• run with the bulls

    get your first month

    of hedgeye free



We booked a fifth consecutive gain on the long-side this week in livestock (ETF: COW) after buying on the oversold signal late last week. 


ALL-TIME HIGHS IN JULY: Hogs and Cattle - Levels chartvF2


Between the cattle shortage in the United States, scandal in China, and PedV virus affecting some 4,700 farms nationwide, both markets have skyrocketed to all-time highs this year amid a longer-term trend of much higher meat prices:


Five year changes:

  • USD Index: +5%
  • Live Cattle: +88%
  • Lean Hogs: +115%

While both have run significantly this year, a price divergence has emerged between the two over the last month. Basis between front and 4th,5th,6th contract months suggest the market expects much lower prices for both by next summer:

  • Lean Hogs: +38% YTD but down -11% over the last month. Spot-Feb basis is implying -25% lower prices by February
  • Live Cattle: +19% YTD and up +5% over the last month. The basis between the two months is not quite as high. The Spot-Jun 15’ basis is implying a -5% price decline by next summer

The USDA extended a conditional license to utilize a vaccine for the PedV virus that usually kills 100% of the baby pigs in an infected farm. Harrisvaccines in Ames, Iowa is responsible for developing the vaccine and will be allowed to test its effectiveness. The market has reacted to its positive outlook. Lean Hogs spot contracts are down -12% since the news broke on the 15th of July, and the forward curve flattened. The vaccine is expected to be tested on the sows with the hope that they build the anti-body to disinfect the milk passed along to piglets. Despite the sell-off in hogs:

  • Put implied volatility right at the money is priced relatively flat vs. its 1 and 3 month averages and 15% above its 6-month averages. As expected the upside skew was immediately flatter on the PedV vaccination news (implied vols for the far out of the money call options were selling about 3-5 vol points lower). Sentiment as measured by the net length of futures and options contracts has remained flat on back of the news. 

ALL-TIME HIGHS IN JULY: Hogs and Cattle - Basis Graph in Hogs 


Supply disruptions in livestock year-to-date have led to a divergence from some of the more observable correlations in the commodity complex our team has flagged to support our big-picture macro themes. The negative correlation to the dollar is not AS pronounced in Hogs and Cattle, but the strength of the dollar is always a catalyst for the consumer (and thus everything priced in dollars).


With a seemingly improving labor market, a pull-back in commodity inflation, and the increase in revolving consumer credit, we need to continue seeing sequential improvement in these three areas for evidence of material improvement in the consumer spending picture. The livestock market is certainly expecting a pullback....   


ALL-TIME HIGHS IN JULY: Hogs and Cattle - Lean Hogs Futures Curve


ALL-TIME HIGHS IN JULY: Hogs and Cattle - Live Cattle Futures Curve


ALL-TIME HIGHS IN JULY: Hogs and Cattle - USD Correls


ALL-TIME HIGHS IN JULY: Hogs and Cattle - 1 Month Correls


ALL-TIME HIGHS IN JULY: Hogs and Cattle - 3 Month Correls


ALL-TIME HIGHS IN JULY: Hogs and Cattle - 6 month correls


Hog prices have outpaced cattle YTD, +38% YTD and +19% respectively, but as mentioned, the market has converged over the last month. Lean Hog spot reached a high of $133.80 USD/lb. on July 15th and has since pulled back over -10%.


Yesterday marked a YTD and all-time high in cattle prices ($159.85 USD/lb.) A few of the outliers potentially fueling the move are included below. (Note: We’re looking to the market for buy signals in these commodities without edge on a fundamental call moving into the fall at this point):

  • July 23rd: OSI Group’s Husi Food Scandal
    • After a Shanghai reporter secretly filmed the packaging practices of a  Shanghai processing plant, the Shanghai Municipal Food and Drug Administration (China’s FDA) investigated and uncovered a number of alarming practices including:
      • Repackaging expired food (at least 4,300 cases)
      • Unsanitary packaging practices
      • The brands affected include McDonalds, Starbucks, and YUM Brands. Most chicken and beef products served at McDonalds in northern and central China are now unavailable. All companies have severed ties with Husi
  • January2014: The USDA reported a cattle herd at a 61 year low, possibly due to a number of factors:
    • Increased demand for organic meat
    • Biggest drought on record in California (spread from to Texas)
    • Supporting younger calves through a major drought and extremely cold winter in the Midwest makes having cattle uneconomical for farmers
  • April 2013: The USDA reported the PEDv virus was now in the U.S. It also estimates over 7M pigs have been killed in the past year, affecting 4,700 farms in 30 states. The mortality rates among young pigs is nearly 100%. Year-over-year, consumers are paying nearly 13% more per year at the super market     


Ben Ryan




Volatility Rips 26% Higher, Just as Hedgeye Has Been Heralding $VIX

Takeaway: We warned you.

Rising global risk and fear rattled markets, body-slammed stocks and sent the VIX soaring up over 26% today.


