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How Many Corn Acres Get Planted This Year?

At noon today the USDA will issue its March planting intentions for the 2013 U.S. growing season.  We will focus on corn, as per usual.  Consensus calls for 97.465 million acres of corn to be planted this year, and we think there may be modest upside to that number.  That’s a big number, not an all time high, but it is the largest acreage that anyone that didn’t vote for FDR has seen.



Obviously, the yield is the key number going forward, and we think the soil moisture condition has shown some improvement in recent weeks, though still below where it should be for this time of the year.  However, the forecast is for some weather events over the next several weeks in a couple of regions where moisture is needed, so we remain encouraged.



However, one additional concern that we have beyond moisture at this point is that planting may be delayed – farmers don’t need to rush out and the ground is still too cold in many regions for planting to begin.  If the weather turns cold, early planted corn can rot as the re-frozen field melts and warms.

 

The good news is that planting can happen very quickly in the right conditions, so we aren’t all that worried if it appears that the crop is getting in the ground too slowly.

 

We continue to think that ADM represents an inexpensive look at the progress of the U.S. corn crop – we see downside in the name back toward book value ($29.05 per share).  Keep in mind, that as much as a disaster the U.S. corn crop was last year and the associated negative impact it had on ethanol and merchandise and handling margins at ADM, the company still managed to earn $2.25.  If things break “right” with the corn crop and incremental acres produce a “reasonable” yield (anything above 145 bushels per acre), we see upside in ADM toward $38/$39 per share.

 

How Many Corn Acres Get Planted This Year? - Corn Acreage

 

Call with questions,

 

Rob

 

Robert  Campagnino

Managing Director

HEDGEYE RISK MANAGEMENT, LLC

E:

P:

 

Matt Hedrick

Senior Analyst






A Telling Chart

Takeaway: Here's a very telling chart that looks at the relationship between the yield on the 10-year Treasury and weekly jobless claims.

Below you'll see a chart that shows the yield of the US Treasury since November, when Hedgeye made its growth call, and a rolling four-week average of the rate of decline of non-seasonally adjusted (NSA) jobless claims. (Note that we have inverted the 10-year yield curve to show the relationship between yields and NSA claims more clearly.)

 

What the chart shows is that as 10-year yields rise, the rate at which NSA claims decline also rises. In other words, improving jobless claims numbers and a rising 10-year yield are moving at similar rates and directions, which indicates overall economic growth.

 

A Telling Chart - 10Y vs NSA Claims  2


HOUSING: Getting Clarity

Takeaway: With so much data flow on housing sometimes it's tough to keep track of it all. We think this chart tells the story well.

This note was originally published March 27, 2013 at 16:33 in Financials

We like the chart below a lot. It tells the current story of housing succinctly in a way that everyone can easily understand. The x-axis shows inventory of homes for sale in millions of units monthly back to 2001. The y-axis is the pending home sales index reading. The bubble size shows the next twelve months home price change based on those levels of supply and demand. Not surprisingly, high demand coupled with low inventory produces big blue bubbles (strong home price appreciation), while the opposite produces big white bubbles (strong home price depreciation).

 

The obvious takeaway is that we're currently in a very favorable dynamic for prices, as shown in the orange circle. The orange circle shows current inventory and volume, but for bubble size, we've used LTM (as opposed to NTM) price change, which was +9.7% through February 2013 according to Corelogic. Note that the orange bubble is smaller than most of the other bubbles in the same area, suggesting price appreciation may accelerate from here.

 

Another takeaway is the inverse relationship between supply and demand. Inventories are negatively correlated with demand, which might seem at odds with recent commentary in the market about how low inventories are holding back transaction volume growth. Consider the range of volume that has accompanied the current level of supply historically. It's produced a volume range on the pending home sales index of 96 to 131. Currently we're near the low end of the range at 105. In other words, we've seen sales activity levels as much as 25% higher than they are today based on the same level of inventory, so we don't buy the NAR argument that it's inventory holding back volume. That said, there are likely other factors such as more stringent underwriting, which we consider a good thing.

 

HOUSING: Getting Clarity - bubble chart

 


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INITIAL CLAIMS - STILL IMPROVING, ALBEIT AT A SLIGHTLY MORE MODEST RATE

Takeaway: After several weeks of accelerating improvement in the labor market, this week saw conditions slow down a bit.

The good news is the labor market is still improving. The bad news is the rate of improvement isn't as strong as it had been. Rolling non-seasonally adjusted claims were lower YoY by 5.9% this week, as compared with 7.2% in the prior week. This rate of improvement is solid, but obviously a sequential deceleration. On a single week basis, the improvement slowed to -2.4%, down from -5.8% in the prior week. We place less emphasis on week to week moves as they've historically had significant volatility. The bottom line: the labor market is still improving, which is supportive for both credit quality and housing's momentum.

