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'Stunning' Weather Reversal Sends Cotton Prices Down 20%

Takeaway: What a difference a couple of months can make.

Editor's note: This is a brief excerpt from retail sector head Brian McGough's morning research. Click here for more information on how you can subscribe.

 

HBI, GIL - Cotton Boom Goes Bust as Rain-Soaked Texas Crop Sets Glut

  • "Two months ago, a drought threatened output in the U.S., the world’s largest exporter, and stockpiles were heading for a two-decade low. Then came the rains in Texas, the top grower, sparking a planting surge that the government said will send inventories to a six-year high before the 2015 harvest."
  • "The 'stunning' weather reversal may boost U.S. output by 32 percent, Plexus Cotton Ltd. said in a report. Prices that in March were the highest in 25 months are now down more than any commodity this year."

'Stunning' Weather Reversal Sends Cotton Prices Down 20% - cotton

 

Takeaway: Cotton is down almost 20% from its YTD highs. Increased yield forecasts from the US coupled with China's decision to release some its cotton reserves, which accounts for nearly 60% of global stocks, means that the supply side of the pricing equation looks relatively healthy.

 

Material cost deflation should help offset labor cost headwinds facing names like (Hanesbrands) HBI and Gildan Activewear (GIL).


Monday Mashup: Big Week for BOBE

Investment Ideas

Monday Mashup: Big Week for BOBE - chart1

Recent Notes

06/30/14  Monday Mashup: DNKN, NDLS and More

07/02/14  DFRG: A Castle-in-the-Air

Events This Week

07/08/14  BOBE earnings release 4:00pm EST

07/09/14  BOBE earnings call 10:00am EST

Chart of the Day

With BOBE set to release earnings tomorrow after the close, we thought we’d take a close look at the value destruction the current Board and management team have perpetuated since mid-2012.  We are expecting a disappointing release and would be buyers on any negative news.  BOBE remains our highest conviction long idea.  We run through our long thesis in this slide deck.

 

Monday Mashup: Big Week for BOBE - chart2

Recent News Flow

Monday, June 30th

  • DIN Applebee’s brought back its Take Two menu for a limited time, giving guests the ability to pair any two selections from its Taste of Summer menu, starting at $10.99.
  • NDLS debuted catering in Colorado.
  • RRGB eliminated the position of COO, currently held by Eric. C. Houseman, in an internal restructuring.  Houseman’s employment will end on or around August 1st.

Tuesday, July 1st

  • WEN announced the return of its #PretzelLoveSongs campaign, in which the company takes select social media posts and turns them into lyrics of songs. This year, the songs will be performed in a series of music videos by Boyz II Men and Jon Secanda.
  • NDLS unveiled plans to add a floating server at its stores in order to drive dessert and drink sales.  CEO Kevin Reddy expects this addition to the restaurants will result in a 3% boost in same-store sales.  Noodles & Company has been testing the floating server in select restaurants for the past two years and plans to roll out the program system-wide by 2016.

Wednesday, July 2nd

  • No significant news.

Thursday, July 3rd

  • BOBE holder Sandell reported a 8.4% beneficial ownership in the company.
  • CAKE announced plans to celebrate National Cheesecake Day on July 30th and 31st by offering any slice of cheesecake at half price.

Friday, July 4th

  • No significant news.

Sector Performance                      

The XLY (+1.7%) outperformed the SPX (+1.0%) last week.  Both casual dining and quick service stocks underperformed the SPX Index.

 

Monday Mashup: Big Week for BOBE - 33

Monday Mashup: Big Week for BOBE - chart4

XLY Quantitative Setup

From a quantitative perspective, the sector remains bullish on an intermediate-term TREND duration.

 

Monday Mashup: Big Week for BOBE - chart5

Casual Dining Restaurants


Monday Mashup: Big Week for BOBE - chart6

Monday Mashup: Big Week for BOBE - chart7

Quick Service Restaurants


Monday Mashup: Big Week for BOBE - chart8

Monday Mashup: Big Week for BOBE - chart9

 

Howard Penney

Managing Director

 

Fred Masotta

Analyst


European Banking Monitor: Swaps Back-off on the Week

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .

