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America Is Winning Again

Confused? Could an Obama Presidency be an ultra bullish American catalyst? These are some of the contrarian questions that I asked myself yesterday. Given that there were political implications to these questions, I had some great feedback from our clients – thank you for helping me find some of the right answers.

History students can always look back to find answers. Historical facts don’t lie, people do. That’s why I always look back before I look forward. That’s not my politics, that’s just my process. The US market’s latest 9 month dance with the Leverage Bear could have largely been avoided if those with the vaunted leadership titles of CEO or Managing Partner could have taken a few hours away from their blackberries every day, and read an economic history book, or two.

Lincoln’s high level answer to finding clarity when confused was “always bear in mind that your own resolution to succeed is more important than any other one thing." No matter what your politics, that’s a hard point of advice to refute. That’s America – feet on the floor early every morning, and get it done. Obama’s speech last night may very well inspire some to get up a little earlier today. It will definitely inspire Republicans to tell you it was just another “rock star speech”. That rebuttal will then inspire Democrats to get up earlier still to tell you that Bush can barely read the English in a speech, never mind give one… then pop, pop, bang – another Jimmy Braddock Republican counter punch comes after that.

So what’s the result? I think the answer to that question is simple - America. From Washington to Wall Street, we need to bring passion back to the daily game of life, no matter what your politics. Last night I was walking my son, Jack, to sleep down on the beach in Westport, CT. I am Canadian, he is American. Along the way there were different languages being spoken by different people of different color. When no one is looking, that’s America.

One of the more important points in yesterday’s note was that since July 14th, the American stock market is winning again. Unfortunately for the competition (including the Canadians), that means most other countries have been losing. Understanding the inverse correlation between commodity price inflation and “emerging market” stock appreciation is a critical one right now. Yesterday, Americans won big time, with the S&P 500 closing +1.5%, as the CRB Commodity Index dropped another -2%. This morning, the Russian stock market is down another -1.4%, taking its peak to trough losses since mid July to -27%. Over that same duration, the S&P 500 has gained +8.2%, trough to peak.

Hope doesn’t find itself as a factor within my macro investment model, but that certainly doesn’t mean it doesn’t exist. As we head to the finish line of another month end, American investor hope is building, as Asian and European ones are waning. These hopes and fears are reflected in both currency and equity markets. The US Dollar is up +5% for August to date, while the Russian Ruble is down -5%. For Americans like Jack, whose father has an 85% position in US denominated currency, this is great. If you are a Russian boy, your country is led by a man named Putin, who just saw the world drop your currency by the most in a month since 1999. You’re also seeing global investors withdraw $25 billion from the Russian market as the world has ‘You Tubed’ Putin Power, and doesn’t see promises kept of troop withdrawal. Stock and currency markets don’t lie, people do.

In Asia, the currency market is worse than in Europe. The South Korean Won is leading Asian currencies to the downside. For the month alone, the Won has lost -7.1% of its value – this is the worst monthly decline since the Asian Currency Crisis in 1998! In Thailand, the domestic political environment has turned toxic. In India, as economic growth continues to slow, weekly inflation readings are now running up 3x what they were at this time last year. In Japan, Prime Minister Fokuda, is crying out today for another 2 Trillion Yen - the same old ball and chain of government sponsored bailout money that has led to decades of economic stagnation. Asian growth is slowing. Asia is losing.

Winning is what Americans do. Despite the Chinese winning every gold medal battle they could, Americans ended up winning the war. The Olympic medal count score was 110 to 100 – America over China. What’s next? Only time will tell… and the fact cards will lay on the table, face up, along the way.

Have a great long weekend,
KM



SAFM - CHICKEN ECONOMICS

SAFM commented that the company is looking at corn delivered into its feed mills at over $6 a bushel and soybean meal delivered into the mills at $380+ a ton. Currently, SAFM is looking at selling breast meat at $1.30, which means that the company is expecting to lose money for the foreseeable future. Just for SAFM to reach average margins, breast meat would need to average $1.85 to $1.90 for 12-months. That represents at 40%+ increase in breast meat. There is no restaurant company that I know of that could handle that kind of chicken inflation.