 

On the seasonally-adjusted side, the optical claims number was worse than expected rising 21k before revision to 357k. This brought the rolling SA print to 343.5k, an increase of 2.5k WoW. As this is what the market is paying attention to, it's logical that we're seeing the long end of the yield curve fall. This is incrementally bullish for housing, but obviously a continuation of headwinds on the margin. As a reminder, the SA data is now facing a small, but growing headwind over the coming six months. This headwind will peak in August 2013 and then turn into a tailwind for a final year. 

 

INITIAL CLAIMS - STILL IMPROVING, ALBEIT AT A SLIGHTLY MORE MODEST RATE - 1

 

INITIAL CLAIMS - STILL IMPROVING, ALBEIT AT A SLIGHTLY MORE MODEST RATE - 2

 

INITIAL CLAIMS - STILL IMPROVING, ALBEIT AT A SLIGHTLY MORE MODEST RATE - 3

 

INITIAL CLAIMS - STILL IMPROVING, ALBEIT AT A SLIGHTLY MORE MODEST RATE - 4

 

INITIAL CLAIMS - STILL IMPROVING, ALBEIT AT A SLIGHTLY MORE MODEST RATE - 5

 

INITIAL CLAIMS - STILL IMPROVING, ALBEIT AT A SLIGHTLY MORE MODEST RATE - 6

 

INITIAL CLAIMS - STILL IMPROVING, ALBEIT AT A SLIGHTLY MORE MODEST RATE - 7

 

INITIAL CLAIMS - STILL IMPROVING, ALBEIT AT A SLIGHTLY MORE MODEST RATE - 8

 

INITIAL CLAIMS - STILL IMPROVING, ALBEIT AT A SLIGHTLY MORE MODEST RATE - 9

 

INITIAL CLAIMS - STILL IMPROVING, ALBEIT AT A SLIGHTLY MORE MODEST RATE - 10

 

INITIAL CLAIMS - STILL IMPROVING, ALBEIT AT A SLIGHTLY MORE MODEST RATE - 11

 

INITIAL CLAIMS - STILL IMPROVING, ALBEIT AT A SLIGHTLY MORE MODEST RATE - 12

 

INITIAL CLAIMS - STILL IMPROVING, ALBEIT AT A SLIGHTLY MORE MODEST RATE - 13

 

INITIAL CLAIMS - STILL IMPROVING, ALBEIT AT A SLIGHTLY MORE MODEST RATE - 14

 

Yield Spreads Narrow

The 2-10 spread fell -9.8 basis points WoW to 161 bps. 1Q13TD, the 2-10 spread is averaging 168 bps, which is higher by 25 bps relative to 4Q12.

 

INITIAL CLAIMS - STILL IMPROVING, ALBEIT AT A SLIGHTLY MORE MODEST RATE - 15

 

INITIAL CLAIMS - STILL IMPROVING, ALBEIT AT A SLIGHTLY MORE MODEST RATE - 16

 

 

Joshua Steiner, CFA

 


Get the US Dollar Right

Client Talking Points

US Dollar Action

As we say often at Hedgeye, if you get the US dollar right, you get a lot of other things right. However, you still have to understand how the dollar is correlated to different assets, and those correlations change over time. Right now, an up US dollar means US and Asian stocks are higher but Brazilian, Russian and Emerging Market stocks are down.  Also, right now, a lower US dollar means higher commodities and basic materials stocks.

Crisis in the Crisis?

Cyprus wasn’t really a crisis though many would want you to believe it was a major global contagion. There are, though, economies in Europe that are struggling, and fear is indeed alive and well across the continent there. The Euro is in a bearish formation, and Italy has been bearish on TRADE and TREND durations for a month now.

Asset Allocation

CASH 30% US EQUITIES 20%
INTL EQUITIES 20% COMMODITIES 0%
FIXED INCOME 6% INTL CURRENCIES 24%

Top Long Ideas

Company Ticker Sector Duration
DRI

Darden stands to be a beneficiary from a housing recovery and an improved employment picture, which boosts casual dining trends. Darden reported earnings today that beat Wall Street expectations, though net income declined 18%.

FDX

With FedEx Express margins at a 30+ year low and 4-7 percentage points behind competitors, the opportunity for effective cost reductions appears significant. FedEx Ground is using its structural advantages to take market share from UPS. FDX competes in a highly consolidated industry with rational pricing. Both the Ground and Express divisions could be separately worth more than FDX’s current market value, in our view.

HOLX

HOLX remains one of our favorite longer-term fundamental growth companies given growing penetration of its 3D Tomo platform and high leverage to the 2014 Insurance Expansion from the Affordable Care Act.