 

--- 

 

European Financial CDS - After widening steadily, swaps were predominantly tighter in Europe this past week. Part of the relief came from Portugal where initial reports of a Luxembourg investigation into Espirito Santo turned out to be wrong. Meanwhile, a temporary short-selling ban in the stock and management change all led to a relief rally. Espirito Santo swaps were 24 bps tighter on the week, closing at 294 bps, but remain +124 bps on the month. 

 

European Banking Monitor: Swaps Back-off on the Week - chart1 Financial CDS

 

Sovereign CDS – Sovereign swaps were little changed on the week outside of Portugal. Portguese swaps tightened 22 bps to 132 bps on the news that its largest bank, Espirito Santo, was not under investigation by Luxembourg. 

 

European Banking Monitor: Swaps Back-off on the Week - chart2 sovereign CDS

 

European Banking Monitor: Swaps Back-off on the Week - chart3 sovereign CDS

 

European Banking Monitor: Swaps Back-off on the Week - chart4 sovereign CDS

 

Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread was unchanged at 15 bps.

 

European Banking Monitor: Swaps Back-off on the Week - chart5 Euribor OIS Spread

 

 

Matthew Hedrick

Associate

 

Ben Ryan

Analyst

 

 

 


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Retail Callouts (7/7): HBI, GIL, AAPL, PETM, WMT, APP

Takeaway: Hedgeye Retail Ideas List. US cotton yield forecasts look healthy-good news for HBI & GIL. AAPL builds smartwatch team as LG & Samsung debut

HEDGEYE RETAIL IDEAS LIST

 

Retail Callouts (7/7): HBI, GIL, AAPL, PETM, WMT, APP - chart1 7 7 2014

 

EVENTS TO WATCH

 

Tuesday (7/8)

  • TCS - Earnings Call: 4:30pm

 

Thursday (7/10)

  • FDO - Earnings Call: 10:00am

 

Friday (7/11)

  • PSMT - Earnings Call: 12:00pm

 

COMPANY NEWS

 

HBI, GIL - Cotton Boom Goes Bust as Rain-Soaked Texas Crop Sets Glut

(http://www.bloomberg.com/news/2014-07-03/cotton-boom-goes-bust-as-rain-soaked-texas-crop-sets-glut.html)

 

  • "Two months ago, a drought threatened output in the U.S., the world’s largest exporter, and stockpiles were heading for a two-decade low. Then came the rains in Texas, the top grower, sparking a planting surge that the government said will send inventories to a six-year high before the 2015 harvest."
  • "The 'stunning' weather reversal may boost U.S. output by 32 percent, Plexus Cotton Ltd. said in a report. Prices that in March were the highest in 25 months are now down more than any commodity this year."

 

Takeaway: Cotton is down almost 20% from its YTD highs. Increased yield forecasts from the US coupled with China's decision to release some its cotton reserves, which accounts for nearly 60% of global stocks, means that the supply side of the pricing equation looks relatively healthy. Material cost deflation should help offset the labor cost headwinds facing names like HBI and GIL.

 

AAPL - Apple poaches another luxury executive as iWatch nears

(http://www.reuters.com/article/2014/07/04/us-apple-tagheuer-idUSKBN0F91NA20140704)

 

  • "Apple has poached a senior executive from Swiss luxury watch brand Tag Heuer, which could be to help it with the launch of its iWatch expected this autumn."
  • "Tag Heuer, part of luxury goods group LVMH, said on Friday its vice president for sales, Patrick Pruniaux, who had been with the brand for seven years, was leaving on Monday to join Apple. It did not say what his new job would be."

 

Takeaway: Interesting that Samsung and LG are both releasing smart watches today. And AAPL hired someone from Tag. I'll probably buy one. But it's so surprising to me that everyone is giving the smart watch a free pass at being a success. The biggest hurdle these companies face is that people under 18 simply do not wear watches. 