Volatility Rips 26% Higher, Just as Hedgeye Has Been Heralding $VIX - VIX Chart


The macro team at Hedgeye has been banging the drum on volatility for weeks. As CEO Keith McCullough has said on more than one occasion recently, “volatility basically bottomed on July 7th around 10—it’s never held below 10, ever.”


In fact, this move in volatility was one of our top three quarterly macro themes. See below.


#VolatilityAsymmetry: Across global financial markets, measures of volatility are at historically-depressed levels. While low levels of volatility aren't necessarily a timely harbinger of financial market calamity in and of themselves, other signals - such as the economic cycle rolling over and pervasive complacency among investors and corporations - would seem to suggest we are well into the latter innings of this bull market.


Click below to watch the video on one of our top three quarterly themes #VolatilityAsymmetry:

VIDEO | #VolatilityAsymmetry: An Excerpt From Hedgeye's Macro Theme Call

Hedgeye CEO Keith McCullough discusses #VolatilityAsymmetry, one of our top quarterly macro themes during our July 11th conference call with institutional subscribers. The presentation detailed what we believe are the three most important macro trends.

Cartoon of the Day: Icarus

Takeaway: We've said it before, and we'll say it again: Risk happens slowly at first, then all at once.

Cartoon of the Day: Icarus - Icarus cartoon 07.31.2014

K – Adding to Best Ideas Short

Consumer Trends Work Against Portfolio. More Than Cost Savings Needed

Kellogg’s has taken so many blows to the head that it’s curious it is still standing. Despite the leg down the stock has taken today following a disaster of a Q2 report, we’re adding Kellogg’s as a Hedgeye Best Idea on the short side.


What’s clear is the company is working against some pretty powerful consumer trends that demand healthier, protein based foods for breakfast (think Greek yogurt and Eggs & bacon) and not cereal with milk. Add on a competitive landscape in snack foods and cereal bars (GIS and MDLZ), the struggles to get cereal and breakfast food adoption across global geographies, and the economically weakened consumer (in the US and abroad), and the macro headwinds on the business are quickly apparent. 


In the quarter, K’s top-line missed consensus ($3.69B vs $3.71B) and diluted EPS of $0.82 decreased -15% Y/Y!  The company lowered its FY 2014 internal sale growth guidance to -1% to -2% (versus previous +1%); cut internal operating profit growth to -1% to -3% (vs prior 0% to +2%); and lowered its EPS guidance to $3.91-3.99 (vs prior $3.97- 4.05). Ouch!

Our greatest worry is that Kellogg’s management believes it can turn around the cereal category and consumer trends based on a new marketing message; in CEO John Bryant’s words “we need to communicate how cereal can be a better option for them.”  The cereal category is expected to be down -5% this year and K is underperforming the category – we frankly are not of the camp that cereal sees a turn around, and in fact we believe that its glory days are firmly past. 


Recent quarters have shown that Project K, a four year program design to create and enhance global efficiencies across supply chains and business units has not delivered.  The resulting costs savings to re-invested and grow its core Kellogg’s brand, global snack brands (in particular Pringles), and emerging market presence, is not working as planned. The revision to guidance this quarter and the broader underperformance we’re seeing across business units is confirmation that the strategy is off track.


We look forward to sharing with you why we think Kellogg’s will continue to underperform expectations in an upcoming Best Idea presentation.


Select commentary in the quarter:

  • U.S. Morning Foods (includes cereal) – operating profit down -20.9%, citing the underperformance of Kashi. The company announced a renewed focus on returning the message of progressive nutrition to Kashi and name a new CEO of the brand that is expect to become an autonomous business and return to its roots in La Jolla, CA.  CEO Bryant called turning around cereal a “multi-year program”.
  • U.S. Snacks – operating profit down -0.4% and underperformance in the category. Co. cited the struggle with 100 calorie packs and decision to reduce SKUs, and expectation for the “segment to be challenged for the remainder of the year”.  Reaffirms strong Pringles sales trends.
  • N. American, Other (includes US frozen and Canada) –operating profit down -20.4%. Frozen down on difficult comparisons (the launch of flatbread sandwiches last year) and the Eggo brand is below expectations (focusing on marketing in 2H behind the business). Canada – strong Pringles sales and 2H optimism on more product activity.
  • Europe –operating profit down -29.7%. Snacking strong (Pringles sales up DD) but renewed efforts on campaign called Origins, to make the connection between food and its origins.
  • Latin America –operating profit 9.5% on strong results across the region. Venezuela currency issues remain a threat to FY earnings.
  • Asia –operating profit -90.2% on weakness in Australia, only partially offset by growth in India after weakness earlier in the year.


