving Consumption - USD vs CRB normal


Jobless Claims:  Yesterday’s initial Claims data confirmed that labor market trends continue to strengthen as the 4-week rolling average in NSA claims registered further sequential improvement, printing at -4.2% Y/Y vs. -2.7% Y/Y the previous week.  


Source: Hedgeye Financials

Recent Data Supports Improving Consumption - JS 2



Income Tax Refunds:  The delay in the IRS processing of income tax refunds, and the impact to consumer spending, has been the other favorite media talking point of late. To put some numbers around it, as of the latest treasury data (feb 19th), individual income tax refunds are down $27.26B y/y (down 24.2%) while business tax refunds are essentially flat y/y.    The delay in refund processing may be exaggerating any existent weakness stemming from the payroll tax increases, but this is ultimately a timing issue.  Any related weakness should resolve itself and reverse over the next few months. 


Federal Tax Receipts:  Withheld payroll taxes are up greater than 10% fiscal YTD (against a run rate of ~2.5% for most of last year).  The move higher is partially explained by a pull-forward in compensation in December ahead of impending tax law changes and partially explained by the actual, enacted tax law changes in January.  We’ll have to wait on the February Treasury Statement to get a clearer read on income growth as the confluent impact of these dynamics wane, but Net-net, income tax receipt growth looks like its running 50-100 bps ahead of last year’s pace.  We’ll get the February update on 3/12.


On balance, with housing & labor market trends remaining positive and energy prices breaking down alongside a bullish setup for the dollar, we remain positive on domestic consumption.  


Christian B. Drake

Senior Analyst 



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