 

OTHER NEWS

 

PETM - PetSmart Issues Statement Regarding JANA Partners Schedule 13D Filing

(http://phx.corporate-ir.net/phoenix.zhtml?c=196265&p=irol-newsArticle&ID=1944885&highlight=)

 

  • "PetSmart welcomes open communications with its shareholders and values constructive input toward the goal of enhancing shareholder value. Our Board and management team are committed to creating value for all PetSmart shareholders, and we will continue to take actions to accomplish this goal and position the Company for growth and success."

 

APP - American Apparel in Talks to Raise New Financing

(http://online.wsj.com/articles/american-apparel-in-talks-to-raise-finances-from-standard-general-1404674792?cb=logged0.2128356599714607)

 

  • "American Apparel Inc. is in talks to raise new financing from hedge fund Standard General that would allow the company to pay off a loan that came due after it ousted founder Dov Charney, people familiar with the matter said."
  • "As part of the talks, the two sides also have reached an agreement in principle to replace all of the company's board—except for its two co-chairmen—with directors who have more industry experience, though no formal agreement has been signed, people familiar with the situation said."
  • "Still unclear is what role Mr. Charney will play at the company going forward. His fate depends on the outcome of a continuing investigation into his conduct, people familiar with the situation said."

 

WMT - Asda restructuring to cut 1,360 jobs

(http://www.bbc.com/news/business-28149288)

 

  • "Asda has announced a shake-up of its management structure, which is likely to result in 1,360 redundancies."
  • "The retailer, which has 578 stores across the country, says 1,360 people are expected to take redundancy, as staff choose to leave or do not meet the overall selection criteria for the new roles."
  • "Asda currently employs over 170,000 people across the UK."

 

Bonobos - Online retailer Bonobos raises $55 million in funding to open more stores

(http://www.chainstoreage.com/article/online-retailer-bonobos-raises-55-million-funding-open-more-stores)

 

  • "Online menswear brand Bonobos has raised a total of $55 million in venture capital funding, bringing the brand's total funding to $128 million. The company plans to use a large part of the latest investment to quadruple its physical store count, growing from 10 locations to 40 nationwide by 2016"

MONDAY MORNING RISK MONITOR: PUERTO RICO PUTS GUARANTOR SWAPS IN A TAILSPIN

Takeaway: The shortened holiday week was punctuated by big moves in AGO, MBIA and Espirito Santo.

Current Best Ideas:

 

MONDAY MORNING RISK MONITOR: PUERTO RICO PUTS GUARANTOR SWAPS IN A TAILSPIN - 19

 

Key Callouts:

 

* U.S. Financial CDS -  Swaps at Assured (AGO) and MBIA (MBI) were sharply wider on the week, adding 87 and 137 bps, respectively. The moves come in response to Puerto Rican municpal debt exposure. Outside of those two entities, however, most of the rest of the complex was modestly tighter week over week. 

 

* European Financial CDS - After widening steadily, swaps were predominantly tighter in Europe this past week. Part of the relief came from Portugal where initial reports of a Luxembourg investigation into Espirito Santo turned out to be wrong. Meanwhile, a temporary short-selling ban in the stock and management change all led to a relief rally. Espirito Santo swaps were 24 bps tighter on the week, closing at 294 bps, but remain +124 bps on the month. 

 

 

Financial Risk Monitor Summary

 • Short-term(WoW): Positive / 5 of 12 improved / 1 out of 12 worsened / 6 of 12 unchanged

 • Intermediate-term(WoW): Negative / 3 of 12 improved / 6 out of 12 worsened / 3 of 12 unchanged

 • Long-term(WoW): Negative / 3 of 12 improved / 5 out of 12 worsened / 4 of 12 unchanged

 

MONDAY MORNING RISK MONITOR: PUERTO RICO PUTS GUARANTOR SWAPS IN A TAILSPIN - 15

 

1. U.S. Financial CDS -  Swaps at Assured (AGO) and MBIA (MBI) were sharply wider on the week, adding 87 and 137 bps, respectively. The moves come in response to Puerto Rican municpal debt exposure. Outside of those two entities, however, most of the rest of the complex was modestly tighter week over week. 