  • The chicken processing industry is not alone. If the chicken processors can’t make money buying corn and soy at those levels, it’s hard to imagine that pork and beef processors can make money either (Just look at how higher grain prices impacted Smithfield Foods’ results reported earlier this week). Importantly, it does not look like it’s going to get any better any time soon. Looking ahead, corn contracts for delivery in the spring are priced between $6.50 and $7.00, potentially making the situation worse in 2009.


  • Given the current economic climate, the relevant issue that remains unclear is the impact on demand for protein. Given the current rate of losses in the chicken industry, the over abundance of processing facilities will correct itself. A critical element that needs to remain in place is the export market, especially shipments to Russia. If political tensions heat up over the Georgian invasion; and the export market were to slow (implying supply would remain an issue), bankruptcy is all but certain for some processors.


  • As you can see from the charts to the right its bull market for farmers of crops, but not livestock! A quick comparison of the USDA index levels for prices received by farmers shows that, while livestock prices are up significantly –they have failed to match the pace of crops. Livestock farmers have felt the pressure as the trajectory of grains, soy and corn prices has continued to squeeze their margins. For the chicken processors, production rationalization has not taken place to any meaningful degree.

LVS: DELAYS AND COST OVERRUNS ON COTAI

Structural issues appear to be impacting LVS on the Cotai Strip. Apparently, one of the near complete hotels on lot 5 or 6 is not settling properly. I think it will cost $50-100 million to fix and likely delay the opening by about 6 months. It is unclear which hotel it is although I’m assuming it’s one of the hotels to be managed by Starwood (St. Regis or Sheraton) or Shangri-La (Shangri-La or Traders). This delay will push the opening into 2010. More to come.


Early Look

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Eye on Putin Power: "Putin accuses U.S. of orchestrating Georgian war"

SOCHI, Russia (CNN) -- "Russian Prime Minister Vladimir Putin has accused the United States of orchestrating the conflict in Georgia to benefit one of its presidential election candidates."

CNN's Matthew Chance has himself quite the story here intraday. Although CNBC and Bloomberg seem more interested in how many buildings Lehman can sell or how many buildings hurricane Gustav can knock down.

This is the global geopolitical canary in the coal mine. Pay attention to it.
KM


http://www.cnn.com/2008/WORLD/europe/08/28/russia.georgia.cold.war/index.html

Philippino Free Money Days Ending

Below, we have attached a 10 year cycle chart that overlays the Philippine stock market with their equivalent of a Fed funds rate. Sometimes one picture like this makes everything crystal clear. This is the Asian easy money policy picture that created today’s runaway Asian inflation.

Look at how Philippine stocks act when access to capital is cheap and flowing versus when it's tightening. That last melt up in stocks coincides directly with the last round of easy money overnight rate cuts.

This morning the central bank raised rates another 25 basis points in order to "tame inflation". Remember, inflation can be imported to a country whose currency is crashing. Inflation in the Philippines was recently reported at +13% y/y.

The titanic is turning here. If you have to be invested, wade into those waters of "emerging Asia" equities with extreme caution.
KM

Bristol Myers Squibb (BMY): We Bought It In the Hedgeye Portfolio Yesterday

On its lows yesterday morning, my Partner, Tom Tobin, thought BMY was oversold relative to the impact of the news (see his portal posting on it this morning).

This is one of these "Large Marge" big cap pharma names that fits within the construct of our Healthcare Sector and Global Macro views, and buying things when they are on sale is what we do.

Intraday here, "DealReporter" was cited by FT mergerarket today citing "industry sources following the situation" that BMY could offer as much as $70/share for IMCL. This is not edge; this has been a price that has been thrown around for some time now.

What has not been thrown around is that I think Carl Icahn is as incentivized as he will ever be to get his IMCL trade booked. For the levered activists facing potential liquidity problems, this is a time to sell what you can, not what you should.

We like the Bristol/Imclone combo. The sooner this deal gets done, even if it's for $70/share, the better for BMY.
KM

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 80.64%
  • SHORT SIGNALS 78.58%
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