Keith is a cowboy

Research Edge Position: Long COW

I suspect that Keith is a Canadian cowboy at heart. I arrived at this suspicion based on several clues: 1) last Halloween he came in to the office dressed in full cowboy regalia, 2) when he and I first met it turned out that one of the few friends that we had in common was the former two-time national Bull riding champion of Canada (it takes one to know one principle, myself notwithstanding), and 3) his tendency to shout "Hoowah!" when trades work out better than anticipated.

Thus when he first asked me what I thought about the ETN COW last year, I realized that I had to take it seriously, because it might well end up in the portfolio.  Since then it has remained on the back burner of my market universe. Our decision to go long this week was based on a convergence of factors: Keith was attracted by the technical set up that it was presenting, several underlying fundamentals looked compelling, and it ties in with our overlapping macro view on reflation and the US consumer.

COW tracks an AIG commodity sub-index that consists of Live Cattle and Lean Hog front month futures contracts. The mix is currently 62.27% front month Live Cattle, 37.73% front month Lean Hogs. 


Although earlier today I wrote that I have a bias against historical comparables, for agricultural commodities, the seasonality is undeniable.

Traditionally, US beef consumption is greatest during cold weather months, and supply levels are driven by the spring calf breeding cycle/late summer slaughter cycle. The start of slaughter cycle coincides with lower consumption patterns to drive prices down in late summer, while prices tend to rise in March and April when demand typically is still  high but supply is at its lowest after the slaughter cycle has ended and the breeding cycle just begun.

In the chart below I illustrated the 20,15,10 and 5 year average indexed price returns for the front month LC contract under the current year. Although earlier today I wrote that I have a bias against historical comparables, in this instance the seasonal inflection is undeniable. Clearly the futures are currently underperforming historical seasonal averages as macro factors weigh on anticipated demand.


Pork demand also follows a seasonal pattern, but the price pressure inflections for that market are different because the breeding and slaughter cycle tends to be based on the corn harvest since farmers breed heavily in advance of the cheapest feed prices. As such, supply is at its lowest in midsummer during comparatively low demand.  Like cattle, Lean Hog futures are currently outside typical seasonal inflections.

Now keep in mind that these are just general rules based on long term historical observations (which I have stated on multiple occasions that I tend to discount), but in agricultural markets it is dangerous to ignore seasonality.


  • Current USDA forecasts anticipate that both Beef and Pork production will be reduced for 2009 based on statistical data showing declining slaughter and carcass weight measures.
  • Canadian Pork exports are forecast to decline more sharply than US production as overlapping local factors have driven feed prices higher simultaneous to a strengthening Currency versus the US Dollar. Next Friday's quarterly USDA Hog report should provide a better picture of the developing import situation.
  • Argentina's Ministry of Agriculture officially estimates that cattle production will decrease by 13% this year due to decreased demand from customers like Russia. Unofficially the disastrous policies pursued by the Kirchner regime have driven Argentine farmers to despair and it has been reported by some media sources that the country may become a net importer for the first time since 1871. Getting hard data on the impact will be difficult as the Ministry stopped generating monthly data in November of last year.
  • Although the work Howard Penney is doing in the restaurant sector shows that the dining industry continues to face a challenging environment, the data continues to suggest that the situation has not deteriorated to levels initially anticipated for mass market food retailers as cheap gasoline; cheap food prices and cheap money have left broad domestic consumption patterns relatively unscathed.


So now we have COW in our portfolio with supporting seasonal inflections, a solid technical setup and a some positive fundamental data points. That doesn't mean there aren't risks involved, primarily tactical in nature. For starters there is always a liquidity risk trading livestock futures, and during summer months the volume can get especially thin. Also, since the ETN tracks the Index, during each delivery month the product must "roll" into the next series: this roll impact will result in a divergence between the continuous front month levels and the ETN performance.

For now we remain long US livestock and will continue to own the COW for as long as the data supports our thesis.

Yipppie Kay Yay.

 Andrew Barber



Yesterday's CPI buys more time for the "free money" cycle. Buying time can be expensive.