Three for the Road

TWEET OF THE DAY

“Our cross country tour of the most hated bull market move in modern history carries on.” --@KeithMcCullough

 

QUOTE OF THE DAY

“If you tell the truth, you don’t have to remember anything.” – Mark Twain

STAT OF THE DAY

357,000, the number of initial jobless claims reported this morning, which was higher than expectations of 340,000


Ears Up

This note was originally published at 8am on March 14, 2013 for Hedgeye subscribers.

“You can judge by his eyes and ears. One cannot read bears like that.”

-John Vaillant, The Tiger

 

Is this a bull or a bear? Whatever it is, and whether you decide to use behavioral ecology, interconnected macro math, or licking your finger, you have to decide on some type of signaling process to answer the question.

 

Knowing where you are in an economic cycle matters as much as understanding where your predator is (the other side of the trade). That’s why I think Vaillant’s epic true story of a man-eating tiger in Siberia is so relevant to my market day.  

 

If you see that his ears are down, that’s not a good sign. Then you have to look at him in the eye with all the rage you can muster and the tiger will stop and back off.” (The Tiger, pg 248) When do you think the bulls will back off lifting your offers?

 

Back to the Global Macro Grind

 

How are the bears going to stop the US stock market from going up? Since there’s a bull market in top-calling right now, are they going to talk it down? That sounds scary. But does that have any teeth?

 

You know, the ears are her steering wheel. You can turn off her teeth with the ears” (The Tiger, pg 96).

 

Admittedly,  that advice comes from a Russian who used to “bag” tigers alive. Reading through Vaillant’s account of encounters with these big cats, I wouldn’t take a stroll into the taiga and try that alone. Neither would I short SPY’s with the VIX signaling 10.

 

Process Review: there are 2 main parts to how I make risk managed decisions in markets:

 

1.       Risk Management Signals

2.       Research Views

 

The Research and Risk Signals aren’t always aligned, but when they are, I move. Instead of the ridiculous “risk on, wax off” thing the sell-side implemented into Old Wall vernacular, let’s think of the market’s main risk (beta) as either having its Ears Up/Down.

 

Reminder on our current Global Macro Research View:

  1. #StrongDollar Deflates Commodity Inflation
  2. Commodity Deflation Drives real (inflation adjusted) Consumption Growth
  3. Consumption Growth Drives GDP Growth, Gold Down, Treasuries Down, Ears Up

Our updated Risk Management Signals for US #GrowthStabilizing and/or #Accelerating:

  1. US Dollar Index: up for the 6th consecutive week at $82.96 this morning (+4.0% YTD)
  2. CRB Commodities Index: closed down (with stocks up yesterday) at 294 (down -0.3% YTD)
  3. SP500: for the 1st time in 2013, our Risk Range is signaling a higher all-time high (up at 1568)
  4. Russell2000: already made a higher all-time high (yesterday) at 943 (+11.1% YTD)
  5. US Equity Volatility (VIX): closed at 11.83 yesterday (-38% since FEB25); no support to 10.89
  6. US Treasuries (10yr): made another higher-low this wk and is testing 6 month highs today

Then, on the interconnected Global Macro Equity market signaling front:

  1. Japan’s Nikkei = +1.2% overnight, making another new YTD high (+43% since NOV2012)
  2. China’s Shanghai Composite = +0.3%, making another higher-low, holding 2206 TREND support
  3. South Korea’s KOSPI = +0.12% overnight, remains bullish TRADE and TREND in our model
  4. India’s BSE Sensex = +1.1% overnight, back above TREND line support of 19,419 to 19,581
  5. Germany’s DAX = +0.8% this morning, making a run for fresh new highs (Bullish Formation)
  6. Brazil’s Bovespa = -1.4% yesterday, and continues to break down (Bearish Formation, -5.3% YTD)

Only 1 of those 6 Global Equity markets has its Ears Down. That 1 of 6 is not like the others because the Bovespa is a heavily weighted commodity stock market. This is why not everyone agrees with the fulcrum point of our Research View; not everyone gets paid by a Strong Dollar, Down Commodities. Know how people get paid, and you’ll know their confirmation biases.

 

Ears Down in Oil? Yep. And guess what’s driving that? #StrongDollar. While the immediate-term TRADE correlation between the SP500 and USD  is currently POSITIVE (+0.84), for Brent Oil vs USD it’s NEGATIVE (-0.88). That’s another way to think about signaling without losing yourself in a Ph.D dissertation about causality.

 

Like a charging bull, bear, or tiger, the Correlation Risk happens fast. And unlike these non-domesticated animals, these mathematical monsters run fast, both ways. So keep those eyes and ears open!

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, Russell2000, and the SP500 are now $1568-1591, $108.14-110.28, $82.46-83.11, 94.12-97.29, 1.97-2.11%, 10.89-13.18, 933-954, and 1541-1568, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Ears Up - Chart of the Day

 

Ears Up - Virtual Portfolio


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