Howard Penney

Managing Director


Matt Hedrick



Fred Masotta



Q2 Group shift (impacted f&b too) plus international (Seoul and Bishkek) drag down an otherwise good quarter – asset sales and more buybacks forthcoming. Outlook positive



Q2 Results & Outlook

  • RevPAR results driven by ADR increase
  • Owned & Leased: negative comp due to calendar and strong results at 5 hotels in 2013. 
    • Margins: Americans +100bps  Outside Americas -400 bps (Seoul and Bishkek were poor)
    • Q2 Group RevPAR +1.5%, impacted by Easter but H1 Group RevPAR +5.1% YoY 
  • Fees:  No fees at four French hotels in 2Q vs YoY.   Difficult Q/Q comparisons for the French hotels will continue through 2014.
  • Outlook:  60% of 2015 on the books, pace up in Q2.  Catering pace +10%

Growth & Trans

  • 8 of 9 hotels remain on market, decided to take 1 asset off the market.  The 8 hotels earned $40 million in EBITDA in 2013.
  • 42 of 44 select service hotels recently listed for sale, earned $45 million of EBITDA on LTM minus management fees. 
  • On track to close on Hyatt Residental Group with ILG. 
  • Maui Property $35 million sale at cost
  • ILG will pay ongoing fees per licensing agreement
  • Acquisitions: actively seeking  
  • Gateway: Park Hyatt $375 million plus pre-opening expense, expect to open in August. In discussions to revise acquisition, may acquire 100% of the hotel at original contract value plus $10m to $15 million = $385 to $395 million.  May purchase for all cash.  Allow for deferral of gains on sales if purchase 100%.

Capital Allocation

  • Remains unchanged.  Grow business and finding opportunities to recycle capital back into the business.
  • Acquisitions via dispositions (disposition proceeds used to buy acquisitions)
  • Expect to return capital to shareholders via repurchases. 
  • Maintain investment grade credit rating - keep gross debt / adjusted EBITDA below 3x.
  • Ample disposition proceeds to fund acquisitions, so expect to continue to return capital to shareholders via share repurchases.



  • Group business - was Easter shift the driver of under performance?
    • America's full-service segment RevPAR negative impact by 250 bps
  • Group trends for rest of the year?
    • Select service RevPAR is a proxy for transient demand and transient demand quite strong, Q3 more transient led, while Q4 more corporate and leisure led demand. 
    • Encouraging signs for association and corporate lead times into 2015 - expansion of booking curve
  • Group pace for H2?
    • H1 Group revenue +5%, pace 8% for 2015 
  • O&L RevPAR vs STR?
    • O&L in 2013 +7%, exclude two hotels outside Americas then 80 bps improvement in aggregate - actual RevPAR at two assets was -10%.
  • Margins? 
    • Q2 2013 margins up 230 bps, market specific Seoul and Bishkek Kyrgyzstan (-250 bps)  Seoul new supply, Bishkek demand issues due to US military airbase shutdown.
  • Playa Resorts
    • $4 million of JV EBITDA vs. $13-$15 million for 2014, now at the low end of the range. Focused on getting assets up and running.
  • Asset sales/recycling?
    • Select service - too early in process to comment but likely a six month process.  Could be one large portfolio or three portfolios of 32, 6, and 4 assets.  Older assets.  Hyatt House brand for past six years. 
    • Full service - expect six to nine months from listing to closing.  Listed in Q1 and expect similar timing.
  • Capital Allocation?
    • Dynamic process weight current commitments vs. future opportunities
  • Opening Pace?
    • Executed contract base remains strong, contract base is seasonal - more signings toward year end. Overall level of activity in India abated pending election, now moving from concern to optimism.  China remains consistent, more activity with select service brands, evolving.
  • Other Income line composition in Income Statement?
    • $20 million from sale of Hyatt Place in Austin - looking foward, difficult to forecast due to equity and cost methods of accounting
  • Hyatt Residential Group details and sales?
    • Time share 2% of total Adj EBITDA in 2013
    • Going forward: licensing fees of couple million per year
  • Recent Acquisition proformas?
    • Hyatt Regency Orlando on track to earn $55 million  San Antonio doing slightly better than expectations.
  • Park Hyatt NYC proforma expectations?
    • Return in high single digits, remains current expectation, will go through ramp up, encouraging partnerships
  •  Seoul & Bishkek issues - when do comps get easier/anniversary?
    • Seoul - comps easier in Q4 2014, on going market challenges due to North Korea and travel issues for Japanese and Chinese traveler into South Korea.  So market issue will not get easier anytime soon.
    • Bishkek - less than $5 million in 2013 EBITDA.  Difficult due to limited market and loss of US Foreign Service/Diplomatic/Military travel.
  • 2015 Group Pace Commentary - below peer pace estimate for H2 2014?
    • Short term bookings of IQFTQ - hopeful bookings will come through.
  • Asset sales - buyer universe for limited service buyers and valuation expectations?   Tax implication for portfolio sale?
    • Buyer universe:  know the public REITs, non-listed REITs, private equity
    • Not trying to tee-up deals for tax deferral but rather manage in normal process of acquisitions and dispositions.
  • Group demand duration?
    • Look to be on the ascension of group demand and progression for group, demand building on its own and not recovered on rate

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