Keith and I talk about history frequently. I know a bit about a fairly broad range of economic and political history, in part because of my education and in part because of my interests. Like many students of history, I have a tendency to massively discount its importance in the decision making process. To my mind, the more you know about past events, the more you understand the unique factors involved with each and, as such, the less confidence you will have in drawing conclusion solely based on corollary. When discussing yesterday's consumer inflation data I told Keith that the current environment seems anomalous to me, and those looking for clues in the reflation puzzle will be frustrated by historical comparisons.

At -1.28%, yesterday's CPI reading arrived at the lowest level since 1950 when the massive deflation/reflation cycle that followed the end of WW2 were wreaking havoc on global commodity markets (see chart below). 


This reading leaves the fed with ample room to keep easy money train rolling at next week's board meeting and also provides the market with clear signals that the return of year-over-year inflation growth will not arrive until mid to late Q4. This breathing room gives the economy more time to recover but that time may come at a steep cost:  with the scales tipped so far in one direction, even modest catalyst could trigger inflationary pockets rapidly, providing a nasty "snap-back".

One of our core ideas coming into 2009 was the demise of correlation of returns for different asset types, and this will be critical in our approach as we position ourselves to profit when inflation does finally raise its head.  We anticipate significant divergence inside the commodity matrix as overlapping demand factors and currency valuation throw the momentum mentality that worked perfectly in the 07-08 boom out the window in favor of market specific fundamentals. In other words, in the cycle that we see on the horizon, soybeans won't necessarily go up because Chinese demand for coal increases, and gold won't necessarily go down because the Brazilian cotton crop is larger than expected. 

As such homework will be required and, if history is any guide, many investors will not do the assigned work and fail the exam.

Andrew Barber


The benign commodity environment and DRI increasing focus on cutting out fat will leave the street focused on same-store sales for FY4Q09.

In FY3Q09, DRI blended same-store sales were down 3.2% at the three core brands largest brands; slightly better that the Knapp-Track industry average of 5.7%. Note we have adjusted the Knapp-Track industry average to comply with DRI fiscal quarter and include DRI's same-store sales trends.


In FY3Q09, Red Lobster reported same-store sales decline of 4.6%, which was 1.1% above Knapp-Track. For the same period the Olive Garden reported same-store sales decline of 1.4%, which was 4.3% above Knapp-Track. Longhorn Steakhouse same-restaurant sales decreased 5.4% for the quarter, which was 0.2% above Knapp-Track.

In FY4Q09, we are looking for blended DRI same-store sales to be down 3.1% or 2.4% better the Knapp-Track. On a relative basis, LongHorn is likely to show the best sequential results on the back of a new media strategy put in place in FY3Q. The number of restaurants with advertising support increased from 45% to 60% and the media weight by 25% (at no incremental cost).


In FY4Q09, we are estimating that Red Lobster's same-store sales decline of 3.0%, which is 2.5% above Knapp-Track. For the same period the Olive Garden reported same-store sales decline of 2.0%, which is 3.5% above Knapp-Track. Longhorn Steakhouse same-restaurant sales decreased 3.5% for the quarter, which is 2.0% above Knapp-Track. Consensus estimates for Red Lobster, Olive garden and LongHorn are -2.2, -0.2 and -4.5%, respectively.

For FY4Q, I'm slightly - $0.01 - ahead of consensus at $0.87 and $2.72 for the fiscal year. Given what we are hearing, and confirmed by the stabilization in Knapp-Track trends, I don't believe there will be much deviation from the trend I have outlined. DRI's marketing muscle is clearly a benefit during difficult times. Benign commodity trends, incremental pricing and cost cutting will lead to a 70bps of sequential EBIT margin improvement to 10.6%.


Trading at 8.0x EV/EBITDA, DRI is relatively expensive - trading at two multiple points above the FSR group. Short interest is low at 7.6% versus 13% for the FSR group. While I don't think there is another $10 million surprise in FY4Q, DRI has further fat to cut out of its cost structure.

While things this quarter look good for DRI, longer-term I'm have issues with DRI pushing hard on the organic growth engine. As I measure how DRI is investing is cash, the trends are headed south. Over the past two years the company's ROIIC has been declining - never a great sign.