 

Tightened the most WoW: C, MMC, MTG

Widened the most WoW: MBI, AGO, AIG

Tightened the most WoW: TRV, ACE, ALL

Widened the most MoM: MBI, AGO, WFC

 

MONDAY MORNING RISK MONITOR: PUERTO RICO PUTS GUARANTOR SWAPS IN A TAILSPIN - 1

 

2. European Financial CDS - After widening steadily, swaps were predominantly tighter in Europe this past week. Part of the relief came from Portugal where initial reports of a Luxembourg investigation into Espirito Santo turned out to be wrong. Meanwhile, a temporary short-selling ban in the stock and management change all led to a relief rally. Espirito Santo swaps were 24 bps tighter on the week, closing at 294 bps, but remain +124 bps on the month. 

 

MONDAY MORNING RISK MONITOR: PUERTO RICO PUTS GUARANTOR SWAPS IN A TAILSPIN - 2

 

3. Asian Financial CDS - Swaps in Asian Financials were mostly tighter on the week, falling by an average of 3 bps. Chinese banks tightened slightly more than peers in India and Japan.

 

MONDAY MORNING RISK MONITOR: PUERTO RICO PUTS GUARANTOR SWAPS IN A TAILSPIN - 17

 

4. Sovereign CDS – Sovereign swaps were little changed on the week outside of Portugal. Portguese swaps tightened 22 bps to 132 bps on the news that its largest bank, Espirito Santo, was not under investigation by Luxembourg. 

 

MONDAY MORNING RISK MONITOR: PUERTO RICO PUTS GUARANTOR SWAPS IN A TAILSPIN - 18

 

MONDAY MORNING RISK MONITOR: PUERTO RICO PUTS GUARANTOR SWAPS IN A TAILSPIN - 3

 

MONDAY MORNING RISK MONITOR: PUERTO RICO PUTS GUARANTOR SWAPS IN A TAILSPIN - 4

 

5. High Yield (YTM) Monitor – High Yield rates rose 1.1 bps last week, ending the week at 5.34% versus 5.32% the prior week.

 

MONDAY MORNING RISK MONITOR: PUERTO RICO PUTS GUARANTOR SWAPS IN A TAILSPIN - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 4.0 points last week, ending at 1885.

 

MONDAY MORNING RISK MONITOR: PUERTO RICO PUTS GUARANTOR SWAPS IN A TAILSPIN - 6

 

7. TED Spread Monitor – The TED spread rose 1.3 basis points last week, ending the week at 22.5 bps this week versus last week’s print of 21.16 bps.

 

MONDAY MORNING RISK MONITOR: PUERTO RICO PUTS GUARANTOR SWAPS IN A TAILSPIN - 7

 

8. CRB Commodity Price Index – The CRB index fell -1.9%, ending the week at 307 versus 313 the prior week. As compared with the prior month, commodity prices have increased 0.8% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

MONDAY MORNING RISK MONITOR: PUERTO RICO PUTS GUARANTOR SWAPS IN A TAILSPIN - 8

 

9. Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread was unchanged at 15 bps.

 

MONDAY MORNING RISK MONITOR: PUERTO RICO PUTS GUARANTOR SWAPS IN A TAILSPIN - 9

 

10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index rose 8 basis points last week, ending the week at 2.96% versus last week’s print of 2.89%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.

 

MONDAY MORNING RISK MONITOR: PUERTO RICO PUTS GUARANTOR SWAPS IN A TAILSPIN - 10

 

11. Chinese Steel – Steel prices in China were unchanged last week at 3,125 yuan/ton, but are down 90 yuan/ton in the past month (-2.8% m/m). We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

 

MONDAY MORNING RISK MONITOR: PUERTO RICO PUTS GUARANTOR SWAPS IN A TAILSPIN - 12

 

12. 2-10 Spread – Last week the 2-10 spread widened to 213 bps, 6 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR: PUERTO RICO PUTS GUARANTOR SWAPS IN A TAILSPIN - 13

 

13. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.4% upside to TRADE resistance and 3.9% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: PUERTO RICO PUTS GUARANTOR SWAPS IN A TAILSPIN - 14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


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