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 80.45%
  • SHORT SIGNALS 78.38%


CCL 2Q09 Earnings call:


Prepared Remarks:

- Just took delivery for Seabourn Odyssey today.


- Reduced fuel consumption helped them by 5 cents.  Also, better than expected pricing on close in bookings benefited them by 3 cents.

  • Mexico hurt them by 3 cents
  • Total revenue yields came in at the lower end of the range, driven primarily by the flu impact


- The capacity increase was driven by European brands growing 8%, and Costa Asia doubled in size.


- 2Q09 revenue commentary:

  • Net ticket yields were down 10%, NA down 14% (Alaska, Mexico), Caribbean & other exotic held up better. European yields fell 6%.
  • Saw benefit from bookings that occurred pre-crisis, hence the back half will not have this benefit and will be more impacted
  • Onboard spend down across the board


- Cost commentary:

  • More vessels in drydock this year
  • As a result of more focus on fuel efficiencies, they have been able to reduce consumption more than the 2-3% run rate of the last few years
  • Currency hurt them as the dollar weakened
  • Continued to find opportunities to save another $33MM and brought total savings to $150MM
  • Fuel will save them $660MM over 2008, with 2009 fuel / metric ton at $353. Fuel and currency are driving their costs down. FX, however, will also reduce their revenues by $175MM or $0.22/ share in 2009
  • 10% change in fuel will impact them by $0.14/share. 10% change in all currency impacts them by $160MM or $0.16/ Share


- Since the March conference call they completed the Italian export credits, European investment bank loan, and two other term loans for $350 million each.  They are on target to get all of their financing needs for 2010 by September.


- Booking environment:

  • Booking volumes are running 26% ahead of last year
  • Seem to have found a price point of attracting customers
  • North American cruise brands are seeing a moderate increase in pricing ability on premium product, however, the lower end stuff has been more impacted by the Mexican flu issue


- 3Q09:

  • Alaska at 39% of capacity
  • Pricing for NA is lower across all itineraries with worst impact on Alaska
  • European prices are lower but not as bad as NA
  • Caribbean prices are also lower
  • Occupancies are lower for NA and slightly higher for Europe
  • UK yields only slightly lower, other mostly mid single digit declines, overall European yields lower in the single digit yield range


- 4Q09:

  • 5.7% NA 9+% capacity increases
  • NA brands Caribbean prices are lower, but booking momentum has been strong
  • European pricing is holding up better than Alaska but lower (on NA brands)
  • Occupancies for NA are still lower, but only modestly
  • European brands pricing better than the US brands during 4Q, and while occupancies still not much lower than last year, expect pricing to be down


- 1Q2010:

  • Fleetwide capacity up 9.2% (13.3% in European brands, 5% in NA)
  • Do expect yield declines in 1Q2010, as a good portion of 1Q09 was booked during better times
  • However, volumes/ bookings are in line
  • If the strong booking momentum continues, it's possible that pricing may be close to 1Q09



- Terms of the EIB loans?

  • $550MM Euros, 250MM drawn in 2009, 150MM in 2011 and balance in 2010
  • Rate is very favorable
  • Unique because the EIB looks to stimulate growth in the economy and these ships will be sailing in the Mediterranean
  • May or may not be repeatable


- Capacity for 2012 & beyond?

  • Expect capacity growth to slow but not stop (he doesn't know, basically)
  • Pricing on ships has come back down to levels of where they used to order ships -so may consider it when they have needs for particular brands (on a constant currency basis)


- 3Q09 net yields looks at the low end of their guidance, and 4Q09 forecasts big rebound (we assume he means less bad) 

  • Without the impact of the flu they would have come in at the mid-point of the net yield guidance in the 2Q09
  • For the 3Q09 - they suffered more because of the premium mix - therefore they feel the impact of yield erosion the most. The 4Q09 will be better because of mix as well, but don't see it dramatically better more just a mix issue


- The magic questions... with capacity increase will yields continue to be negative in 2010?

  • Too early to say- clearly they don't want to opine on this year and to be fair they just don't know


- The only time they saw an impact on Mexico was during the 3 week travel advisory period, as soon as they announced the new itineraries the demand rebounded at strong levels, but at lower pricing levels (expect pricing to rebound to previously depressed levels)


- Feel encouraged because everything was trending up before the travel advisory.


- Whether the % of European passengers on Europeans brands are any different than 2008

  • No but the North American Brands are carrying more non-Americans


- Fuel supplements back in place? No plans since the economy is crisis

  • In other words - they would love to but they can't because what goes into a supplement will come out in pricing - thank for the obvious question


- Onboard spending for European brands has held up reasonably well


- Mexican Flu impact

  • Nickel of extra costs for the change in itineraries - part of it fell to the 3rd Q
  • The other 5 cents was due to digging themselves out of the hole when bookings came to a standstill (7 cents in the 3Q - why not just throw the kitchen sink at it ... right?)

- 2010 is the first time when they planned itineraries in a high fuel environment.  So the savings will be high on consumption (we assume 4%)


- Costa Asia? (immaterial to the company)

  • See the summer season absorb the 2x capacity... (coming from 1 ship to 2)
  • Winter season was slow
  • Typically go to Japan & South Korea (4-6 day trips)
  • Don't see the same "RevPAR" trends as lodging because it much less penetrated


- Dividend

  • Clearly would like to see a turn in earnings and cash flow before re-instating the dividend
  • Won't risk loss of the investment grade rating


- IBERO brand

  • Haven't acquired the entire brand yet... in the approval process. Its only 2 ships. Have taken full control of the company though and have restructured it. Wont develop more ships until the Spanish market recovers


- If they can get same level of occupancy as 2009 in 2010 the pricing will be up - but that's obvious... he's just saying if they can fill all the incremental demand (9+%) than they can start raising pricing.... Again this is the million dollar question

  • Think that should cycle the price declines by the end of 2Q2010


- Since end of March they have seen yield declines start to improve. 

  • A lot of the volume they are seeing is close in volume, still behind booking levels for 2010... not enough to price though. Won't know until 3/4Q.


- Alaskan capacity will be down in 2010.



Initial claims continue to hover above the 600K line in the sand

Today's Initial claims number arrived at 608K; 3k higher than the prior week's number which was revised upwards by 4K, but still below the four week moving average by 8k. Since last week's bullish claims reading the S&P 500 has declined modestly on slightly increased volatility, while the US Dollar index has cut its decline for the year significantly from  -7% to under -2% and the yield curve has narrowed with 2 year yields rising to close the gap with the 10 year by over 10 basis points.

With Claims still hugging the psychologically important 600k line, the "glass half full " crowd are left still looking for signs of a bottom here, with accelerating declines in benefits paid  providing more clues that the rate of job losses has moderated sharply.

As always with the sometime conflicting employment data that the US government provides, interpretation is key: declining benefits paid to existing claimants could indicate a tightening job market for the newly unemployed, and could perversely cause the department of Labor Unemployment Rate metric (a lagging indicator -see our post on June 9) to rise. Despite this caveat, the declining pace of job losses is clearly evident and we currently anticipate that next month's unemployment release will likely register slightly below 10% -that critical double digit dam-buster that the bears are desperately seeking.

Our overall tactical outlook has not fundamentally changed from last week: We expect to continue to trade the equity market inside a narrow range for the near term, and while we have increased our domestic equity exposure to 15% from 12 % since last week, we have not seen enough supporting data for the equity market to join the glass half full crew yet.

Andrew Barber



Retail First Look: 6/18/09



In a sad sad statement about how my mind works, upon waking up at 4am to yet another rainy morning, my first thought was not about how peaceful it sounded with the rain hitting the trees. But rather " weather really going to have to be an issue for the retailers that I'm going to have to spend a single iota of brainpower exploring?" The reality is that sales are increasingly under pressure over the past 2 weeks. This is based on both our discussions with industry sources and was validated by SportscanINFO apparel data yesterday that showed a big downtick last week. Remember that this is the exact time that sales should be picking UP seasonally, and without a strong finish to June we're going to have to deal with excess promotional activity in July. Yes, inventories are in OK shape, but those facts can change easily without the top -line kicking in. Check out our analysis in our note last night.


Ok McGough, do you really expect me to believe that the market does not get a real-time read on these numbers and trends? Isn't it in the stocks already? Of course they do. Certain folks out there already know the exact comp number for key retailers through yesterday (even though they shouldn't). But the reality is that the MVR (Morgan Stanley Retail Index) is only down only 5% over the past week, and while this is 2x the S&P, it is far less of a divergence than we've seen in retail in the past when sales weaken. Are investors looking through the weather? Maybe, but when numbers are printed at a time when stocks have stopped going up on good news, I cannot imagine that it will be a positive event.


Where do I come out? This is not enough to rattle my models and bullish view on cash flow in the coming 9-12 months for apparel/footwear. But near-term I'm more sensitive to sticking with the names where I KNOW there are company-specific levers to grow earnings, and where the Street is grossly off base with earnings expectations. This includes PSS, RL, UA, and even LIZ (despite today's guidance issued in conjunction w/convert deal). US-centric companies without specific levers that have no positive FX exposure to a weakening dollar (ie bricks and mortar retailers) are particularly at risk.



Some Notable Call Outs

  • A PVH executive described the divisional consolidation at Macy's in the first quarter as "a little crazy as they've tried to reorganize their divisions and consolidate from seven into one". The merchandise direction on a go forward basis is being led by the former Macy's East. This bodes well for PVH because it was most heavily penetrated with this division and orders are likely to increase for doors that were formally less engaged with the PVH product.


  • Last week was the worst year over year change in sports apparel since July 2008. Everything was down at an alarming rate. Sporting goods retailers fell down by 15%, discount/mass channel declined by 40%, and the recently strong family retailer channel decreased by 10%. I call it like it is, and will VERY rarely pull the weather card. But last week's impact was unmistakable. The average temperature was 6-15 degrees cooler than average across virtually the entire US - with warmer temperatures only in Virginia, Georgia and parts of Texas. I won't even begin to call out the rain, because it rained pretty much everywhere.


  • We expect designer and luxury brands to continue to partner/collaborate with mass oriented retailers. The latest announcement that Jimmy Choo will create a holiday shoe and accessory line for H&M is yet another example. As luxury remains the hardest hit sector across retail, it is not surprising to see brands augment growth with seasonal and short term deals to boost cash flow and broaden their customer reach. Note yesterdays comments about lux retailers and brands starting to use price as an offensive weapon. They need to be creative elsewhere as well.


ZachHammer's overview of items you're unlikely to find in the general press.















  • Indian retail may lose foreign direct investment of up to Rs 400 crore this fiscal because of last week's recommendations by the Parliamentary Panel on Commerce, which has opposed further leeway to the entry of international retail brands in the country <>












RESEARCH EDGE PORTFOLIO: (Comments by Keith McCullough):


06/17/2009 12:31 PM


The shorts can't be enjoying this +4.25% squeeze on a day where the world was supposed to be ending. Sell green here and buy it back on a down day. KM


06/17/2009 10:04 AM

BUYING UA $21.28

People freaking out again today, and it continues to bet on McGough's call here on the long side when they do (see his note). Buy low. KM


Insider Trading Activity:


CHS: John Burden, Director, purchased 10,000 shs on a base of 30,000 after a 100% increase in share price YTD.

HLYS: Roger Adams, Founder, continues to wind down holdings (38,600 shs).

CMRG: Ken Ederle, VP& GMM, sold nearly half of his position (17,300 of 37,300 shs).




Retail First Look: 6/18/09 - consumer disc 



  • Positive divergence between the MVRX +60bps and XLY +140bps versus the S&P -14bps.
  • Within Consumer Discretionary, Media and Specialty Retailers continue to outperform to the upside with Luxury Goods companies the only industry with negative absolute performance.
  • BGFV rebounded sharply +7% after a 4-day -18.7% selloff.
  • ANF +4.7% shares traded higher after company announced credit amendment and closing of Ruehl operations.
  • CROX -7.3% shares cool for second straight day following huge run up last week on the back of mgmt roadshow.
  • HAR maker of GPS devices continues 2-day -17.4% slide on 2x avg. daily volume following disappointing earnings Monday.

Early Look

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